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  • Western Asset Mortgage Capital Turned In A Huge Total Economic Return For Q2. Any Problems? [View article]
    Only time will tell, but I stick by everything I wrote above.

    The time to buy mreits was late last year and early 2014, when they were trading at significant discounts to NAV. If you were gutsy enough to buy them when they were down and out, then, hey, more power to you. Nice trade. But the share price alone (not to speak of the dearth of bullish commentators on SA) tells me that most people during that time frame were either puking up shares or scared to get back in the water.

    With your obviously profound knowledge of mbs and the mreit biz, you can be the judge yourself of when you think they'll do an SPO. But the only "dreamer" is you if you think this is going to get up anywhere near $18 a share anytime soon.

    Aug 15 02:40 PM | 1 Like Like |Link to Comment
  • Western Asset Mortgage Capital Nails The Quarter - Cautious On 18% [View article]
    3 things:

    (a) There is no way it is going to $20, regardless of the divvy. They won't allow it to go up that much (and would be stupid to do so), because they can do an SPO and monetize the premium to NAV. While the NAV will likely grow modestly, they're not running a big enough duration gap to capture that kind of a gain to book to support a $20 share price. If it breaks much over $16 I'll be a seller and look to pick up more trading shares in the next SPO.

    (b) The fact that it's edging up closer to NAV tells me that the market expects a divvy raise. These things are pricing now off of NAV--not yield--so the big move after earnings, IMHO, signals that the market feels the divvy will be solid to modestly higher. And they have every incentive to pay it all out to juice the share price.

    (c) Long-term, at least one more sizeable SPO would be good for WMC (and accretive to earnings) because their expense structure needs to be spread across more shares. They're small compared to the other mreits, and thus the sunk costs come at the expense of earnings. More shares means there is a bigger pool over which to spread those fixed costs of keeping the lights on. Also, mgmt didn't get to sell as many shares last time as they'd initially filed for, so you can bet they'll be looking to grow if the opp presents itself. Short-term, the share price will take a hit, but that's the time to buy.

    No one knows the future, but all my best guesses...
    Aug 15 02:29 PM | 2 Likes Like |Link to Comment
  • Western Asset Mortgage Capital Nails The Quarter - Cautious On 18% [View article]
    A thoughtful, cautiously optimistic take on their situation. Always good to be a bit skeptical and keep in mind the worst case. I still disagree on the divvy cut, though.

    They're easily earning the .67, and they realize that their pathway back to a premium to NAV (and the ability to issue more shares) is to maintain the aggressive divvy. Market is already pricing in a div raise to .70 or .75 cents for September.

    Friendly bet: they raise dividend to .75 and then immediately do an SPO after the ex-date.
    Aug 13 05:40 PM | 2 Likes Like |Link to Comment
  • Western Asset Mortgage Capital Turned In A Huge Total Economic Return For Q2. Any Problems? [View article]
    I don't disagree with the article or thesis--only the timing.

    While I know you were bullish before earnings, how quickly we forget that nobody wanted to touch these mreits 3-6 months ago when they were trading for serious discounts to book and the worst case hangover from a bad 2013 was baked into their prices. You could have gotten WMC for $13 and change. Now, though, once the cow is already out of the barn, you're seeing all the positive mreit articles popping up again on SA. WMC was a steal at a 15% discount to NAV. Now that it's nudging up to $15, it's no longer cheap, and I'll be selling off my trading shares if by some miracle it breaks $16 before the divvy.

    Also, if it's at or above book after ex date in late Sept, it's a cinch they will do an SPO.

    It's all in the price of these things.

    Disclosure: long WMC and MTGE (Holds on both at these current prices)
    Aug 13 05:28 PM | 1 Like Like |Link to Comment
  • RadioShack: Buying The Stock Outright Is Still A Losing Proposition. But With Downside Protection, It Is Becoming A Viable Bet [View article]
    No problem, Muggles, and rock on!

    For the past 18 months I have been (very vocally) short the stock via puts and have owned the unsecured bonds to offset some of the cost of rolling over the short position. The bet was that the common stock would decline more rapidly than the price of the bonds.

    All that I'm saying above is that even if/when they declare Ch. 11 (as they surely will) there is now very little additional money to be squeezed out of the short position (borrowing the stock is prohibitively expensive, and the puts are pricey, whereas the calls are very cheap). The longer they take to go into BK, the more the time value of the puts decays (theta). In the very unlikely event (5-10%) that they could stave off a BK for another year by refinancing their senior debt or by exchanging their unsecured bonds for common stock, the calls could have a reasonably attractive upside.

    So I'm agreeing with the author that (a) while it is *extremely* likely (indeed, a near certainty) that they end up in bankruptcy, (b) the out of the money calls are cheap and offer an asymmetric risk/ reward if by some miracle they manage to restructure their capital structure via a strategic investment, refinancing, or exchange offer.
    Aug 10 04:28 AM | 1 Like Like |Link to Comment
  • RadioShack: Buying The Stock Outright Is Still A Losing Proposition. But With Downside Protection, It Is Becoming A Viable Bet [View article]
    One of the more sensible things written about RSH on SA lately, and I tend to agree with the author on the relative R/RW at this stage of the game. 90% chance the common stock goes to zero, but there's a point of diminishing return in trying to squeeze out the last ounce from the short side. Given the pricing of calls versus puts, and the possibility that they can drag this out for a long time (and burn lots of theta in the process), I closed out my synthetic short last week and bought some cheap OTM calls as a lottery ticket with a small % of the profits. This thing may still have one last convulsive dead cat bounce left in it...
    Aug 9 04:58 PM | 1 Like Like |Link to Comment
  • Double Digit Return In 30 Days With Western Asset Mortgage Capital [View article]
    Agreed in that they (and others) have hedged away relatively more of their duration gap via swaps and swaptions versus where they were positioned in 2013. And the move to become a "hybrid" will also contribute some empirical negative duration.

    But you're kidding yourself if you think there isn't still major IR sensitivity in WMC and other mreits. Not only will they lose NAV if rates rise significantly, but volatility in rates increases the cost of their IR swaps (and eats into margins). They'll do well if IR rates stay benign...and struggle if they rise. You can't escape the math--and the risks.

    Disclosure: Long WMC and MTGE
    Aug 7 07:13 PM | Likes Like |Link to Comment
  • Double Digit Return In 30 Days With Western Asset Mortgage Capital [View article]
    Howdy J,

    Glad you made out nicely! I think that qualifies as a blowout earnings report, and the internals look really solid. NIM increased, and they've added back some of the leverage. Their earnings power is really strong, and I could easily see a .5-.10 bump in the divvy. But nothing wrong with banking the divvy in a two day trade and moving on down the road ;)

    IF--and this is the big IF--10yr rates remain in the sweet spot for the remainder of the year (no expensive vol to hedge away, and either a slow decline toward 2% or a gentle oscillation between 2.4% and 2.75%) these guys are going to make $bank. But just a heads-up, they're exposed to rates, and if the price into divvy season creeps up again beyond the mid-15 range, you've gotta expect an SPO.

    Tempted to reduce some here on the pop, but still holding for now...
    Aug 7 05:38 PM | 1 Like Like |Link to Comment
  • Walter Energy: The Bottom Is Near [View article]
    Yah, agreed, the unsecureds are really getting pushed down in the capital structure. And agree they'll probably get even cheaper. But they do have some nuisance value in a BK, the coupon pays some of the short hedge, and I can see them getting exchanged in the next 6-12 months to the detriment of the common.
    Aug 5 05:07 PM | Likes Like |Link to Comment
  • Double Digit Return In 30 Days With Western Asset Mortgage Capital [View article]
    Agree with the general thesis that this stock is heading for a big bump, but I disagree with many of the details.

    MBS markets are *not* similar to the first quarter, and agency mreits with similar strategies (MTGE, AGNC) have already reported terrific quarters (WMC's last earnings was a headline disaster). With their shift to a hybrid/ non-agency model, it's harder to look-through into their portfolio, but if you assume that they remain heavily in 30-yr agency TBAs, and have returned to their old ways of running a healthy duration gap, their book value is likely materially higher than the last reported value of $15.44 on 5/31. Just spitballing, I'd guess it's currently in the neighborhood of $15.50 (reflective of the dividend paid), but there's a lot of variance given their portfolio

    Assuming that earnings are strong, and NAV grows, you can expect a nice pop at earnings release. But the bigger bump should come as they announce the divvy mid September and in the run up to ex-divvy near the end of September. I think they should be able to hold at .67. If the stock goes anywhere north of $15.50 in the run up, it's time to take something off the table.

    They're trading at a discount to NAV, so very unlikely they do another SPO anytime soon. They don't, in fact, do SPOs "often," though they clearly wanted to do a bigger issue last time around. Something to watch for after the next ex-divvy date if the share price sticks in the $15 range.
    Aug 4 04:48 PM | 4 Likes Like |Link to Comment
  • Walter Energy: The Bottom Is Near [View article]
    If all the "if's" you outline should come together, then there's a very slight chance that WLT makes it to the other side of the mountain. But not only are these huge "if's"--and there's no empirical indication that we've hit a bottom in Met prices--but given where they stand right now, the common equity is still **way** too expensive given the risk-reward. With unsecured debt trading in the 40s and 50s, and falling by the day, how in the world is the common able to price through to a $385M market cap? This valuation makes absolutely no sense given their stressed capital structure. Going long the unsecured debt (nice + carry so long as they can keep paying the coupons...) and short the common (which has much farther to fall) seems like a better way to play this story.
    Aug 4 04:25 PM | 2 Likes Like |Link to Comment
  • American Capital Mortgage Buy reiterated at Wunderlich [View news story]
    SHE is also the savviest among analysts covering the mreit space, IMHO. Check her record on calling the top and bottom.
    Aug 1 06:35 PM | Likes Like |Link to Comment
  • Why I Believe Annaly Will Increase Its Dividend Soon And Shares Should Be Purchased Before Earnings Are Released [View article]
    Thanks much for the reply, RS. Actually, I'd think--based on your macro thesis--that you'd have preferred for NLY to have remained a pure (more or less) agency mreit which would be likely to perform better given the macro scenario of "lingering low rates" you describe.

    It's by no means clear that moving toward the hybrid model is any more certain (or less certain) to generate higher revs and earnings, as you assume. What it does allow you to do is to reduce IR risk and generate similar returns with lower leverage. It's a *defensive* move toward rates. If I held the view that IR were going to continue steady to downward (which I personally do), I'd much rather they stick to a pure agency model, which is more likely to generate at least some modest capital gains/ growth in book value.

    On the improbability of $19 per share (I never say "never," though this one's darn close...). You'll pardon me for saying that the $19 call smacks of anchoring bias. If you don't believe me, run the math in reverse: assuming an aggressive downward move in TSY10 from 2.5% to 1.5% over a 36 month time frame, and a current NAV of $12, what effective duration gap would they need to capture a gain in book value of more than 50%? The answer is a mind-boggling 50!

    To put that in perspective, that would be the same as buying a 20YR zero coupon treasury, putting two-ish turns of leverage on it, with no hedges. Any PM that would position a portfolio in that way should be fired immediately. Further complicating this with mbs, you also have to factor in that the lower IR rates necessary to move the needle on NAV are likely to reawaken pre-payment fears.

    These mreits can still be decent investments at these prices and should be able to throw off low teens returns for the foreseeable future. But you've also got to be realistic that it's mathematically impossible to replicate the kinds of mega earnings and cap gains these guys put up in the 2009-2013 period. $19 is not gonna happen, IMHO, but good luck to all.
    Jul 23 02:35 PM | 5 Likes Like |Link to Comment
  • Why I Believe Annaly Will Increase Its Dividend Soon And Shares Should Be Purchased Before Earnings Are Released [View article]
    No position in NLY one way or another, and am inclined to agree with you that it's not bad at these prices (though it was better six months ago sub $10...). But I do question your belief that it could get back to $19.00 per share anytime soon (or ever).

    If you assume that (a) share price is at least loosely tethered to NAV; (b) as an mreit, they'll continue to pay out most earnings as dividends; and (c) that they'll remain at least somewhat hedged and with relatively low leverage, it is a virtual mathematical impossibility that they'll ever again reach $19.00 per share.

    MBS at these prices (and low yields), means that there's limited upside in terms of capital gains (NAV appreciation). Unless they are willing to run a big duration gap (not their style) in anticipation of a material move in mbs, there's just no way that they move the needle that much in terms of book value. Run the numbers yourself--even if TSY10 dropped from 2.5% to 1.5% over the next three years, which wouldn't surprise me at all, the gains to book would still be of an order of magnitude less than you're projecting.

    Not a criticism of your macro thesis, with which I pretty much agree.
    Jul 23 12:25 PM | 5 Likes Like |Link to Comment
  • Conflicts Of Interest: The Manager Got Your Money, Part 3 [View article]
    Hey CWMF,

    You're right that tracking ownership can be tricky, if you want to do it in a way that tells you anything useful about mgmt and incentives. The key is to separate out mgmt teams that have invested their own funds--material cash buys in the open market--versus those that have simply handed themselves chunks of stock and options. My impression (again, without systematic consideration, but from following this space intermittently over the past years) is that ARR and AGNC had relatively meager ownership by mgmt, and what little they had had been given as incentives. By way of contrast, I'd always respected the fact that Gary Kain was one of the seed buyers of MTGE on the IPO with a significant chunk of personal cash. The structure at EFC might be a bit convoluted, but those guys also own a big chunk of their own units.

    On the SPO's: just counting them up would be a useful exercise. Who were the serial offenders in 2010-2013?

    Lastly, the one variable (maybe the probitive one) that none of these variable captures: can they trade bonds? Even the worst and most conflicted structure might be justifiable if it gets you a first-rate team of traders.
    Jul 22 07:36 AM | Likes Like |Link to Comment