There are times when the Fed does something that is less than expected and it actually becomes welcome news. As far as I am concerned, that is what Annaly Capital (NLY) received today.
I am by no means suggesting that the share price of Annaly has hit bottom, nor am I suggesting that all is well for their current dividends. What I am stating is that based on what the Fed said today, NLY has a very important asset: Time.
The picture is not pretty for this huge agency mREIT and thus far their bid to buy CreXus (CXS) has not been finalized, nor has anything happened in the Chimera (CIM) buyout rumors, which were mentioned in this well written article.
The special committee that CXS has put together stated quite clearly:
"The Special Committee has not set a definitive timetable for its evaluation, and no decisions have been made by the Special Committee with respect to CreXus response to Annaly's proposal. There can be no assurance that any agreement will be executed or that Annaly's proposal, or any other transaction, will be approved or consummated. The Special Committee does not intend to disclose developments regarding these matters until it has determined that there is a need, if any, to update the market."
In the article noted above, certain musings were offered:
"Therefore, it does make sense for NLY to look for high-yielding alternatives, such as CMBS or non-agency RMBS. This is the reasoning behind their acquisition of CXS. Now, this is not implying that for this trade to make sense, NLY would have to buy the assets in CIM at a cheaper level than "fair" prices.
If NLY purchased CIM, I would hope they do not underpay for CIM (as a CIM shareholder I would not like that too much). Still, at fair values that would remain attractive, because non-agency yields and spreads over the swap curve remain wide."
The fact of the matter is that nothing has happened yet. Personally I think the CXS deal will happen at some point, but I do not think that NLY will buy CIM. NLY has announced a $1.5 billion share repurchase plan for 2013, and profits have been tight since the Fed began buying $40 billion MBS every month.
I suppose Annaly can further drain their cash reserves, but I would question that move. Right now however, the company has been given some time to navigate the new landscape by the Fed.
The Fed Actions As Of Today
I guess anything could happen, but Ben Bernanke laid out his latest plans for QE4 today. The entire press release can be read right here.
The bottom line is that the Fed will continue purchasing $40 billion in MBS, and another $45 billion in Treasuries;
"The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."
In addition, the Fed also stated some economic "target" numbers, as to when they might begin thinking about easing away from the QE efforts: A 6.5% unemployment rate and a target rate of 2.5% for inflation. Thus, the Fed has given additional transparency for NLY to consider.
"In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."
Where Does Annaly Stand Right Now?
A picture is worth a thousand words and this chart basically says it all:
- 139 basis point spread between the 2 and 10 year notes.
- A 2.82% 30 year Treasury yield has not changed.
- A 3.34% 30 year mortgage rate that still will be held to that level if not lower.
Based on that chart, NLY and other agency mREITs are being ham strung. The share price of Annaly has reflected these difficulties: A drop of nearly 20% since the Fed began buying MBS.
Dividends have been sliced about 25% in the last 18 months as well.
The good news, if any, is that the Fed did not announce an increase in the amount spent on MBS buying each month. For those seeking a silver lining, that is pretty good. The Fed has also given target numbers to be monitored and that is also not bad for NLY. At least they can keep an eye on what is going on before anything else happens.
These moves by the Fed does give an all clear however. The Fed will continue putting pressure on yields and the spread, and that will hamper profitability for NLY. I also believe the dividends will be cut significantly by NLY, for 2013, and combined with a declining share price, the total returns could be very poor.
The best news, is that there now is some time for NLY to actually make something happen within their own business model, and transform themselves into a huge hybrid enterprise in this market sector.
A sliver of light, but there is still too many uncertainties for me.