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 February 27.

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 the FSP;

(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 worthless.

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 rest.

Notice that the bottom three are “convertible preferred stocks.” The others are either Trust Preferred Stocks or Enhanced Trust Preferred Stocks.

Convertible 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.

CDx3 Selection 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 disaster.

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 insolvent.

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 this economy.

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 stock;

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."

Amazon is running a great promotion for Preferred Stock Investing this month and I wanted to be sure that you knew about it.

Through March 31, 2009 you will receive 50% off of a subscription to popular business and personal finance magazines when you purchase Preferred Stock Investing.

As I read a lot of the articles from these types of magazines, for me they fall into three categories - (1) interesting to someone other than me; (2) generally interesting to me but nothing actionable;  and (3) on point information that is useful to me right now. 

Articles in this last category are what I'm really looking for and, frankly, they happen at a rate of about one every couple of months.

But it is these gems that have saved or made me several hundred or even thousands of dollars so the few bucks for the subscription is easily worth it to me.

At 50% off, this is a slam dunk and I'm happy to make you aware of Amazon's offer.

And here's the best part- Amazon has knocked $2 off of the price of Preferred Stock Investing as well.

2009 is going to be a historically important year for our economy in general and for investors in particular.

Buy the book at $2 off and get 50% off of these great business and personal finance magazines at the same time.