Isn't it ironic, or maybe twisted, that an improved market perspective about the economy and increased speculation about a potential Federal Reserve policy shift also started to sink stocks recently? For Annaly Capital (NLY) and other mortgage REITs the decline started a bit earlier, and paralleled increases in interest rates. It's all quite ironic though, and probably mistaken in my estimation.
It's ironic because there would be less competition for mortgage-backed securities if the Fed stopped buying them, making pricing better for Annaly's new purchases. And an improved economy means fewer defaults on mortgage loans, which means reliable income for Annaly. Yet, the same scenario sent bond yields and mortgage rates rising higher, raising concern about the value of Annaly's current asset portfolio.
Never fear, though, as the economy is not nearly as healthy as the market has attested to, with the SPDR S&P 500 (SPY) higher by 14.9% year-to-date through June 4. The evidence of economic trouble just keeps coming through the flow of economic reports, with yet another indication of the issue Monday in the ISM Manufacturing Index release. So it should not be long before the Fed reaffirms its dovish tendency and reassures the market that a monetary policy shift is not imminent. That might just reverse the latest interest rate trend, and also the price trend in NLY and peers like American Capital Agency (AGNC) and Two Harbors Investment (TWO).
Annaly Capital shares are down 7.1% since their May 21st close, the day before the FOMC meeting minutes release and the testimony of the Federal Reserve Chairman changed the game for stocks. That was when the market perceived that the Federal Reserve might shift from its dovish policies. It led me to pen, Is the Fed Asleep at the Wheel, last month. But Annaly's shares had been on the decline for a few weeks before that.
NLY was more closely tracking the steady rise of interest rates, a month long phenomenon I discussed in The Fed Could Derail the Real Estate Recovery. While the beta coefficient of NLY, at 0.15, indicates it should meander through market moves like this, it seems the market and NLY have a common catalyst this time in rising rates.
I feel relatively confident in my assessment of the illusion of economic recovery, given faulty Fed math and the unemployment underground. It seems that finally the stock market is willing to notice weak economic data points, given its addiction to the Fed and its need for the Fed to notice. So, as the proof of economic issue files in and given the Fed's stake in the housing recovery, I expect Bernanke's bunch will make clear its intent to continue to cushion growth. Until then, NLY investors can continue to collect their double-digit dividend yield.