I would like to revisit a trade I suggested on American Capital Agency (AGNC) in October and look at the company now to explore if a long-term investment is still something investors should consider. There is one "event" that could be very positive for the stock's value.
Back in October, I wrote an article on AGNC and I suggested a short income play that could not have been more wrong. The stock moved in the opposite direction. Here is the play I suggested:
The Options trade
Presently trading at $33.04 and since both analysts are looking at a '$34' price level, this may provide an opportunity for a short-term income play to add to a long-term position on a stock.
Buy the December 2012 call with a strike of '$33' (priced at $1.17)
Sell the December 2012 call with a strike of '$34' (priced at $0.62)
Net Debit to Start: $0.55
Maximum Profit: $0.45
Maximum Risk: net debit
Maximum Length of Trade: 2 months
Reasoning behind the Trade
On the recent dip, looking a short-term move up to capitalize upon.
Market volatility should assist in stock's move.
The stock continued down through what I thought was support. So what can I learn from this trade gone wrong?
First of all I should listen to my technical observations.
I am not an advocate of technical trading standing alone, but I do think it is important to use fundamental analysis side by side with technical. When I look back on my observations, here is what I wrote:
Will it move sideways or continue down now? At this point I think it is safe to conclude it is not going to move way up again. But I am not yet sure about a long-term bearish move down yet.
The indecisiveness here should have revealed that I should wait on a trade and not force a trade just to put one up. I needed to verify the direction the stock will move. There was a resistance level I disregarded at '$33.2' and I did not verify a move up or down. This is where I failed. I should have taken the bounce off the resistance level as a sign that the stock would not move up past that level. If I did this, I might not have suggested this trade. So patience and verifying a move is important before I make a trade like this next time. It is always good to reflect and learn from our failures.
There is no doubt that AGNC is in a bearish trend. The recent oversold position in the RSI developed because of the extreme move. The stock usually corrects after a position like this and that is exactly what AGNC did. Now I want to know if that move will continue. The latest two week move reveals a resistant point around $31.7 that the stock failed to move past for 2 weeks. The MACD MA's failed to rise above '0' so that does not give a strong argument that the stock will turn bullish soon. I also have defined a definite resistance level that the stock just cannot move past. It did rise above the middle Bollinger band and is in between the middle band and the 50 day MA on a downward trend and I do not see a turning point just yet.
long-term Investing in AGNC
Revisiting as short-term income strategy and learning from one's failure is always good. But what about a long-term investment in the stock- is it a good time to consider this? Paying out 90% of their profits, Mortgage REIT's have had double digit dividend yields that crush Treasury bond and other dividend yields quite easily. With the higher returns comes higher risk with changes in interest rate risk and declining spreads. But the double digit returns have attracted a huge amount of investors. Is this attraction likely to continue? And should one invest in these companies right now?
It is no surprise that the markets reacted poorly to Obama's reelection in November as it meant an even more flattish curve on interest rates. Since REIT business models depend upon the spread between their borrowed capital and the rate of return on the money invested, Federal Reserve policies that continue to shrink ROI on real estate plays havoc with REIT margins.
But it may not be all bad for mortgage REIT's. And this last statement refers to the influence of the "fiscal cliff" upon regular dividends. If the results of all these talks on dealing with this tax and spending problem result in raising the dividend tax rate up to the regular income level, it will have a positive affect upon investing in REIT's since they are already taxed like regular income. For this reason we could see an investment rebound in the industry and this will help AGNC in the long run.
I would suggest paying close attention to the news and the progress on talks for the "fiscal cliff" to see how this problem pans out. I believe the position on dividends will define the future and influence the direction for Mortgage REITs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.