Tuesday December 6

US stocks rose today even as oil prices slid. The S&P 500 rose 0.3% to 2,212 and the Dow Jones rose 0.2% to 19,251. The KBW Bank Index rose 1.3% while Utilities lost 0.4%. Economic data today showed that factory orders rose a strong 2.7% on the month which was in line with estimates. Fallout from the Italian referendum “No” vote continues to be subdued. Italian financials today rose 4.2% and the country’s 10 year debt yield fell 6bp to 1.95%. The ECB meets on Wednesday and many expect that Mario Draghi will offer an extension to its program and purchase more Italian bonds to help alleviate the situation there. Matteo Renzi was asked to stay on as prime minister until next year’s budget is passed which could be alleviating some concerns for the time being. In the US the 2 year yield fell 1bp to 1.12%. The 10 year yield also fell 1bp to 2.39%. 2yr vs 10yr was unchanged at 1.27%. The yield on the German 10 year bund rose 4bp to 0.38%. The US dollar was stronger across the board as investors look towards Fed rate increases as early as next week. USD rose 0.4% against EUR to $1.0719. USD rose 0.2% against JPY to Y114.03. USD rose 0.3% against GBP to $1.2676. Oil prices fell with WTI losing 2.1% to $50.68. Brent fell 2.3% to $53.66.

Blackstone is set to test the IPO market and capitalize on one a financial crisis era investment. After the financial crisis home prices plummeted, banks repossessed homes at an unprecedented rate as a result of mortgage defaults. Blackstone saw this as an opportunity to buy 50,000 homes and spend roughly $10bn in attempt to turn the residential rental property market into what exists for condos and commercial real estate. That investment turned into Invitation Homes which maintains and rents out the homes Blackstone purchased in the aftermath of the financial crisis. Invitation Homes filed confidentially for an IPO and could list as early as January. Blackstone took that opportunity during the crisis to buy homes at deeply discounted values. Invitation Homes makes money from renting out these properties, and is set to benefit on the growing popularity of renting compared to buying which many believe could be a result of high student debt burdens. Once public investors will want to see revenue growth, which could come through increasing rents on tenants. However if rents rise too significantly tenants may move back towards home ownership. Invitation Homes has also started to issue securitized bonds backed by cash flows from rent payments. Such securities from Invitation Homes represent roughly 32% of that $16.7bn market. These strategies for Blackstone are also made difficult by the fact that is difficult to add new properties en masse considering that home prices and foreclosures have returned to normal levels so they are no longer able to buy thousands of homes at a discount. Wall Street investors collectively have put $32 billion into similar strategies and now own between 1 and 2% of rental properties in the United States. American Homes 4 Rent was a similar company started by B. Wayne Hughes with funding from Alaska’s state oil fund. Starwood has a similar company. Both have IPOd in recent years and have performed well this year far outperforming the market as home prices, and thus the value of the company’s assets, have risen. Home ownership is at its lowest rate in 50 years, and access to credit for some borrowers has been decreasing resulting in higher interest rates. Rents for single family homes are also rising faster than apartment rents, and vacancies are at their lowest level in more than ten years. These companies typically target homes in areas with good school districts that are popular with families, since they will have more pricing power in raising the rents on those families since they will be less likely to leave.

Banks have been willing to take on more risk in executing block trades because the IPO market has dried up. Some block trades have been the equivalent of more than 30 days of average trading volume in a single name, compared to the ten to twenty days that banks would normally take in other years. These types of trades carry lower margins and higher risks than IPO business. Some analysts estimate that block trades have reached $85bn this year which is way up from last year’s $62bn. This comes as the IPO market is at its slowest pace in thirteen years. For the investors selling into the block trade these transactions are advantageous because it allows for price certainty and no exposure to the downside. However with that comes the cost of a discounted price. As ECM fees decrease smaller banks have made attempts to enter into the space as well such as William Blair & Co. Citigroup ranks sixth, while Goldman Sachs and JP Morgan rank first and second respectively. Rising share prices have made this a profitable practice for banks who are able to capture some of that upside. However they may be less willing to take on that risk in a down market.

Tuesday December 6

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