Volatility shadows preferred stocks; Fannie Mae, Freddie Mac remain focus of secondary

By Andrea Heisinger and Stephanie N. Rotondo

New York, June 4 - A trader said preferred stocks were "coming back" early in Tuesday trading, following the previous week's sell-off.

By the close, the market was called "very volatile" by a source, with a slight upward draft seen late in the day, but still ending lower.

"We ended down about 16 bps [basis points] or about 4 cents," the source said. "We slid south until mid-afternoon, about 29 bps or 7 cents, and then edged up."

In the primary, AmTrust Financial Services Inc.'s new $115 million of 6.75% series A noncumulative perpetual preferreds were seen around $24.70 at midday.

The deal priced late Monday, coming in line with price talk and upsized from $100 million.

Meanwhile, secondary dealings were focused on Fannie Mae and Freddie Mac.

The primary is expected to remain stagnant for the time being.

"There's not a lot getting done right now," a trader said. "Until things improve, it's going to remain light."

Fannie, Freddie in spotlight

"Fannie and Freddie are all jumping," a trader said at midday Tuesday.

On Monday, Guggenheim released a research note that indicated preferred holders probably would not see much recovery in the event the government-backed mortgage giants are liquidated. But the trader remarked that another report said that there could be money left over for such holders, though it was unclear just how much they might get back.

Bloomberg reported Tuesday morning that a bipartisan group of senators was polishing a new bill that would liquidate the agencies and create one single company. In the event of liquidation, the U.S. Treasury would get its money first.

Freddie's 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) were up 50 cents at midday, or 8.29%, at $6.53. Fannie's 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were up 60 cents, or 10%, at $6.60.

A report out Tuesday on preferred stock relative values from BofA Merrill Lynch also mentioned Fannie Mae and Freddie Mac.

Prices of preferreds from the two government-sponsored agencies have risen substantially, with little chance that they will resume dividend payments, according to the report.

There is also "little chance of a privatization that would provide a substantial benefit to the preferred holders," the report states.

Financials dominate

After the close, a trader said that most of the day's most actively traded preferreds were from the financial sector.

A series D preferred from JPMorgan Chase & Co. led trading with 801,000 shares changing hands, ending off 1 cent at $24.89.

Next up was a series B preferred from HSBC Holdings plc, which had 680,000 shares trade, ending off 17 cents on the day at $27.15.

The London-based bank was in the news Tuesday after the attorney general of New York state filed suit over some foreclosure practices.

Goldman Sachs Group Inc. saw its series I preferred trade 630,000 shares, ending off 39 cents on the day at $24.66.

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