Three key events over the last few weeks were
critical for preferred stock investors –
Treasury secretary Tim Geithner’s Financial
Stability Plan (FSP) preserved preferred stock
dividends issued by government assisted banks;
the much awaited toxic asset plan finally
appears to be coming together; and the CDx3
Selection Criteria saved CDx3 Investors once
again by successfully filtering out the three
Citigroup preferred stocks that were converted
to Citi’s near-worthless common stock on
FSP Positive For
Preferred Stock Investors
On February 20, 2009 readers of this CDx3
Newsletter received an update from me
summarizing Geithner’s Financial Stability Plan
and its effects on preferred stock investors. In
that update I made three observations:
(1) The Financial Stability Plan left dividends
earned by preferred stock investors alone. While
banks that receive new federal funds are going
to be required to cut their common stock
quarterly dividend to $0.01 per share (see
FSP, paragraph 4c),
preferred stock dividends are left alone under
(2) Geithner’s February 10 presentation
confirmed that the FSP would deal with the
“toxic assets” that are keeping banks from
lending but did not include any detail (which
sent the market into a tailspin once again).
Make no mistake here- this issue has been, and
continues to be, a major linchpin to recovering
from this Global Credit Crisis (see below toxic
asset plan update); and
(3) The FSP reaffirms private ownership of our
banks. While there was much debate regarding
nationalization of U.S. banks during February,
it was Fed chairman Ben Bernanke’s February 24
sworn testimony to congress that seemed to calm
most of these fears.
All three of these FSP provisions are long-term
positive for preferred stock investors. Look for
a very positive reaction from the market when
Geithner presents a workable plan to deal with
toxic assets on bank balance sheets.
Toxic Asset Plan Should
Lift Preferred Stocks
The Wall Street Journal (online) posted a story
late in the day on March 2, 2009 saying that the
toxic asset plan was starting to gel. According
to the article, Geithner’s plan will use a group
of privately managed investment funds that would
contain these toxic assets.
Not all of these underperforming assets are
worthless, just a lot of them and no one knows
which are which (hence the problem).
Under the fund model, a fund would contain a
collection of these underperforming assets (kind
of like a mutual fund contains a collection of
common stocks). Investors would purchase shares
in the fund for pennies on the dollar of the
original value of the assets that are in the
fund. It would therefore only take a small
fraction of the assets to perform in order to
offset the losses of the ones that were in fact
I heard an interview on Bloomberg radio with the
manager (I did not catch his name) of just such
a fund that contains distressed assets backed by
underperforming residential mortgages. He has
been managing this fund for many years and
claimed that over the last year they have been
doing exactly what the WSJ is now saying
Geithner wants to do with these toxic assets.
The man being interviewed claims that the funds
they have set up during this Global Credit
Crisis have averaged a 15% annual return. Under
this model, it only takes one good apple to pay
for the whole batch of rotten ones.
Whatever the details, the market should react
very positively (even explosively so?) when
Geithner announces a workable plan and it is
starting to sound like that announcement might
happen this month. Since investors tend to favor
lower risk investments first during a recovery,
CDx3 Preferred Stocks*, which are the highest
quality preferred stocks available, are well
positioned to ride the wave once Treasury puts
the plan in place.
Subscribers to the
CDx3 Notification Service
are provided with the CDx3 Preferred Stock
catalog that lists dozens of currently trading
CDx3 Preferred Stocks from a wide variety of
industries. Each CDx3 Preferred Stock listed in
the catalog includes a CDx3 Spec Sheet with
complete details and a link to the prospectus on
file with the Securities and Exchange
Commission. Updates and the latest preferred
stock research are also provided to subscribers
each month in the subscriber’s exclusive
newsletter CDx3 Research Notes.
Average CDx3 annual yields are currently well
north of 10%. Please consider subscribing to the
CDx3 Notification Service
and start your plan to ride the recovery.
Announcing a solution to the toxic assets on
bank’s balance sheets could very well be the
trigger that the market is waiting for.
CDx3 Selection Criteria Save Investors
There was a big
dust-up at the end of February regarding
Citigroup and its preferred stocks. The CDx3
Selection Criteria hit another home run for CDx3
Investors. Let me break it down for you.
Prior to February
27, Citigroup had 14 preferred stock issues
trading on the open market plus other
custom-made preferred stock issues owned by the
U.S. government and others. Here are Citi’s 14
preferred stock issues.
Only 4 of Citi’s
14 preferreds qualify as CDx3 Preferred Stocks;
the CDx3 Selection Criteria filtered out the
Notice that the
bottom three are “convertible preferred stocks.”
The others are either Trust Preferred Stocks or
Enhanced Trust Preferred Stocks.
preferred stocks are preferred stocks that allow
the issuing company (Citigroup in this case) to
convert the shares of these preferred stocks to
shares of common stocks at a certain conversion
ratio and under certain conditions.
On February 27
Citigroup exercised their right to convert their
three convertible preferred stock issues (C-I,
C-P and C-M) to common stock. Citi then
suspended the dividend payments on its common
stock leaving investors who were holding shares
of these three convertible preferred stocks high and dry.
Criteria number 8 eliminates convertible
preferred stocks because of the uncertainty
surrounding the conversion. The risk-lowering
focus of the CDx3 Selection Criteria allowed
CDx3 Investors to sidestep Citigroup’s February
On March 2, 2009
Citi announced that it would continue to pay the
dividends on all four CDx3 Preferred Stocks.
This announcement continues the perfect track
record of CDx3 Preferred Stocks having never
missed a dividend payment – ever.
But make no
mistake here. Citi is obviously in very fragile
condition and could very possibly become the
first ever issuer of CDx3 Preferred Stocks to
either defer a dividend payment or even become
But no CDx3 issuer
has ever done so. The ten CDx3 Selection
Criteria that separate CDx3 Preferred Stocks
from the pretenders have successfully filtered
out every failed bank during this Global Credit
Crisis - New Century, IndyMac, Freddie Mac,
Fannie Mae, Washington Mutual, Lehman Brothers
and the others were all filtered out. CDx3
Investors have received every dividend payment
in full and on time.
But I think we all
know that there are no guarantees, especially in
Citi’s future, and
that of several other banks, is now tied to Tim
Geithner and the eventual plan for dealing with
the toxic assets that are plugging up our credit
markets. Providing a solution to this problem
soon will be a massive positive boost to the
economy, these systemic banks and to everything
and everyone connected to them (which is just
about everything and everyone).
* CDx3 Preferred
Stocks: CDx3 Investors are only
interested in the highest quality preferred
stocks and there are lots of pretenders to weed
out. Applying the CDx3 Selection Criteria (Preferred
Stock Investing, Chapter 1) will eliminate
about 90% of the regular preferred stocks
trading on today's stock market.
For example, here
are three of the ten CDx3 Selection Criteria
that regular preferred stocks must meet to be
considered "CDx3 Preferred Stocks:"
1. be issued by a
company with a perfect record of never
having suspended a dividend on a preferred
2. have the "cumulative"
dividend requirement, which means that in the
unlikely event that the issuing company misses a
dividend payment to you (which I have never seen
happen with a CDx3 Preferred Stock), they have
to make it up to you later; they still owe you
the money; and
3. be rated "investment
grade" by Moodys Investors Service.
Having specific and
consistently applied selection criteria takes
the emotion out of your investing decisions and
leaves you with the highest quality preferred
stocks - "CDx3 Preferred Stocks."