Preferred stock investors eye data; Freddie sees quarterly loss; banks on credit review

By Stephanie N. Rotondo

Seattle, Nov. 3 – The preferred stock market was flat at Tuesday’s bell, though one market source said liquidity was “decent.”

To start out the session, another trader said the session was “sleepy” as investors were keeping their “eye on the prize.”

Later this week, the second trader said, a fresh initial jobless claims number is expected, as well as nonfarm payrolls. How those figures look will determine “whether the Fed will have a reason to raise rates in December,” the trader said.

“If the numbers are strong, we will probably see a 20-basis-point sell-off,” the trader added. If the numbers are weaker than expected, “things will grind a little tighter.”

As for the new issue pipeline, the space continued to be silent. The trader noted that with Veterans Day next Wednesday, issuers will “basically have one week to get a deal done and then it is Thanksgiving and November is over.”

“There is a lot of chatter that [Citigroup Inc.] will be issuing soon,” another source remarked.

In the secondary, Freddie Mac reported its first quarterly loss in four years on Tuesday, prompting some to call for federal housing reform sooner than later, according to a trader. The loss means the Treasury has no profits to sweep up either, he said.

“But no one is going to do anything going into elections,” the trader opined.

On the news, GSE preferreds were trading flat to lower at mid-morning but reversed course to finish higher on the day.

Freddie’s 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) closed up 8 cents, or 1.61%, at $5.05. The preferreds were initially off 7 cents, or 1.41%, at $4.90.

Fannie Mae’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) ended 10 cents higher, or 2.04%, at $5.00. The preferreds were also at $4.90 earlier in the day, which was unchanged.

Freddie posted a net loss of $475 million for the third quarter, which compared to a profit of $2.08 billion the year before.

The swing to the red was due to losses from derivatives used to hedge interest-rate risk. Those losses totaled $4.17 billion, up from $617 million in the previous year.

The uptick in the losses was tied to long-term interest rate declines.

On the plus side, Freddie had positive net worth of $1.3 billion, meaning it would not need to seek more help from the U.S. Treasury.

“Freddie Mac’s reported quarterly earnings loss is accounting driven and does not reflect a deterioration in the underlying health of its business,” Rob Runyan, a Treasury spokesman, said in a statement on Tuesday. “Nevertheless, the prospect of any material losses by the GSEs is another reminder that comprehensive housing finance reform is necessary.”

Banks rise despite S&P review

Standard & Poor’s is taking a look at eight major U.S. banks as possible candidates for downgrade, including Citigroup, JPMorgan Chase & Co. and Goldman Sachs Group Inc.

Despite that news, the banks’ preferreds were trending higher.

Citi’s 7.875% fixed-to-floating rate trust preferred securities (NYSE: CPN) gained 9 cents, closing at $25.43. JPMorgan’s 6.15% series BB noncumulative preferreds (NYSE: JPMPH) rose 3 cents to $25.33, while Goldman’s 5.5% series J fixed-to-floating rate noncumulative perpetual preferreds (NYSE: GSPJ) improved 2 cents to $25.07.

S&P placed the three banks – along with Bank of America Corp., Bank of New York Mellon, Morgan Stanley & Co. Inc., State Street Corp. and Wells Fargo & Co. – on “credit watch negative” on Tuesday, giving the entities a 50% chance of being downgraded by the end of the quarter. S&P said it was looking at the banks because the likelihood of the government stepping in in the event of another crisis was less than previously calculated.

“The action reflects our belief that U.S. regulators have made further progress and provided more clarity in enhancing their plans for resolving systemically important institutions – lowering the probability that the U.S. government would provide extraordinary support to these institutions to enable them to remain viable,” S&P said in its report. “This is substantiated by the notice of proposed rulemaking (NPR) the Federal Reserve made public last Friday.”

The proposed rule would require large banks to carry large loads of debt that could be converted into equity in cases of emergency.

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