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Leveraging a bond yielding 1.5%-2% by 8X is not a great business, writes David Schawel,...

  • Tuesday, December 4, 2012, 10:04 AM ET
    Leveraging a bond yielding 1.5%-2% by 8X is not a great business, writes David Schawel, remaining bearish on pure-agency mREITs. Dividends - and share prices along with them - will be cut more than expected next year. How about non-agency? Maybe too popular, he says. "Every hedge fund is suddenly an expert." (other ideas instead: I, II)
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This news story has 22 comments:

  •  
    why is it "not a great business"? have you seen the ROR for AGNC over the last several years? Did something change?
    4 Dec 2012, 10:12 AM Reply Like
  •  
    Yes, the margin went to hell.
    4 Dec 2012, 10:17 AM Reply Like
  •  
    I am happy when fools trash the mREIT sector. Makes it cheaper for the rest of us
    4 Dec 2012, 10:46 AM Reply Like
  •  
    Leveraging a bond yielding 1.5%-2% by 8x may not be sexy, but it beats buying some equity position in a company and praying a bunch of suckers push up the stock value in this anemic market.

    I'll take 16% from AGNC or 12% if they cut the dividend. No matter how you slice it, AGNC will yield more in a year than many hedge funds and top mutual fund managers.
    4 Dec 2012, 10:22 AM Reply Like
  •  
    Agree, when I hear the word bond, I think of bondage, no thanx
    Capt. Brian
    The Lost Navigator
    4 Dec 2012, 10:57 AM Reply Like
  •  
    Funny Funny makes a short unjustified statement but links to a newsletter to BUY. First it is not 8X is was less than 7.5X and they said they were going to reduce leverage during this low interest environment. They are also able to keep up the dividend due to large undistributed fund balance. This Reit also has the portfolio majority in shorter term, lower balance loans, therefore does not have large prepayment rate as evidenced by their 9%CPR last qtr versus industry at 12-15%
    4 Dec 2012, 10:27 AM Reply Like
  •  
    "This Reit also has the portfolio majority in shorter term, lower balance loans, therefore does not have large prepayment rate as evidenced by their 9%CPR last qtr versus industry at 12-15%".
    Great, but how do you factor in the higher payups on these pools in your analysis? Treasurys prepay at 0% CPR. Should REITs buy Treasurys?
    4 Dec 2012, 01:50 PM Reply Like
  •  
    Just out of curiosity, what does a bank do?
    4 Dec 2012, 10:35 AM Reply Like
  •  
    David Schawel also said on valuewalk.com that "I find it unlikely we see a large rise in yields without a strong lending led recovery." and then followed that by saying, "At the same time prepayments accelerate, they will be forced to redeploy this cash back into lower yielding bonds"

    All I want to know is how prepayments will be possible if banks aren't lending? If you want to take advantage of a lower rate, you need a loan. If banks aren't lending because they've set the bar so high that nobody can reach it, then prepayments are impossible.

    It is my assessment that prepayments will only impact the margins of the mREIT business and not the whole. Not until lending activity kicks into high gear. But when that happens, the velocity of money will rise and so will rates. Thus negating prepayments and expanding the margins for mREITs to profit.
    4 Dec 2012, 10:48 AM Reply Like
  •  
    What is your opinion with regard to the stock price. Could it drop so far as to negate the dividend?
    5 Dec 2012, 12:43 PM Reply Like
  •  
    Yes. Every stock falls by the same amount as the dividend paidout. So a $1.25/sh will be deducted from the share price on Dec. 18th which is the ex-dividend day.
    6 Dec 2012, 08:59 AM Reply Like
  •  
    Whomever wrote this should go buy CD's from the bank that pay 0.75%
    4 Dec 2012, 11:37 AM Reply Like
  •  
    1.5-2 leveraged at 8x gets you 12% to 16% returns. Seems pretty good to me.
    4 Dec 2012, 12:02 PM Reply Like
  •  
    I have followed this debate for years, as I accumulated more AGNC via DRIP and purchases. Stay the course on this one. Their results say they are steady and the chatter is just talking heads meeting the need to say something.
    4 Dec 2012, 12:07 PM Reply Like
  •  
    10X would obviously be better.
    4 Dec 2012, 12:11 PM Reply Like
  •  
    It's like the man said, what does the bank do? 10 to 15 times less.
    It's a no brainer for me.
    4 Dec 2012, 12:12 PM Reply Like
  •  
    it's interesting that we see a post like this 3-4 times per month... and comments tend to focus exclusively on the likelihood (or not) of precisely maintaining dividend payouts. i think the situation is far more nuanced that that. agnc has done an amazing job of producing returns... and managing risk(s). given market yields, i'm ok if the dividend drops to 12, or 10, or 8... so long as they manage the risk down appropriately. the alternatives yield 2-5% (or lower). the market is not working, it is being managed. the fed is driving. they are making policy promises for 2-3 years into the future. in that environment, the notion of leveraging 2% 8X probably does make sense.
    4 Dec 2012, 12:32 PM Reply Like
  •  
    Mtge is the buy in this sector.
    4 Dec 2012, 09:48 PM Reply Like
  •  
    I'm new to mREITs, can anyone tell what I can monitor to see what drives the stock price of AGNC/MTGE/NLY/ARR? Thanks.
    6 Dec 2012, 01:32 PM Reply Like
  •  
    it's somewhat correlated to Book Value which they provide in all of their SEC filings. A well run mREIT like AGNC or CYS will usually trade above book while the crappy ones like CIM trade below book.

    since Obama won, they all sold off below book value on fears that dividend tax rates will rocket but it's foolish because these dividends were never afforded that 15% deal in the Bush Tax cuts program.

    So if you are new - welcome. Buy AGNC, ARR, WMC & CYS and enjoy your returns.
    7 Dec 2012, 10:26 AM Reply Like
  •  
    I'm new to mREITs, can anyone tell me what I can monitor that provides direction for the mREIT stock price?
    6 Dec 2012, 01:32 PM Reply Like
  •  
    I looked at mtge can anyone tell me why it is increasing in price when all the others are decreasing?
    7 Dec 2012, 02:20 AM Reply Like
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