Annaly slides further

Annaly Capital (NLY -2.3%) takes out not just a new 52-week low today, but slides to its lowest price since the 2001 - when the yield curve was negative. Yes, higher rates have hurt the mREITs (REM -1.2%), but some more than others. Who cut leverage at the wrong time? Who put on more hedges with the 10-year at 2.25% (good), and who put them on at 3% (not so good)?

The Q3 earnings call (transcript) revealed a management hunkered down - talking leverage to 5.4x (from 6.2) and hedges to 74% of assets from 56%. Core earnings have been in the range of $0.28-$0.32 per share for the last five quarters (compared to current $0.35 dividend), so a payout in the area of $0.30 seems likely.

CEO Denehan-Norris: "I don't think anybody, given how many people got it wrong, can sit here and sit before you and say that they know exactly when [the Fed is going] to taper and they know exactly what the impacts are going to be on mortgage assets and all assets in particular."

Annaly Q3 earnings coverage.

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Comments (28)
  • Rubenov
    , contributor
    Comments (467) | Send Message
    A complete disaster.
    11 Nov 2013, 03:51 PM Reply Like
  • David Pinsen
    , contributor
    Comments (2109) | Send Message


    For anyone still long NLY and looking to add downside protection now, here are a couple of ways of doing so:
    11 Nov 2013, 08:00 PM Reply Like
  • rrs2205rrs
    , contributor
    Comments (131) | Send Message
    I'm buying.
    12 Nov 2013, 12:30 AM Reply Like
  • Stone Fox Capital
    , contributor
    Comments (9637) | Send Message
    why in the world would anybody add downside protection now?
    12 Nov 2013, 03:35 AM Reply Like
  • DeepValueLover
    , contributor
    Comments (11168) | Send Message
    Huge bargain here.


    Compare the NLY yield with that of the 30 year Treasury.


    Not even close.
    11 Nov 2013, 03:59 PM Reply Like
  • Douglas E. Johnston
    , contributor
    Comments (1773) | Send Message
    so if i buy a 30 year Treasury, repo it out, and buy some more, repo those out, and buy even it one more time and then offer you a ~13% yield, that constitutes a bargain?
    11 Nov 2013, 04:45 PM Reply Like
  • Got That Swing
    , contributor
    Comments (292) | Send Message
    The 30 year treasury will not go bankrupt, but NLY might.


    Nevertheless, NLY is now tempting.
    11 Nov 2013, 08:09 PM Reply Like
  • Schwamendingen
    , contributor
    Comments (7) | Send Message
    Agreed 100%. But if you only have $1,000 to invest (or even a million), the Goldman Sachs or other repo desk will not do business with you. Yet you can buy 100 shares of NLY. And NLY management gets a big cut. I don't question whether they deserve the cut; after all, they are stellar managers. Still, the 99%ers get the short end of the stick.
    11 Nov 2013, 10:50 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (11168) | Send Message


    With the Fed in a QE liquidity trap?


    12 Nov 2013, 09:47 AM Reply Like
  • DonSimon
    , contributor
    Comments (124) | Send Message
    Look at the price moves the last one and. Five days. It seems that the "nibblers" are returning. Even if they cut the dividend by 50%, that is still a 6.5% yield. I say if you wanted it for the longterm, nibble into it.
    11 Nov 2013, 04:08 PM Reply Like
  • Gary Jakacky
    , contributor
    Comments (2946) | Send Message
    The chart I have shows Annaly at $9.57 in 2008. Get your straights fact! :)
    11 Nov 2013, 04:13 PM Reply Like
  • chopchop0
    , contributor
    Comments (5155) | Send Message
    "A complete disaster."




    "Huge bargain here.


    Compare the NLY yield with that of the 30 year Treasury.


    Not even close."


    Interesting to read the disparate comments not only here but elsewhere when it comes to mREITS.
    11 Nov 2013, 04:28 PM Reply Like
  • Rubenov
    , contributor
    Comments (467) | Send Message
    It has been a disaster. Look at the 1-year chart.


    I believe there's value here and obviously they're discounted to book value... but this whole taper uncertainty has shown no mercy to the sector. If only we knew when this would turn around.
    11 Nov 2013, 04:33 PM Reply Like
  • American in Paris
    , contributor
    Comments (5495) | Send Message
    It isn't going to turn around. Before the crisis TLT was in the low 80s. Today it finished at 103.02.


    If TLT hits 90 in two years, ANNALY is bankruptcy material. And hedges have a cost, hedging can drive you bankrupt as well. The more likely tapering becomes, the more expensive become the hedges.
    11 Nov 2013, 04:57 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (11168) | Send Message
    People who consider NLY to be a "disaster" are the same people salivating at the latest social media IPO.


    NLY is not and has never been the "hot, go-go momentum stock of the week".


    It is purely for income investors who could give two shakes about equity growth.


    The key is to understand the mREIT sector (and the MLP, BDC and the closed-end HY sectors too). They serve the same purpose as the old utility stocks back in the normal days of 7% interest rates.


    Growth and income investing have different goals.
    12 Nov 2013, 09:53 AM Reply Like
  • yu1168dug
    , contributor
    Comments (2) | Send Message
    The bottom is near.
    11 Nov 2013, 05:35 PM Reply Like
  • fidelity comment
    , contributor
    Comments (240) | Send Message
    I also see a dip in Oct 2008 below 10 on my charts.
    11 Nov 2013, 05:36 PM Reply Like
  • jpmist
    , contributor
    Comments (372) | Send Message
    The end is near, no, really!

    11 Nov 2013, 06:01 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (4801) | Send Message
    Nice blog Jpmist.
    One thing that is not so clear is when tapering will start and how much it will be.
    That is a killer to mreits.
    They just need the fed to get out of the market.


    If any of them start re-leveraging before tapering happens as well, I'd run for the hills unless there was some extraordinary factor where tapering will not start for a long long time.
    11 Nov 2013, 06:10 PM Reply Like
  • jpmist
    , contributor
    Comments (372) | Send Message
    Thanks for reading, xxavatarxx!


    The Fed taper issue is what's holding me back from buying now and I can't wait for it to be off the table so the MBS market can just trade on fear and greed instead of trying to game the Fed.


    One thing I'm pretty certain of is that when the taper comes, not only will the mREITs be prepared for it, as witness their lower leverage, but the MBS market will be as well. I seriously doubt we'll have a 100bp move in MBS rates like we started back in April.
    11 Nov 2013, 07:44 PM Reply Like
  • Dividends#1
    , contributor
    Comments (4216) | Send Message
    Hi jpmist,


    Excellent blog. I just read your latest piece. Very funny and logical.


    I agree with everything you say, except trying to time the buy with the exit of the FED, it can't be that easy. However, maybe you are correct.


    But since I have given up trying to time my investments, I own AGNC and keep reinvesting the dividends.


    I was unclear about the difference between the core earnings and the interest spread income.


    It seemed like they were the same from your explanation.


    Although you stated that the core earnings were cash from interest on the MBS notes subtract interest paid on short term debt it uses to buy the stuff. {Is the short term debt the same as repo loans?}


    I have learned from an intelligent person or two here at SA that ....


    The spread income is the yield on the MBS less the cost of repo and less the cost of interest rate swaps.


    As far as your thought about the taper, not causing AGNC and other mREITS to get crushed, I made similar comments, prior to reading yours. Great minds think alike, I hope I did not jinx that.
    11 Nov 2013, 09:36 PM Reply Like
  • jpmist
    , contributor
    Comments (372) | Send Message
    Hi Div1,


    Looks like I'll have to fire my proofreader, yes my explanation of core earning and interest spread margin did read alike. They are similar in that core earnings looks at the earnings as a dollar per share figure while interest spread looks at the rate difference between buying and borrowing. Really two ways of looking at the same thing without portfolio valuation clouding the issue.


    I just read Ellington Residential's report and they've got a pretty good definition of core earnings:


    "Core Earnings consists of net income (loss), excluding realized and unrealized gains and losses on real estate securities and financial derivatives, and, if applicable, items of income or loss that are of a non-recurring nature. Core Earnings includes net realized and unrealized gains (losses) associated with payments and accruals of periodic payments on interest rate swaps. . . . one of our objectives is to generate income from the net interest margin on our portfolio and we use Core Earnings to help measure the extent to which we are achieving this objective."


    Ellington's report is interesting reading because they increased their book value as asset prices improved overall for last quarter, their net interest margin increased as well. Since the company started only this year, they don't have the burden of older MBS to contend with and might be a harbinger of improvement in the mREIT sector. They hedge aggressively, so it may also be a case of their guessing right for last quarter. We'll see. . .


    More on Ellington here:
    13 Nov 2013, 01:19 PM Reply Like
  • Dividends#1
    , contributor
    Comments (4216) | Send Message
    Hi jpmist,


    Your comment above is a little over my head with a lot of technical terms. I have learned a lot over the last 7 months, however, I still have plenty to learn.


    I have my hands and head full reading about AGNC, so to read about Ellington will cause me to overload and burn out.


    I do appreciate the thought.


    I will continue to check your blog and comments. I understand the majority of your comments and get a lot out of them.


    Be well.
    16 Nov 2013, 07:18 PM Reply Like
  • Tactical Technician
    , contributor
    Comments (146) | Send Message
    It might be trading at 2002 levels but is still trading above the lows of 2008.
    11 Nov 2013, 08:40 PM Reply Like
    , contributor
    Comments (269) | Send Message
    NLY is obviously taking an ultra conservative "end of world" nearly fully hedged postion here to survive the worst. It has somehow survived for more than 15 years including 2008. It will survive this"crisis" of neurosis based Fed information short near panic selling. NLY's yield may go down to as low as 10%!!!! Horrors! That's still a lot more than any other segment of the market. If you bought "blue chip" Apple or Caterpillar 1-2 years ago with their anemic yields you would not only be down as much as NLY but have no dividends to bail you out either.
    11 Nov 2013, 09:12 PM Reply Like
  • chopchop0
    , contributor
    Comments (5155) | Send Message
    If you bought "blue chip" Apple or Caterpillar 1-2 years ago with their anemic yields you would not only be down as much as NLY but have no dividends to bail you out either."


    Correct. It amazes me how much ppl get up in arms about these mREITs, but then fail to remember the very basic fact of yield/reward = risk. Do people honestly think JNJ, KO, or WMT will pay them 12%???
    11 Nov 2013, 09:39 PM Reply Like
  • Workinhard
    , contributor
    Comments (337) | Send Message
    mgmt of the m-reits do not earn their pay in general , they do great when the curve is steep and yields are heading down but they have shown time after time that they can't protect book value in volatile markets.
    11 Nov 2013, 10:36 PM Reply Like
  • New Low Observer
    , contributor
    Comments (2473) | Send Message
    The current decline in REITs is quite similar to the blowup that took place in 1974. Not saying that we'll go that far (elimination of dividend), but it is trending in that direction very quickly.


    12 Nov 2013, 01:35 AM Reply Like
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