Preferred stock market stays firm; Wells Fargo gains on profit increase; JPMorgan mixed

By Stephanie N. Rotondo

Phoenix, July 12 - Preferred stocks were strong Friday, as investors reacted to good bank earnings from Wells Fargo & Co. and JPMorgan Chase & Co.

However, it was light in terms of volume, which a trader attributed to a decline in the consumer confidence index.

"People are thinking the economy is not as strong as they thought," he said.

As for the bank earnings, Wells Fargo reported a 19% increase in profit, while JPMorgan posted a 31% gain. Wells Fargo's preferreds were all trading up, though JPMorgan was on the mixed side.

Fannie Mae and Freddie Mac were meantime in the news again as preferred stock holders filed a class-action lawsuit against the Treasury Department, alleging that its takeover of the two mortgage giants was unlawful.

That suit follows a similar one filed by hedge fund Perry Capital on Sunday.

But a trader said the news had "zero effect" on Fannie and Freddie paper, which was trading in mixed fashion at midday.

Wells rises on earnings

Wells Fargo reported a 19% increase in its second-quarter profit on Friday, and its preferreds were rising as s result.

The 8% series J class A noncumulative perpetual preferreds (NYSE: WFCPJ) earned 6 cents, closing at $29.00. The 5.2% series N class A noncumulative perpetual preferreds (NYSE: WFCPN) increased 7 cents to $23.22.

The San Francisco-based bank posted a profit of $5.5 billion, or 98 cents per share, versus a profit of $4.6 billion, or 82 cents per share, the year before. Revenues were about flat at $21.4 billion.

Analysts polled by Thomson Reuters were expecting a profit of 93 cents per share. Though revenues were somewhat stagnant, they were also in line with expectations.

Still, there were signs of potential concern, especially given the Federal Reserve's recent comments about tapering off its stimulus program.

Wells Fargo saw new home loan applications fall to $146 billion from $208 billion in the same quarter of 2012. Mortgage originations dipped to $112 billion from $131 billion.

However, total average deposits rose 9% from the previous year to $1 trillion. Commercial and consumer lending was up 3% at $802 billion.

JPMorgan profit surges

JPMorgan also reported earnings on Friday, and despite a 31% surge in profit, its preferreds were mixed on the day.

The 5.45% series P noncumulative preferreds (NYSE: JPMPA) were steady at $23.75, while the 5.5% series O noncumulative preferreds (NYSE: JPMPD) dipped 2 cents to $23.98.

For the second quarter, the bank posted a profit of $6.5 billion, or $1.60 per share. Revenues were $25 billion, up from $22 billion the year before.

Analysts had been expecting a profit of $1.44 per share on revenues of $24.84 billion.

The increased profit was attributed in large part to gains seen in the investment banking unit, the credit card unit and in its mortgage lending unit.

The investment banking section saw revenues of $3.1 billion, up from $2.7 billion the year before. Fees increased 38% to $1.7 billion.

Of that $1.7 billion, $956 million were fees related to debt underwriting.

Mortgage originations meantime rose 12% to $49 billion. But, overall profit in the mortgage banking group dropped 14% to $1.1 billion.

In the credit card business, the bank's revenues swelled 10% to $105 billion.

Freddie, Fannie end mixed

Fannie Mae and Freddie Mac were the subjects of yet another lawsuit, a trader said on Friday.

The trader said that preferred stock holders had filed a class-action lawsuit against the Treasury Department on Thursday. The lawsuit alleges that the government agency's August 2012 amendment to a bailout agreement that allowed it to take nearly all of the mortgage giants' profits was unconstitutional.

The class-action suit comes on the heels of a suit filed on Sunday by Perry Capital, in which the hedge fund alleged that the government's 2008 takeover of the two firms was unlawful.

But both Fannie and Freddie saw their preferreds shaking off the news, and trading volume in both was much lighter than usual.

Freddie's 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) dropped a nickel to $5.07 and Fannie's 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) rose a dime, or 2%, to $5.10.

On Thursday, House Republicans unveiled legislation that would wind down the two mortgage firms.

If passed, the bill would end both Fannie and Freddie in five years and would reduce the government's role in the mortgage market.

Critics of the bill, however, say it would result in increased mortgage rates and would require higher down payments for Federal Housing Administration loans.

Last month, senator Bob Corker introduced similar legislation to the Senate.

MPG Office active on lawsuit

MPG Office Trust Inc.'s preferreds were trading actively as holders of the securities filed a lawsuit to stop a proposed merger and tender offer with Brookfield Office Properties Inc.

The 7.625% series A cumulative redeemable preferreds (NYSE: MPGPA) closed at $25.30, which was unchanged on the day but down from opening levels of $25.38. The paper hit an intraday high around $25.70.

On April 25, MPG and Brookfield announced their plans to merge. Brookfield then announced a tender offer for all outstanding MPG preferreds.

But MPG hasn't paid dividends on the securities since 2008, which means that about $9 of accrued and unpaid dividends have piled up. In its tender offer, Brookfield did not offer to pay the extra funds.

And, if holders do not participate in the tender, their holdings will be converted to Brookfield preferreds and that company would have the sole decision-making power in whether to pay the accrued dividends or not.

According to the class-action lawsuit, the merger and tender offer violate the preferred indenture, as the preferred shares would be subject to a conversion if not validly tendered. The indenture states that such a conversion would not occur without the holders' consent.

A hearing to request an injunction on the merger and tender is scheduled for July 24. Both MPG and Brookfield have agreed to put off closing the deals - the tender was to expire July 17 - until the hearing has been held.

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