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They're still down in the dumps, but a rally may be imminent for the badly bruised mortgage REIT sector, following Federal Reserve Chair Ben Bernanke's recent comments regarding the economy and, by extension, the beginning of the end of QE3.
Stock prices take a dive amid the panic
Mortgage REITs have been in the grips of a Fed-induced taper terror ever since the Federal Open Market Committee ended its two-day meeting in June. Sector heavy Annaly Capital (NYSE: NLY ) has been hit by an 11% dip in share price since June 18, with Armour Residential (NYSE: ARR ) experiencing the same percentage drop. Meanwhile, American Capital Agency (NASDAQ: AGNC ) has seen its own stock take a 14% dive.
Adding insult to injury, last Friday's jobs report only added fuel to the fire burning under the battered sector, despite the fact that closer examination revealed a less-than-stellar view of the economy, which is good news for those fearing an early end to QE3. A brief rally did ensue on Monday, perhaps fueled by investors taking advantage of fire-sale mREIT prices.
Fed isn't ready to let the economy stand on its own
The release of the latest FOMC meeting minutes, combined with Bernanke's comments in Boston late yesterday, should give the beaten-down trusts a reprieve, however.
The minutes clearly show that "all members but one" advocated for an extension of the Fed's current economic stimulus program, because of the information available to the committee in regards to the economy. Only the one holdout saw the employment numbers as a positive indicator of an economic turnaround, and that member was overruled by the majority, whose collective opinion was that it isn't time yet for the training wheels to come off. Further, short-term interest rates were discussed, and the FOMC was very clear that the current low-rate situation will not change until the unemployment rate drops to 6.5%.
Comments made by Bernanke after the release of the meeting minutes were supportive of the notion that QE3 won't be tapering any time soon. He noted that the current unemployment rate of 7.6% possibly "overstates the health of the labor market," and that "highly accommodative monetary policy for the foreseeable future is what's needed."
Calming the waters
In my opinion, Bernanke went out of his way to let the markets know that QE3 is no longer infinite, but neither is it coming to an end -- or necessarily slowing down -- for the foreseeable future. For mREITs, particularly the agency-only players mentioned above, this is good news indeed. At minimum, this respite from taper dread should give mortgage REITs more time to plan for this eventuality -- and give everyone a chance to wrap their minds around the inevitable end of quantitative easing.
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