Preferreds soften amid weak economic data; Bank of America sees profit, preferreds decline

By Stephanie N. Rotondo

Phoenix, Oct. 15 – Preferred stocks were melting in early midweek trading, though they had rebounded some from the day’s initial lows.

The Wells Fargo Hybrid and Preferred Securities index finished off 9 basis points. That was up considerably from the lows, which were hit shortly before 10 a.m. ET and then then again shortly before 2 p.m. ET.

While the index didn’t end at the day’s high, it was near it.

The broader markets were also volatile – mostly toward the downside – amid a drop in consumer spending, manufacturing and inflation data. The weak information has investors considering whether the U.S. economy can hold up amid a global economic slowdown.

“It was an ugly day,” one trader said. “The [Treasury] bond market was taking it on the chin.”

At one point, he said, the long-bond had rallied 6 points, only to give up some of those gains.

Bank of America Corp. came out with its third-quarter results on Wednesday, showing a surprise profit, which was brought down by massive legal fees.

Following the release, the Charlotte, N.C.-based bank’s preferreds traded mostly lower.

As bank earnings roll on, Goldman Sachs & Co. is slated to announce its earnings on Thursday. Investors are said to be expecting an improvement in profit year over year, but the investment firm’s preferreds were still heading downward.

Bank of America slips

Bank of America reported a surprise profit Wednesday, despite a nearly $17 billion settlement with the government regarding its role in the mortgage banking crisis.

But even with that profit, the bank’s preferreds could not hold up.

The 6.625% series W noncumulative preferreds (NYSE: BACPW) – the most active of the structure – fell 8 cents to $25.03.

At mid-morning, the preferreds were down 13 cents at $24.98.

Net income for the third quarter was $168 million, down from $2.5 billion the year before. On an adjusted basis and excluding an accounting gain, the earnings per share was 40 cents, better than the 32-cent average estimate forecast by analysts polled by Bloomberg.

Revenue fell 4.3% to $21.2 billion. Revenue was helped by a 24% increase in global banking, which includes the investment banking unit.

Trading profit gained 21% and fixed-income and trading revenues rose 11% to $2.25 billion, surpassing estimates.

Eyes on Goldman

With Bank of America, JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. earnings done and over with, investors will likely be turning their eyes to Goldman Sachs, which is slated to release earnings on Thursday.

In the last year, Goldman has seen 1% growth year over year. That streak is expected to continue in the third quarter.

But even with that optimism, Goldman was weaker on the day, at least for the most part.

The 5.5% series J fixed-to-floating rate noncumulative perpetual preferreds (NYSE: GSPJ) slipped 6 cents in early trades to $24.01. It ended even lower at $23.99.

The 6.375% series K fixed-to-floating rate noncumulative preferreds (NYSE: GSPK) were down 8 cents to $25.45.

However, the 5.95% series I noncumulative preferreds (NYSE: GSPI) rose 6 cents to $24.03.

Yuma deal ‘goofy’

As the overall markets remained in turmoil, the primary preferred stock space has been near radio silent.

On Tuesday, Yuma Energy Inc. announced an offering of series A cumulative redeemable perpetual preferred stock, coming out of MLV & Co. LLC. One trader characterized the sale as a “goofy deal,” seeing the issue at $22.50 in the early gray market.

The trader said that the deal is being shopped at a “huge discount to par” and that it was being “loaded up with concessions.”

The deal has not yet priced.

Dividends will be paid on a monthly basis. If the company fails to pay a dividend, or if the shares are not listed on any exchange for 180 days, the dividend rate will increase by 2%.

The preferreds become redeemable on the third anniversary of issuance and upon a change of control.

The redemption price is par plus accrued dividends. Upon a change of control, the preferreds can also be converted into common stock.

The company intends to list the new securities on the New York Stock Exchange under the ticker symbol “YUMAPA.”

Proceeds will be used to pre-pay outstanding debt under a credit agreement.

Yuma Energy is a Houston-based oil and gas company.

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