More on the Sandler downgrade of AGNC and ARR

"The stock prices do not fully reflect the risks to the agency mortgage REIT model," writes Sandler O'Neill in its downgrade of American Capital (AGNC -1.2%) and Armour Residential (ARR +0.4%). The risks:

Price volatility in MBS, the overhang of what the Fed might do with $1.3T of MBS on its balance sheet, other MBS owners could become sellers - namely mutual funds and other mREITs, retail skittishness could widen discounts to book value even further, and the transition to a new Fed chairman.

While not cutting earnings estimates, Sandler does cut AGNC's price target to $21 from $25, and ARR's to $3.50 from $4.50.

The average book value/share of agency mREITs fell 4.5% in Q1, 14.7% in Q2, and "we don't think all the volatility is behind us." Book value could fall another 10-25% if some of the above risk factors play out. Additionally, Sandler expects the agency mREITs to trade at a 10-20% discount to book as long as the overhang of the Fed being a seller remains.

Earlier: The downgrade and Compass One's differing opinion.

Related ETFs: REM, MORT, MORL.

Comments (6)
  • Patrick Harden
    , contributor
    Comments (463) | Send Message
    Vague, vague, and more vague. What if $10T in MBS fell from the sky? Those points don't feel very specific, especially when the market has already priced in a 25% tapering to begin this week.
    16 Sep 2013, 01:34 PM Reply Like
  • Matt Priore
    , contributor
    Comments (142) | Send Message
    I would have to go back and locate the release, but as I recall in one of Bernanke's conferences a while back he was pretty clear that MBS would not be liquidated from the Fed's balance sheet as that would have a negative impact on the market- they planned to hold them and allow for amortization. Point 4 is in stark contract to this, and "the overhang of the Fed being a seller" wouldn't appear to be a significant concern if this is the case.
    16 Sep 2013, 02:04 PM Reply Like
  • Matt Priore
    , contributor
    Comments (142) | Send Message
    Validated: The report is a little less concrete than I originally thought, but the Fed is not expected to liquidate its MBS portfolio.

    16 Sep 2013, 02:44 PM Reply Like
  • Douglas E. Johnston
    , contributor
    Comments (1773) | Send Message
    these sandler guys are jokers...where we're they when 10-year yields were sporting a ONE handle? .... that's when they should ahve warned investors....


    and Matt is right. U have lower Treasury supply (higher tax receipts) so more likely to taper them back to keep a constant % of ownership. Fed's not going to disrupt MBS market although i think they are happy that risk got repriced over last few months. Plus, higher rates themselves are going to hold back MBS supply so Fed sales aren't adding
    16 Sep 2013, 02:54 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2862) | Send Message
    The fed won't sell, they'll let the bonds roll off and just stop re-investing the interest payments. And even that won't begin for another year or so at least.
    16 Sep 2013, 02:59 PM Reply Like
  • William Packer
    , contributor
    Comments (1012) | Send Message
    sounds like a good way to get the stock to $21. im all for it. plan on buying at $21.
    16 Sep 2013, 06:14 PM Reply Like
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