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“It is hands down the most valuable resource for preferred stock investors." Leonard W., CDx3 Notification Service subscriber MORE>> |
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Readers of my book, Preferred Stock Investing, Third Edition, are entitled to free periodic updates to the preferred stock tables presented throughout chapter 15 of the book as long as the Third Edition is in print. Providing free periodic updates helps keep readers of Preferred Stock Investing up to date. The 2010 update to Preferred Stock Investing is now available! And I am also happy to announce that as a special service to readers, the 2010 update goes beyond an update to the preferred stock tables found in chapter 15. In this update I also take the opportunity to provide you with the results of the "CDx3 Income Engine" (the preferred stock investing method explained throughout the book) as implemented throughout the Global Credit Crisis (2007 - 2009). The nature of the preferred stock market since June 2007 deserves special attention and the 2010 update to the book would not have been complete without wrapping up the method's performance during these historic (extreme) conditions. Specifically, the 2010 update to the Third Edition of Preferred Stock Investing includes updates to the following chapters:
Preferred Stock Investing, Third Edition is one of the most highly reader-rated books of any kind available for sale in the United States. To receive the free 2010 update to Preferred Stock Investing, Third Edition just follow the instructions on the first page of chapter 15 in the book. If you have yet to pick up your copy of Preferred Stock Investing, Third Edition you can do so at any of your favorite online retailers (see retailers). Please pick up your copy today then follow the instructions on the first page of chapter 15 to download the free 2010 update. Just Posted On The Preferred Stock Investing Reader's Forum: On October 26 I posted an alert to the Preferred Stock Investing Reader's Forum (my blog) regarding the effect that the mortgage documentation mess was having on the market prices of preferred stocks issued by specific mortgage lenders and servicers. As automated trading kicked in, prices dropped delivering a great buying opportunity to preferred stock investors. (jump to Forum) The Last Month's CDx3 Investor Results article describes the 26 high-quality preferred stocks, issued by six mortgage lenders and servicers, that have been affected by the mortgage documentation snafu that emerged on October 14. The market prices of these 26 specific preferred stocks have dropped an average of $0.44 per share and now deliver an annual dividend of 7.391% to preferred stock investors. (jump to article) The Special Announcement article provides you with an updated list of trust preferred stocks (TRUPS) that will be among the first to be affected by Section 171 of the Wall Street Reform and Consumer Protection Act. Remember that subscriber's to the CDx3 Notification Service, my preferred stock email alert and research newsletter service, receive this same list with all of the trading symbols. This month's list identifies fourteen of the highest rated, highest quality trust preferred stocks. Secondly, I have summarized some of the research from my book, Preferred Stock Investing, Third Edition, and am making it available to brokers, financial planners and investment groups for free. (jump to article) In the CDx3 Company Spotlight article I introduce you to PS Business Parks, a $1.4 billion Real Estate Investment Trust owning over 21 million square feet of commercial office space. Avoiding the debt taken on by many of its competitors during the real estate boom, cash-rich PSB patiently waited for their competitors to start selling off buildings at bargain basement prices in order to pay down debt. The four properties that PSB has added this year are shown in this article. (jump to article) The CDx3 Question of the Month is presented both here and on the Preferred Stock Investing Reader's Forum. If you visit the Forum you can test your knowledge by clicking on your answer to the question. You will receive an automatic email that provides you with the correct answer and my explanation. Or you can just read the answer in the below CDx3 Question of the Month article. This month's question - "How do I pick the highest quality preferred stocks?" (jump to article) Why wait until next month's CDx3 Newsletter to find out what is going on in the preferred stock marketplace? Throughout the month I post regular research articles on the Preferred Stock Investing Reader's Forum and make them available to you for free. In the Free Special Offer article below I provide you with a link that allows you to receive my posts via an email message rather than having to visit the Forum to see what's new. Any time a new article is posted, you will receive a message in your email inbox automatically - free. (jump to article) Coming Up For Preferred Stock Investors: Two simultaneous, but short-lived, events are both putting downward pressure on the market prices of the highest quality preferred stocks during November. These events are described in the Next Month's Sneak Peek article. (jump to article) I look forward to reporting back to you in next month's issue of the CDx3 Newsletter. |
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 Automated Selling Undervalues 26 High-Quality Preferred Stocks Buyers To Benefit: Computers Failed To Distinguish Between Profits And Cash-Flow The mortgage documentation mess that came to light on October 14 triggered an automated sell-off of the common and preferred stock shares offered by large mortgage lenders and servicers. Selecting out the highest quality issues identifies 26 specific preferred stocks issued by six different companies that are now available to preferred stock buyers for a discounted price (see Table 1). Automated selling kicked in on October 14 and has dropped the current market prices of these 26 high-quality preferred stocks by an average of $0.44 per share over the last two weeks. Any title company employee will tell you that very few mortgage borrowers actually read the massive stack of paperwork that they are required to sign when buying a home. The requirement for the vast majority of these forms stems from some long-forgotten lawsuit rather than anything resembling good business reasons. If you haven't purchased a home lately, these document packages can easily exceed the page count of a James Rollins novel and, in the event of a foreclosure package, you are looking at over 300 pages of forms. There are forms that ask you to agree to terms as specified in a specific law or government regulation, which is never attached since that would just complicate matters further. There are even forms that ask you to agree that you have received other forms. And you sign forms saying that you are authorized to sign more forms. The typical sign-off session can take hours. First-time borrowers getting a Federal Housing Administration (FHA) loan are advised to bring a toothbrush.
Neither Party Being Asked To Sign Actually Reads These Documents Borrowers, who are generally ill-equipped to challenge the terms expressed in such documents, are faced with (a) signing without reading or fully understanding or (b) walking away from the deal - and their new home. The fact is, and has been for a long time, that borrowers, overwhelmed at the hundreds of pages in front of them and in a hurry to get their impatient kids home to dinner, usually just sign (and sign and sign and sign...). And now we have official confirmation of what everyone has suspected all along: the lenders do not actually read these documents either... The mortgage document mess that erupted during October shows us how absurd buying a home has gotten; it is literally now the case, officially, that the documentation has grown so obscure and confusing that neither party to the agreement, borrower and, as we now know, lender, actually read it. So when barrower's lawyers expressed shock and dismay in court last month at statements from lender employees attesting that they had not actually studied some of the forms found within these document packages before signing them, it sounded a bit disingenuous since their clients, the borrowers, rarely read them either.
Common Stock Versus "Cumulative" Preferred Stock Dividends When the mortgage documentation pot boiled over on October 14 and it started to become apparent that mortgage lenders and servicers were going to have to undertake a tedious, labor-intensive and costly exercise to review and update hundreds of thousands of foreclosure forms, investors quickly understood that profits, at least in the short-term, were going to take a hit. This is where it is important to understand the difference between the payment of quarterly common stock dividends and the payment of quarterly preferred stock dividends. A company's quarterly common stock dividends are very closely linked to its quarterly profits; preferred stock dividends, on the other hand, are more closely linked to the company's cash flow. This is especially true of "cumulative" preferred stocks where, in the event of a missed dividend payment, the company still owes you the money. The cash needed to pay a quarter's cumulative preferred stock dividend is known and reserved in advance and it does the company little good to skip paying you since doing so does not change their obligation to pay. This is very different from the considerations that go into paying, or not, the quarterly common stock dividend. Common stock dividends do not come with any type of cumulative obligation to pay so are much more a function of each quarter's profits.
Automated Selling Brings Bargains To Preferred Stock Buyers Undeterred by such differences, automated trading systems kicked in and started selling on October 14. Bank of America (the proud owner of what use to be Countrywide), for instance, saw the market price of their common stock drop by over 10% in the 48 hours ending October 15 (and is still down). These automated systems do not seem to make much of a distinction between a company's common stock and the same company's preferred stock when it comes to selling off and that is where the opportunity is for preferred stock investors. Over the same 48 hour period that saw the market prices of large mortgage lenders/servicers fall, the volume of preferred stock shares traded over this short period tripled as computer programs blindly disregarded the difference between the considerations that go into paying common stock dividends versus preferred stock dividends; they appeared to be applying common stock risk algorithms to preferred stock share holdings. While the havoc brought on by this latest mess will reach many companies, applying the ten preferred stock selection criteria from chapter 7 of my book, Preferred Stock Investing, allows us to identify the highest quality preferred stocks ("CDx3 Preferred Stocks," see sidebar at the top of this CDx3 Newsletter for criteria examples) issued by mortgage lenders and servicers.
26 Cumulative Preferred Stocks, All Rated Investment Grade, Yield 7.391% As itemized in Table 1, 26 specific preferred stocks were able to pass the filter (note that to protect the values of subscriptions to the CDx3 Notification Service, my preferred stock email alert and research newsletter service, the trading symbols used here are fictitious. Subscribers can find the trading symbols posted on the CDx3 Discussion Group). All 26 of the preferred stocks listed in Table 1 are cumulative and all are rated investment grade by Moody's. And yet the automated selling that took place in response to the mortgage documentation mess has caused the market prices of these high-quality preferreds to drop an average of $0.44 per share since October 13, creating a unique opportunity for preferred stock buyers. There are even nine issues to pick from that are currently available for a market price less than the redemption price of $25.00 per share (see bold typeface November 2 prices). Table 1 is sorted by the last column, Change. The Change column shows the drop in market price per share since October 13 for each of these preferred stocks. Only three of these high-quality preferred stocks have avoided a price drop. Using November 2, 2010 closing prices, the average annual dividend yield of the 26 issues identified here is 7.391% (have you seen the interest rates being paid by bank CDs lately?). This chart graphically illustrates the opportunity. The 26 preferred stocks identified in Table 1 are issued by six different companies. The automated sell-off over the last couple of weeks has been focused on some companies more than others, but all have seen the market price of at least one of their high-quality preferreds drop in price. In many cases, the discounted market prices that are now available to buyers have not been seen since last July. If you thought that you missed the opportunity then, you have been given a rare second chance - courtesy of a package of documents the signers of which no longer read.
Learn To Screen, Buy and Sell The Highest Quality Preferred Stocks Preferred Stock Investing includes the information, websites and other resources needed for you to be a very successful preferred stock investor. For those who would rather someone else do the research and calculations, I offer the CDx3 Notification Service. Subscribers to the CDx3 Notification Service receive an email alert when there are buying and selling opportunities coming up. Subscribers also receive their own non-promotional preferred stock research newsletter every month, have their own website that hosts the CDx3 Preferred Stock Catalog and have access to the CDx3 Discussion Group, the only online forum just for preferred stock investors. Invest in the best. Subscribe to the CDx3 Notification Service (see reader comments) today. |
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 UPDATED: This Month's Under $25 Trust Preferred Stock List These 14 Preferreds Will Be Among The First To Come Under The Wall Street Reform Act This table presents an updated list of Big Bank-issued trust preferred stocks (TRUPS) that will be among the first affected by section 171 of the Wall Street Reform and Consumer Protection Act, signed into law on Wednesday, July 21, 2010. Section 171 creates the largest single opportunity for preferred stock investors in history (how's that?). And like most investments, the highest returns will tend to favor those who get in earlier rather than later. The new law prohibits Big Banks (assets greater than $15 billion) from counting their TRUPS in their "Tier 1 Capital" calculation, a measure regulators watch when assessing the adequacy of a bank's reserves. These Big Banks are therefore likely to retire ("call") their TRUPS. Investors who hold shares of a TRUPS when it is called will receive $25.00 per share, so investors who purchase shares now for less than $25 position themselves for a capital gain on top of the above-average dividend income that they will be earning in the meantime. The far right column of this table shows you the effect that adding a capital gain onto the regular quarterly dividend income has on your Effective Annual Return...courtesy of the U.S. Government. By watching this list each month, you will be able to monitor this opportunity as the January 1, 2013 implementation date approaches (expect prices to generally increase toward $25.00 per share). Since market prices change every day, the list of affected TRUPS selling for less than $25 per share changes as well. So I will provide you with an updated list in this Special Announcement article every month. These are the highest rated, highest quality issues that are going to be first affected by section 171 of the new law that are also selling for less than $25 per share right now. Subscriber's to the CDx3 Notification Service (my preferred stock email alert and research newsletter service) are provided with this same TRUPS list, including the trading symbols, on page 7 of each monthly issue of the subscribers' newsletter, CDx3 Research Notes. Please consider becoming a subscriber to the CDx3 Notification Service today.
Brokers And Investment Groups: New Meeting Materials Now Available As the most comprehensive research service available for the highest quality preferred stocks, all of the large, and many smaller, brokerage firms subscribe to the CDx3 Notification Service. My Preferred Stock Investing Group Materials are intended for brokers with a group of clients or self-directed investment groups that are interested in learning something about preferred stock investing. The Preferred Stock Investing Group Materials include a slide show (27 slides, PowerPoint Show format) and an accompanying handout that provides my commentary for each slide. The handout is available in color and black and white (PDF format) for easy printing. The materials include my tips regarding how to select, buy and sell the highest quality preferred stocks and summarize much of the research from my book, Preferred Stock Investing. Specifically, the materials are organized into three parts: Part 1: Approach and Objectives To Preferred Stock Investing Part 2: How and When To Buy and Sell Preferred Stocks Part 3: Preferred Stock Investing Resources To request the Preferred Stock Investing Group Materials just send an email request to: InvestmentGroupMaterials@PreferredStockInvesting.com You will receive an auto-reply email message with current download instructions. |
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 Who Are These Companies That Issue CDx3 Preferred Stocks? PS Business Parks, Inc. (NYSE: PSB)
As of July 2010 PSB owned and operated approximately 21.1 million rentable square feet of commercial space located in eight states: Arizona, California, Florida, Maryland, Oregon, Texas, Virginia, and Washington. This space enjoyed a weighted average occupancy rate of 90.4% throughout 2009 (source: PSB 2009 Annual Report). Much of this space is "flex" space. Flex space refers to a building that is specifically designed and built so that its interior can be reconfigured to meet varying tenant needs over time. PSB locates its properties in high population growth markets near what the company refers to as "decision maker housing." PSB follows an age-old management practice: "cash is king." While many of their REIT competitors took on massive amounts of debt during the real estate boom, PSB largely sidestepped that pitfall. From its 2009 Annual Report, CEO Havner says "...since we believe the economic environment will continue to be challenging and capital for privately owned commercial real estate will remain scarce, we are patiently waiting for opportunities. With $230 million in cash and an unused $100 million line of credit, we are positioned to take advantage of acquisition opportunities as they arise." PSB avoided the commercial mortgage backed securities (CMBS) debt that many of its competitors took on by the truck load. The volume of CMBS debt held by REITs that is coming due over the next five years exceeds $1 trillion. With delinquencies already starting to pick up, Havner sees opportunity for cash-rich PSB. Havner knew then that, beginning in 2010, many of his competitors would have to start selling off properties at bargain basement prices in order to generate the cash needed to pay off maturing debt. With prices way down and debt-laden competitors anxious to lighten the load, acquisition opportunities have started to present themselves for PSB, right on queue. During the nine months ended September 30, 2010, PSB acquired:
The successful expansion of PSB's presence in Virginia is particularly important as this market has been particularly profitable for the company. Looking at the table, PSB's Virginia space represents 15.5% of the company's property holdings (in leasable square feet), but contributes 22.3% to PSB's Net Operating Income (NOI). Learn more about PS Business Parks: Company website | Profile | Upgrades/Downgrades | Recent News. Reader Note: The purpose of the CDx3 Company Spotlight article is to give you a sense of the types of companies that issue CDx3 Preferred Stocks. Companies that appear in the CDx3 Company Spotlight either currently, or in the past, have issued CDx3 Preferred Stocks. Since I am not familiar with your financial goals, resources or risk tolerance, my mention of these companies here should not be taken as a recommendation by me for you to buy, or not buy, securities issued by these companies. Companies can issue multiple series of preferred stocks, some of which may meet the CDx3 Selection Criteria while others do not. |
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 How do I pick the highest quality preferred stocks? Answering this question, along with gathering the data needed to do so, consumed over a year of research and now occupies chapters 7 and 15 of my book, Preferred Stock Investing. To a certain extent, the answer depends on how we define the phrase "highest quality." What may be high quality to one investor may send another investor running for cover. For most investors though, the quality of an investment is directly related to its return versus its risk. Most investors would agree that an investment that provides an above-average return with below-average risk is of higher quality than an investment providing the opposite - lower return for higher risk. Most investors would also agree that an investment that provides no return could be considered to be of low quality. This is where history can help us put boundaries on this question since we can identify such securities by looking at historical data (back to 1926 in my case). When looking back at the characteristics of preferred stocks that have had their dividends suspended, patterns and consistencies start to emerge. That is, many of these failed securities have had common characteristics. Similarities also emerge among preferreds that have provided investors with reliable returns without a hiccup since their introduction, despite some historically rocky economic conditions. The highest quality issues are going to be among the ones that share the characteristics of those issues that have consistently paid their dividends without fail. The question this month for preferred stock investors: How do I pick the highest quality preferred stocks?Your choices:
(A)
The prospectus specifies that the dividends are "cumulative." (C) The issuing company has a perfect track record of never suspending a preferred dividend. (D) All of the above.
The correct answer to this question is (D), all of the above. Notice that neither these criteria, nor any of the remaining CDx3 Selection Criteria from chapter 7 of Preferred Stock Investing, have anything to do with specific industries or types of businesses. We are looking for the highest quality issues regardless of where they come from. So while relaxing these criteria may provide an investor with a different array of industries from which to choose, doing so increases investor risk. For example, for preferred stocks from telecommunications or manufacturing to become candidates, you would have to give up the "cumulative" dividend requirement. While there are a few exceptions, preferred stocks issued by companies in these industries are generally "non-cumulative," meaning that if the issuing company misses a dividend payment to you they have no obligation to make it up in the future. Risk adverse preferred stock investors are looking for preferred stocks that are "cumulative." In fact, it is the "cumulative" dividend requirement that saved CDx3 Investors during the Global Credit Crisis more than any other criteria. Looking at the 70 bank-issued preferreds that were trading at the time, the 13 preferreds issued by the banks that were saved from bankruptcy were all "cumulative" ( see itemization)Rating agencies such as Moody's and Standard & Poor's provide creditworthiness ratings for preferred stocks. These ratings have two main categories, investment grade and speculative grade. Preferred stocks that carry the investment grade rating are viewed by the rating agency as being of lower risk than those rated speculative. While the dividend return of a speculative grade preferred stock may be higher than those rated investment grade, the CDx3 Selection Criteria favors lower risk over higher returns. And looking for preferred stocks that are issued by companies with a solid history of consistent performance is also important when trying to identify the highest quality preferreds. Airlines provide an obvious example. If you had to choose between two preferred stocks, both cumulative and investment grade but one had been issued by a company with a history of bankruptcy and suspended dividends (e.g. Delta Airlines) and the other had not, which would you judge to be the higher quality security? Having cumulative dividends, an investment grade rating and being issued by a company with a perfect track record of never having suspended preferred stock dividends are just three of the ten CDx3 Selection Criteria from chapter 7 of Preferred Stock Investing. With new issues being introduce, and old issues being retired, the number of preferred stocks trading every day ranges between 1,000 and 2,000. By applying the ten CDx3 Selection Criteria, preferred stock investors are left with the highest quality issues available. The resulting list is available 24/7 to subscribers to the CDx3 Notification Service in the CDx3 Preferred Stock Catalog on the subscriber's exclusive website. You can submit your own preferred stock question: Submit your question. |
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 Preferred Stock Market Research Now Available All Month Long - Free Automatic Email Delivery Of Preferred Stock Market Research Now Available Readers do not have to wait until next month's issue of the CDx3 Newsletter to stay plugged into the market for high-quality preferred stocks. Preferred stock research articles, marketplace observations and preferred stock news from the financial press and other information are posted to the Preferred Stock Investing Reader's Forum (my "blog") throughout the month. To receive articles by email automatically without having to visit the Forum, click here A separate window from FeedBurner (a Google service) will open on your screen. Enter and verify the email address that you want articles from the Forum to be emailed to as instructed. And don't worry - you'll never receive any spam from me and your email address will not be shared. By receiving the articles as I post them via email, you do not have to visit the Forum in order to stay plugged into my research regarding the marketplace for the highest quality preferred stocks. You are also invited to visit the Forum and comment on my articles. Please accept my invitation to receive articles by email and visit the Forum. |
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 Two Simultaneous Events Benefit November Buyers Standard & Poor's Rebalance Plus Mortgage Paperwork Mess Creates Short-Term Opportunity The October issue of the CDx3 Newsletter described the three-month process undertaken by Standard and Poor's, due to wrap up in November, to rebalance its S&P U.S. Preferred Stock Index. S&P's rebalancing includes the addition of about 200 preferred stocks to their Index that were not previously included. This rebalancing, in turn, has caused iShares to commensurately restructure their Preferred Stock Exchange Traded Fund (PFF | quote), mostly by selling millions of shares of previously included preferred stocks and buying smaller quantities of the 200 new entries. Ending in November, this restructuring has create short-term downward pressure on the market prices of many preferred stocks. And now, simultaneously, we have the mortgage documentation mess. As described in the above "Last Month's CDx3 Investor Results" article, this latest fiasco is putting additional short-term downward pressure on the market price of several preferred stocks as well. The S&P U.S. Preferred Stock Index rebalancing and the mortgage documentation mess, occurring simultaneously purely by chance, have combined to produce some really great, albeit short-lived, prices that should interest preferred stock buyers. While we do not know how long these effects will last, it is clear that, at least for the time being, the month of November should provide one of the best buying opportunities for preferred stock investors that we have seen since July. November 2010 could very well provide preferred stock buyers with a rare opportunity to add the highest quality preferred stocks to their portfolio at great market prices, courtesy of S&P and some sloppy mortgage paperwork. Invest in the best. I look forward to reporting back to you in next month's issue of the CDx3 Newsletter. |
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Learn
to screen, buy and sell the highest
quality preferred stocks by
purchasing
the third edition of my book, Preferred
Stock Investing (see
retailers). The book identifies
the resources that you need to be a very
successful CDx3 Investor completely on
your own. If you would rather we do the
research and calculations for you I
offer the
CDx3 Notification Service
(see
reader comments).
Chapter
15 of Preferred Stock Investing
includes a list of all of the CDx3
Preferred Stocks issued since January
2001 and the investing results you
would have achieved had you invested in
them using the CDx3 Income Engine.
And
readers also receive free periodic
updates to the preferred stock lists in
chapter 15 as long as the Third Edition
of the book is in print.
Please
take a look at
www.PreferredStockInvesting.com.
And if you
know
someone who might be interested in simple
investing
for non-experts please have them send an email
message to:
CDx3Newsletter@PreferredStockInvesting.com
and
they will automatically
begin receiving this monthly CDx3
Newsletter
next month (plus a
CDx3 Special Report) - all FREE. Many Happy Returns, Doug K. Le Du |
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Copyright (c) 2010 by Doug K. Le Du CD Times 3, CDx3, CDx3 Income Engine, CDx3 Investor, CDx3 Portfolio, CDx3 Preferred Stock, CDx3 Perfect Market Index, CDx3 Bargain Table are trademarks of Doug K. Le Du. All rights reserved. Company logos are trademarks of the indicated companies. Service Marks (SM) are service marks of the indicated companies. DISCLAIMER: The content of this CDx3 Newsletter is to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be discussed herein. Consider your financial resources, goals and risk tolerance before investing. You, and not Doug K. Le Du, are solely responsible for your own investment decisions.
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For
New Readers...
PS
Business Parks is a $1.4 billion Real Estate Investment Trust (REIT)
that engages in the acquisition, development, ownership, and
operation of commercial properties primarily multi-tenant flex,
office, and industrial space. PSB, headquartered in Glendale,
California, was founded in 1983 as a spinoff of Public Storage.
Public Storage still owns about 25% of PSB's common stock and the
two companies share a CEO in Ron Havner.
