Let's update the prospects for MREIT's not that the Federal Reserve Open Market Committee has set some new targets for exiting a highly accomodative monetary policy, widely called QE....X. First, transitioning from Operation Twist, where short term securities are exchanged for longer term securities, to direct buying of longer term treasuries will have limited direct impact on MERIT's. The Fed is making the change commencing January 2013, simply because they are running out of short term securities in their portfolio to exchange. The new policy of direct purchases actually increases their balance sheet by approximately $ 1Trillion/year. Secondly, the continuation of the Fed's purchase $ 40 Billion/month of Mortgage Backed Securities and the specific targeting of 6.5% real unemployment, factoring in Labor Participation as part of the unemployment rate, is directly relevant to MREIT's. These firms now have substantial clarity about the continuing magnitude of Fed purchases and the specific conditions for the program to end. As previously indicated, keeping rates artificially low raises the value of the MREIT's existing portfolio of government guaranteed MBS's. adjusted for the decay, or early payoff of their holdings. Keep in mind payment on the MBS
S's is government guaranteed, not the early termination or refinancing of mortgage securities. This favors the larger older MREIT's, such as AGNC, that have a larger percentage of older higher yield MBS's. Since the MREIT field has become a bit crowded over the past two years with newer entrants, we will likely see some healthy consolidation, favoring the better performing firms including AGNC, MTGE, WMC, PMT and others. MREIT's attain their margin from the difference between their lower cost of borrowing and the higher percentage realized from monthly mortgage payments. These results are increased or diminished by leverage and hedging. Again the larger and more experienced companies are advantaged. In summary I believe that the greater visibility into the size and conditionality of Fed involvement in MBS asset purchases is a net positive for the larger, older, and more agile MREIT's. Even if they experience some margin compression resulting in lower yields, 10+% is comparatively attractive and difficult to replicate. Additionally decay or early payment, requires borrowers to refinance, a cumbersome, difficult, and unattainable process for many.