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  • Annaly: What Is Going On (The Finale) [View article]
    Dear Mr. b:
    For the record, I do not now own NLY but have. I have never owned any options, either put or calls on NLY. If you are so interested in full disclosure, why don't you use your real name?

    My purpose in writing that comment was to point out that the fortunes of NLY are tied to the spread, as the author points out, and that in a rising interest rate environment, that spread comes under pressure. Therefore, while it appears to be doing well now, once rates start to go up from their unprecedented lows, the dividend, BV and price may go down.

    I don't have time to respond to the author's comments now but will later.

    I have to ask you something. Why are you so willing to jump to the conclusion that I have an ulterior motive in writing a bearish piece on a stock where I thought the original article missed several points. I was merely trying to point out the risks that exist in this environment. Please accept my sincere apologies for wasting your time. I will not do it again.
    Mar 29 11:08 AM | Likes Like |Link to Comment
  • Annaly: What Is Going On (The Finale) [View article]
    I am going to chime in here because I think the author missed a key point about NLY. mREITS generally trade off of P/BV and their net interest margin (NIM). Because they utilize mark to market accounting, the reported balance sheet numbers of their investments is a pretty good representation of their actual value. NLY has roughly traded at low of 90% of BV to a high of roughly 110%. So, you want to buy the company when it is trading at a discount.

    However, the dividend and price are a function of what they can earn on their investments less what they have to pay for funding in the repo market. They borrow short and lend long, just like a bank. A falling interest rate environment is their "high cotton" days, like '08. this is because their funding costs, ST debt, fall faster than their longer term investments. Therefore the NIM increases as does the dividend. Also the price of bonds increases therefore the BV of NLY will increase. However, in a rising interest rate the environment, the exact opposite happens. As rates rise, bond prices fall as will the BV of NLY. Also, their funding cost on their ST debt will rise faster than they can reset the rates on their investments. The prices of the bond investments will have fallen so they have less money to invest. The result is their NIM gets squeezed and their dividend gets reduced. This is a key point!!

    Somebody commented that NLY has always made money so they must be OK. WRONG. Go back to '98-'99. The stock traded down to $6 from $13. Why? Because rates rose. In '99 rates on the 10 year T's rose from 4.7% to 6.5%. (Wouldn't 6.5% be great right now!!!) NLY got hammered.

    So where does this leave us today? I think it is safe to say that we are pretty damn close to the bottom of where interest rates can go. The Fed has manipulated rates to historical lows and we have had a ~30 year bond bull market as rates have fallen. The Fed recently thru operation twist has pushed long term rates lower so the yield curve is very flat. kenpittman, ask yourself can NLY make money borrowing short and lending long in an environment of a flat yield curve where the spread between the two is low? What will happen is that as their bond investments mature they will have to reinvest the proceeds at lower rates, thereby decreasing their NIM. Most importantly, as rates begin to return to "normal" as economic activity picks up and inflation that we are told does not exist returns, NLY will have to swim against the tide. Their BV will decline as will the dividend. Not good for the stock price. Even a 14% yield does not help a 50% drop in stock price.

    Lastly, NLY has a great track record managing agency paper investments. They probably learned a lot from their '98-'99 experience. They employ hedging. They have reduced leverage. All good stuff. But they will be going against the current. It will be tough to make money. I have no idea when rates will go up. The Fed has said they will keep them low for a long time. If you believe that NLY could be OK for a while. However, their higher rate bonds will run off and their NIM will decrease if the yield curve does not change. If the recent improvement in the economy is real, rates may go up faster than people think. A return of (or recognition of) inflation could increase rates despite the Fed's efforts. Gentlemen, that call is yours. I have owned NLY and others. I do not own them now for the above risks. Hopefully kenpittman, this may give you a chance to get out before it is too late. At least you can understand the risks. What institutional investor owns this stock is totally irrelevant to me and does not, in my opinion, constitute sound research.

    Sorry to have taken up your time here but I have felt that most of the chatter on this stock misses the risks inherent in the stock in today's environment. For the record, I do own Colony Financial CLNY. It is a play on the company's management being able to identify cheap paper in the commercial real estate market.
    Best regards to all
    Mar 26 11:25 AM | 8 Likes Like |Link to Comment
  • Annaly Offers An Eye-Opening 14% Dividend Yield [View article]
    I think we may be using different terminology. NLY, MFA, TWO and all other mREITS are equities. They are not mutual funds or CEF's. They are stocks.

    So this brings up my big question. Not to be impolite, but what was the purpose of your article? It seems to be merely a description of some of the stocks and their prices.

    I was hoping to find some in-depth analysis of the portfolios and some mention of the risks in a rising rate environment. Borrowing short, they are susceptible to their costs rising faster than their investments. Certainly hedging can help mitigate this risk but, as you say, it is difficult to judge. I think if you look back at NLY the last time rates rose (could there have been such a period?) they got killed, as did the industry.

    For what it is worth, I think they may be a good yield play now if you believe the Bernank will keep both ST rates low for a long period. If LT rates drift up, they should be able to reset the yields on their investments. However, if you believe that ST and LT rates may go up fairly soon despite the Bernank's efforts, you may find out what the risk baked into these stocks was. As rates go up, bond prices go down, so the BV of these stocks will decline. As they seem to trade off BV, that could put downward pressure on their stock prices. Pressure on their already smaller NIM's would cause dividends to be reduced.

    Best regrads
    Mar 25 12:20 PM | 1 Like Like |Link to Comment
  • Annaly Offers An Eye-Opening 14% Dividend Yield [View article]
    Think about it. It would be a little difficult to leverage an already highly leveraged company. Why would a PE investor buy one of these businesses when they could do it themselves, if they so desired. mREITS are just investment funds, not real companies.
    One other question you might want to ask is what happens to the spread if interest rates start to rise? None of these businesses are risk free to say the least.
    Mar 24 08:42 PM | 1 Like Like |Link to Comment
  • Agency Mortgage REITs: Understanding The Risks [View article]
    Thank you. Glad to see someone out there knows what is going on.
    They lost their funding. It was not a problem with their portfolio. It is easy to forget how bad things were in '08. In fact, the whole repo market could have failed. The fact that it did not points to its strength today. But it is still on of the risks
    Jan 22 08:23 AM | Likes Like |Link to Comment
  • Which mREITs Will Outperform In 2012? [View article]
    Very disappointing article. You merely stated the obvious. You make no assessment of the SEC action. You make no assessment of the falling/fallen long term rates and flat yield curve other than to say we should watch interest rates. WOW, what insight!! What should I watch for - rising rates, falling rates, high or low prepayments? Your article is useless and unfortunately typical of much of what is published on SA.
    Best wishes for a happy new year. Hope this helps you improve your analytical and writing ability.
    Jan 3 12:14 PM | Likes Like |Link to Comment
  • Earthlink (ELNK -0.6%) issues a notice of redemption for its 3.25% Senior Notes due 2026, joining a long list of companies paying off debt with free cash. What does it say about the corporate world when a once high-flying tech-bubble stand-in is settling now for retiring low-interest debt?  [View news story]
    To answer your question, the notes are convertible, hence the low rate. By redeeming the notes the company is reducing dilution of the equity holders. The company has adequate cash flow and does not need the capital. This is a good thing.
    Oct 15 08:58 AM | Likes Like |Link to Comment
  • Income Investors Face Enormous Macro Risks Ahead [View article]
    Quick comment: Point 1, first sentence - "the Fed will spare no recourse...in order to prevent depression and associated inflation." I believe you mean deflation, not inflation. In a depression, prices fall due to lack of demand. Falling prices creates a vicious cycle of people waiting for prices to fall further before buying. This is what the Fed has been trying to prevent by massive monetary stimulus and low manipulated rates. That sows the seeds for future inflation, but we have to get out of a recession induced by deleveraging first. That could be a very long time. Ask the Japanese.
    Sep 10 10:28 AM | 2 Likes Like |Link to Comment
  • Merger Ideas for Sprint [View article]
    I believe you have really under estimated the complexity of Clearwire. S had a controlling interest in CW but renounced it removing its board representation in order to avoid any potential liability in the event of a CW bankruptcy. Obviously S would like to buy the minority interest of CW. It is just a matter of price. S wants to buy low; CW wants to sell high. CW financing options are limited; they are financially stretched. They still have network to build out to give S its desired penetration. I suspect the ATT deal will bring them closer together.

    Any informed readers have any idea as to the stand alone value of S/CW network if they sold it off?

    Thanks
    Mar 24 12:36 PM | Likes Like |Link to Comment
  • Merger Ideas for Sprint [View article]
    I thought S was upgrading its network to LTE. Why would it not be compatible with MetroPCS? What do you think of their network upgrade plan? Thanks
    Mar 24 12:30 PM | Likes Like |Link to Comment
  • Microsoft: Can You Really Find a Better Risk / Reward Scenario? [View article]
    Thank you Chris
    Mar 24 12:04 PM | 1 Like Like |Link to Comment
  • Microsoft: Can You Really Find a Better Risk / Reward Scenario? [View article]
    I see your point and understand your concern. However, in theory, any company's value is equal to the PV of the FCF it generates in perpetuity. Another way to think of the perpetuity value is to think what the company could be sold for, say to a private equity firm. You can also look at the perpetuity value as the EV/EBITDA or P/FCF x at given point.

    I baked in a 0% growth factor which does not even allow for inflation so I think I am pretty conservative. My TV is only 10x FCF. The problem with DCF models is that small changes in a variables can have very large changes in the fair value.

    What this boils down to is do you think that MSFT's cash flow and earnings are going to start to decline significantly 4-5 years from now? Will windows machines really start to decline in favor of tablets? What about their Office franchise? Business division sales were up 24% in '10. Will the corporate world throw away the PC and office in 5 years? What about their new game controller? Sales in the entertainment division rose 55% to $3.7b. Kinectx sold 8m units. Granted, Windows revenues were $300m short in '10 but overall the company way beat expectations. Then there are the cloud computing contract wins over Google - Dept of Agriculture, Dept of the Interior, NYC, CA and MN. (per Fred Hickey).

    This is a very solid company with huge cash flow generating ability and cash reserves. It appears cheap to me now
    Mar 23 10:29 AM | 1 Like Like |Link to Comment
  • Microsoft: Can You Really Find a Better Risk / Reward Scenario? [View article]
    I agree with Mr. Lau's and your conclusions and I have a few comments and observations on MSFT's valuation.

    First, I would like to point out that you jumped from Cash flow from Ops to Free Cash Flow without mentioning cap ex. FCF is CFFO - Cap ex. However, I believe you took it into account in determining your FCF yield as CFFO for '10 was $24B but you used $21B for FCF so I assume you estimated $3B for cap ex. If that is true, then your calculation of FCF yield of 10.9% is correct. And, that assumes on growth, which Mr. Lau points out is quite possible.

    So let's make some assumptions of FCF growth for 5 years and a terminal value. If you use TTM as of 12/31/10 as proxy for FY 6/11 and grow CFFO by 3% per year, assume cap ex for the next 5 years is $3B per year (it has averaged $2.8B p/y for the last 3 years) then FCF would grow about 2.7% per year for 5 years. If you add a terminal value assuming 0% growth in perpetuity and discount that stream back at 10% and add $31B in net cash divided by 8.7B fully diluted shares you get a value of $32.68 per share.

    If it takes 3 years for the market to recognize the value discrepancy and you pay $24.80 per share today and receive $0.64 dividend per year and sell the stock for $32.68 you would generate an IRR of 12%.

    Seems like a reasonable return from a AAA credit. Who knows maybe they will actually create some new innovative products or buy some and growth may be higher than 3%.

    I am long MSFT
    Used Morningstar for financial figures
    Mar 19 02:57 PM | 3 Likes Like |Link to Comment
  • MLPs Enter Challenging Week [View article]
    I wish I could figure out a way to use any of the obvious information in your article. Exactly what challenges will MLPs face next week? Volatility has increased. There is a flight to safety. MLP's may go down as a result. Boy, that's insight!!!
    May 11 12:00 PM | 4 Likes Like |Link to Comment
  • The Nine Best Natural Gas, Oil Pipelines for Income and Capital Gains [View article]
    You are a little light on explanation about why you would purchase the companies you recommended. Are they selling at a cheap price to fair value? What is the fair value? You also don't go into much information about GP companies vs LP companies. You don't discuss hedging positions for gathering pipelines nor contract details about how a company generates revenue. There is a big difference between a keep whole agreement for a gathering pipeline and a long term transport agreement for a long haul pipeline.
    Sep 16 09:43 AM | 2 Likes Like |Link to Comment
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145 Comments
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