RBS preferreds jump ahead of addition to index; JPMorgan, Wells Fargo mixed post-earnings

By Stephanie N. Rotondo

Phoenix, July 13 - Preferred stocks rose on Friday, though one trader was puzzled as to why.

"I don't know why everything's jumping up," he said. With JPMorgan & Chase Co. stating that it could have "hidden losses" from the first quarter, "I expected banks to sell off, and they're not.

"People are just chasing yield," he said.

"It was a good day in the preferred market," another market source said. "Very much more liquid, though most of it was in [Royal Bank of Scotland Group plc]."

RBS preferreds got a sizeable boost during the session, though without any fresh news to drive the move. The source speculated that the bank's upcoming addition to Standard & Poor's preferred index might have been playing a role.

Despite the general optimism, there wasn't much movement in JPMorgan's preferreds nor in Wells Fargo & Co.'s preferreds. Wells Fargo also had earnings out Friday, which were deemed "decent."

Recent new deals from Vornado Realty Trust and Chesapeake Lodging Trust remained well traded.

RBS steadily gaining

Royal Bank of Scotland's preferreds were heavily traded on Friday and significantly stronger by day's end.

The 6.08% noncumulative guaranteed trust preferreds (NYSE: RBSPG) rose 35 cents, or 2.32%, to $15.41, while the 6.4% series M noncumulative dollar preference shares (NYSE: RBSPM) jumped up 44 cents, or 2.38%, to $18.90.

The 6.6% series S preference shares (NYSE: RBSPS) meantime earned 42 cents, or 2.27%, ending at $18.92. The 7.25% series Ts (NYSE: RBSPT) had a higher percentage gain, closing up 63 cents, or 3.06%, at $21.19.

The 5.9% noncumulative guaranteed trust preferreds also had a big gain, finishing up 46 cents, or 3.04%, at $15.57.

Though there was a lack of news to act as a driving force in the Edinburgh-based bank's preferreds, one market source had a theory.

The S&P preferred index, he said, is a "very poorly maintained index, but the most publicly available one." As such, many investors base their investments on what is included in the index.

The problem is that S&P only updates its index once a year, whereas other "good" indexes rebalance every month.

"And there's always issues that they miss," the source said of S&P's index - for instance, RBS' preferreds.

The source said it was believed that the RBS issues were being shortchanged and needed to be added to the list. That wish was recently granted, when last week S&P announced its newly rebalanced index, which included not one, but all of RBS' preferreds.

As a result of the addition, which will occur July 20, "anybody that manages their money to that index has to go out and buy them."

Earlier in the week, he heard that broker-dealers were snatching up paper in anticipation of increased demand. There is rumored to be one large exchange-traded fund in California that uses said index as a benchmark, and it is believed that the firm has been a "large buyer."

JPMorgan, Wells Fargo mixed

In its earnings release Friday, JPMorgan said that it had lost $5.8 billion this year from bad trades, which traders might have deliberately lied about.

Despite the loss, the bank managed to report a nearly $5 billion profit for the second quarter.

Wells Fargo meantime reported a second-quarter profit of $4.6 billion, a 17% gain.

"Stocks were up significantly" on the back of the strong kick-off to bank earnings season, a source said. Though JPMorgan "has its issues," its results - as well as those of Wells Fargo - were "solid."

"Everyone took comfort from that," the source said.

The earnings did little to affect either banks' preferreds.

Wells Fargo's 7.875% enhanced trust preferreds (NYSE: BWF) were up 21 cents at $26.15. JPMorgan's 8.625% series J noncumulative preferreds (NYSE: JPMPI) ended down 7 cents at $27.15.

Vornado, Chesapeake fare well

Vornado's $300 million of 5.7% series K cumulative redeemable perpetual preferreds - a deal that priced Wednesday and freed up Thursday - was seen trading in a $25.15 to $25.20 context, according to a trader.

He said he also saw a $25.22 offer for paper.

Chesapeake Lodging's new 7.75% series A cumulative redeemable preferred shares were also stronger at $25.10 bid, $25.20 offered.

That deal priced Tuesday and freed Wednesday.

On Wednesday, Chesapeake's 660,000-share greenshoe was partially exercised, with 600,000 additional shares being sold. That brought total issuance to $125 million from $110 million.

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