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  • Zulauf: Fed won't hike this year [View news story]
    mREITs have been suffering because the 10-yr/2-yr yield spread has compressed by a full percentage point in the last year (see chart for STPP on In addition, many mREITs have been hedging the long end of their portfolio against the expected rising rates causing hedging losses in addition to shrinking spread income.

    I agree that the bond market looks technically very overbought and due for a noticeable correction at the least. I like your point about bonds peaking at the announcement of the ECB QE program; that exactly what happened at the announcements of the Fed QE programs.

    As far as panic borrowing by prospective mortgagors before rates rise, there are three considerations. (1) There's little refinance activity, and little prospect for same, because those who qualified to refi did so when rates were 3%-3.25%. (2) There are no subprime, Alt-A or stated-income prime mortgages offered any longer, so the pool of qualified mortgagors is drastically shrunk and will remain so until the bank regulators relent and again allow credit/asset-based mortgage lending again instead of income-based only (highly unlikely any time soon). (3) Real median income has actually shrunk by 5% since 2009 in spite of the "recovery," and that combined with a slight rise in mortgage rates plus a rise in home prices shrank the affordability index quite significantly.

    Many millions of vintage 10-year interest-only mortgages that couldn't be refinanced, both first liens and HELOCs, are going into 20-year amortization in 2014-2016, and that means payments more than doubling (imagine the poor souls who refinanced or bought houses in 2005-2006 with 80/20 prime or Alt-A financing with both interest-only first and second liens, of which there were many). Housing and the economy are going to take another hit. There were only abut 2 million borrowers that were able to refinance using the HARP guidelines.
    Jan 24, 2015. 03:54 PM | 1 Like Like |Link to Comment
  • American Capital Agency's Upcoming Q4 2014 Earnings Projection - Part 2 [View article]
    It seems most mREITs that hold fixed rate MBS have suffered through 2014 due to the ever decreasing 10/2-yr yield spread, which dropped from about 420 bps to 330 bps during the year, not to mention mistaken short hedges against T-bonds. You can monitor the spread with STPP:

    It remains to be seen whether the perpetually-expected rise in long rates will materialize in 2015, but the start is not encouraging. I suppose about the time the mREITs decide to take off short hedges bonds will crater on cue. I do note that TLT is very overbought with rsi at 77.8%, so expecting a near term correction in bond prices, so increase in 10/2 spread, but there might not be enough MBS available at significantly higher yields to help much for quite a while. Maybe a 3-way collar is in order with hope it doesn't end like many of the oil hedges.

    Long AGNC with put hedge. Recently took profit in Dec 23-strike puts, Jan 23 22.50-strike puts and now long partial hedge of Feb 20 22-strike puts and long partial hedge of March 22.50-strike puts. Looking for possible near term stability in price, then test 20.90 recent support on disappointing earnings, ex div action and STPP bottom.
    Jan 19, 2015. 07:26 PM | 2 Likes Like |Link to Comment
  • 3 New Red Flags Waving [View article]
    The article makes some good bearish points, but I can't help noticing that TLT is way above its moving averages and has entered a serious danger zone with rsi(14) above 77. This week could see an open up/close down scenario and the beginning of a serious intermediate term correction. The stock market typically goes opposite to TLT, so maybe a significant low this week.

    I should add that there's an unusual situation in the bond futures market with the June contract at 167 and the March contract at about 150. That much spread in nearby futures is quite unusual. I'm not sure what it means. To agree with the futures TLT would need to trade up significantly from 133 by June if the June futures hold near 167.
    Jan 19, 2015. 06:08 PM | 2 Likes Like |Link to Comment
  • Cheap Oil Prices Do Not Benefit The Economy [View article]
    The drop in oil price is a negative for GDP near term as a matter of mathematical certainty. GDP=C+I+G.

    1. Consumers will have no more income than before, in fact less in aggregate due to layoffs of oil production related workers. Reduced dollars spent by consumers on oil products will just be spent on different products. They might save a little more in aggregate since for too many near the bottom of the income distribution gasoline is a necessity that precluded any saving at all at the higher prices. More saving equals more investment by definitions, but will take time to emerge.

    2. Investment in oil production drops immediately as we have seen in recent announcements of capex cuts by E&P firms; however, I saw one estimate that a 50% drop in drilling investment would drop GNP by only 0.4%. Businesses that consume oil or oil products as inputs of production will make more profit; some will be distributed to investors and some will pay down debt or be invested if demand is sufficient (however, by assumption, total consumption will not increase yet, so no reason for investment).

    3. Government spending on oil products will be reduced by almost 50%, and that reduction in government spending will shrink the deficit and reduce GNP immediately by that negative dollar amount, and over time by that negative dollar amount times the GNP multiplier over the time span defined in the multiplier.

    Those who say the oil price drop acts like a tax cut are wrong. With a tax cut consumers actually have more disposable income. A drop in product prices just shifts consumption among products and affects the distribution of investment among products. Also, consumers don't have more income in aggregate, in fact less by the amount of reduced payrolls in oil production and oil related investment. To the extent that businesses that use oil products pay some of their increased profits to investors there is extra available income; unfortunately much of that goes to institutions, not consumers, and much goes to retirement accounts where it isn't spent near term. in addition, business owners and investors who get increased income in non-retirement accounts have a much lower marginal propensity to consume than the aggregate of consumers so there's less impact near term on GNP (that's the reason for the ever widening distribution of wealth and income).
    Jan 19, 2015. 04:20 PM | Likes Like |Link to Comment
  • Assessing Risk Versus Reward For High Yield BDCs [View article]
    A very worthwhile article. Did you include dividends or dividends reinvested in the calculations of returns?

    I like BDCs for the high current income; dividends can fluctuate, but typically not a lot either upward or downward. My solution to BDC capital risks is to hold them with married puts virtually all the time. That covers price drops due to ex-div price drops, secondary offerings, badly received earnings reports, shrinkage in yield spreads, dividend cuts, general stock market risk, and the many other negative influences that could rear up. That's worked very well so far.

    Long PSEC and FSC with put hedges (yeah, I know, the worst performing picks).
    Jan 18, 2015. 05:08 PM | Likes Like |Link to Comment
  • Risk Is Our Business: American Realty Capital Properties [View article]
    I bought ARCP for the dividends, but married put options to protect capital, and keep rolling those over. In view of the major problems for ARCP, its stockholders, and Cole, that persist only in absence of updated audited financials, I'm puzzled and very bothered by the delay in getting them. You'd think they'd be ordered on a crash basis.

    You wrote "Potential rewards once the accounting issues are cleaned up include a... resumption of a dividend (which amount is unknown, but was $1/share prior to the dividend suspension). None of that is likely to happen immediately after the accounting review is completed, and, indeed, may never happen." Unless there was major accounting fraud, according to preliminary reviews FFO has barely been affected, so I don't see any reason why a reasonable special "catch-up" dividend, and a regular dividend should not be reinstated post haste when new financials are issued. Granted there will need to be a new reserve for anticipated legal costs, perhaps even for settlements, that will dent FFO, but I don't see how that can have a material effect in the near term. A REIT must pay out 90% of taxable income to maintain REIT status, so something should happen pretty soon.
    Jan 17, 2015. 03:16 PM | 2 Likes Like |Link to Comment
  • 10 Scary Charts: January 15, 2015 Update [View article]
    You missed the one that is the most important to most folks, and has them very frustrated, if not scared, and that is Real Median Household Income, still well down from 2009 and going pretty much sideways for the last three years.
    Jan 16, 2015. 06:14 PM | 2 Likes Like |Link to Comment
  • $50 Oil Won't Be A Problem For Atlas Resource Partners [View article]
    Your article is much appreciated. For their current income I hold a number of royalty trusts and recently added LNCO and BBEP, and SDRL (not recently enough however!), all hedged with in the money puts since day one, and often net short delta, so not worried about paper capital losses (in fact will come in handy some day). I did recently dump SDRL, CHKR and SDT. Throughout the oil debacle I've been following all the articles on SA about oil and gas and their related upstream MLP's to get a feel for the positions and prospects of the securities. ARP was on my buy list with LNCO and BBEP last Fall, but never got around to researching ARP further until today. Your article sufficiently convinces me that ARP is a much better choice than LNCO or BBEP (especially BBEP) and most of the royalty trusts, and possibly an outright buy, that I feel comfortable moving significant capital out of BBEP and some of the trusts and into ARP, with the usual put hedge. Very helpful.
    Jan 11, 2015. 07:24 PM | 3 Likes Like |Link to Comment
  • Western Digital: A Cash Cow With Management Commitment To Return 50% Of FCF To Shareholders [View article]
    Thanks for the article. You make a pretty good case. I notice that the P/FCF is only 12.92, and that often has room to go significantly higher. The four items that give me pause are that revenues appear to have stalled for two years, the price on a monthly chart is now near the top of the upward channel from 2013, insiders have been selling rather briskly for several months (down 28.7%), and the overall stock market is in a much riskier zone of valuation (boats tend to float or sink together). Might be a good stock to own long term but hedge with puts.
    Jan 11, 2015. 06:04 PM | 2 Likes Like |Link to Comment
  • The Coming Euro Crash [View article]
    Thanks for an interesting article. Although not central to your subject, I am annoyed by one little item in your article, which I see espoused repeatedly by many very knowledgeable authors and commentators regarding the oil crisis, that the drop in oil prices should be stimulating because it's equivalent to either a tax cut or an increase in real income. I believe both those thoughts are in error. It doesn't increase aggregate or personal nominal income at all, and it simply shifts current consumption to other goods and/or increases personal savings, and shifts business profits from oil producers to oil consumers. A tax cut works to increase current consumption and savings on both personal and aggregate levels while increasing the government deficit, neither of which a drop in oil prices does. In fact it will decrease government spending to the extent governments spend less funds on oil products.
    Jan 11, 2015. 04:05 PM | 1 Like Like |Link to Comment
  • An ETF Portfolio Yielding 9% [View article]
    Interesting study. As you suggested the 3-year sample period is pretty limited, so I'm viewing the results as inconclusive. I'm surprised BDCS made the 50,000 share/day volume cut. Finviz currently shows the average volume as 34.81k.

    I had KBWD but gave it up after a couple years with profit because it couldn't be hedged, and moved funds to REM for its higher yield and hedging capability. Same with BDCL, so moved funds to PSEC and FCS. Had PCEF but found the options too illiquid for effective hedging possibilities. Had HYG but took profits and moved to other high yield vehicles. Had numerous preferreds and PGX, a near match to PFF, but moved funds to various mREITs, BDCs and MLPs and ARCP with hedges.

    In general, there are lots of good choices in the high yield space to maintain current income, but I've found it pays to have good hedges much of the time and the ability to sell out of the money calls. I wish BDCS and PCEF would develop enough volume to have good option markets as AMLP, PFF and REM do.
    Jan 11, 2015. 03:06 PM | 1 Like Like |Link to Comment
  • Update: How I'm Looking At Recent Insider Trading At Javelin Mortgage [View article]
    Look at the chart of the 10/2-year yield spread, STPP. It's been down continuously since late 2013. Earnings of most mREITs, except the ones heavily in ARMs, have suffered for months due to the yield compression.
    Jan 9, 2015. 08:51 AM | Likes Like |Link to Comment
  • Update: How I'm Looking At Recent Insider Trading At Javelin Mortgage [View article]
    What's your take on JMI's hedging position? I heard that ARR is hedged at the long end and that accounts for the dismal stock performance since the taper tantrum while all the other mREITs have rallied even in the face of a declining 10/2-year spread (down continuously since Jan 1, 2014 by 100 basis points). I understand that ARR and JMI are managed by the same outside managers. Long JMI but hedged with puts.
    Jan 8, 2015. 07:55 PM | Likes Like |Link to Comment
  • Making Sense Of Complicated Financial Statements: Intro To Five Oaks [View article]
    Thanks for the article. I have several mREITs and have been thinking of switching some capital between names. The yield and monthly distributions on OAKS are attractive, and the stock is optionable, so I had been trying to get more information on the company and your article was very helpful; there isn't much other independent research available on the net. I had also found the latest financial statements and was a bit perplexed by the multifamily category which is such a large portion of assets but a small portion of net income. Could it be the case that it is easier or cheaper to use the multifamily as financing collateral than RMBS to account for the lopsided interest expense ratios?

    I look forward to your next article about OAKS. I hope you can shed some light on exactly what are the multifamily properties or securities that are held in that category, and whether the loans or securities are HUD insured. Also, it would be helpful to know what comprises the "held for sale category" regarding RMBS versus multifamily or other types.
    Jan 8, 2015. 09:10 AM | Likes Like |Link to Comment
  • 5 Red Flags Retail Stock Investors Should Not Ignore [View article]
    Great review. Good time to hedge. If this isn't the most bearish setup since 2007 it soon could be.
    Jan 6, 2015. 01:14 AM | Likes Like |Link to Comment