Because of the massive bailout of the GSEs the U.S. Treasury holds $117.1 billion in Fannie Mae senior preferred shares and $72.3 billion in Freddie Mac senior preferred shares. After determining it would be able to recapture most of its valuation allowance for deferred tax assets (DTA) at the end of the first quarter, Fannie Mae announced on May 9 that it would pay the Treasury a second-quarter dividend of $59.5 billion. The U.S. government's investment in Fannie Mae and Freddie Mac is paying off quite handsomely. Freddie is expected soon to recapture its DTA, setting up another special dividend, and no matter how much in dividends the GSEs pay to Uncle Sam, there is still no mechanism for either GSE to repurchase any government-held preferred stock.
Junior PreferredDividend payments on junior preferred shares of Fannie Mae and Freddie Mac were suspended when the GSEs were taken under conservatorship in September 2008, instantly sinking in price to pennies on the dollar. But with investors seeing a possibility for life for the GSEs after a full repayment of the government bailout, the junior preferred shares have also rallied this year. After all, Fannie May had $3.2 trillion in total assets, while Freddie had $2.0 trillion in assets, as of March 31.
Stocks Down on Mixed SignalsThe broad indices all ended lower, as investors continued to react to the mixed signals Wednesday, on when the Federal Reserve might curtail its monetary stimulus. The Fed has kept the short-term federal funds rate in a range of zero to 0.25% since late 2008. Since September, the Fed has been expanding its balance sheet through net monthly purchases of $85 billion in long-term securities, in an effort to hold long-term rates down In a strong bull market so far this year, one of the biggest questions for investors is when the Federal Reserve will finally pull back on its economic stimulus efforts, and how dramatically the central bank's policy will change. .
In China, fears of a slowing economic recovery were being sparked by a drop in the flash HSBC Purchasing Managers' Index on Thursday. The preliminary report on manufacturing showed that China's factory activity slowed for the first time since October, with the index declining to 49.6 in May, below the level of 50 level dividing expansion and contraction. The concern over China and the eventual end of the Fed's stimulus offset the strong housing price numbers from the FHFA, as well as two other positive U.S. economic reports:
- The Department of Labor reported that first-time unemployment claims for the week ended May 18 totaled 340,000, declining by 23,000 from a revised figure of 363,000 the previous week. The new-claims figure was slightly below the average estimate of 345,000, among economists polled by Thomson Reuters. The four-week average for jobless claims was 339,500, down slightly from a revised 340,000 the previous week. The Labor Department also said continuing claims were down by 112,000 during the week ended May 11 to 2.912 million. Economists had expected continuing claims to come in at 3 million.
- The Census Bureau reported that sales of new single-family houses rose 2.3% to a seasonally adjusted annual rate of 454,000 in April, from an upwardly-revised rate of 444,000 during. Economists were expecting the pace of sales in April to increase to an annual rate of 425,000.
-- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn