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  • I Was Wrong: A Post Mortem On Genworth Financial [View article]
    Kudos for writing an article to admit that you were wrong and explain why. I don't know anything about the company or how to value it, but I looked at a chart on finviz and noticed that insiders have recently increased holding by some 70%. I also noticed that today's stock closing price of 5.03 is $2.34 less than their cash on hand, the P/FCF is only 1.02 and they are making money. On the surface it seems there are some awfully good metrics. Perhaps it's time to increase your stake and hedge it with put options.
    Nov 23, 2015. 06:08 PM | 5 Likes Like |Link to Comment
  • Leveraged Loans Betray The Rally In Stocks [View article]
    A very valuable warning with interesting charts. Your main point was "And because leveraged loans are so highly correlated to stocks, I think equity investors would do well to take notice." I wish you had presented more information about the important premise that "leveraged loans are so highly correlated to stocks." Long term correlation is not presented in the charts presented, and the correlation even appears negative very recently (I know, that anomaly is what should worry us). I'm guessing that longer term charts might prove that there is excellent correlation over longer time frames, perhaps over an economic cycle, and perhaps with the leverage loan pricing providing a comfortable lead time to indicate things to come for stocks.
    Nov 22, 2015. 04:56 PM | 4 Likes Like |Link to Comment
  • 5 Reasons To Love Prospect Capital [View article]
    Wait. Aren't interest rates on most of their loans floating at a rate of a margin plus the 1-year LIBOR rate with a floor of 1%? And the 1-year LIBOR rate has gone up for the past year from 0.5618% to 0.94135% now. If the 1-year LIBOR rate gets above 1% and keeps going up BDCs will be money machines going forward. Of course, I admit I don't expect rates to keep going up, since the world is about to sink into recession and a possible jump in defaults appears more relevant than a jump in interest income. Perhaps the rate jump first for a short time and then a spike in defaults.
    Nov 22, 2015. 04:39 PM | 2 Likes Like |Link to Comment
  • Western Asset Mortgage Capital Corporation And The Painful Interest Rate Shock [View article]
    "The result is that WMC can be a bit of a black box when it comes to investing in the portfolio since investors don't know what hedges were in place at what times during the quarter." So true, and this is the essence of the problem for any analyst or investor to estimate what is going on inside their subject or investment regarding ANY mREIT. One must rely on a little faith in proven management to get hedges right, but there hasn't been much to validate faith in any mREIT the last couple of years. That's why I continue to hold all mREITs with strong put hedges. It appears to me that the yield curve is going to keep compressing for a while and that won't be good news for core NII's, adding ongoing pressure to earnings on top of the penalties mREITs have been paying for falling asset values and poor hedging activities.
    Nov 22, 2015. 04:23 PM | Likes Like |Link to Comment
  • ARMOUR Residential REIT And The Shocking Portfolio Update [View article]
    If I understand you correctly the main problem is that the mREITs are hedging MBS with LIBOR swaps that aren't tracking Treasury rates and, therefore, not MBS rates. Or is it that they are hedging repos with LIBOR swaps that aren't tracking? I find it surprising that LIBOR swap rates are underperforming Treasuries given that 2-month to 1-year LIBOR rates are right at 52-week highs right now while 2-year to 10-year Treasuries are not. Should one expect the LIBOR swap rates to come into better alignment with Treasuries over a short time frame? In any case, why do mREITs use LIBOR swap rates instead of hedging repos and MBS more directly with some other derivatives? This ongoing issue of the difficulty of hedging an mREIT's portfolio effectively, in addition to other issues, is one of the main reasons I hold all mREITs with strong put option hedges.
    Nov 22, 2015. 03:25 PM | 2 Likes Like |Link to Comment
  • Why Stocks Are Getting Riskier By The Day [View article]
    Mr. Gordon thanks for another great article and your interesting responses to comments. Adverse events in the credit markets may have already taken a toll on many sectors but could worsen. The corporate credit spreads have increased significantly. The 6-month and 1-year Dollar LIBOR rates have almost doubled in the past year: 6-month from 0.3262% to a 52-week high today of 0.61175%, and one year from 0.5618% to a new high of 0.94135% today. That's inflicting increasing pain for many millions of homeowners still stuck in ARMs in their adjustment periods. If the 1-year LIBOR breeches 1% that will kick in increases on much adjustable rate corporate debt with a 1% floor on the adjustment index. Those are not good trends for the economy in general (but would tend to be at least a short term buy signal on floating rate debt and BDCs). Perhaps the Fed is just going to bump 0.25% to keep up with LIBOR; that will tighten credit in the banking sector. In any case the adverse credit trends in LIBOR and corporate credit spreads should be priced into stocks already. The question is whether they will worsen.

    On the credit front what should be of greatest concern for stock investors, and most likely to feed a market crash, is the record high margin debt and negative credit balances in accounts; no margin for error there.
    Nov 22, 2015. 09:46 AM | Likes Like |Link to Comment
  • What Do I Like About mREITs? [View article]
    Thanks for all your work on the fascinating mREITs.

    OAKS is one of the few monthly payers that interest many folks and there's almost no coverage (the others are AGNC, ARR, JMI and ORC).

    AI is, I think, the only one that is a C-corp and, therefore, offers qualified dividends good for taxable accounts, so, it should interest many.

    There's precious little coverage of the mREITs that hold a high proportion of ARMs, and that would be a great niche to analyze on occasion, especially now that LIBOR indices have about doubled this year so interest income is increasing on legacy ARMs in their adjustment periods; HTS, MFA, CMO and ANH if memory serves.
    Nov 19, 2015. 08:23 PM | Likes Like |Link to Comment
  • What Do I Like About mREITs? [View article]
    I like that idea also, and would add that some other data would be useful, including net interest spread, core earnings, UTI, current yield, book value, stock discount/premium to NAV, and whether you think the dividend is stable, at risk or might increase.
    Nov 19, 2015. 08:05 PM | Likes Like |Link to Comment
  • Prospect Capital: What More Will It Take? [View article]
    Don't expect much capital gains from any BDC; they must pay out 90% of taxable income. Enjoy the high dividend yields. Buy puts to protect capital, since the credit cycle has turned and BDCs and mREITs will trade like gold (a bear market for a minimum of four years). One possible optimistic note, the 1-year dollar LIBOR is now just a hair under 1.00%; if it gets over 1% the senior floating rate loans will begin to have interest rates adjust upward, so dividends could increase (however, rising payments on loans could be bad for corporate credit quality). We'll just wait and see what bad news these 20-30% discounts from NAV is pricing in for BDCs, or whether this is just a great time to buy.
    Nov 19, 2015. 07:10 AM | Likes Like |Link to Comment
  • Market Update: The S&P Sits At An Inflection Point [View article]
    Thanks for the reply. I'm not necessarily calling a top, just pointing out that there are some dangerous extremes happening with the betting and perhaps valuations. I reviewed your interesting links regarding margin debt and I don't believe they contradict my concern. In the past tops in margin debt preceded major tops by several months. It's one of those indicators that can never pinpoint a top but gives an early warning of possible danger ahead. But it appears that such debt is beginning to be liquidated confirming the downtrend in averages and the bear market in some stocks and sectors.

    There is always doubt about the trend. Just when a top appears imminent or past the market can suddenly go nuts on the upside. I remember being convinced in late 1999 that the top was in. Then the market went wild on the upside with high volatility before the actual top in averages. But if the weight of evidence shows the odds favor a bear market coming soon, it isn't stupid or wasteful to put on a hedge. You ask "...if hedges are put on now -- what if your theory is wrong? what transpires then?" All that transpires is you lose your option premium if the market does nothing, or you win in spite of the hedge if there's a significant rally. You seem to have proven to be astute at calling short term trends. When you called for a short term pullback with S&P 500 around 2110 you could have bought put options in SPY that would have profited nicely during the pullback to lower your cost basis. At the point when you would call for a short term bottom, as you now anticipate 2000 might prove to be, you could roll out of the higher strike price and reestablish the hedge at a lower strike price.
    Nov 15, 2015. 08:36 PM | Likes Like |Link to Comment
  • Market Update: The S&P Sits At An Inflection Point [View article]
    Thanks for very thought provoking article and congratulations on your recent correct calls of short term overbought and oversold situations. One concern I have is that although the S&P 500 has stubbornly rallied and/or mostly refused to correct much the last few years there are numerous segments of the market that have been severely clocked. Anything energy related or mining related has been decimated. REITs, particularly mortgage REITs, BDCs, and closed end funds have all had their own serious bear markets. Perhaps there are others. The most concerning indicator is the massive historically high level of margin debt and negative credit balances which normally occurs near market tops. Another is the record high level of corporate profits to GDP which usually regresses downward. My suggestion to index investors is to have a healthy level of put hedges for a while, at least until 50-day moving averages move above the 200-day averages and they are both sloping upward in an environment of improving worldwide economic indicators.

    One issue that seems to be prominent is that of the Fed increasing the Fed Funds rate. Investors should be aware that the 6-month and 1-year dollar LIBOR rates are both up more than 0.25% in the last year and have almost doubled. The Fed might merely be about to follow the LIBOR market. In any case, one might speculate that the rise in rates is an indicator of stress not economic growth.
    Nov 15, 2015. 02:11 PM | 1 Like Like |Link to Comment
  • Retirement Strategy: Hate The Stock Market? You Still Can Retire Rather Comfortably! [View article]
    Great article. Results have been great for the past 30 years, but there's a very big question mark about returns for the next 30 years. A lot depends on timing. In 2007 my wife rolled a 401k into an annuity in an IRA. The 401k was mostly sale of a former employer's stock which did very well. I instructed the broker not to invest the entire amount all at once but to invest 25% per quarter. He ignored my instruction and invested the entire amount in stock funds on the exact day in October, 2007 that the stock indices peaked! In the following eight years the investments are DOWN some 20%.

    If you are young enough to invest every month or year for 30-45 years perhaps you will have great results, a 6-12% return, depending on future financial history. If you happen to invest a lump sum all at once late in life at a bad time in the markets, you could have terrible, even negative, return. Currently I think the stock market has had a major top and may go down a lot for quite a while; the state of margin debt and negative credit balances in accounts are in frightening historically high territory. For any new commitments to the broad market I'd wait until the SPY and NYA 50-day moving averages move back above the 200-day moving averages and they are all upward sloping, which could be a long time.
    Nov 14, 2015. 01:45 PM | Likes Like |Link to Comment
  • Netflix Joins The Dark Side (Of The Market) [View article]
    " a market-maker, you'll be left holding the bag if the price drops 10% tomorrow." I thought the market makers made the price. They have the order book. They also probably hedge with exchange traded options and know when they're going to crash or goose the price.
    Nov 11, 2015. 05:13 PM | 1 Like Like |Link to Comment
  • ARMOUR Residential REIT: Best-Of-Breed? [View article]
    I know most investors in ARR have been badly burned with capital losses and declining dividend. One wonders if management will ever figure out how to manage a stable income and book value, and whether shareholder interests will ever align with those of the external manager. I don't know. I do know I like a 19% yield paid monthly by a stock that can be held with a strong exchange traded put option hedge available in a liquid market. If the dividend goes down significantly, then, usually, so has the stock price, so I roll the hedge down in strike price and buy more to make up the income. At some point this sucker will bottom and I can let the price run well above the strike price before establishing a new hedge. Perhaps the recent lows around 20 will prove to be a good intermediate bottom. I've got the Jan 21 and 22 put strikes now, and maybe that will do it. We'll see. But at least we know the 0.33/mo dividend will hold for three months.
    Nov 10, 2015. 07:18 PM | 3 Likes Like |Link to Comment
  • mREITs: This Is What Best-Of-Breed Looks Like [View article]
    AMTG is an interesting suggestion, however, I'd like to see a detailed analysis of portfolio, hedges, prepayments and core income. Can't argue with increasing dividends and a 27% discount to book. I do note that the dividend was cut from 0.70/qtr to 0.40 in September, 2013, so the potential for disaster apparently exists assuming the management and strategy hasn't changed much. I'm thinking of switching funds from IVR to some other mREIT, so AMTG is now on the short list of candidates. With mREITs it seems there are many more ways for things to go wrong than right, so I hold positions with strong in-the money put hedges most of the time, and that has been very helpful these last few years. The yields on WMC, ARR and AI are spectacular right now if the dividends hold up. AI also has the advantage of being a C-corp with a qualified dividend for taxable accounts.
    Nov 10, 2015. 06:59 PM | 3 Likes Like |Link to Comment