Fed Minutes Should Provide a Lift for These Mortgage REITs

Mortgage REITs have been suffering terribly this week, particularly since American Capital Agency (NASDAQ: AGNC  ) reported a lousy third quarter, which followed two other dour quarterly earnings announcements.

Tuesday saw a virtual bloodbath in the sector, with American Capital Agency plummeting by almost 8.4%, while fellow agency player Armour Residential (NYSE: ARR  ) dropped by nearly 6.4%. Even hybrid mREIT American Capital Mortgage Investment fell by 5.3%, possibly in sympathy with its big brother – both managed by former Freddie Mac executive Gary Kain.

FOMC minutes should provide some relief
The sector could rebound later, though, following the release of the Federal Open Market Committee meeting minutes at 2:00 p.m. While markets were surprised last month by the Fed's no-taper stance, there seems little doubt that the taper will be put off until 2014  – a state of affairs that should give mREITs an immediate shot in the arm.

If analysts thought the economy was ready for a QE3 exit previously, many have likely changed their minds by now. A big factor weighing in on a postponement of the taper will be the government shutdown and squabble over the debt ceiling, which has still not been truly addressed. The effects are not difficult to measure. Yesterday, the Conference Board reported a drop in its consumer confidence ratio to 71.2 from September's 80.2, and State Street's Investor Confidence reading dropped by 5.6 points from the prior reading.

September's jobs data, despite showing a decrease in the national unemployment rate from 7.3 to 7.2, was disappointing, showing an anemic economy that added a mere 148,000 jobs during that month, rather than the expected 180,000. Even Chicago Fed President Charles Evans has noted that both of these issues will probably lead to a deferment of tapering well into next year.

A temporary reprieve
While a short-term rally in the sector will surely be welcome, the current troubles afflicting mREITs won't go away for some time. If the market believes that the taper will be put off until spring, mREITs may have some time to regroup, and bulk up their dwindling book values before the next taper terror hits. However, the fact that they just don't know when the Fed will move on the issue is causing quite a bit of damage right now.

For American Capital Agency, the $0.24 drop in book value hurt, as did Armour's $0.17 book value decrease. Following second-quarter results that also disappointed, these two agency players could definitely use some good news to help lift them out of their current malaise.

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