Fed Forecast Puts Annaly And mREITs In A Sweet Spot

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 |  About: Annaly Capital Management, Inc. (NLY), Includes: AGNC, CIM, CYS, TWO
by: Markos Kaminis

The Federal Reserve recently issued its updated economic forecasts, and its inflation view supports Annaly (NYSE:NLY) and mortgage REITs. In fact, if the Fed is correct across the board, then the outlook is sweet for NLY and the mREITs.

The Federal Reserve just issued its updated economic forecasts at the latest Federal Open Market Committee (FOMC) meeting alongside its updated monetary policy statement. While I had issue with the Fed's forecast for GDP this year, because the Fed's math just does not add up, if the Fed is right about inflation and GDP, Annaly has an all-clear buy signal.

The Fed's moderate inflation outlook is a positive for Annaly. While it does project rising prices, it does not see much of an increase at all. In fact, only the bottom end of the range rises from 2013 to 2015, implying that the Fed believes it can contain inflation.

PCE Inflation

2013

2014

2015

Fed Forecast

1.3% to 1.7%

1.5% to 2.0%

1.7% to 2.0%

Click to enlarge

While a little inflation expectation would help widen the net interest margin for Annaly, a lot could kill mortgage affordability, so this forecast is just right. A little inflation in real estate might also help give impetus to prospective home buyers waiting on the sidelines. It would serve as a push for them to get in while the going is still good. Prices are already on the rise, as reinforced this week by the S&P Case Shiller Home Price Index. As a result, more mortgages would be written and an increasing supply of securities would avail for Annaly at subsequently better pricing.

Inflation signs could also force the Fed to start backing away from its super-dovish activities. If the Fed had to at least worry about inflation a bit, it would potentially stop its asset purchases and begin downsizing its balance sheet, not to mention raising rates some. Taking the Fed out of the business of buying mortgage backed securities would help pricing and yields for the benefit of Annaly and other mREITs like American Capital Agency (NASDAQ:AGNC) and Chimera Investment (NYSE:CIM). So the Fed's inflation outlook is Goldilocks-like, not too hot and not too cold. Obviously, stock specifics will come into play for individual mREITs, but capital flows continue to find them and their attractive dividend yields. NLY is my favorite of the group, and apparently also Jim Cramer's, if you've been watching CNBC's Mad Money this week.

mREIT

Dividend Yield

Annaly Capital

11.2%

American Capital Agency

15.5%

Chimera Investment

11.1%

Two Harbors Investment (NYSE:TWO)

9.3%

CYS Investments (NYSE:CYS)

10.9%

Click to enlarge

If the Fed is also right about GDP, where I have my doubts, then the economy should grow nicely and unemployment should decrease. These are obviously supportive of Annaly's activities, along with just about every other American company, save perhaps prison management firms.

Fed Forecast

2013

2014

2015

GDP Forecast

2.3% to 2.8%

2.9% to 3.4%

2.9% to 3.7%

Unemployment

7.3% to 7.5%

6.7% to 7.0%

6.0% to 6.5%

Click to enlarge

So, if the Federal Reserve's economic forecasts are reliable, and I'm sure many readers will have something to say about that, then Annaly and mortgage REITs generally may be in a sweet spot and enjoy a Goldilocks like environment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.