Wells Fargo: Financial Winner

NEW YORK ( TheStreet) -- Wells Fargo was the winner among resurgent large U.S. banks on Thursday, with shares rising more than 2% to close at $40.72.

Bank stocks rebounded from a four-day slide, heading into the Labor Department's monthly non-farm payrolls report on Friday, which will include the U.S. unemployment rate. The KBW Bank Index ( I:BKX) rose over 1% to close at 60.64, with all but one of the 24 index components showing gains.

The broad indices all ended with gains to snap a two-day losing streak, after the Department of Labor said initial unemployment claims during the week ended June 1 totaled 346,000, declining by 11,000 from an upwardly revised 357,000 the previous week. Economists polled by Thomson Reuters on average expected new jobless claims to come in at 345,000. The four-week moving average for unemployment claims was 352,000, increasing from a revised figure of 348,000 the previous week.

On a positive note, outplacement consultant Challenger, Gray & Christmas said that job cuts in the United States during May totaled 36,398, which was a decline of 4.5% from April, and the third straight monthly decline. Year-to-date layoffs were down 11%, according to the report.

Earlier on Thursday the European Central Bank announced it would leave key "interest rate on the main refinancing operations," unchanged at 0.5%, while keeping its deposit facility rate at 0.00%. ECB president Mario Draghi said during a press conference that a negative bank deposit rate was under consideration, because of "downside risk" for the European labor market.

"The accommodative stance of our monetary policy, together with the significant improvements in financial markets since mid-2012, should contribute to support prospects for an economic recovery later in the year," Draghi said.

The Bank of England on Thursday also said it would leave its benchmark interest rate unchanged at 0.5%, while maintaining "the stock of asset purchases financed by the issuance of central bank reserves" at 375 billion pounds ($578 billion).

Wells Fargo

Shares of Wells Fargo have returned 21% year to date, following a 27% return during 2012. The shares trade for 1.8 times tangible book value, according to Thomson Reuters Bank Insight, and for 10.4 times the consensus 2014 earnings estimate of $3.90 a share. The consensus 2013 EPS estimate is $3.71.

Based on a quarterly payout of 30 cents, the shares have a dividend yield of 2.95%. The company in March announced the Federal Reserve had approved its plan for "a proposed increase in common stock repurchase activity for 2013 compared with 2012." Wells Fargo's common share buybacks during 2012 totaled $3.9 billion.

Fannie and Freddie

Common shares of Fannie Mae ( FNMA) and Freddie Mac ( FMCC) showed continued volatility, ending strong after brutal pullbacks over the previous two sessions.

Fannie's shares rose 9% to close at $1.99, following a 28% decline over the previous two days. The shares have risen 665% since the end of 2012, when they closed at 26 cents.

Freddie's shares were up 8% to close at $1.89, after a two-day slide of 29%. The shares are up 627% year-to-date, also having closed at 26 cents on Dec. 31.

Fannie and Freddie -- known as the government-sponsored enterprises, or GSEs, and holding roughly $5.2 trillion in mortgage loans and mortgage-backed securities. Both firms were taken under government conservatorship in September 2008, but continue their key role by purchasing roughly 90% of newly originated mortgage loans in the United States.

The U.S. Treasury holds $117.1 billion in Fannie Mae senior preferred shares and $72.3 billion in Freddie Mac senior preferred shares, for assistance provided to the companies. The GSEs returned to profitability last year and they have paid or announced dividends to the government totaling $131.6 billion. But the companies are not allowed to repurchase any of the government-held preferred shares or consider restoring dividends on junior preferred shares.

Long-term investors holding GSE common shares and junior preferred shares expect a political settlement that will allow Fannie and Freddie eventually to repay the government and go on operating, or a dissolution of the GSEs that includes an eventual payout to investors.

Bloomberg on Tuesday reported that Senators Bob Corker (R., Tenn.) and Mark Warner (D., Va.) are drafting a bill to dissolve Fannie and Freddie over a period of five years, while having the U.S. Treasury take over the GSEs' mortgage loan guarantees. The GSEs would, in part, be replaced by a new government agency.

The draft bill signals a major change of attitude in Washington, as it gives consideration to an eventual recapture of value by non-government shareholders of the GSEs.

A petition to " restore fairness to Fannie Mae and Freddie Mac common shareholders" was created at the White House's Website on Saturday, requesting the government "provide fairness and protection to GSE shareholders." The petition compared the bailout of Fannie and Freddie to the government bailouts of American International Group ( AIG) and Citigroup ( C), raising the prospect for a conversion of government-held preferred shares to common shares.

That type of conversion enabled American International Group to move past its bailout and the company's repurchases and other sales of converted shares enabled the Treasury to claim a profit of $5 billion.

The petition Thursday afternoon was still far from its goal of 100,000 signers, with only 3,357 signatures at 4:0 p.m. ET, but that was three times as many as the previous day.


-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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