jrad52

American Capital Agency: Making Money the Old-Fashioned Way

I think you need to read AGNC's 10-Q a bit more carefully. AGNC buys mortgage debt insured by government agencies yielding 5.5%, and somehow turns it into a return on equity of 25% to 30%? And you're not a little suspicious?

How about the fact that AGNC is leveraged 8 to 1? How about the fact that the value of its investments declined by $ 26 million in 27 days, while its net income (excluding the value loss, which is only included in other comprehensive income on the balance sheet and hasn't hit the income statement yet) was only $ 5.5 million? AGNC didn't make a dime in the June quarter - it lost $ 20 million. At that rate its equity would be wiped out in a year.

I like and own ACAS, but AGNC is crazy. Take a look at the risk footnote in the 10-Q. If interest rates rise by 1% (100 bp), net interest income is projected to drop 22% and the value of its portfolio is projected to drop by 4%. The 4% doesn't sound too bad until you remember the 8 to 1 leverage. A 4% drop in value on a $ 2.4 billion portfolio equates to $ 96 million loss, or about 35% of equity. And that's after considering AGNC's interest rate hedges. A 1% drop in interest rates would increase net interest income by 13% and increase the value of the portfolio by 2.4%. Something seems a bit strange, that a 1% drop in rates doesn't produce the same effect (in the other direction) as a 1% rise in rates.

Anyway, AGNC seems to be a highly leveraged bet on a drop in interest rates, and probably will do ok if rates stay the same. But the risk in owning AGNC is a lot more than you indicate.

Terra Nitrogen Vs. Terra Industries

2 errors in your analysis, 1 regarding the split and the other regarding the earnings effect on TRA. With regard to the 50% split to TRA, the 50% kicks in only on the incremental distribution in excess of $ 1.045. So when you took 50% of the entire distribution ($ 77.7 million), you're overstating the impact. TRA gets its 2% GP distribution on the first 71.5 cent distribution (which includes the first target), so the first $ 13.5 million distribution goes to TNH's common units (who get $ 13.3 million) and TRA (which gets $ 270K). Then, on the distributions up to $ 1.045 per unit, the common holders get $ 6.1 million and TRA gets $ 1.3 million. Only then does the 50% split kicks in. So of the remaining $ 56.8 million, TRA gets half, or $ 28.4 million. Overall, this would leave the common holders with a total distribution of $ 47.8 million, or $ 2.60 per unit.

Then, don't forget that TRA is a corporation and must record taxes on the distribution, so the impact on its bottom line should be reduced by about 35%. On TRA's 90 million shares, the EPS impact is between 5 and 7%.

So I think this hurts the TNH holders much more than it helps TRA.

Hope this helps.