Duff & Phelps (DUF)

There is no doubt after the third quarter's earnings reports that the agency-backed mortgage REIT sector is beginning to splinter into markedly different strategic approaches. FOMC minutes confirm the high demand for agency MBS, noting that:

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt.

Oct 27, 2009

• NYSE up 15.03 (0.22%) to 6,975.12.
• DJIA up 59.55 (0.60%) to 9,927.51.
• S&P 500 up 2.31 (0.22%) to 1,069.26.
• Nasdaq down 10.28 (0.48%) to 2,131.57.

GLOBAL SENTIMENT

While the bears may be celebrating the dip in the market this week, let’s keep in mind that we are still on a very positive trend that will take more than a few days to break. The more bearish you are, the more you need to treat these dips as an opportunity to hedge something. The stocks we’ve selected for the Watch List are purposely stocks that we don’t mind sticking with through thick and thin because they provide exceptional value AND good income-producing opportunities through dividends and option sales.

Our new Watch List is only 2 weeks old but is already performing very well with 10 of our 13 positions winning already. And that’s not even counting the buffer we get from our hedged entries. Two of the three losers were knocked out of winning positions on Friday’s dip - it’s all about timing! Still, great progress but not so much so that some of the positions can’t still be entered, I highlighted my comments at the end of each trade as to whether or not I still like them.

High-flying, agency-backed mortgage REIT, American Capital Agency Corp. (AGNC), recently turned in its third quarter numbers, making the company the first in its sector to report for Q3. The headline numbers were impressive, with $1.82/share in GAAP earnings and $1.89/share in taxable income - well above the $1.40/share Q3 dividend. However, a quick review of the earnings release and the shareholder presentation reveals that AGNC's stunning results were once again the result of selling off its appreciated MBS holdings.

Last quarter, the company traded out its high-yield fixed MBS for higher-yielding ARMs, using the capital gains to boost EPS by $0.72/share. This quarter, the company traded out the high-yielding ARMs for lower-yielding ARMs, again achieving capital gains that boosted EPS by about $0.73/share.

The U.S. government does few thing better than create debt. After a year of talking about it, the government is going to have the chance to throw their good debt, Treasury bills notes and bonds, after bad, non-performing toxic loans and securities. The Federal Deposit Insurance Corporation (FDIC) and the U.S. Treasury are going their separate ways on their cash for trash schemes at this point. Accountants and investors should be wary of the big prices they see coming from the FDIC’s auctions, but taxpayers should be afraid of the U.S. Treasury’s efforts to re-inflate the securitization bubble.

Have you missed the awesome run in agency-backed mortgage REITs? There may still be time to get in on the great returns by picking a sleeper stock that is poised to break out.

Cypress Sharpridge Investments, Inc. (CYS) is a recent entrant to the mortgage REIT world. The Company, which primarily invests in agency residential mortgage-backed securities, came public in June 2009, raising $100 million by offering 9.1 million shares at $11.00, the low end of the proposed $11.00 to $13.00 range.

The grey vertical line just before July 9 on the chart below is the point in time when I asked the question, “Are high yielding AmREITs ready to run?” Looking back, it is now clear that this divergence was sustainable and AmREITs were indeed “ready to run.”

This is my first post on the Seeking Alpha Instablogs. So without hesitation, I will jump right into my dividend play for the remainder of 2009. American Agency Mortgage Corporation (AGNC) is a mortgage REIT with a whopping dividend of $1.50 per quarter. At the close on August 19, 2009, AGNC was trading at $23.34 (-0.13%) which equates to a 25.80% yearly dividend payout.

As for the underlying price of the stock, it is trading just a few points off its 52-week high. Since peaking at $25.70 on August 10, AGNC has pulled back a little over 9%. The stock is up almost 40% over the last year along with a 76% increase in quarterly dividend (ex-date 6/30/2009).

4:10 PM, Aug 11, 2009 --

• NYSE down 86.4 (1.3%) to 6,463.62.
• DJIA down 90.5 (1%) to 9,241.
• S&P 500 down 12.7 (1.3%) to 994.35.
• Nasdaq down 22.5 (1.1%) to 1,970.

GLOBAL SENTIMENT

While some investors viewed Petsmart’s 233% dividend raise as extremely important, I found the increases from several high yield stocks to be very intriguing as well. First of all, as a dividend growth investor my goal is to generate a double digit yield on cost after years of consistent dividend increases by the companies I have included in my portfolio. But what if I could purchase dividend stocks that already spot double-digit dividend distributions? Regular readers of my blog know that I do not like chasing high yielding stocks blindly. My experience with American Capital (ACAS), which suspended its dividend is a lesson that will never be forgotten. Despite the fact that the company recently announced a dividend of $1.07/share in order to maintain its status of a business development company, 90% of which would be paid in additional shares and the rest in cash, the company faces troubles with its creditors.

Two of the companies that raised distributions, American Capital Agency Corp. and Hatteras Financial Corp. have fluctuating dividend payments. The other one, Prospect Capital has raised distributions for 19 consecutive quarters. Most of these distributions consist of earnings and returns of capital. Companies could only afford paying such distributions by selling additional stock and raising more money by selling additional debt in order to grow and sustain operations.
The double digit current yields, also show investors pricing in a high probability of a dividend cut.

What are aMREITs?

Here are my search criteria:

The players:

Q4 2008, Shareholder Call

February 05, 2009; 11:00 am ET

A month ago (December 10, 2008), I started an informal technical analysis experiment:

Certain chart and volume patterns are supposed to foretell a stock's (commodity's, ETF's, etc) future price movement. Occasionally, if I come across such chart patterns I'll post about them. Then, I'll check back after a while to see how the predictions turn out.

There are three general opinions of technical analysis: (1) it is a science that works, (2) it's a pseudoscience that works because its practitioners all do the same thing when a chart is a certain way, or (3) it's a bunch of hogwash.

I'm somewhere between (2) and (3), but am more open to (1) after tracking Adam Hewison's predictions on spot gold for a couple of months. I would like for (1) to be true, as would most people, for obvious reasons.

Will the future be inflationary or deflationary? The answer to that economic question is likely to be the most important variable in developing a profitable investment strategy to navigate the next few years. Some investors point to the recent drop in October’s Consumer Price Index, the slowing velocity of money given tighter credit, or the precipitous decline in asset values such as real estate and equities as support for the deflationary view.

I think one would be well served to look at this debate from a “cui bono” perspective - in other words, who benefits from the different outcomes? The goal of the US government with all of these interventions/bailouts is first and foremost to stay relevant, i.e. stave off a complete financial system melt-down because it is hard to collect taxes from a barter system, and second to keep this de-leveraging process orderly. Given the current state of affairs and the subsequent responses by the Treasury and Fed, it is becoming very clear that the only way out of this debacle is to inflate our way out.

American Capital Agency (AGNC) is a REIT that doesn't actually own any real estate.

Although it enjoys favorable tax status so long as it pays sufficient profits as dividends, its investment portfolio exclusively contains agency-backed home mortgages. Since AGNC first opened for investment this April -- well after the subprime risks were known by American Capital Strategies (ACAS), which supplies AGNC's management -- AGNC isn't sitting on a subprime time bomb, but acquired its assets with its management firm's full understanding of the type of market in which it was initiating its investments.

Markets Quiet - Freddie Mac (FRE), Fannie Mae (FNM)