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.
