Seeking Alpha

laterre

laterre
Send Message
View as an RSS Feed
View laterre's Comments BY TICKER:
Latest  |  Highest rated
  • 2 mREITs To Buy And 3 I'd Avoid [View article]
    Agreed, and full-out respect to you for not taking chances with other people's money. Everybody should be so scrupulous.

    One last point and than I'll stop (I promise!). I know I'm not going to sell you on TWO, and, truth be told, I'm just as leary of the premium to NAV as you are. The moment the ABX slope breaks I'm out. But I can't resist one last observation about it being "riskier" than the agency mreits you put OPM into.

    All other things being equal, there is more *natural* hedging and less volatility in a bond portfolio allocated 50% agency and 50% non-agency than in a 100% allocation to either asset class. That's because credit risk naturally offsets interest rate risk, and vice-versa.

    Inflationary Scenario A: sudden interest rate spike due to QE-3, hot inflation numbers, Fed surprise, economic recovery: agency prices tank, non-agency prices go up.

    Deflationary Scenario B: Euro-disaster contagion spins out of control: non-agency prices go down, agency prices go up.

    In both cases, the portfolio acts like a stable barbell. You don't even have to pay up for fancy put options. This is with respect to the NAV of the bond porfolio only, of course. Virtually all mreits trade as risk-assets, and thus both AGNC and TWO would be hammered equally in scenario B.

    So, IMHO, if you really wanted to manage risk for your clients, you'd put them in MFA or another conservatively managed hybrid. Or even better, an open-ended mbs bond fund like DBLTX. It's just a terrible mistake to generalize about agency versus hybrid performance--or risk--based on a 1 or 2 year window of the wildest secular bull market for us gov bonds we've ever witnessed. Bull markets exaggerate competence into genius and disguise all kinds of mistakes. Even the ARR mgmt looks nearly competent based on 2011 performance. This is the underlying point of my question above on surfing the asset class to impressive-looking results.

    I'm done. Peace, and good luck to you, your family, and clients.
    Feb 20 12:05 PM | Likes Like |Link to Comment
  • 2 mREITs To Buy And 3 I'd Avoid [View article]
    Hey Todd,

    Thanks. Makes perfect sense, and we all have different investment styles. Mine is to focus only on a single sector and to swing for the big trade rather than passively investing and collecting divs. To each his own...

    That said, I do think there's one "rule" that you're leaving out of your arsenal: Debt always leads; equity follows. Work that into your repertoire and you'll be the one-eyed mreit king in the land of the blind!

    One other suggestion for a future post. Here's something that's been nagging me for a few weeks now. There's all kinds of focus on "good" and "bad" mreit management, so, for example, people pay up for AGNC and NLY, CIM trades at a discount, etc. But how much does mgmt really matter relative to the moves in the underlying bond market? Or, put differently, given what they own, was there any possible way that a nitwit agency mreit manager could have lost money, or that someone owning non-agency mbs could have outperformed in 2011? Aren't their results completely overdetermined by the beta of the bond market?

    I'd be curious to see what the actual "value-added" is of the various mgmt teams, RELATIVE to the amount of under or overperformance that was directly attributable to them just surfing on the beta of the asset classes they happened to be investing in. To give you a concrete example: looking at the charts and reports, AGNC obviously did much better than TWO last year in terms of total economic return (book value+dividends paid). But how much of this was simply an artifact of the fact that agency paper took off, whereas non-agency paper sank, i.e. was simply driven by macrotrends independent of decisions by mgmt?

    So imagine you took AGNC's "total economic return" for 2011, then subtracted out (a) dividends earned and paid; (b) accretion from secondaries; (c) the amount of gain to NAV that was attributable to the big decline in the 10-YR from 1/1/2011 to 12/31/2011.

    Then do the exact same calculation for TWO, but accounting for declines in NAV due to the drop in subprime and the compensating gains in NAV from their agency portfolio. This would have to be ball-park, obviously, though I bet you could get pretty close just using publically available info for bond prices via the ABX, Primex, and 30 and 15 yr mbs prices

    Without running the numbers, I'd venture that you'd find three quite surprising things. First, I doubt that there would actually be much difference in the two numbers you'd be left with for AGNC and TWO. Or, put differently, the most significant component of their over or underperformance, respectively, is the asset class in which they happen to invest.* Beta matters much more than alpha. And, third, I bet you'd find that TWO's management actually did better (i.e. lost less) relative to the degree of price change in their underlying asset classes.

    I know, I know, if I'm so curious I should write my own article...

    *Obviously the allocation % of agency versus non-agency, and the subsector of non-agency, is a variable and not a constant for TWO, but keeping it simple.
    Feb 19 11:16 AM | Likes Like |Link to Comment
  • 2 mREITs To Buy And 3 I'd Avoid [View article]
    Hey Todd,

    I take your point about TWO being overpriced relative to 12/31 book. You've stated here an important rule--maybe even THE cardinal rule--for mreit investors: don't pay above book. But the second thing to learn after every rule is when you follow it, and when you don't. The market is generally pretty smart, and it's worthwhile asking why it's now willing to price in a 10% premium for TWO after a pretty feeble 2011. Could it be that TWO has farther than the others to bounce back if 2012 stays risk-on? Or that people are aware that its NAV has already bounced back? Above and beyond the perfectly reasonable point about its premium to book value, I don't think it's a logical inference to conclude that because TWO or other soundly managed (i.e. not CIM or IVR) hybrids performed badly in 2011, they'll necessarily do so in 2012. In fact, I'd make the opposite assumption.

    Also, the problem with your thinking about waiting around for 1Q 2012 results to see the NAV of TWO and others increase (or not) is that by then it's too late, and you've missed the arbitrage opportunity. This is why I was chuckling (snarky, I know...) about you and others now jumping into MTGE. While there's probably another buck and a half left on the table if the market holds up, that ship has done sailed, my man. The real money (nearly 40% inclusive of dividend) was to be made by loading up the truck back in Sept/October when there was a hugely irrational discount to NAV and it was pretty clear that earnings would blow out and the dividend would go up. Just as it's really obvious now that they're fluffing in preparation for a 2ndary.

    No basic disagreement: MTGE is a great long-term investment, and it's worth paying up for Kain and the mgmt if an investment is what you're after. Hybrids are more volatile, though I'd dispute the idea that they're inherently riskier, particularly those like MFA with miminal dependence on repos. More than one way to play this market.
    Feb 17 08:26 AM | 1 Like Like |Link to Comment
  • 3 REITs Yielding 15% And 2 To Avoid [View article]
    Out of MTGE at $20.90 (last week) and $21.70 (today). Thanks to all of you who took my shares away from me at a premium to NAV. I'll happily buy them back from you after the secondary, which will be in 3...2...1...

    Proceeds into TWO, MFA, and EFC. Or, put differently, in 2011 I've launched the first "inverse Todd Johnson" ETF, LOL!

    Just kidding you, man, luv your stuff!!!
    Feb 13 02:05 PM | 2 Likes Like |Link to Comment
  • Sell Chimera Before The Earnings Announcement Tonight [View article]
    NAV, reit taxable earnings, accretion of discounts, etc. are all largely based on mgmt "assumptions," which they don't share with the likes of mere investors, so why would this q be any worse than the last? Though maybe this is the q where they finally get around to ripping off the bandaid. I've hated on this company for years, but have to say, was sorely tempted to buy when it dipped below $2.50. At $3.10+, not so much... We'll see. I didn't see TWO's book value dropping that much, but cash prices have moved back up since 12/31.

    In any event, you're probably *very* safe in assuming that there's no big upside surprise coming after hours.
    Feb 9 12:09 PM | 1 Like Like |Link to Comment
  • American Capital Agency Is Still A Buy After Dividend Cut [View article]
    AGNC's strength today is actually an encouraging sign of the rationality of the market.

    Shows that the market had already priced in something much worse in terms of earnings and spreads. And, more importantly, the market seems to have looked past the dreadful (but predictable) contraction in spreads and focused on the only real metric for valuing these mreits: namely, book value.

    Confirms what the smart money has always understood, that these shouldn't price based on some imaginary, hypothetical yield % but on a relative discount or premium to NAV.
    Feb 7 10:46 AM | 1 Like Like |Link to Comment
  • Why I Am Avoiding American Capital Agency [View article]
    It may get crushed for others reasons (Greece, refi-ganza, etc), but I think it's important to take a measured view of the dividend cut.

    First, this was entirely predictable based on the bond yield curve. It shouldn't have come as any surprise to anyone who follows the bond market, and thus was probably already priced to some extent into the stock. Notice the successively lower highs over the past six months. Unless something changes dramatically, the dividend will continue to be trimmed and/or the retained earnings cannibalized throughout 2012. This is simple math.

    Second, I don't see a huge sell-off given that it's still a nice dividend. There will be some panicked retail dumping at the open, but it'll stabilize above book value, which is all it's really worth anyway.

    Thirdly, and more broadly, I'm sticking with my thesis that non-agency mreits will outperform agency mreits in 2012. If Kain and his team have done their job, we'll see that MTGE has shifted a good percentage of their book into prime non-agency in Q4, and they'll report some nice earnings with healthy spreads on low leverage.

    Hedging is never a bad idea, but puts eat into income.

    My 2 cents. Props to Bear Fight for calling this one.
    Feb 7 08:08 AM | Likes Like |Link to Comment
  • Capstead Mortgage's Earnings Report Bodes Well For Agency REIT Peers [View article]
    Haven't read the earnings report and don't follow CMO, but based on your numbers (CMO's average yield of 2.07% on portfolio and their mainly ARM portfolio), I'm not sure you can generalize from their performance to that of the other agency mreits. CMO is an odd duck, and most others are holding higher coupon 30 yr fixed which are much more sensitive to prepays. No matter how carefully they've selected, spreads are going to contract for NLY, AGNC, ARR, etc.
    Feb 2 10:11 AM | Likes Like |Link to Comment
  • 4 Dividend Stocks To Avoid And 2 To Buy [View article]
    Hey Todd,

    Happy New Year. You make an important point about the hydrid reits. When you're dealing with a black box like CIM, or even the more transparent TWO and IVR, it's beyond the ability of the average retail investor to fathom. Though honestly, you could make the same argument about the agency mreits, no? Can you really monitor CPRs in real time or model negative convexity?

    That said, while agreeing with you that junky credit changes the game in certain respects, I disagree with the conclusions you're drawing at this particular juncture about the relative attractions of agency versus non-agency mreits.

    Ok, so without a back office, there's absolutely no way that you or I can accurately value CITI ALT 2006-A5-3A3. But it doesn't follow from this that one can't make macro judgments about whether the non-agency market is cheap relative to agency mbs. And it is, absurdly so, which has sparked a major rally in the cash market for non-agency mbs. You can follow this via any number of the indices. I can tell you now with 85-90% confidence that the book values of MFA, TWO, EFC, and even IVR and CIM have bounced since last earnings. Assuming the rally in non-agency mbs continues, these stocks are eventually going to pop as discounts to NAV narrow.

    Credit risk is different and harder to quantify than IR, CPR, or political risk, but I actually prefer taking on the former rather than the latter three in this environment. Not saying that AGNC or NLY can't have decent years or that the wheels are coming off. But the pedal is to the metal with them right now in terms of spreads and the yield curve, and I can't imagine a scenario where they surprise to the upside. Whereas non-agency mreits--even those with new money--are relatively undervalued, particularly MTGE and gems like Ellington Financial. [Disclosure: long and accumulating...]

    Not saying to dump agency mbs, but there's more upside, IMO, on the other side of the fence, and one doesn't need to be able to understand every facet of the business to profit from them.
    Jan 11 12:02 PM | Likes Like |Link to Comment
  • Which mREITs Will Outperform In 2012? [View article]
    Really kinda hard to make these kind of global predictions--especially given all the uncertainty that lingers in 2012. But if I had to bet, I would actually take the opposite side of your thesis, for the very reasons that you mention.

    Long rates are already low and could go even lower on any kind of European meltdown; agency mbs is rich right now, with prepays destined to come up, and spreads are already declining. Just look at the dividend cuts across the space last Q. I don't see any catalyst for a major overperformance for agency mreits. They'll muddle along just fine in this environment, but there are no rabbits left in the hat with the yield curve as flat as it is.

    By way of contrast, at some point in 2012 you are going to want to own non-agency mbs. By any account it's cheap right now with 9-11% loss-adjusted yields. The only thing holding back investors from piling in is the suspicion that it will become even cheaper very shortly. Best case, things get better in the economy and non-agency mbs outperforms. Worst case, things go completely to hell and new money can snap up non-agency mbs at fire-sale prices ca. 2009. AGNC, NLY, and others don't have this kind of flexibility.

    I'd go out on a limb and predict that a basket of TWO, IVR, MTGE, MFA, and even that ugly duckling CIM will outperform AGNC, NLY, CYS, ARR, and ANH in 2012.

    Also, you don't have to choose: balance the credit risk of non-agency with the IR risk of agency.
    Jan 4 12:03 PM | Likes Like |Link to Comment
  • Why I Am Avoiding American Capital Agency [View article]
    Agree generally with what you and others are saying: mgmt is simply the best, and they've done *everything* possible in this environment to squeeze out extra returns. But there are limits to how much marginal return you can generate, and stretching generates additional risk.

    Think of a car speeding on a highway. You COULD drive 120MPH, but doing so increases the chance of accidents or flashing lights.They can increase leverage (risks obvious). They can stretch into older, higher coupons (paying a bigger premium and exposing themselves even more to pre-pay and political risk). Or they can play it safe and stick to new low coupon 3s and 3.5s (further eroding spreads).

    They can't change the yield curve, which is a headwind for everyone. And as election time rolls around, there are whole buildings full of very clever, determined people who are committed to trying to refi all those homeowners stuck in underwater, overpriced mtgs.

    No such thing as a riskless 19%...
    Dec 31 09:43 AM | Likes Like |Link to Comment
  • Why I Am Avoiding American Capital Agency [View article]
    Right now MTGE is taking advantage of the spreads available via a 99% agency allocation. But unlike AGNC, they have the ability at any minute to shift into non-agency mbs, which will tend to move in the opposite direction of agency (negative versus positive duration).

    In the best case for 2012, MTGE continues doing exactly what AGNC is doing right now: harvesting solid spreads on agency mbs and paying 17% divy. But assume the worst case for 2012: bank failures in Europe, US 10-yr falls further to 1.5%, agency mbs spikes. In this scenario, non-agency mbs will get dumped at ridiculous discounts and loss adjusted yields. They and lots of others are sitting right now just waiting for something like this. Conversely, if the economy turns a corner in 2012, MTGE has the option of shifting their allocation into non-agency mbs, which will do better than agency mbs in an improving econonomy/ rising rate scenario. That's an optionality that AGNC doesn't have.

    And it sells at a discount to NAV. When buying mreits, never pay retail ;)
    Dec 31 09:29 AM | 2 Likes Like |Link to Comment
  • Why I Am Avoiding American Capital Agency [View article]
    The "evidence" is in current mbs prices, and it's not an assumption but is manifestly obvious. Even if you can't pull a bond quote, think about this commonsensically: if you or I can go to the bank and get a 30-yr mortgage sub-4%, the net to the mbs investor (subtracting underwriting and GSE fees) is 3% +/-. If you want empirical evidence, current FNMA or FHLMC 3 and 3.5 coupons are selling right now @ 99.25 and 102.20, respectively, for a ball-park yield of just a hair over 3%.

    Why does this matter? Because it guarantees that every single $ that comes into the door of NLY, AGNC, etc. from prepays of older securities they bought in 2009 or 2010 and which were yielding 4.5-5% (or $ from new secondaries) now has to be re-invested into this flatter yield curve. Smart asset selection of older, higher coupon stuff can stretch the margins a little bit, but the reality is that spreads are contracting. ARE contracting...as in the present, right now...

    AGNC is still a fantastic shop, and will dojust fine, but I wouldn't put new money there. The optionality and discount to book for MTGE makes a lot more sense, IMO.
    Dec 29 10:55 AM | 8 Likes Like |Link to Comment
  • Jeffrey Gundlach On Uncertainty And Gold In 2012 [View article]
    Volatility is definitely cheap right now, and while I agree with your take that precious metals are a good long-run bet with the debt monetization that is inevitable, I don't think that they're going to give you the results you're looking for in the face of short-term dislocations.

    Absent some clearly communicated QE3 in 2012, the dollar will strengthen--not weaken--on European uncertainty. And PMs tend to mirror extreme sell-offs in the equity markets as people raise cash. If you really want to hedge for "extreme scenarios," you should be looking at TLT, ZROZ, etc. that add duration and will spike on panics.

    Gundlach's point--which gets lost in your thesis--is that you can't really know whether we're in for inflation or deflation, so you need to own asset classes that pay high dividends and move in opposite directions in either an inflationary or a deflationary scenario: high duration treasury equivalents such as GNMAs which act as hedges during sell-offs, on one end, and junky non-agency mortgages that will benefit from inflation, on the other end.

    Never hurts to have some cash!
    Dec 26 07:18 AM | 2 Likes Like |Link to Comment
  • RMBS And The Value Of Agency Backing [View article]
    Hi James,

    I like that you're doing some *original analysis* in your posts, unlike the usual recycling of pumping and bashing. The easy answer to your question about valuing their book is to look at the bond market.

    In an ideal world it would be no problem to value the book of these mreits. In principle they are no different than open-ended mutual funds that mark their bond portfolio to market every day. Particularly in the case of the agency mreits--where the mbs market is large, liquid, and publicly quoted--it's really not hard to track their portfolios more or less in real time. GAAP values diverge slightly, of course, because of amortization of premiums and swaps, but I don't have a big problem working off the quarterly book values, and most analysts easily track the "premium" or "discount" (price/NAV) of the agency mreits.

    The non-agency's are another matter altogether. Some like MFA and TWO seem pretty straightforward and are transparent in disclosing the mark-to-market value of their bond portfolio, inclusive of hedges and discounts (in the case of non-agency) or premiums (in the case of agency). But CIM and IVR (to a lesser extent) are black boxes so far as I'm concerned. Because the valuation and performance of CIM's non-agency portfolio is simply an artifact of assumptions about future cash flows, and seems to bear no relationship to the cash market for comparable mbs, I (and apparently other investors) are placing a heavy discount to the GAAP number.

    Obviously the same thing can be said of the major banks like BAC etc which trade at fractions of their "book" value. The bloodless verdict of the market is saying something quite different about that number...
    Dec 15 07:59 AM | 1 Like Like |Link to Comment
COMMENTS STATS
332 Comments
401 Likes