Midday Commentary: Preferreds reverse course; Fannie, Freddie shares weaken

By Stephanie N. Rotondo

Phoenix, Aug. 8 - An uptick in equities was helping the preferred stock market gain ground on Thursday.

"The market's taking off," a trader said.

Still, with no new issues in sight, activity remained muted.

Fannie Mae reported earnings early in the day, following Freddie Mac's earnings release on Wednesday. Despite increased profits, the agencies' preferreds were turning downward.

Fannie's 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were down a dime, or 2.08%, at midday, at $4.71. Freddie's 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) dropped a quarter, or 5.15%, to $4.60.

Though the mortgage giants have seen a return to profitability - Fannie posted a $10.1 billion profit for the second quarter, while Freddie saw profits of $5 billion - a trader said that most are assuming that the government will continue in its plans to wind them down.

However, the trader noted that with all of the profits the companies are making, the government might take a different route.

"They can't just throw that money away," he said.

Fannie intends to make a $10.2 billion dividend payment to the Treasury in September. Once that payment is made, Fannie will have paid $105 billion to taxpayers, after taking $117.1 billion in 2008.

For its part, Freddie is planning to make a $4.4 billion payment, bringing its total paid to the Treasury up to $41 billion.

Freddie took $71 billion in bailout funds.

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