Wednesday, June 17, 2009
S&P Downgrade of Banks
Standard & Poors has downgraded many of the banks that issue Cdx3 preferred stocks. How does this downgrade affect the preferreds they issue? It seems that there was quite a sell-off, is it overdone? Do you consider the Standard & Poors ratings or just Moody's? I believe one bank, Citizen's is now below investment grade per S&P. Your thoughts would be appreciated.
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Hello Jim-
Thanks for your post.
If you look at the market prices of the CDx3 Preferred Stocks from these banks over the last quarter you will actually see a sharp increase despite any downgrade activity. Market prices of these CDx3 Preferred Stocks have gone up dramatically since last October (pre-TARP), over the last quarter and have continued to do so over the last three weeks, The Market ignoring any downgrades completely.
From this I conclude that The Market sees the rating agencies as just now getting caught up to what they, The Market, already felt or anticipated with respect to these issues.
Here’s the data:
Since this credit crisis began in June 2007, there have only been two CDx3 Preferred Stocks* from banks that have been downgraded below investment grade, both coming last month (May 6 in one case and May 18 in the second case). And all, including these two, continue to pay their dividends in full and on time. Since the end of the last quarter (pre-downgrade) the market prices of even these two issues have risen by $1.19 per share (15.03%) in one case and by $5.01 per share (30.93%) in the other.
Looking at the bigger picture, the average market price of the 32 CDx3 Preferred Stocks from The Protected Fifteen CDx3 banks has increased another 1.3% over the last three weeks (to $19.85 per share from $19.60 per share) using today’s closing market prices (June 17, 2009). And since the implementation of the TARP program last October, the average market price of these 32 CDx3 Preferred Stocks is up over 50% (subscribers to the CDx3 Notification Service: check the chart on page 7 of the June 2009 issue of CDx3 Research Notes).
Although the market for financials has fallen off a bit over the last couple of days (due to concern over the increased cost associated with the proposed increase in government regulation), the market prices of the bank preferred stocks that are able to pass the CDx3 Selection Criteria have been rising since last October and continue to do so (although I expect the rate of increase to slow).
My research identifies the market conditions that tend to favor buyers of the highest quality preferred stocks and the market conditions that tend to favor sellers. Additionally, my research shows that those conditions tend to present themselves repeatedly within any five-year time period – the life span of a CDx3 Preferred Stock. Those following the preferred stock investing method described throughout my book, Preferred Stock Investing, will buy and sell the highest quality preferred stocks (“CDx3 Preferred Stocks”) accordingly, enjoying great dividend income in the meantime (current average annual yields are about 10%). Short-term fluctuations in market price are of less concern.
Regarding Moody’s versus S&P ratings, I find differences between them over time to be negligible so the CDx3 Income Engine uses Moody’s.
Hope this helps Jim. Thanks again for your post.
Many Happy Returns.
*Please note that in keeping with the Posting Guidelines, since this forum is available to the general public, and not just subscribers to the CDx3 Notification Service, trading symbols for CDx3 Preferred Stocks are not provided here. Subscribers to the CDx3 Notification Service will find these two preferred stocks identified by trading symbol in the July issue of the subscriber’s newsletter, CDx3 Research Notes.
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