Bernanke Gives mREITs Cause to Cheer

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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.

Dwindling mortgage REIT dividends may have convinced you that these investments may not be the best bet for your retirement portfolio, but remember that the best investing approach is to choose great companies and stick with them for the long term. Still, there are some definite dividend-winners out there that are worthy of your attention. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

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  • Report this Comment On July 12, 2013, at 2:23 PM, spokanimal wrote:

    Bernanke is correct that the 7.6% unemployment rate overstates the health of the labor markets.

    The "labor participation" rate remains near record lows in the U.S. Anyone who gives up and stops looking for a job is removed from the calculation of the unemployment rate, and by giving up, they actually cause the unemployment rate to improve (tick lower).

    The labor participation rate ALWAYS includes such a person as unemployed, whether they're looking for work or not. One's read on the participation rate needs to be buffered by people retiring... especially given that retirements are rising with the baby-boomers entering retirement age...

    ... but even when you buffer the L.P rate for such influences, the state of employment in America still reflects the country's sluggish rate of growth overall.


  • Report this Comment On July 12, 2013, at 5:40 PM, sluggowski wrote:

    Today AGNC is down 3.33% - at 21.9. Either you were wrong, or there is something wrong with AGNC, the purest MREIT.

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