Seeking Alpha

American Capital's Kain talks shop at conference

  • "Get used to it," is what American Capital Agency (AGNC) CIO Gary Kain hears from many about the significant discount to book value his stock (and the entire agency mREIT sector) sell for. If things like banks and closed-end funds can trade at discounts, why not agency REITs? It's all about collateral, responds Kain. The fixed agency MBS market is the world's 2nd most liquid, totally transparent, and offers negligible bid/ask spreads. There is complete certainty with respect to book value, not always true with other sectors selling at discounts.
  • Presentation transcript here, presentation slides here
  • Off the purchase of a 7.5% stake (8.5% if MTGE is included) in Hatteras (HTS) - the only of AGNC's mREIT purchases made public so far - Kain said he wanted to get exposure to hybrid ARMs, but they're not easy to buy in size. A sizable American Capital buy could have moved the market by half a point or more. The better way to get a decent stake was by buying Hatteras at around a 20% discount to book.
  • Clearly feeling his oats after a tough 2013 (he notes book value fell just 5.5% while the stock declined 14.3%), a confident Kain says buyers of agency mREITs are not only purchasing a portfolio of MBS selling for significant discounts to where they trade in the open market, but those MBS - having already priced in a stronger economy and a Fed QE exit - have room for sizable upside.
  • Related ETFs: REM, MORL, MORT
Comments (34)
  • Dividends#1
    , contributor
    Comments (2230) | Send Message
     
    I think Kain will redeem himself in 2014. Some of the poor moves made in late 2012 and 2013 have been corrected and the "NEW" and improved portfolio going forward should see BV increasing and dividends increasing sometime in 2014. I know there are still some factors that will limit the upside of the dividend,
    however those same factors also limit the downside. Bottom line: AGNC is in a
    much better position now then last year. They are set up well to have a nice
    ecomonic return in 2014. If you have held on to your position in AGNC and added over the last several months as I have, I believe we will be rewarded over the next several years. I am glad I did not panic. I think most of the WEAK HANDS have been flushed out of AGNC. The price action of late has been very encouraging. Kain was very confident in hos last presentation.
    15 Feb, 09:21 AM Reply Like
  • DeepValueLover
    , contributor
    Comments (8140) | Send Message
     
    (FIG) and (ACAS) are standouts in 2014. Expect @ least a 25% total return this year.
    15 Feb, 10:41 AM Reply Like
  • leopardtrader
    , contributor
    Comments (860) | Send Message
     
    AGNC will remain subdued. Price will eventually get to single digit. Management will try their very best but the momentum unfortunately is to the downside. Not for AGNC alone but the universe. Rates will eventually be increased down the road a& this perception will be more powerful than reality
    15 Feb, 10:50 AM Reply Like
  • tstreet
    , contributor
    Comments (560) | Send Message
     
    Yes. You are correct. The universe, like everything else is subject to entropy. You can't mess with the 2nd law of thermodynamics. Not sure, however, what you mean by "subdued". Since mid December, AGNC has been anything but subdued. Maybe it's subdued, but it has bounced well off its lows.

     

    I felt that things were turning around after AGNC weathered well the first round of tapering. As it turns out, the reality was better than the fear as people discovered that actual gradual tapering was not the end of the world. AGNC made further gains after the latest earnings report and conference call. It also does not seem to have been negatively impacted by the unconventional practice of buying other MREITs stock.

     

    But then there is always the future which has a nasty habit of not being all that predictable. We do know,however, that the universe will eventually settle into a big entropic puddle.
    15 Feb, 01:55 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2230) | Send Message
     
    leopardtrader,

     

    AGNC will remain subdued. Single digits? You have got to be kidding us? First of all subdued and single digits in back to back sentences is a contradiction. Subdued implies to tone down, single digits would not be subdued but crushed. That would be an almost 60% price drop and a price drop of about 75% from AGNC's all time high. Your crystal ball is very fuzzy.

     

    You are basically calling for armageddon. What do you base your call on? I will say I strongly disagree.
    15 Feb, 07:49 PM Reply Like
  • chopchop0
    , contributor
    Comments (3129) | Send Message
     
    "Rates will eventually be increased down the road a& this perception will be more powerful than reality"

     

    People said that 3-4 years ago and got burned (namely Bill Gross). Good luck predicting when that will happen. In the meanwhile, I'll collect my fat divvy from AGNC and NLY
    16 Feb, 12:59 AM Reply Like
  • Rob1492
    , contributor
    Comments (215) | Send Message
     
    Leopard... Are you serious or is that a typo? Single digit?
    15 Feb, 10:54 AM Reply Like
  • LITTMIC2273
    , contributor
    Comments (3) | Send Message
     
    Rob1492,
    Leopard don't know what is talk about....$agnc $20.56-$22.76 for the 1st half of 2014....with $.65 for the 1st& 2nd qtr dividend....Yes we all know that interst rate will go up..10yr-3.15% by the end of 2014.....$agnc ..i'm for the long haul...
    16 Feb, 09:34 PM Reply Like
  • poor student
    , contributor
    Comments (24) | Send Message
     
    Holy ambiguity, Batman. "Price will eventually get to single digit" Every to time I try to hang my hat on "eventually" it always falls on the floor. Could you give me something a little firmer to hang my hat on, please?
    15 Feb, 12:34 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (2063) | Send Message
     
    "Clearly feeling his oats after a tough 2013 (he notes book value fell just 5.5% while the stock declined 14.3%), a confident Kain says buyers of agency mREITs are not only purchasing a portfolio of MBS selling for significant discounts to where they trade in the open market, but those MBS - having already priced in a stronger economy and a Fed QE exit - have room for sizable upside."
    .
    .
    .
    not so sure about this one.
    Sizable Upside as everything is already priced in?? Really.
    Gary K needs to pass me what ever he is smoking.
    15 Feb, 02:00 PM Reply Like
  • Rob1492
    , contributor
    Comments (215) | Send Message
     
    xxavatarxx ... He said that book value is back to where it was in September... so 25 + that is at a 10 year t bill rate of about 2.7. He also states that a rapid 100 basis point rise in rates will cost about 13% in book value which would bring it down to its current market value of 22. So I think it is fair to say that is also priced in. The rise in rates would also lead to an improved spread as no one is expecting short term rates to move in the near future thus an increased dividend... what are you basing your current very negative outlook on?
    15 Feb, 03:09 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (2063) | Send Message
     
    Rob, AGNC's modeling says that about a 100 basis point spread.
    I don't believe any mreits modeling right now.
    This is just based on the numbers put out into the quarterly 10Q's of all the mreits I track and what actually happened over the past year or two.
    The interest rate models sucked to put it bluntly.

     

    What if the treasury rises back to 3%.
    Gary is trying to say MBS prices will not fall in that case?

     

    Myself, I think they (MBS) will fall if the treasury moves higher.
    It may also fall just due to tappering and as real estate gets moving again in the spring/summer.
    The supply/deman effect on MBS.

     

    Call it a difference of opinion at the end of the day.
    : )
    15 Feb, 04:40 PM Reply Like
  • Rob1492
    , contributor
    Comments (215) | Send Message
     
    I expect that if rates went back to 3% then NAV would fall back to where they ended up this past quarter. And if they rose past 3% the NAV would fall even further. But the rise will not be infinite ... and what you will lose in NAV you should gain in spread. My own sense is that the 10 year t bill will trade in a 100 basis point or less range 2.4-3.4 up until that point that the Fed signals that the will start raising short term rates. If true I believe this range will be healthy for owners of AGNC stock
    15 Feb, 06:39 PM Reply Like
  • William Packer
    , contributor
    Comments (278) | Send Message
     
    Rob, that's like saying that IF you own a stock, and it's trading at $20 with a 10% yield, that if it goes to $10, it will yield 20% and thus the shareholders are better off because they now have a bigger yield. LOL. (take the stock price in this example and replace with NAV. It's the same deal. Prepayment speeds will slow and capital will be returned to the company very slowly, they will not be able to reinvest that capital because it will go to paying down the leverage that will be jacked up as equity falls)
    15 Feb, 06:51 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2230) | Send Message
     
    William, "(take the stock price in this example and replace with NAV. It's the same deal". It is not the same deal because the NAV will NOT drop 50% like in your example and you disregarded Rob's assertion that AGNC will benefit from a larger spread. You also change your mind everyday or hour. You was long AGNC then not, then yes. Kain was a clown at 1pm and a genius at 3pm. I understand you are a trader and constantly changing your trades based on the latest information you analyze and your conclusions of such. However, I think long term holding of AGNC is a better strategy for me then trading, and I think Kain is a better trader then you. Good luck though, if you are the rare person who can keep making a profit after 10 years without negative health consequences, I tip my hat to you. You would certainly be in the minorityI do believer Gary Kain is a real pro. We shall see.
    15 Feb, 07:35 PM Reply Like
  • Positive Concavity
    , contributor
    Comments (152) | Send Message
     
    xxavatarxx,

     

    The 100bp model estimate that you are referring to are based on instantaneous parallel shocks to the yield curve. Applying these results to historical interest rate moves won't tell the whole story of what happened to AGNC. To properly assess value you also need to decompose the value change due to the change in the shape of the yield curve, the change in implied volatility and the change in MBS spreads. Once you evaluate all these elements, model estimates actually perform very well.

     

    It is not the models that are not working, but rather the interpretation of results. This is also why AGNC recently started to include NAV/Asset value sensitivity to mortgage spreads.
    16 Feb, 02:02 AM Reply Like
  • William Packer
    , contributor
    Comments (278) | Send Message
     
    dividends, the example was just that... an example.. I never said AGNC would drop 50%. (Although this is a possibility if rates rose 200 bp and no or little rebalancing actions were taken). REALITY: bonds will yield negative as the yields rise to respond to an improving economy without fed support. Yields likely to stabilize on the 10 yr bond at 4.0 to 4.5% by 2015. (AGNC book will have declined by another 20-30% by this point) and the stock will be trading between $14 and $16 if this 4.0 to 4.5% 10 year comes to pass.. and book value would be around $17) Compare that to $CHMI which would have a book near $26 and a 1.4x multiple added on to that bringing the valuation in line with NRZ. So a CHMI would be a $36 stock. I really don't want to get into specifics, but after CHMI releases the Q4 report and you can get a bit more color on what i'm saying.. I'm sure you'll agree it's time to leave Mreits and move into these Mortgage Servicing Rights investments. That said, AGNC is a solid buy at $18 and under! I think you can be comfortable enough owning the stock there... The risks would be factored in... But at $22 no way... That is too expensive and you will be underwater on AGNC soon enough.
    16 Feb, 01:59 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2230) | Send Message
     
    Hi William,

     

    First of all, it is highly unlikely rates will rise 200bp in a spike like fashion ( extremely low probbility). And of course if rates started to spike, AGNC would rebalance hedges, etc.

     

    You know that you can't predict rates in 2015 today. No one has a crystal ball. You have your reasons for your viewpoint in your last comment, however you can easily change your mind as you get new data.

     

    To compare AGNC to a brand new IPO (CHMI) is a little overly brazen of you. CHMI's daily average volume over the last 10 days was 29,644, no liquidity. I have no idea whio runs the company and would never invest in an IPO. I am not looking to buy a lottery ticket. I think comparing AGNC to CHMI is nonsense. I can see your point as to the potential of MSR's, that is why I started a small position in MTGE ( which you suggested several weeks ago, I agreed with your assessment of MTGE).

     

    William, since you are a short term trader, you will probably be out of CHMI in a short time, so I do not look at your analysis as a long term investment play, only as a short term trade. Is that correct? If so, you might have a good trade, but again it would not apply to me. Good luck with your trading, it is way too streesful for me. I am no longer a spring chicken and can't handle the trading game anymore. If you can handle the day to day stress and make a good profit, then you are in the minority. Just be honest with yourself as the years pass. Some are built for it, again only a select minority, especially over a decade or more.
    17 Feb, 10:11 AM Reply Like
  • xxavatarxx
    , contributor
    Comments (2063) | Send Message
     
    I think he brought up CHMI based on their investment portfolio.
    They should do well in a rising rate environment.
    17 Feb, 01:07 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2230) | Send Message
     
    I understand what you are saying. You are probably right. However, he trades in and out of his positions, so it is probably a short term trade.
    17 Feb, 08:50 PM Reply Like
  • William Packer
    , contributor
    Comments (278) | Send Message
     
    Or you could buy $CHMI and watch it grow book and earnings as interest rates go up. MSRs are where it is at. (most of their capital was put into MSR). competitor $NRZ trades 40% higher than $CHMI but they both close to the same assets. $18 stock at CHMI, but analyst price targets just came out around $23. So... do your own DD. New company IPO'd last year in OCT. No quarterly reports yet.
    15 Feb, 03:52 PM Reply Like
  • Rob1492
    , contributor
    Comments (215) | Send Message
     
    Dividends... I agree with everything you said...and William for such a smart guy I am surprised... You know that with repro costs fixed that when MBS rates go up the interest rate spread will increase thus leading to a real increase in Dividends not one related to a falling share price. Right now that spread is about 2.7 (between 10 year and 1 month t bills). Historically on the high end. As you know the past year this spread has bumped up to 3 a few times and then has fallen back. The largest this spread has ever been has been since 2001 has been 4.0%. Each time this spread has been brief and the spread quickly decreased.

     

    http://1.usa.gov/1373Smq

     

    More realistically I believe it is unlikely that the 10 year T bill rate gets above 3.5 while the 1 month rates stay at zero.

     

    Kain has half of his portfolio in seasoned 15 year MBS for a reason. Even with rising rates the prepayments in seasoned 15 year MBS will be much faster than with 30 year MBS. In addition, when rates go up and spreads maximize he can decrease the percentage of 15 yrs in his portfolio further increasing his interest rate spread.

     

    I personally will take money off the table when the Fed starts raising short term rates.... but until then I will stay long AGNC
    15 Feb, 08:47 PM Reply Like
  • William Packer
    , contributor
    Comments (278) | Send Message
     
    Rob, The fed will likely raise short term rates sooner than you think. And before you can "get out..." the bonds will have already sold off reflecting the new expected fed funds... Just like after 3 months of QE3, the market already expected the fed would taper purchases.. even though it did not happen for another 6 to 9 months past the initial sell off in bonds. The spread will jump huge.. bigger than prior years, and fill the gap within 6-9 months. So I see a 3.6% 10 year bond by Q3 2014, and a stable 4.0 to 4.5% 10 yr bond in 2015 along with a 1% fed funds. .. with possible future fed funds increases coming in 2016.
    16 Feb, 01:37 PM Reply Like
  • Workinhard
    , contributor
    Comments (167) | Send Message
     
    One of the reasons that these may trade at discounts is because the Book Value is only released once a quarter, despite mgmt knowing with 99% certainty what the BV is everyday. If there was more transparency , like daily or at least weekly BV disclosure, the m-reits might trade better.
    15 Feb, 09:21 PM Reply Like
  • Rob1492
    , contributor
    Comments (215) | Send Message
     
    William,

     

    First I would say you are much earlier then most expect (announcing short term rates rising in Q3 2014) ... but maybe you are right... but even with that you are predicting a 300 - 350 bp spread that is extremely large and unlikely to be sustainable but we will see.... and even with that we are talking about a 90 bp rise for 2014... certainly not as high as the 130 bp rise last year
    16 Feb, 04:30 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2230) | Send Message
     
    Hi Rob,

     

    Good comments. Also, the % increase will be much lower, as we are now at 2.70% vs. 1.64% or so.
    17 Feb, 10:15 AM Reply Like
  • AllStreets
    , contributor
    Comments (1018) | Send Message
     
    Rates will go up at some point but spreads will remain positive until the economy gets overheated with low unemployment and moderate to high inflation which is years away. There will be bouts of bond bears like last spring and that will hurt mREIT prices mostly due to effects on book value not loss of spreads. Hold mREITs for years for the dividends and hedge against capital loss with put options or put spreads.
    17 Feb, 08:35 AM Reply Like
  • Rob1492
    , contributor
    Comments (215) | Send Message
     
    Hi Dividends!

     

    I do thing William has some good points though as the spread between NAV and market price for AGNC narrows then the down side protection decreases. Like you I am hoping for a dividend increase next quarter. If that happens might get a good run in share price.... after which I might take a portion of my position off the table and look at a stock like CHMI to park it.

     

    For you...just continue to reinvest those dividends :)
    17 Feb, 03:01 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (2063) | Send Message
     
    Do you think they would raise the dividend Rob?

     

    I would think they will save what ever extra they make for a rainy day because they cannot apply the gain on MBS sales to their taxable income until they clear the Capital Loss which is getting big.

     

    MBS sales has always been a decent size chunk of their dividend when they were holding at $1.40.
    17 Feb, 03:17 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2230) | Send Message
     
    Hi Rob,

     

    I think we are over analyzing this and it feels painful. As far as a dividend increase next quarter, that might be a little too optimistic. Scott Kennedy has stated that he sees a dividend increase in Q32014 and that assessment is subject to change based on new data. So, I am hoping for an early increase, however I am not expecting it yet.

     

    I have stated several times that I see a dividend increase in 2014, and AGNC seems to be headed in that direction. I am looking for it too occur in Q2 or Q3. I am basing this onthe fact that AGNC earned enough taxable income last quarter to cover their dividend, they did not have to tap into their UTI account. They seem to be having a better quarter so far compared to last. Kain says they are almost finished rebalancing their portfolio and keeps talking about the rare opportunity to be an AGNC shareholder. I am at a loss for more solid reasons. I am tired and will sit back and enjoy what I believe will be a good time to own AGNC. 
    17 Feb, 09:50 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (2063) | Send Message
     
    "I am basing this onthe fact that AGNC earned enough taxable income last quarter to cover their dividend,"
    .
    .
    .
    Dividends#1, they made their taxable income because of the capital loss *facepalm*
    How does that help you foresee their future taxable income.
    Are you expecting a capital loss every quarter now that will cover their taxable income?

     

    At least Rob understands their spread income.
    That on the other hand is looking decent.
    17 Feb, 11:31 PM Reply Like
  • Rob1492
    , contributor
    Comments (215) | Send Message
     
    Hi xxavatarxx!

     

    I have listed below what I took from their last quarterly report...If you take there dollar roll loss and CPR benefit away you are left with $0.70 net spread per share. In addition I think their dollar roll income will be positive this quarter (slightly negative last) Their interest rate spread at the end of the quarter was 2 bp above the beginning and they have slightly increased their leverage from 7.2 to 7.5. They did not use any UTI last quarter and I do not expect they will use any this quarter. Thus I think it is not unreasonable that they increase their dividend to the .70-.75 range. I will be very interested in what Scott Kennedy says in a week or so. My projection is the back of a napkin ... he gives you the real deal.... am interested in your thoughts...

     

    "$0.75 net spread and dollar roll income/(loss) per common share, comprised of: Interest income, net of cost of funds (including interest rate swaps) and operating expenses
    Estimated net carry loss (also known as "dollar roll income/(loss)") of $(0.02) per common share associated with the Company's net short position in agency mortgage backed securities ("MBS") in the "to-be-announced" ("TBA") market
    Estimated "catch-up" premium amortization benefit of $0.07 per common share due to a change in projected constant prepayment rate ("CPR") estimates

     

    $0.65 estimated taxable income per common share
    $0.65 dividend per common share declared on December 18, 2013
    $0.59 estimated undistributed taxable income per common share as of December 31, 2013"
    17 Feb, 03:58 PM Reply Like
  • William Packer
    , contributor
    Comments (278) | Send Message
     
    rob, the dividend on AGNC will likely go up as long as rates don't extend past 3%. But if they do, the dividend will likely be taken even lower as they rebalance to hedge up. I'm sure they have a stop loss point at which hedges kick in. but who knows.. maybe they don't. maybe they think the extension risk is low and will float through it.. in which case they could get hammered on the NAV side.
    17 Feb, 05:42 PM Reply Like
  • Rob1492
    , contributor
    Comments (215) | Send Message
     
    Hi William!

     

    I agree! AGNC is acting like they believe that 3% for the 10 year t bill rate is a ceiling and this could well be true until the Fed signals a new change in rate policy. How soon that comes is the big question. I know you feel it is just a couple of quarters away. We will see... but I expect a dividend increase for the stock would be viewed as very positive and might provide a nice opportunity to take some profits
    17 Feb, 06:21 PM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Tools
Find the right ETFs for your portfolio:
Seeking Alpha's new ETF Hub
ETF Investment Guide:
Table of Contents | One Page Summary
Read about different ETF Asset Classes:
ETF Selector

Next headline on your portfolio:

|