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Retired Atlanta dentist with a specific interest in agency mortgage REITs and leveraged Munis.
  • Taper Tantrum - Take Two 0 comments
    Jun 21, 2013 11:04 PM | about stocks: MORL, MORT, NLY, AGNC, STPP

    That was the week that was. It reminded me of the Leslie Nielsen line from one of his "Airplane" movies, "I picked a bad week to give up sniffing glue" That's a joke, btw.

    The market reaction to Bernanke's comment Wednesday was the most irrational I've seen in quite a while. And not just the market, but also the financial media that seemed to latch on to the worst case scenario they could find and echo it endlessly. I listened to and have watched Bernanke's testimony twice and I really didn't see anything new from last month.

    It's my view that the Fed simply can't tell us when they're going to start tapering because they won't know until the data tells them to. And while they can project a time frame when they might taper, the decision remains conditional on inflation, various aspects of unemployment data as well as the precise nature of economic recovery which still seems tenuous.

    And now some charts!

    Doug Short was nice enough to update his Daily Treasury Yields Chart as of Thursday. Note that the Ten year went even higher today, up 12bp to 2.53%.

    (click to enlarge)

    That blip of the 3 month rising up a bit would worry if it were not for the DTCC GCF Repo Index data chart which show Repo rates at 6 month lows. There must be a lot of Repo money sloshing around looking for assets.

    (click to enlarge)

    The 2/10 spread from which STPP is based is now 2.17. Even higher than the chart below shows since the spread quote is yesterdays.

    (click to enlarge)

    While I don't expect the 2/10 spread to continue straight up next week, it's worth considering where STPP traded a few years ago.

    (click to enlarge)

    MORL continued to be hammered, reacting violently on high volume. Several of it's component mREIT announced small dividend cuts for Q2, namely the two largest in the MORT index, NLY and AGNC. We won't know why for several weeks, but a fellow SA contributor and I independently worked out MORL's next dividend and agreed on $1.10, which on a rolling 3 months basis gives you an annualized 26% yield. It's hard to imagine MORL continuing to stay as oversold as it has been, especially since it's next dividend reflects the majority of mREITs which go ex-dividend in June. Friday was the first day I can recall where MORL finished higher than it opened after plunging during the day. I'll take encouragement where I can get it.

    (click to enlarge)

    Several Bloomberg interviews I heard today seemed to make the same point that the market completely misinterpreted Bernanke and over-reacted in a bizarre manner. Check out this one. I happen to agree. Perhaps over the weekend sanity will reign and we can start a nice welcome summer rally.

    To close, I continue to pound the table for STPP, the Steepening Yield Curve ETN. Bernanke says that when the time is right, the Fed will withdraw from the Treasury and MBS market and allow long rates to go up. I believe him and STPP is pure play on that happening.

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