Preferred stock trading volatile; JPMorgan firms on earnings; energy names retreat

By Stephanie N. Rotondo

Seattle, Jan. 14 – The preferred stock market gyrated between weak and nearly neutral on Thursday, though it ultimately finished with a softer tone.

The Wells Fargo Hybrid and Preferred Securities index ended off 4 basis points. Still, that was better than earlier readings, which had the index down was as much as 36 bps.

The declines came as the broader markets looked to regain territory. Investors were snapping up energy names as oil prices rebounded and JPMorgan Chase & Co.’s fourth-quarter earnings came in better than expected, contributing to the those gains.

But as preferreds go, energy-linked paper was mostly down, albeit fairly active on the day. JPMorgan’s numbers meantime gave its preferreds a boost.

Meanwhile, Fannie Mae and Freddie Mac preferreds continued their downward spiral, trading under $3. A market source noted that the GSEs are in guiding mode, lowering the expectations on single-family mortgage originations for the year by as much as 17%.

JPMorgan earnings beat

Notable for Thursday’s session was JPMorgan’s earnings release, which showed a better-than-expected profit at year’s end. The New York-based bank attributed its performance to its cost-cutting efforts and fewer legal fees.

On the heels of the financial report, the preferreds were ticking higher.

The 6.15% series BB noncumulative preferreds (NYSE: JPMPH) rose 15 cents to $25.90. The 6.1% series AA noncumulative preferreds (NYSE: JPMPG) increased 7 cents to $25.88.

Fourth-quarter net income was $5.43 billion, or $1.32 per share. That compared to income of $4.93 billion the year before.

Analysts had forecast EPS of $1.25.

The consumer banking division helped to offset the impact of falling oil prices. Consumer banking revenue increased 10% to $2.41 billion year over year. Meanwhile, the company said it intended to set aside $500 million to $750 million to cover loan losses pertaining to the oil and gas space.

The commercial bank segment of the firm – the unit in which most of the oil and gas loans are held – saw its profit fall to $550 million from $693 million.

Corporate and investment banking also improved, with the unit posting a $1.75 billion profit.

That compared to the $776 million earned in the same quarter of 2014.

Total revenue for the quarter came to $22.89 billion, up from $22.75 billion the year before.

As for legal fees, those declined to $644 million from $1.1 billion. Employee compensation fell to $1.86 billion from $2.02 billion, a sign the bank might have reserved less funds for year-end bonuses than in the previous year.

Oil busy, mostly lower

Domestic oil prices rebounded Thursday, attributed to short-covering and “natural covering” as options were set to expire at the end of the day.

West Texas Intermediate crude rose 2.03% to $31.10 a barrel.

In the common equity markets, oil’s rise prompted investors to snap up energy stocks, thereby pushing prices higher. While energy preferreds were also busier than usual, they did not necessarily perform on the same level.

Vanguard Natural Resources LLC’s 7.625% series B cumulative redeemable preferred units (Nasdaq: VNRBP), for instance, dropped 72 cents, or 14.09%, to $4.39. Legacy Reserves LP’s 8% series B fixed-to-floating rate cumulative redeemable perpetual preferred units (Nasdaq: LGCYO) were also down, losing 40 cents, or 10.96%, to close at $3.25.

Breitburn Energy Partners LP’s 8.25% series A cumulative redeemable perpetual preferred units (Nasdaq: BBEPP), however, closed up $1.32, or 29.4%, at $5.81.

Fannie, Freddie slump

Fannie and Freddie preferreds sunk in Thursday trading, though a market source noted that the paper outperformed its common equity counterparts.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) dropped 12 cents, or 3.88%, to $2.97 in heavy trading – over 4.2 million shares. Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) weren’t as active – about 1.6 million shares were exchanged – but declined 11 cents, or 3.55%, to $2.99.

Fannie’s variable rate series O noncumulative preferreds (OTCBB: FNMFN) meantime lost 41 cents, or 7.44%, to end at $5.10.

The GSE preferreds have been on the slide of late, though without any major news to act as a catalyst. Late Wednesday, The Wall Street Journal published a snippet on Fannie, noting that the agency’s common equity had dropped considerably as well, falling under $1.50.

The Journal noted that there was no news to push that paper down either but said that the last time the common was trading so low, it was October 2014 and a federal judge had just dismissed an investor lawsuit against the government’s conscription of the agencies’ profits.

One preferred stock source remarked that “a lot of times, there is no reason” for the losses mounting in Fannie and Freddie paper. “It’s just more people are ready and willing to throw in the towel on them.”

Still, the source also mentioned that Fannie had recently sought to lower expectations by forecasting weaker single-family mortgage originations – “their bread and butter,” the source said. That news could have certainly hammered the common, the source said, as well as enlightened investors to the fact that the “concept that these guys are cash machines” is just “fantasy.”

“The heavy volume [in the preferreds] could be nothing more than trading in sympathy with the common,” the source commented, though he added that the preferreds fared better than the straight equity. “Or it is a reassessment of the business risk of the GSEs. Maybe they aren’t doing as well as people thought.”

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