Stress Results

The stress results are scheduled to be released the first week in May. Some institutions will be determined to need more liquidity and be given a period of time to get it and some will be deemed OK. Does anyone have any inklings on how the base organizations of CDx3 preferreds will fair?

Chuck

Two Questions

1.) Does anyone know if the posts from the old blog will be moved to this one?

2.) Does anyone know if there is a regulation in place requiring when dividends must be paid relative to the ex-dividend date? Does the issuer have a 30 day window, for example?

Preferred Stock Investing Reader Question

The call date on one of my five year old preferred stocks just arrived. Can the issuing company purchase their own preferred stock at today's low market prices or are they obligated to buy them back from me at $25 per share? Jim M.

From the April 2009 issue of the CDx3 Newsletter (free, what's this?)

Every CDx3 Preferred Stock has a five year life span between its introduction (the "IPO date") and its "call date" when the issuing company regains the right to buy your shares back from you. If they do so ("call" your shares), they must pay you $25 per share.

What Jim is wondering is whether the issuing company can sneak around having to pay you $25 per share by going out to the open market, where the market prices are currently lower than $25 per share, and buy up the shares there on the cheap (and cheating you out of the higher $25 price).

There is nothing stopping an issuing company from purchasing its own preferred stocks on the open market but that has nothing to do with a “call.”

When purchasing preferred stock shares on the open market there has to be an agreeable buyer and an agreeable seller – it takes both. If a seller prefers to hold onto their shares until a future call they cannot be forced to sell their shares to the issuing company (or to anyone else). The only way the issuing company can compel a shareholder to sell their shares back to the issuing company is via a call (in the case of CDx3 Preferred Stocks).

“Convertible preferred stocks” however work differently. In the case of convertible preferred stocks the issuing company can compel shareholders to convert their shares to common stock under the terms of the prospectus. This is what we saw Citigroup do with three of their preferred stocks in late February (see related article below). This is why the CDx3 Selection Criteria exclude convertible preferred stocks.

Citigroup Looking For Volunteers

From the April 2009 issue of the CDx3 Newsletter (free, what's this?)

If you hold Citigroup preferred stocks there are two different programs happening and it is important not to get them confused.

On February 27 Citigroup announced that it was exercising its right to convert three of its fourteen preferred stock issues to common stock. These three issues (C-I, C-P and C-M) were "convertible" preferred stocks which means that the issuer (Citi) has the right to convert them to common stock shares in accordance with the terms of the prospectuses for these issues. Citi did so on February 27, 2009.

Note that only four of Citi's preferred stocks qualify as CDx3 Preferred Stocks and none of these four were included in Citi's February conversion. The CDx3 Selection Criteria (Preferred Stock Investing, 3rd Ed. chapter 7) protected CDx3 Investors from this conversion.

In early March, Citi filed with the SEC for a new, separate preferred stock conversion program. This additional program has nothing to do with their February 27 preferred stock conversion. Rather, the new program relates to the remaining eleven trust preferred stocks (TruPS and ETruPS) from Citi.

Under the March 2009 filing, Citi is going to invite holders of the remaining eleven Citi preferred stocks to voluntarily convert their preferred stock shares to common stock shares. Those who decline Citi's kind offer will continue to receive their dividend payments just as they would have otherwise. To compensate those who choose to volunteer for giving up the ongoing dividends that they would otherwise be earning, Citi is going to offer a very handsome conversion ratio, leaving volunteers with common stock that is worth several times the current market value of their preferred shares.

The timing of the voluntary conversion offer is unclear but if you hold Citi preferred stocks you hould receive a communication from Citi (via your broker) explaining the new voluntary program.

Treasury Toxic Asset Plan Triggers Massive Market Rally

From the April 2009 issue of the CDx3 Newsletter (free, what's this?)

In the March 2009 issue of the CDx3 Newsletter I gave you an early heads-up about the then-unannounced Treasury plan for dealing with the toxic assets that are plugging up our credit system. Under the heading Toxic Asset Plan Should Lift Preferred Stocks I said “…the market should react very positively (even explosively so?) when Geithner announces a workable plan…” I went on to describe that the upcoming announcement was going to create funds (like mutual funds) that were composed of toxic bank assets; some performing, some not. The idea being that it would only take a couple of performers to offset the losses for all of the laggards.

On March 23 Treasury secretary Tim Geithner announced the Public-Private Investment Program (PPIP – see summary) for dealing with toxic bank assets and The Market reacted immediately by having its biggest monthly gain since 1987.

Subscribers to the CDx3 Notification Service received a detailed analysis from me that explained how the PPIP is likely to affect the market for CDx3 Preferred Stocks. My analysis of the PPIP unveiled three specific points of impact:

(1) Near-term pricing and yields: The PPIP includes a specific mechanism that is likely to act upon preferred stock market prices and yields in the short-term in a very specific way. I'm looking for the 32 CDx3 Preferred Stocks (subscribe for trading symbols) issued by The Protected Fifteen CDx3 banks to lead the way (due to January acquisitions the list is now at fifteen rather than sixteen as reported last December);

(2) Preferred stock dividend rates: The dividend rate that preferred stock investors are likely to see from new preferred stock issues later this year is directly impacted by the PPIP. My analysis shows subscribers the dividend rate that we are likely to see offered by new preferred stocks and the reasons why; and

(3) Source of new issues: While the PPIP is a relief program for banks, new preferred stocks that we see later this year are not likely to come from banks. There is one specific industry that I am looking to that should lead the way with new preferred stock issues after the PPIP is implemented this summer. The extent to which they do so is a bellwether of the success of Geithner's plan.

The next milestone will be the PPIP's actual implementation where we will find out the answer to the next question: will the banks sell their assets, as toxic as they may be, at the auction-determined price or just hang onto them and hope that things improve on their own over time? The April 2, 2009 "mark-to-market" accounting rule change by the Financial Accounting Standards Board (FASB) throws an interesting twist into answering that question. Banks are restricted to lending up to a certain percentage of their "Tier 1 capital." The toxic assets lower the Tier 1 values, so banks have been prevented from lending as much. The FASB rule change (taking the rule back to what it had been for the last 75 years until a few months ago) allows banks to revalue many of these assets at a higher value, freeing them up to lend. Energizing lending is the primary goal of the PPIP; so has FASB solved the problem or simply added a complimentary component that should help out? Will banks still opt to sell these assets this summer since they are suddenly not nearly as toxic as they use to be? Does it really matter, so long as credit starts flowing again to individuals and businesses?

These are some of the points of impact on the marketplace for CDx3 Preferred Stocks that I will be watching in the coming months.