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Retired Atlanta dentist with a specific interest in agency mortgage REITs and leveraged Munis.
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  • The End Is Near! No, Really!

    Well, it's been almost 2 months. Really didn't have anything new to add, but the landscape has changed now. The Congressional Clown show has finished another chapter in their magnificent incompetence and in doing so threw sand in the gears of data the Fed needs for them to decide when to start tapering. It was seemingly a done deal for September until it wasn't and the MBS market reacted by rallying. It's retraced about 35% of the April taper tantrum at this point and last week we got a stronger than predicted employment report that dropped prices back down a bit. So volatility remains, but the guys at Mortgage News Daily feel we're simply at the low of another trading range.

    The main news last week was that by now most of the agency mREITs I follow have announced financial data for Q3. As you can see from the MORT chart, the market didn't like the reports. AGNC in particular crapped the bed with it's aggressive bets on MBS rates in the tba market, then Annaly's new CEO didn't impress anyone during the conference call by raving at the Fed for not making her job any easier.

    On Seeking Alpha there was the usual wailing and gnashing of teeth but a new voice of calm, goes by the name of "Cash King" with some rational thoughts that we might be at the bottom of the mREIT carnage. Then there was poor Scott Kennedy who's spent days of his life trying to guess AGNC's Q3 number only to get blindsided by the awful numbers AGNC reported. Poor guy. Yet another bearish author Regarded Solution heaps snark and scorn on anyone questioning his take that the mREIT sector will be toxic for quite some time.

    In spite of my thin grasp of what the numbers in the reports actually mean, I did some quick back of the envelope scanning and came up with some numbers that lead me to believe that the sector has bottomed. All we need to do is get past the next Clown Show episode, and the long awaited beginning of the Fed Taper of MBS purchases for rate volatility to subside. Once that happens mREITs can spend less on hedging, expand their leverage and take advantage of the increased net spreads that are already showing up in their reports.

    There are a lot of terms I don't understand in those quarterly reports, but I do have a good grasp on some key ones. Book value I get and it's a pretty clean number - just add up the MBS you have on the books as well as cash, Treasuries and the value of the hedges. Currently all the mREITs are trading at discounts to book, but I won't dwell on that because that would imply respect for the mREIT market, the vast majority of who don't exactly know how the companies actually work.

    Another one is core earnings. This one's a bit slippery but it's needed to draw focus off GAPP earnings which don't work well for mREIT due to more stuff I don't quite grasp, but I'll take everyone's word for it. Core earnings has an actual definition that all the mREITs use, so it's a handy number. To me, it simply means how well the carry trade working. Cash from interest on the MBS notes subtract interest paid on the short term debt it uses to buy the stuff and there you have it. The number leaves out what's spent on hedging which is fine by me cause that's an opaque black box as far as I'm concerned- by the time we know how they've hedged its too late to do anything about it.

    Last but not least is my favorite, the net interest rate spread. This is another one that doesn't get too squirmy, the spread is simply the difference between the rate they're getting on their MBS portfolio and the rate their paying on their repo financing. Again, no hedging, but it's a indication of the potential the company has to generate revenue.

    I suppose I should also mention the leverage ratio. It's not a bad number but it gets tainted with mention of the tba market. AGNC breaks out leverage with and without the tba number and I don't know how to weigh that. I do know that without exception all the agency mREIT have knocked down their ratios in double digits. This is a good thing for safety, but a bad thing for earnings.

    So Charts and Numbers!

    I had to leave off AGNC's numbers which were negative and threw off the whole point of the chart. AGNC did end up in positive numbers in Q3. At first glance the chart isn't too encouraging, but 3 of the 6 companies showed improvement or leveling off. A mistake a lot of the mREIT bears make is in projecting the downward slope of the curves down to infinity. That's only going to happen if we have another 106 to 100 two month swoon in the MBS market like we did in Q2. I doubt that will repeat itself because the bond market has figured out it over-reacted to the Fed withdrawal from the MBS market. We'll still have volatility when the Taper is put in play, but it's doubtful we'll have a similar plunge.

    This gets better. Note that the extreme downturn all of the companies took from Q1 to Q2 have leveled off? This tells me the majority of the damage has been done. The bears are wrong again in projecting these lines down to zero. Not going to happen.

    Saved the best for last. This is a data-point that some of the mREIT bears don't want to even acknowledge. For most of the sector the net interest spread has increased from Q2. Admittedly, it's been confusing for me to see the sector get hammered every time rates go up. Last Friday was a great example, the ten year went up 7 bp and MORL got hammered down 5%. A rapid rise in rates is hard to predict and expensive to hedge for as we saw in Q2 of this year. But at the end of the day, once the higher spread is adapted to, the more money the mREITs can make. Particularly when all they have to do is hike leverage.

    These data-points are why I think the end is near. What to do about it will have to wait for another post. The market is still currently over-focused on increased rates harming Book value instead of seeing the greater revenue from increased net interest spread. Until the sector can show it can manage the higher rates while keeping BV level, it's not quite time to get back in.

    But we're close. The end is near!

    Nov 10 8:30 PM | Link | 2 Comments
  • "Oh, The Humanity. . ." The mREIT Castastrophe

    Wow, today was quite a day. For MORL, there was 3X daily average volume and a savage drop in price just because the 10 Year Treasury spiked up once again 8 basis points.

    I have almost nothing new to say about this except that I have to wait 3 more weeks before I can buy back MORL which I have every intention of doing since at this price MORL will be paying out trailing 3 month dividends of nearly 30%

    About the only good thing that happened today is the beginning of a possible break in linkage between the mREITs and my leveraged Munis. I've been reading lately of institutional investors seeing the historically large discounts to NAV the Muni's are carrying now, so maybe those CEFs will stop going down now that they're paying after tax dividends of nearly 10%

    So let's look at Doug Short's great Yield Curve chart that he updates periodically:(click to enlarge)

    Note the yellow circles which show the current yield spread hike looking a lot like what happened starting Q4 of 2010. Wanna see how Annaly managed their dividends from that 2010 spike? Sure.

    See anything worth selling off the mREIT sector to book value discounts over 10%? Me neither.

    Finally, what really intrigues me in this current tapering mayhem of the mREIT sector is illustrated by this chart below:

    Back in the throes of the '09 financial crisis, somehow I found the stones to buy this preferred share of NRF at around $13. It pays out a steady 52¢ per quarter so I basically bought a 16% yield. I'm real happy now I did that as I have an enormous gain countering the losses I now have in my mREITs and Muni's.

    It's hard not drawing the conclusion that the same scenario is going to play out for MORL.

    Writing this the following day, I can't resist appending this graphic as the 10 year yield does an about face along with MORL and STPP. Interesting that my Muni's rallied both days, which I take as a hopeful sign of institutional bargain hunting.

    Tags: MORL, stpp, mort
    Aug 19 5:09 PM | Link | 2 Comments
  • Zombie MREITs

    (click to enlarge)

    The mREIT market is now the Bond market's bitch, as the young kids say. This week has been a perfect illustration of it.

    (click to enlarge)

    Monday there was not much movement because everyone was frozen in fear anticipating the after market release of AGNC earnings.

    As you can see from the jump Tuesday, the news was received pretty well that AGNC didn't suck as much as everyone thought they would, so mREITs opened in rally mode and impressively managed to hold most of its gains. Kudo's to Scott Kennedy on SA who did a spectacular estimating most of AGNC's numbers.

    Wednesdays price action was very dramatic and illustrates how the US treasury bond news moves the mREIT sector. The day opened with a better than expected ADP employment number and a better than expected GDP number of 1.7%. And in the blink of an eye, MBS drops at the open, the STPP spread widens causing MORT to give up everything it gained the day before. The reasoning apparently that with a stronger economy, the Fed won't be able to put off tapering out of bond purchases which means lower future bond prices, higher yield spread, and continued mayhem for mREIT hedges.

    At 2:00, the Fed notes were released and scrutinized to find that there was nothing to support the certainty the bond market had only 5 hours earlier so the 10-2 spread as well as MBS values reversed to Tueday's close and MORT almost closed even for the day.

    Thursday's news reversed all that once again. ISM numbers were higher than expected, and jobless claims sunk to a 5 year low. So The spread widens STPP higher than Wednesday's open, the MBS market plummets taking MORT down with it.

    To complete the whipsaw weeks efforts, Friday's employment news met with dismay at the low number of jobs added in July. The results of the week is that STPP, MORT and the MBS market pretty much finished where it started Monday morning.

    This week, the ever unpredictable Annaly may decide to release it's numbers and I probably will have to dig into that one, since Kennedy won't. My call on AGNC disappointing was completely off, but maybe I'll be correct that NLY will surprise.

    There I've jinxed it.

    Tags: MORT, morl, stpp
    Aug 04 7:49 PM | Link | Comment!
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