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laterre

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  • 5 Proven 15% Dividend Stocks For Energizing Your Portfolio [View article]
    Hi Harry,

    Thanks for this. Again, I feally think they're capped at 300M shares, which would suggest they're maxed out currently on SPO's. Surely they'll be able to twist some arms and get that number bumped up at the next shareholder meeting, though if I were a current AGNC shareholder I'd vote against.

    I'm reluctant to weigh in on the preferred issuance, as I know I'll be flamed for this. But...here goes anyway. Issuing preferred shares is a form of structural leverage. It's like taking out a mortgage. In many ways it is preferable to issuing new shares, as the cost is fixed at slightly more than 8% (taking into account the underwriters discount), whereas the cost of funds from an SPO is 16% or the current divvy. So regardless of how it is accounted for on the books, it affords the possibility of increasing ROE and juicing the divvy. Good news, right? Maybe for now, but here's the rub. Like any form of structural leverage, it exaggerates upside and downside. So in an environment where spreads compressed and earnings were stressed <8% (*well* below current levels), it potentially hurts common shareholders, who'd find the first $X00 million (you can do the math) going to the preferred holders before the common divvy is paid. Also, and let us all pray this never happens again, in a 2009-ish situation, having a severely stressed preferred floating out there creates the conditions for a nasty compression trade, where hedgies buy the pref and short the common. Put simply: at the margins, this makes the common ever so slightly more risky.

    Why would they do this? The bullish case: (a) they're locked out on new issuance and saw some opportunities; (b) they feel like the mbs market is more stable now, so they feel more comfortable taking on a little additional leverage. That's all cool. But the really cynical explanation is that margins are compressing, and this is a way to goose the divvy a little bit by adding leverage with a relatively cheap cost of funds.

    My 2 cents...
    Apr 20 07:59 PM | 1 Like Like |Link to Comment
  • 5 Proven 15% Dividend Stocks For Energizing Your Portfolio [View article]
    Hey Todd,

    Correct me if I'm wrong, but am I mistaken that AGNC can't do any further 2ndaries without shareholder approval? They're maxed out in terms of their common share authorization, no? Wasn't that the issue last summer when their request for 500M failed, and they re-submitted for 300M, which was approved. I just assumed this was why they issued the preferred instead, which was otherwise a curious move. I'll save my thoughts on the wisdom of the latter, but if I'm correct about the common authorization being maxed out until the next shareholders meeting, then there's a floor under AGNC and it's likely to run up relative to NAV...
    Apr 20 09:53 AM | Likes Like |Link to Comment
  • 5 Proven 15% Dividend Stocks For Energizing Your Portfolio [View article]
    AI, huh? Edgy! Dipping your toes into the waters of credit risk. I'm *impressed*, as I really wouldn't think this one was your style.

    The price is right on AI, but it scares me off, to be completely honest. I don't like the Wells notice or the potential overhang from their earlier securitizations. But more importantly, I just flat-out don't like their portfolios, either the agency or the non-agency. In terms of their agency book, they're the anti-AGNC: really high coupons and prices (>4.5 and 108!). That's a huge amount of value between the curves that could potentially be unlocked by refis.

    Seems like they're marking the non-agency fairly, which is admirable and re-assuring, but the pricing on their "senior" (with 40% or so delinquencies and 50% severities) and re-remics (20% delinquency and 50% severity) makes it look low Alt-A-ish . The non-agency market was really rolling in early 2012 but has softened and I worry about another credit sell-off. Hopefully they've unloaded some of the "senior" and re-remics on the bounce, as they were sitting on a pretty big chunk of re-remic with exposure (+ or - ) to housing and the economy.

    An interesting pick. I could imagine owning this at a diff point in time. Just seems out of character for you given what you've said in the past about the hybrids.
    Apr 19 08:34 AM | 3 Likes Like |Link to Comment
  • Introducing The 3rd SandRidge High Yield Trust [View article]
    Thanks for your kind words, TJ. I just try to call em like I see them.

    Wow, even better--a brewing scandal involving nat gas producers! I've got a limit order for 10% of my eventual position in for SJT and HGT, assuming they'll continue to drop throughout 2012. Gotta start dipping the toes in the water...

    One other thought on your article. Let's assume you're right that SDR is a "shitty deal," to quote our friends at GS. What does that tell us? If you look at the history of bubbles and busts, going all the way back to South Sea, tulips, 1980s commercial real estate, etc., the proliferation of so-called "shitty deals" almost always marks a top or signals a bottom. Think pets.com, Archstone-Smith buyout, "Abacus" and "Timberwolf," etc. Maybe this is obvious, but tends to go unnoticed at the time.

    By definition a "shitty deal" is one where the risks and rewards are asymmetrically distributed, which is not what happens naturally in a healthy market. At tops, sellers mug dumb, overeager buyers; at bottoms, desperate sellers initially misrepresent by offering bad deals that seem to be good to be true and then end by puking up the really good deals when they can't hold on any longer and the market collapses.

    Again, I don't know anything about Sandridge. But when the unambiguously "shitty deals" start popping up in mreit land, I'll be sure to speak up ;)
    Apr 18 11:03 AM | Likes Like |Link to Comment
  • Introducing The 3rd SandRidge High Yield Trust [View article]
    Hey Todd,

    Thanks much for your thoughts.Gotta dig more into the differences in trust structures. Like I said, this isn't my area, and I hear you about fading Cramer. That's never a bad trade. That being said, your observations about this deal and Sandridge's financial condition, if true, actually support my thesis. We'll know the bottom is near when crazy, desperate sales are getting made under conditions of duress, when a couple of big producers start shutting in wells, and maybe even a bankruptcy or two among the minor producers.

    If this deal is really a panic sale, as you suggest, then maybe it's a good deal for buyers. All I know: I buy stuff cheap, and nat gas simply can't get much cheaper without supply destruction. These trusts are non-correlated, have some positive carry, and everyone in the financial media is now talking armaggedon. That's my sign to start accumulating. If NG eventually goes sub-$1.00, even better!

    Feel free to ignore, as I don't use my real name, just solid arguments ;)
    Apr 18 07:53 AM | 1 Like Like |Link to Comment
  • Introducing The 3rd SandRidge High Yield Trust [View article]
    Hey Todd,

    Curious about the cause and effect of your thinking. I see elsewhere you're also advocating selling HGTand SJT. Is this also on grounds of financial strength of parent, or that you just don't like nat gas right now? Because the latter is ultimately the cause of the former, no?

    I don't really have any opinion on these particular trusts, except to note that natural gas is becoming ridiculously cheap, which to me is a signal to begin accumulating, not a sell signal.

    Also, mad props on trying to infer something about the financial stability of the parent co from the bond market. But on a quick glance it looks like their 2020 8.75% senior debt is trading well above par, which isn't usually a sign of walls imminently cracking. Compare that to, say, GMXR's paper...

    Energy isn't exactly my thing, but natty is on sale blue-light special.
    Apr 17 07:12 PM | 2 Likes Like |Link to Comment
  • What's The Compelling Reason For Owning Annaly Capital Management? [View article]
    I don't feel like rehearsing the whole thing again, but hedging is explained in my comments on one of James' earlier articles.

    The short version: they hedge against (some) of the loss of value in their portfolio by entering into a ladder of interest rate swaps. The idea is that as rates go up, their NAV would otherwise lose value dramatically because of all the leverage they used.

    Plan vanilla IR swaps work by them paying a FIXED rate, say, 1.5% and receiving back at a FLOATING rate that is based on LIBOR plus some spread, say, 6 MO Libor+1%. As rates move up or down, they and their counterparties move money back and forth as the swap contract goes into or out of the money. This compensates them for some of the IR exposure of their long agency mbs porfolio should rates increase.
    Apr 11 01:49 PM | 1 Like Like |Link to Comment
  • Widows, Orphans And mREITs [View article]
    Thanks for clarifying. We simply disagree about risk management. Try trading pass-thrus in a rising rate environment for a few years (with or without leverage) and maybe you'll come around to my way of thinking. Sincere best of luck to you and your clients.
    Apr 2 12:20 PM | Likes Like |Link to Comment
  • Widows, Orphans And mREITs [View article]
    I agree that your title is perhaps bolder (more irresponsible?) than the actual argument, which is more nuanced. But unless I'm misreading, your point isn't just that we can hold mreits on a long time horizon (by which you presumably mean so long as things are auspicious) as opposed to short-term trading. It's making quite misleading assumptions about the risk characteristics of a particular asset class that is, at least in my opinion, inappropriate for widows and orphans.

    I'm a dull reader, and prone to irrationality, so maybe you can clarify your thesis for others like me. Are you, or are you not, saying that if a 75 year old retiree on a fixed income came to you for investment advice, you'd put a significant portion of her life savings into mreits and tell her to sleep well at night? Are you, or are you not, inferring from the dividend stability and daily volatility of the best performing members of a particular asset class over a cherry-picked time horizon that these are safe rather than appropriate mainly for "risk capital--play money"? Are you, or are you not, saying that anyone who thinks to the contrary is "grave," "nail-biting," "hypersensitive," "irrational," or "anxiety-ridden"?

    Sorry, I don't want to be an ass (a losing battle for me, but that's a long story...). But I worry how people who don't understand the worst case and the risks embedded in leveraging mbs 8 times over are going to interpret what you're saying here.
    Apr 1 12:11 PM | Likes Like |Link to Comment
  • 4 Dividend Stocks For Retirees And 1 To Avoid [View article]
    Interesting range of views here, and I don't think the answer has to be "all stocks/no bonds" or "all bonds/no stocks."

    But there are several fallacies being expressed about bonds and bond funds. First, for retirees who own actual bonds, rising interest rates are a GOOD THING--as you'll have something waiting for you to reinvest the proceeds into at a higher rate.

    Second, all of these criticisms seem to assume that "bond fund"=ultra high duration govt or corporates. Not only are there many intermediate term total return funds such as DBLTX or others that run relatively short durations (sub 3 now for DBLTX), there are entire classes of bonds (convertibles, floating rate, non-agency, and junk) that will likely RISE in value with higher rates. You can easily earn 5-7% with much less volatility than a pure dividend stock portfolio, nt to mention one highly correlated with one or two commodity classes such as oil or nat gas.

    Lastly, and most importantly, let's put the bond risk versus stock risk argument into perspective. Suppose a typical intermediate term bond fund with a duration of 5 (a little on the high side, actually). What this means, in essence, is that if rates rise 1 full point, your capital will lose 5%, 2 full points 10%, etc. Compare this to the volatility and correlation in a typical stock portfolio. A high-grade dividend portfolio of stocks could very well lose 3-5% IN A DAY, and 25-30% in a major pull-back. In addition, for retirees who don't necessarily care about temporary declines in NAV, the advantages of bonds or even bond funds is that higher rates are ultimately good in the sense that the yield on the fund will eventually rise to match the new market rates.

    Owning some bonds and some stocks also allows for bar-belling, as with the proper selection you can massively reduce the volatility of your portfolio.

    Lots of misunderstanding of bond funds being spouted about here...
    Apr 1 11:51 AM | 4 Likes Like |Link to Comment
  • Widows, Orphans And mREITs [View article]
    You're joking, right? Is it any coincidence that the period in question corresponds to an historical bull market in mbs and near perfect spreads for mreits.

    Maybe you and Granny would be singing a different tune if you'd been holding in 2005-2006, when the old hands at NLY and MFA had to slash dividends and fight to survive in the face of quarterly half point IR hikes; or if the US govt hadn't intervened to save mbs investors by backstopping Fannie and Freddie (which were never explicitly guaranteed); or had been holding Bimini, Thornburg, Redwood, or any of the others that either went the way of the Dodo or were crippled in 2008-2009.

    But probably this time is different, and there won't be any twists or turns in the credit market in the next five years. Wouldn't it be nice to think so.
    Mar 28 07:46 PM | Likes Like |Link to Comment
  • Selling Legacy Mutual Funds For A Retiree's Yield Improvement [View article]
    Fair enough, and I know many people feel similarly about bond funds for precisely these reasons. That being said, the two main advantages to a low duration bond fund over cash are, first, that you'll earn at least something on your money while you wait, which can be important for retirees, and second, depending on what kind of fund, it'll actually gain something at the same moment your equities are dropping.

    To each his own, and your being gunshy after being burned in the 1990s is certainly understandable. But I'd personally never sleep worrying that with a major credit event, correlation among stocks goes to 1, and the whole portfolio could lose 10% or more in a day. Having a ladder of high quality bonds provides some insurance against this and brings in a little extra $ too.

    Good luck to you!
    Mar 28 07:24 PM | Likes Like |Link to Comment
  • Selling Legacy Mutual Funds For A Retiree's Yield Improvement [View article]
    Hi Norman,

    Thanks for this honest and open article. I enjoy your writing, even though I think we disagree about some investment fundamentals, and I worry that others in retirement--less savvy than yourself--may take the wrong message from your strategies.

    Just a couple of things. First, I can appreciate the need for retirees to "juice" their portfolio with some high yielders. And you seem to be doing this in good proportion. But the story you yourself tell about FTR and AGNC has a lesson behind it: namely, that the drive to chase high yield can have ugly results. AGNC hasn't panned out that badly, to be sure, and there's a strong case for retirees to own some mreits in this environment. But the general proposition of stretching for HY worries me, especially if the rationale gets expressed in terms of the binary of either/or: it's either HYielders such as FTR paying 17% or bank CDs. Those two extreme alternatives ought never to appear in the same investment universe. Why not focus on the spectrum of CEFs, preferreds, etc that pay 7-8% instead.

    Secondly, I can see where you're going with dividend paying equities. But I just wonder about the rationale for having virtually zero fixed income exposure as a retiree. Doesn't this bother you? If the goal is maximizing income, there are any number of excellent bond funds (open and closed end) by Doubleline, TCW, Metwest, or even Pimco that throw off 5-7% with much less volatility than your typical index of S&P dividend payers. Moreover, having something in bonds gives you a hedge if we should have a major correction in stocks. I know that bond funds are verboten in some quarters, but some form of fixed income does play an important role--if only as a downside hedge--in any retirement portfolio. You seem like a sophisticated enough guy that you could ladder some munis or corporates yourself to achieve the same effect if the bond fund problem worries you.

    Thirdly, if your goal is income, have you considered any number of CEFs, many of which offer high single digit yields from mortgage backed securities while using only a fraction of th leverage of AGNC and others? If you have a decent broker, you can lever these yourself and with even modest leverage of 2:1 achieve the same yield as AGNC.

    I find it interesting that as someone in my 40's, who could weather some major ups and downs, my portfolio is both more conservatively allocated than yours (>70% bonds, mbs, bond funds, or bond equivalents) and throws off more income.

    Thanks for sharing your strategy, as it's generated some good discussion!
    Mar 28 08:59 AM | 1 Like Like |Link to Comment
  • Annaly Offers An Eye-Opening 14% Dividend Yield [View article]
    This is an interesting question. All other things being equal, you are correct that the market would tend to bid the yields on mreits down to high single digits. But there are two factors that mitigate against this. First, most reit investors realize what Todd has pointed out below: namely, that all that you're buying with an mreit is a leveraged bond portfolio and a claim to a future income stream. Thus the price of the equity (the stock) is naturally anchored to the underlying NAV. Only an idiot would bid it up to 40 or 50% premium to the underlying assets, regardless of the yields. But secondly, and probably most importantly, the mreits have the ability to monetize the premium to NAV by issuing more shares. The frequent secondaries provide a natural cap on the price of the stock. There's also the risk premium: 15-17% yield doesn't come without risk.

    Your call on whether it's too good to be true...
    Mar 26 02:17 PM | 1 Like Like |Link to Comment
  • American Capital Agency And Hatteras Financial: Growth, Dividends And Lessons For Mortgage REIT Investors [View article]
    @ Hawker

    We could and probably would quibble about the details, but quickly:

    1) As someone who looks at and prices these (and their strategies) in terms of bond prices and underlying NAV, I don't really care about share price in and of itself. Assuming a rational market, the fact that all mreits "get killed" initially in the face of an interest rate shock presents a buying opportunity until the market correctly re-prices in those who played it safe and those who took risks, and arbitrages away those differences. But your broader point holds (with which I wholeheartedly agree): the truly cautious investor or someone convinced that rates will go up should be wary of any and all mreits.

    2) I simply don't accept your premise that the "bond market is dumb." Equities yes temporarily, and cefs certainly, but the mbs market is huge, liquid, and populated by sophisticated folks, some even more sophisticated than Kain. Are there opportunities for people who are smart, forward-looking, or outright "plugged in"? Sure. But once that market moves, or moves unexpectedly, the active players who take on duration risk--either positive or negative (cough, IVR, cough)--will either be proven right or wrong. My point *isn't* that Kain et. al. made bad bets. In fact, as I say clearly and admiringly, they were proven right in these instances and deserve to get the credit for betting correctly. But you have to acknowledge that these *were* BETS. There's a difference between good and bad gamblers, but they are a diff breed than folks like Lloyd who don't even want to sit at the table. If, as you suggest, AGNC are now actively dumping the pre-HARP-ed, low balance, low coupon, and high LTV portfolio they've assembled (which I'd be doing ASAP), they are also making a bet. That's what an active management style entails: trying to figure out which direction the wind is blowing and tacking aggressively to capture gains. The alternative is simply trying to minimize changes in NAV related to IR risk and duration gaps. ANH is a clear example of the latter model, with both its strengths and faults.

    3) You'll note that while I personally subscribe to the latter, more conservative school of bond mgmt in the portfolio I run, I think I was quite clear that I've never, nor would ever, own ANH, for many of the reasons you cite that are peculiar to that particular company. They have not executed well. I'm *not* saying buy ANH. And as I also clearly state, I have owned AGNC in the past and own MTGE now. But I do this precisely because I understand the duration problem, the ways in which they'e hedging (or not hedging) IR risk, and can offset or hedge this myself in other parts of my portfolio. CMO sounds interesting, perhaps as a better managed version of the ANH model. Thanks for the tip.

    Enjoy your comments. Stop by more often.
    Mar 26 09:43 AM | Likes Like |Link to Comment
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