Brent Nyitray, CFA, MBA

This report will probably hold the hawks on the Fed at bay and allow them to continue to maintain ultra-low interest rates. That said, the bond market has been pricing in a tapering of quantitative easing.

Ten-year bond yields influence everything from mortgage rates to corporate debt. Now, they’re the benchmark for long-term US interest rates.

We’re nearing the end of August—many investment professionals will be watching markets from the beach. The second revision to Q2 GDP will be out on Friday.

The NAHB Wells Fargo Housing Market Index, which measures homebuilder sentiment, peaked at 71 during the height of the housing bubble in late 2005. It bottomed out at 8 in early 2009.

In July, the Northeast saw housing starts jump from 116,000 to 134,000, while starts rose from 171,000 to 175,000 in the Midwest.

QE increased the size of the Fed’s balance sheet almost eightfold since the turn of the century. Currently, the Fed’s balance sheet holds around $4.5 trillion.

Some Fed members argued that while unemployment is low, the overall labor utilization rate is low. The Fed has more work to do to achieve full employment.

On August 17, 2016, the Fed released the minutes from the July FOMC meeting. Overall, bonds took the FOMC minutes to be relatively dovish.

Pretty much anything that has a material adverse effect on a company will be considered an MAE, although there are exceptions to that rule.

We’ll look at the MAE clause of the Post Properties and Mid-America Apartment merger agreement. We’ll see how Mid-America could walk away from the deal.

Post Properties was trading at ~$62 per share before the deal with Mid-America was announced. If the deal breaks, it could return to those levels.

Mid-America Apartment is buying Post Properties (PPS) in a $4.5 billion stock transaction to create the largest publicly traded apartment REIT.

Post Properties and Mid-America Apartment announced a merger. Mid-America will purchase Post Properties for ~$4.5 billion in stock and assumed debt.

The ten-year bond yield fell by 8 basis points to 1.51% for the week ending August 12, 2016. Ginnie Mae TBAs rose by 4 ticks and closed at 104 28/32.

For the week ending August 12, 2016, Fannie Mae TBAs ended at 103 24/32—up 4 ticks for the week. The ten-year bond yield fell by 8 basis points to 1.51%.

Lately, mortgage rates and bond yields have shown a weak correlation. Treasury yields have fallen over the past month, while mortgage rates have been steady.

We’ll look at the MAE (material adverse effect) clause of the Everbank (EVER)-TIAA merger agreement and see how TIAA could walk away from the deal.

Everbank is a major player in the mortgage origination space. TIAA is looking to take some of that mortgage origination and put it on its balance sheet.

On August 8, 2016, TIAA and Everbank (EVER) announced a merger in which TIAA will purchase Everbank for $19.50 per share in cash, or ~$2.5 billion.

There are two basic types of state foreclosure laws—judicial and non-judicial. In non-judicial states, foreclosures are handled through a streamlined process.

In June, the total foreclosure inventory fell 26% from a year ago to 375,000 homes. This works out to be about 1% of all homes with mortgages.

Planned job cuts rose 19% in July compared to June. However, they fell 57% YoY (year-over-year) in July.

Employment costs rose 0.6% in the quarter ending June 30, 2016. Over the past 12 months, compensation costs for civilian workers have risen 2.3%.

In July 2016, the labor force participation rate rose to 62.8%—up 10 basis points from June. The labor force rose from 158.9 million to 159.3 million.

Lately, mortgage rates and bond yields have shown a weak correlation. Treasury yields have fallen in the past month, while mortgage rates have been steady.

Ten-year bond yields influence everything from mortgage rates to corporate debt. Now, they’re the benchmark for long-term US interest rates.

There isn’t much in the way of market-moving economic data this week. One of the highlights will be the JOLTS job openings data on Wednesday.

Annaly positioned itself to reduce its interest rate risk and increase its credit risk. Since 2009, global bond markets have risen in value by about $17 trillion.

Annaly Capital leverages its portfolio with repurchase agreements. Annaly Capital’s repurchase agreements fell from $54.4 billion to $53.9 billion in 2Q16.

By investing in commercial real estate, Annaly Capital is increasing its returns. At the same time, it’s taking on credit risk.

Annaly Capital ended 2Q16 at 5.3x leverage—flat with the first quarter. It’s still less than the 6.3x ratio it operated with before the taper tantrum.

Annaly Capital reported core earnings of $0.29 per share in 2Q16. Wall Street analysts expected $0.29 per share—earnings were in line with the expectations.

On July 28, 2016, Oracle (ORCL) and NetSuite (N) announced a merger. Oracle will purchase NetSuite for $109 per share, or $8.6 billion net of cash and debt.

The relationship between Oracle and NetSuite goes back a long way. Oracle co-founder Larry Ellison and his family own almost half of NetSuite stock.

In the merger deal between Oracle (ORCL) and NetSuite (N), the MAE clause lays out the circumstances under which Oracle can back out of the transaction.

NetSuite agreed to a non-solicitation agreement with a fiduciary out. This means that during the pendency of the merger, NetSuite may not contact other potential buyers.

Oracle (ORCL) co-founder Larry Ellison and his family control 45% of NetSuite (N) stock. So it’s theoretically possible but not likely that a company could make a hostile bid.

With most mergers, the rate of return is driven by the time it takes to finalize the transaction. For Oracle (ORCL) and NetSuite (N), the timeline will be driven by the antitrust waiting period.

American Capital Agency increased its “at risk” leverage ratio in 1Q16. It funded its balance sheet with ~$41.9 billion in repurchase agreements.

American Capital Agency declared a dividend of $0.60 per share for the quarter. It didn’t change from $0.60 per share declared during the fourth quarter.

American Capital Agency’s book value per share rose from $22.09 in 1Q16 to $22.22 in 2Q16—the first increase in the book value per share in six quarters.

In June 2016, private construction fell 0.6%, and public construction fell 0.6% month-over-month.

Mortgage rates and bond yields have shown a weak correlation. Treasury yields have fallen over the past month, while mortgage rates have been steady.

There isn’t much real estate–related economic data this week. There are some important macro reports as well as the jobs report on Friday.

Fed Chair Janet Yellen mentioned that the Fed intends to let the labor market run hot for a while in order to try and encourage wage growth.

On July 27, 2016, the Fed ended its FOMC meeting without hiking the federal funds rate. The decision was unanimous with only Esther George dissenting.

Home prices in the Pacific and Mountain states have outperformed prices in the rest of the country over the past two years.

May’s 5.6% year-over-year gain in home prices has put the FHFA (Federal Housing Finance Agency) House Price Index at about 4% above its April 2007 level.

In May 2016, the FHFA (Federal Housing Finance Agency) reported that house prices rose by 0.2% month-over-month and 5.6% year-over-year.

In June 2016, housing starts rose from 1.1 million to ~1.2 million. We also saw increases in both single-family and multifamily starts.

D.R. Horton (DHI) reported net income of $294.8 million, or $0.66 per share, for 3Q16.

The ten-year bond yield rose by 2 basis points to 1.6% for the week ending July 22, 2016. Ginnie Mae TBAs fell by 6 ticks to close at 104 12/32.

Lately, mortgage rates and bond yields have shown a weak correlation. Treasury yields have fallen over the past month, while mortgage rates have been steady.

Housing starts and building permits came in around 1.2 million—towards the top end of a narrow range over the past year.

The FOMC meets on July 26 and 27. Two weeks ago, it was a non-event. The market has been raising its estimates for the federal funds rate by the end of 2016.

Fannie Mae’s monthly National Housing Survey asked respondents if it’s a good time to buy and sell a house. They’re more confident that it’s a good time to sell.

Arbitrageurs will certainly be interested in setting up the ARM Holdings (ARMH) spread, especially if they can get an 8% return using the ordinary shares.

ARM Holdings (ARMH) was trading at about $47 per share before the deal with Softbank was announced. The risk-reward ratio is about 12:1.

Softbank is paying a pretty penny for ARM Holdings (ARMH). The premium to the prevailing share price was in the low 40%.

Softbank decided to waive any antitrust or regulatory conditions to the transaction. It doesn’t care if the regulators have issues—it’s buying the company.

ARM Holdings and Softbank are merging in a cash transaction. In an unusual step, there aren’t regulatory or antitrust conditions to the transaction.

The Softbank-ARMS Holdings merger intends to increase Softbank’s growth so that it can position itself as a leader in Internet of Things.

On July 18, Japan’s Softbank and the United Kingdom’s ARM Holdings (ARMH) announced a merger where Softbank will buy ARM for 1,700 pence in cash.

There are two basic types of state foreclosure laws—judicial and non-judicial. In non-judicial states, foreclosures are handled through a streamlined process.

The federal government has taken numerous steps to reduce foreclosures. It started with loan modification programs.

Ginnie Mae and the TBA market The Fannie Mae TBA (to-be-announced) market represents the usual conforming loan—the plain Fannie Mae or Freddie Mac 30-year mortgage. When a mortgage banker makes a Veterans Affairs or Federal Housing Authority loan, that loan is securitized and put into a Ginnie Mae TBA. The biggest difference between Fannie Mae […]

When the Fed talks about buying MBS (mortgage-backed securities), it’s referring to the TBA (to-be-announced) market.

Mortgage rates are the lifeblood of the housing market. The Fed’s plan to help the housing market started when it pushed rates lower to allow people to refinance.

This week is relatively data-light. However, a slew of reports will interest real estate investors.

In the risk arbitrage world, an 0.5% annualized return is too tight to bother with unless you think it gets competitive.

We’ll look at the MAE (material adverse effect) clause of the WhiteWave (WWAV) merger agreement and see under which circumstance the buyer (Danone) can walk away from the deal.

As we saw in the first part of this series, French food company Danone is buying US dairy products firm WhiteWave (WWAV) for $56.25 a share in cash.

Given the terrible growth in payrolls, we might see more flattening of wage inflation back towards the current inflation rate.

In June 2016, the labor force participation rate rose to 62.7%—up 10 basis points from May. The labor force rose from 158.5 million to 158.9 million.

In June 2016, non-farm payrolls rose by 287,000. Non-farm payrolls easily topped Wall Street analysts’ estimate of 180,000.

If the merger caused cable providers to drop Starz because they didn’t want to work with Lions Gate, it wouldn’t be a MAE (material adverse effect).

According to the MAE (material adverse effect) clause of the Starz-Lions Gate deal, legislation that limits intellectual property protection wouldn’t be considered a MAE.

In the merger deal between Lions Gate Entertainment (LGF) and Starz (STRZA), the MAE (material adverse effect) clause lays out the circumstances under which either party can back out of the transaction.

The week after the jobs report usually doesn’t have much data—more or less, this week isn’t an exception. Earnings season kicks off this week.

The Fed has been consistently high in its inflation forecasts. At the June 2016 FOMC meeting, the Fed took up its 2016 inflation forecast from 1.6% to 1.7%.

On July 6, the Fed released the minutes from the June FOMC meeting. The Brexit vote mainly overshadowed anything that came out of the June FOMC meeting.

In the risk arbitrage world, an 11.3% annualized return is about right given that the spread really isn’t “arbitrageable.”

John Malone and Lions Gate (LGF) already control 43% of the vote, so it would be almost impossible for a hostile buyer to get anywhere.

Starz agreed to a non-solicitation agreement with a fiduciary out. During the pendency of the merger, it can shop itself or contact other potential buyers.

Starz (STRZA) and Lions Gate are merging in a stock and cash transaction. This deal is about increasing content and distribution.

On June 30, Starz (STRZA) and Lions Gate (LGF) announced a merger. Before the deal closes, Lions Gate will split into voting shares and non-voting shares.

Last week, the ten-year bond yield fell 12 basis points to 1.44%. Mortgage rates fell 10 basis points to 3.46%.

Last week was pretty light in terms of economic data, but markets were concerned with adjusting to the Brexit vote. For all the worries about Brexit overseas, it simply won’t have much of an effect on US corporate earnings.

Mortgage refinance applications, as measured by the MBA (Mortgage Bankers Association) Refinance Index, fell last week. Since mid-2013, refinances have been dropping dramatically.

Mortgage purchase applications fell 3% in the week ending June 24, 2016. We’re at the tail end of the seasonally strong period for house purchases.

Mortgage applications fell 2.6% last week after rising 2.9% the week before. Rates were increasing for most of the week, only to fall on Friday on the Brexit vote.

In this part of the series, we’ll look at the MAE clause of the Amsurg (AMSG) merger agreement with Envision Healthcare (EVHC) and how Amsurg could back out of the deal.

In April, the Case-Shiller Index rose by 1% month-over-month. It’s up by 5.4% YoY. Prices are still about 10% below the peak set in the summer of 2006.

Lately, mortgage rates and bond yields showed a weak correlation. Treasury yields fell over the past month. Mortgage rates have been steady.

After closing the prior week at 1.6%, bond yields, as tracked by the iShares 20+ Year Treasury Bond ETF (TLT), fell by 5 basis points to 1.6% last week.

We do have some important economic data this week—personal income and spending, the third revision to first quarter GDP, and construction spending.

April’s 5.9% year-over-year gain for home prices has put the FHFA (Federal Housing Finance Agency) House Price Index at about 3% above its April 2007 level.

The latest Existing Home Sales report shows available inventory at 4.7 months and a market that’s tilted heavily in favor of sellers.

KB Home’s net income came in at $15.6 million on a GAAP (generally accepted accounting principles) basis, as compared to $9.6 million in 2Q15.

For 2Q16, KB Home reported revenues of $811 million, which easily topped the Wall Street estimate consensus of $750 million. Revenues increased by 30% YoY.