Seller's Calendar

I normally use good-to-cancel orders for the CDx3 issues that appear on the Seller's Calendar. Does anyone know if these orders should typically be cancelled once the new, monthly Seller's Calendar is issued (assuming the order isn't filled)? I've been leaving them active but only now realized that doing so might not be the proper procedure per Doug's book.

Thanks!

Carl

Distribution Dates

When a preferred stock is called and the call date matches a distribution date for example, call date is 8/1/2014 and one of the four distribution dates is 8/1, do you receive that very last 8/1/2014 payment?

Preferred Stock ETF - Lower Diversification At Higher Risk Without The Capital Gain

State Street gave birth to a new preferred stock Exchange Traded Fund (ETF) last Thursday and several readers and subscribers have asked what I think about preferred stock ETFs in general, and the new State Street ETF in particular (PSK). I will have more to say about investing in preferred stock ETFs versus individual issues in the upcoming October issue of the CDx3 Newsletter (what's this?), but wanted to give you this short version now.

An ETF is a fund composed of multiple securities, just like a mutual fund, except an ETF prices in real-time throughout the day just like other stocks (mutual funds only price once per day after the trading session so investors really never know the real market price of a mutual fund, they just know what the market price use to be).

The new State Street ETF is one of only four preferred stock ETFs available. The other three are composed of approximately 80% bank-issued preferred stocks with about a third of the issues rated below investment grade. So these ETFs offer less diversification and more risk to preferred stock investors when compared to building your own preferred stock portfolio with a more diverse group of investment grade issues ("CDx3 Preferred Stocks").

State Street's offering has the stated goal of minimizing, but not avoiding, speculative grade preferreds. A welcomed improvement over the other choices.

There have been several articles in the financial press over the last few days about the new State Street preferred ETF, several of which have done their readers a disservice by implying that preferred stock ETFs can be part of a capital gain investment strategy. They point to the impressive gains that have been made so far this year.

You can read one such article from MarketWatch (an online Wall Street Journal publication) and my comments to it by clicking here (see comment #4 at the bottom of the article).

As I described in my comments to the MarketWatch article, preferred stock ETFs eliminate what my book, Preferred Stock Investing, refers to as the Rule of Buyer/Seller Behavior (Preferred Stock Investing, page 43). This rule of preferred stock market price behavior is key to buying when the market price will tend to favor buyers and selling downstream when the market price will tend to favor sellers.

The elimination of the Rule of Buyer/Seller Behavior by preferred stock ETFs also eliminates the capital gain component of preferred stock investing. Consequently, in additional to lower diversification and speculative grade exposure, preferred stock investors who favor adding a downstream capital gain to the great dividend income that preferreds tend to provide will probably be very disappointed with the long-term market price behavior of a preferred stock ETF.

Preferred stock ETFs are intended for investors who are willing to take some risk in exchange for long-term, fixed dividend income more so than for those looking to increase their portfolio diversifcation with the highest quality preferred stocks plus have an opportunity for a downstream capital gain.

Gains seen this year in preferred stock ETFs have been caused by a recovery from the Global Credit Crisis, not because these ETFs adhere to the Three Rules of Market Price Predictability (Preferred Stock Investing, chapter 3).

Look for my more detailed analysis regarding investing in preferred stock ETFs in the upcoming October issue of the CDx3 Newsletter.

Many Happy Returns.

What does this mean?

What does it mean when a company issues the statement (I'm paraphrasing) "to issue common shares in exchange for existing preferred shares" and what effect does that have on the preferred shares?

"Re-Remics" Add Value To Bank Preferred Stocks

Remember the term "toxic assets?" This term was all the buzz starting about a year ago and throughout the spring of 2009. The old Treasury secretary (Paulson) tried to figure out how to deal with "toxic assets" clogging up the balance sheets of investment banks, preventing loans, even naming a program after it - TARP (Troubled Asset Relief Program). The program name stayed, Paulson did not.

Then the new Treasury secretary (Geithner) came up with the Public-Private Investment Program (PPIP), a complex potential solution involving a miriad of government agencies and bank regulators, that has largely been ignored by those who hold the toxic assets and by those who are suppose to buy them.

An unfortunate outcome because what's good for investment banks is generally good for preferred stock investors.

So there they sit, tying up vast amounts of bank capital - hundreds of $billions. Capital that could otherwise be put to use furthering the profitability of the bank and benefiting its employees, borrowers and investors - including its preferred stock investors.

But it looks like that is starting to change.

Click here to see an interesting AP article regarding how investment banks are working their way out of the toxic asset mess.

By breaking up the toxic bundles and restructuring them with known-to-be-good real estate mortgage assets (creating what are now called "Re-Remics" since there must be a snappy noun for everything related to investing), the banks are finding buyers. Slowly but surely, according to this AP story, banks are working these toxic assets off of their balance sheets - no Treasury program required.

While there are several statements within the article that are, at best, oversimplifcations, the article is correct in saying that this bundling strategy is not a new idea. Bundling risky mortgage-backed assets with less-risky mortgage-backed assets in order to spread the risk has been going on for decades (according to Fed chairman Bernanke, this technique ends up providing about 40% of the cash used to fund home mortgages).

Using an old strategy to solve a new problem appears to be working mainly, as the article points out, because investors know what they are buying this time around and the price for the new retreads is set by the market accordingly.

And the risk versus reward tradeoff is working the way it always works - bundles that are completely composed of assets backed by the higher risk loans are selling for pennies on the dollar while bundles mixed with lower risk assets are selling for a higher price.

But selling, nonetheless.

And that is great news for preferred stock investors who are provided with investing opportunities at lower risk as the overall health of these investment banks improves.

A lot of really smart people throughout Treasury have been working for over a year now to figure out a way to deal with these toxic assets. While the Treasury's toxic asset program has struggled to find traction, the market itself appears to have found a way to deal with this festering problem.

Should these banks be required to use the government's PPIP to deal with this more quickly or is the slow-burn, market-based approach the way to go here? Please take a look at the AP article and post your thoughts (just Click To Post Comments below).

Many Happy Returns.

using the seller's calendar

I notice that a CDx3 Preferred Stock has a quarter end date of 9-9 and has reached it's selling price. Why isn't it on the calendar?

Citi Preferred Stock Conversion: A Win-Win For Preferred Stock Investors

During July of this year Citigroup performed one of the largest preferred stock conversions in history.

The conversion was voluntary so many holders of Citi trust preferred stocks struggled with the decision.

Holding onto their shares meant the continuation of the known, fixed quarterly dividends. But if too many of their fellow shareholders converted their shares, those who did not convert could find themselves in an "illiquid" market where there are not enough buyers and sellers left to do trades.

Unless Citi called the shares some day, an illiquid market could mean that those chosing to hold onto their Citi trust preferred stock shares, while continuing to receive quarterly dividends, would never be able to sell their shares and get their principal back.

Now that the big conversion is over, there is good news for both those who chose to hold onto their Citi trust preferred stock shares and for those who chose to convert.

The much-feared illiquid market never materialized. While enough preferred stock shares were converted for Citi to meet their financial goals, plenty of shareholders decided to continue to hold their shares. The daily trading volume of Citi trust preferred stock shares over the last few weeks has been roughly the same as it has historically been.

And for those who converted, you are in the chips as well.

Scroll down and take a look at my July 21, 2009 post on this blog titled "Know Your Citi Conversion Break-Even Point." In that post I provided a table that shows Citi preferred stock holders the market price that Citi's common stock has to get to before converting their shares becomes profitable.

Looking at the table, those who paid top dollar some time ago for their Citi preferred stock shares ($25 per share) would turn a profit by converting their preferred stock shares to Citi common stock if Citi's common stock price ever exeeded $3.42 per share.

$3.42 per share; that's been the magic number to watch for. After that price, pretty much every former trust preferred stock holder is in the black.

Citi's common stock cleared $3.42 on August 5, 2009 and has not looked back since (closing at $4.54 today). Those who chose to convert their Citi trust preferred stock shares, while no longer receiving the nice quarterly dividends that preferred stocks pay, have now made a spectacular captial gain on their original preferred stock investment.

For Citi trust preferred stock investors, the Citi conversion has provided a very rare example of a case where both investors who chose to convert their preferred stock shares, and those who chose not to, have been left with a positive outcome.

For those who converted: in the conversion table provided in my July 21 post, find the price that you originally paid for your preferred stock shares in the left column. The right column provides the value of the Citi common shares that you received at the time of conversion. If you click anywhere on the table a new window will open on your computer screen and show you the current market price of Citi common shares. The difference is your per-share profit.

Many Happy Returns.