Wells Fargo: Is This The Play On The Real Estate Recovery?

Wells Fargo's big upside earnings surprise has got everyone dissecting what is exactly is going on here; most agree it is a real estate recovery story, at least for the moment.

Why? $100 billion in mortgage originations! A lot more than expected, so there is either: 1) a big market share pickup in mortgages for Wells, and/or 2) the real estate market is improving.

Either way, it's good news for Wells, but the Street believes there is at least some truth to the idea that residential real estate is bottoming.

Why? Because the banks that have the greatest exposure to mortgages—Wells (up 26 percent today), Bank of America (up 31%), JP Morgan (up 13 percent), PNC (up 17 percent)...are the ones with the biggest gains today.

You know what the bears are saying:

1) Stress test or not, there is a capital raise coming...from Wells and other banks.

2) Toxic assets will remain a problem.

But...bulls say...what if there was a capital raise, and the market bought enthusiastically into it?

That's exactly what's happening in real estate investment trusts (REITs).

Today, Equity One became the latest REIT to float a secondary...not 4 million shares, as was discussed, but 6.5 million at $14.30. There was more demand than expected, to dilute the stock!

They became the latest to float a secondary....following Prologis, Kimco, Simon Property, and AMB.

What's going on? Remember, REITs are among the most shorted sectors on the Street. Traders are telling me that the secondaries are being bought by value players locking in compelling valuations.

But there is another group buying in: short sellers, who are buying into the offerings as an economic way to cover their short positions.

But here's the main reason REITs are getting interest: survival of the fittest.

Traders believe that the best REITs will indeed survive—and prosper, because the survivors will be buying distressed assets from the losing REITs at low valuations.

What's important is that it appears that the REIT structure is being validated and endorsed with each recapitalization.




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