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  • Goldman Sachs - 6.375% Is Good, But Peers Are Better [View article]
    QDI/DRD is noted. There will be a duration differential in 10yrs, as the fix/flt begins to float, and the return differential will separate. That said, using a curve convention adjusted duration (as most are measured to call/early redemption) the GS-J and GS-K have an adjusted duration of approximately 7 whereas the GS-I have an adjusted duration of approximately 3. When viewed in a duration construct as currently used, the difference is counterintuitive. As well, duration is rarely used when valuing perpetual instrument, it is more a "traditional bond" measure. Finally, given the fact that it will then (10yrs) float at a LIBOR equiv of the current coupon, one must consider each issuers potential funding rates/swap rates at that time, quite the undertaking when attempting to calculate the option adjusted duration or, for that matter, the value of the option being sold to the issuer.
    Apr 22 10:22 AM | Likes Like |Link to Comment
  • The 20 Best Value Bond Trades With Maturities From 1 To 5 Years [View article]
    Correct me if I am wrong, but weren't "legacy" ratings simply the assignment of a letter grade to a default probability? This would also show up in the agencies default probability/ratings migration tables. Moody's went a little further with their purchase of KDP, which is, again, a market pricing, quantitative based approach to ratings validity. Theoretically, one could also use the implied default rate on CDS. Is there a significant variance between your model and any of these? If backtested, what would the predictive power been in 2007?

    One statement I also find to be a quantum leap of faith is "Assuming the recovery rate in the event of default would be the same on all bond issues,". The assumption that a financial firm such as any bank listed, nevermind Goldman, would have the same recovery rate as say, UTX, SPG or K, (without even differentiating between holco, bank level...) seems incredibly weak.

    While I certainly appreciate your work with models, without the requisite analysis of the credit and a "curve" view, one is rolling the dice.
    Apr 21 03:29 PM | Likes Like |Link to Comment
  • RAIT Financial - At 7.625% Their Debt Is Attractive [View article]
    The MFA seniors are a decent investment as well. I like NRF (own the common and preferred), but I am still waiting to see what happens with the asset manager spin-off and the attention paid to the fund. The investments you listed are all good investments, and RAIT has been climbing back, but I like the position as part of a portfolio and think it is a decent place in the capital structure to play RAIT.
    Apr 14 10:23 PM | 1 Like Like |Link to Comment
  • Western Asset Mortgage - Is 18% Rational? [View article]
    All: WMC has responded to my article with changes. Below I will reproduce what they have stated:

    First, our current annualized yield is approximately 18.5% based on our first quarter dividend of $0.67 and today’s closing price of $14.50.
    ****I have corrected this in the comment section***
    Second, our estimated book value as of April 2, 2014 was publicly disclosed in our preliminary prospectus dated April 3, 2014, the day we announced our follow-on offering. Here is the exact language:
    “As of April 2, 2014, we estimated our book value per share was between $14.45 and $14.60. The estimate of our book value per share as of April 2, 2014 may differ from the book value per share that is ultimately reflected in our financial statements as of and for the three months ended March 31, 2014.”

    “Additionally, on March 20, 2014, the date we declared the cash dividend referred to above, we estimated that our core earnings for the quarter ended March 31, 2014, would be less than the declared cash dividend of $0.67 per share of common stock and may differ from market and analyst expectations and presentations. Any such shortfall may be attributable to the transition of our portfolio to a greater exposure to Non-Agency RMBS and CMBS and an increase in income derived from the use of 'to-be-announced' forward contract ("TBA") dollar roll transactions.”
    ***I use core earnings as those are the earnings that should be the basis of comparison.

    That said, I will also try to add (via SA's new "edit article" feature) some of the suggestions in the body of the article. Importantly, WMC management has been very quick to respond historically and address concerns (at least to me), which, IMO, speaks volumes. As I have stated historically, WAMCO has always had strong management and ability - I am glad to see that has continued (hence my long position).
    Apr 9 10:18 PM | 3 Likes Like |Link to Comment
  • Western Asset Mortgage - Is 18% Rational? [View article]
    Excluding that, and annualizing their most recent dividend of $0.67 would, at today's price, equate to an 18.5% yield. Not sustainable IMHO unless they raise capital to continue to pay investors. I would expect the dividend to continue being reduced until the yield is below 15% (which could still be too high).
    Apr 9 01:42 PM | 1 Like Like |Link to Comment
  • The Rally Nobody Noticed: Municipal Bonds [View article]
    What happens to the bank bid for munis if they are no longer considered high quality liquid assets as is current proposed in BASEL and can no longer be used as collateral in the LCR component?
    Apr 2 12:10 AM | Likes Like |Link to Comment
  • Should An Intelligent REIT Investor Buy CapStead Mortgage? [View article]
    They did, in fact, get out of the commercial real-estate game (at the low in 2008/2009), but does that change their profile and returns in the last five years? CMO is simply an mREIT that has chosen to have a different risk profile than other agency mREITs (which I have often written about having previously managed a mortgage portfolio). Reset/financing spread risk is still a risk. While I am not negative on the space as Brad is (I have positioned various mREITs such as TWO, NRF, AGNC, WMC), there are risks and book value/dividend stability are among them. These risks must be understood by investors as it has, quite frankly, cost many investors a healthy sum of money.
    Mar 25 08:40 AM | 2 Likes Like |Link to Comment
  • Should An Intelligent REIT Investor Buy CapStead Mortgage? [View article]
    Appreciate that someone will state what TWO is doing by buying MSRs as cheap IOs. One thing, however, is that CMO can use more leverage to increase yield because of their convexity profile. As they use fixed/float in a substantial portion of their portfolio, prepay risk is often deferred but not eliminated.
    Mar 25 08:23 AM | 1 Like Like |Link to Comment
  • Digital Realty: Despite Turmoil, New Preferred Is Interesting [View article]
    Absolutely - like traditional fixed income, in a period of rising rates, buy up coupon. It may be at a premium, but you will hold in better.
    Mar 20 07:36 PM | 1 Like Like |Link to Comment
  • Two Harbors: Innovation And 9.8% Yield [View article]
    I have the same concern. It almost seems like they are trying to maintain at approximately 10-11%.
    Mar 17 09:13 PM | Likes Like |Link to Comment
  • A Primer On Exchange Traded Debt [View article]
    Shreya, Thanks for the overview of ETD as it is (often) a much better alternative than "traditional" debt as you don't get dinged for size in the same way you would with $1000 par debt. Hope to see more articles forthcoming from you.
    Mar 17 04:23 PM | 1 Like Like |Link to Comment
  • Apartment REITs - Time To Move Out? (Part 1) [View article]

    Good point. Indeed, some of the areas are supply constrained and hard to build, but not many MF REITs are singularly focused in these areas (AVB and EQR are the most focused, admittedly). REITs like AVB are interesting as they are higher end apartments, which can now be replaced with a house in certain areas (either owned or rented from Blackstone). The lower multiples are a factor of location, desirability and portfolio size, but I believe we will see multiple contraction, and those most at risk are those with higher multiples. Thanks for the comment and insight.
    Mar 11 09:40 PM | Likes Like |Link to Comment
  • Apartment REITs - Time To Move Out? (Part 1) [View article]
    bag, great point. Mixed are not an apples to apples comparison with pure play, and the thesis is focused on multifamily (as it states). My screen brought them into my spreadsheets due to the multifamily component, but part 2 (haven't released it yet) is pure play focused. My thesis is that large cap multifamily REITs are overvalued at current levels and are going to encounter headwinds. That multifamily is trading near pre-crisis multiples with a different landscape makes no sense to me. Partially, it is due to "rate replacement" given the low absolute rate found darn near anywhere. When this changes (yes, rates will rise), will investors want to own AVB at 25x FFO with headwinds?
    Mar 11 09:34 PM | Likes Like |Link to Comment
  • Apartment REITs - Time To Move Out? (Part 1) [View article]
    I have to disagree that the FFO multiple has zero bearing on a qualified investment decision (whatever qualified is). I dont follow the landlord has higher costs than net lease so there are lower costs associated. This doesn't make sense and therefore, the higher percentage of income translating into FFO does not make sense. Please clarify. The premise of the article is that your safety net is slowly being taken away, so a higher cost, lower FFO yield, lower cap rate sector is not the way you want to go.
    Mar 11 09:28 PM | Likes Like |Link to Comment
  • Exchange Traded Debt: An Analysis [View article]
    Wow. Having run institutional fixed income portfolios for over 20 yrs, all I can say is wow. I appreciate that you may be out of your comfort zone in fixed income, but readers might not be aware of that. That you brought attention to these securities is helpful to individual investors (and smaller funds), but the information is off.

    "Like equity, these securities are traded on stock exchanges using tickers; however they are subordinate to debt, senior to equity, and behave like notes or bonds. They can be thought of as preferred stock that pay out consistent coupon payments."

    These are bonds, be they senior or subordinate, these are bonds. Some call them "baby bonds" as they trade at $25 par rather than the standard $1,000.

    "The below scenarios consider an investment in each of the five securities till its first call date (as listed in Table 1) which is used in lieu of the maturity date "

    You cannot use the call date as a maturity date, nor can you assume that it will be called. Why cant we make these assumptions? Credit risk, rate risk, financing options...

    "From the above table, one can see that the returns are significantly higher than that of standard risk-free assets, i.e., treasury securities of comparable maturities"

    That is because an investor needs to be compensated for credit risk and optionality. Treasuries are the basis as they do not have credit risk or optionality. Hence the spread.

    "In this situation, the risk-free asset (usually treasury securities) can be replaced with higher yielding ETD to achieve even higher returns with only a marginal increase in risk."

    Lest you forget the correlation of credit and equity...You cannot substitute credit for the risk free rate in a "portfolio strategy". Especially if you get paid to do so.

    "Well, with ETD, the fundamentals of the actual companies do not matter. As long as the underlying company is a going concern and is unlikely to default, an investor can expect consistent payments on ETD and not be concerned with stock price or market fluctuations."

    Having run credit portfolios and directed research and trading of the asset class, let me assure you, the fundamentals DO matter. You do understand that the "fundamentals" determine if the company is at risk of default, right? Please look at the effect of downgrades on prices. Be concerned. This is a big part of the risk you are getting paid for.

    "The five securities discussed above are all issued by stable, established firms in the finance, insurance, energy, or communications sectors."

    Please learn the "fundamentals.

    "One point to note however, is that ETD is traded flat. Unlike bonds and other debt instruments, there is no clean or dirty price and accrued interest is not paid to the seller. Instead, it is assumed that the security price reflects the upcoming interest payment. Hence, an investor can time his/her purchase to a day after the ex-dividend date to get the best price."

    When something trades "flat" it trades without accrued. Keep in mind that these securities INCLUDE the accrued in the price (hence the price drop when it pays). Some might refer to this as a "dirty" price. You can factor out the accrued to create a "clean" or "stripped" price.

    "One should be careful about these dates, and unwind his/her position before the date to avoid immediate capital losses (since they are currently trading at a premium and would be called at the call price of $25)."

    Of course, your yield-to-call factors this in. You will amortize the "true premium" (stripped price minus par) to the call date in this scenario.

    "This type of security, especially the specific issues discussed above, can be used to replace part or the entire risk-free asset in an optimal portfolio to gain increased returns with a disproportionately lower risk."

    The risk is by no means (emphasis) disproportionately lower. One has merely to look at historical returns in the space (especially IG space as the author suggests).

    Shreya, I am not trying to criticize, but merely correct inaccuracies. Fixed income is a specific asset class for a reason and understanding one asset class does not imply an in depth understanding of another. I recently wrote an article on a similar "baby bond" by Verizon, so I fully appreciate the value in baby bonds, but I also fully appreciate the risk. More articles on similar topics could help investors create an exchange traded credit portfolio.
    Mar 11 08:43 PM | 3 Likes Like |Link to Comment