Quick news for today...with a longer "what is it" with insight.

Rates came in at about 4.875-ish on the 30 year fixed notes with me...and may be getting better tomorrow morning again.

FNMA 4.0% bond closed out the day trading at $100.03...which is just 5 cents below the 25 day moving average...and UP 31 basis points on the day. Investors who "sold" their mortgage backed securities holdings last week to "preserve profit" were likely purchasing their way back into the market today. Money flowed from bank stocks and others and some came to the bond market today. Good for
rates...not good for the DOW.

Dow closed out 289 points LOWER. News that the the government will convert much of their "preferred" stock they own in financial corporations into "common" stock did not help the "perceived" value of
bank stocks.

What is it?

***Why do we care if the government is "converting" preferred stock to common stock?***

When someone owns "preferred stock" they get a promised return...like buying a bond.

Most of the "preferred stock" the government owns now is earning 8%-ish as a return...which is pretty
good. For the corporation issuing the preferred stock: it is considered the same way a "debt" would be considered on the balance sheet of the corporation issuing the stock.

Example: (maybe oversimplified...but to illustrate) If I have 100 billion dollars in preferred stock in a bank...with an 8% return. I would be paid $8 billion or 8% over one year's time.

That means that $8 billion or so of the bank's earnings would need to be paid to ME before they see their
"bottom line"... It is like a LOAN to the bank. This obligation to pay me...would be considered a liability
similar to an "overhead" cost or a payment on a loan.

"COMMON STOCK" pays a dividend based on the profits of a company...if the company is not as
profitable...the dividend is reduced. Since payout is contingent on the company being successful...and is reduced if it is not...it can be LESS taxing on the bottom line.

Owning common stock is having an ownership interest in the company you purchase it
from.

VS.

LOANING a company money in the form of Preferred Stock.

Converting preferred stock to common stock...and thereby gaining a form of ownership in the
bank puts the government in a greater position of control over our financial system and we are one step closer to bank nationalization.

In the same turn this "dilutes" the value of the current common stock by making the pie bigger (more common
stock exists due to the conversion of preferred shares.) When the pie is bigger...those who own a piece of it...now hold a smaller piece of it in relation to the whole pie.

Also, the taxpayer and the feds potentially earn less on the money they have invested in
preferred stock...since the dividend for common shares is paid according to bottom line profitability ... which has been down until the first quarter of this year. Investors fear that the first quarter profitability is SHORT TERM and much of it is due to low mortgage rates that will likely go away soon. It is an EVENT instead of a PROCESS that led to the profitability.

FLIP SIDE:

Banks are able to deleverage...or remove some liability from their balance sheet. This makes their ratio of money held vs.. loans outstanding look better.

Banks also are no longer committed to pay as large a return on the fed's preferred stock holdings...which
could strengthen them...

Stronger banks and government run banks COULD be positive in the world's marketplace. (However: have you ever seen the government's MAJOR involvement in any industry that added any kind of efficiency, sense of urgency or even a sense of accountability for service?)

Bottom line: this may be a "water testing" announcement and nothing will happen at all in the short term. Watch for the markets to come back as the ripple of this announcement gets covered over with more recent readings in the days to come.

Have a great eve,






P.S. Thanks to BRAD THURBER at D.A. Davidson Investments in Great Falls, Montana for the low down on
"preferred" vs.. "common" stocks. (406 727 4200) He is great resource and an asset to his clients.