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laterre

laterre
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  • American Capital Agency: Time To Abandon Ship? [View article]
    You've gotta keep some perspective on where mreits stand in the cycle, not compared to rates last week but to 2010, 2011, etc.

    Obviously, buying into an AGNC (or any other mreit last summer) for a $36 SPO, and paying a 20% premium to book, was a dumb strategy. When these things were considered indestructible, and all the rage, I cringed when people on here were saying that mreits were "safe," "alternatives to cds," core of retirement plans, grandchildren's college money, blah, blah, blah... So much for that song.

    Book values are going to get hit, no doubt. But the flip-side is the return of 2010-2011 dividend levels based on higher NIMs.

    Either mreits are bad investment because of their spreads compressing and divvy's being reduced (last summer's flashy-crashy fear du jour) OR they're a bad investment because of the duration risk to NAV (this summer's fear). But both CAN"T be true simultaneously.

    Lower NAV=higher yields... Will there be some ugly re-pricing in the transition period, sure? But unless mbs prices backed up considerably from QE3 levels, these things were destined to go the way of the dodo.

    I'm betting after some extreme vol they pull back another 10% and stabilize on positive divvy announcments.
    May 28 12:08 PM | 2 Likes Like |Link to Comment
  • American Capital Agency: Time To Abandon Ship? [View article]
    After a godawful AM in mbs land (FNMA 3.5s down 26 ticks and counting), prices for 3.5s are...gasp...exactly where they were last May.

    Sucks for NAV, but new money gets you a wider spread.
    May 28 11:44 AM | Likes Like |Link to Comment
  • Why Exide Could Be A Compelling Speculative Buy [View article]
    Thanks, South Gent. Yes, I've been following the bonds for six months or so now, and based on their prices it seemed clear the equity was (as it almost always does) mis-pricing the poss of a bk. Equity always gets the memo too late. Deep OTM options paid 300%, and just closed out this AM.

    But now flipping things around on the long side, I might be interested in picking up some of the seniors at distressed prices for a post-reorg play. Was just wondering if you've modeled what the enterprise would look like with the junior debt cancelled and the seniors (with some haircut) taking the new equity. This would be their second run through bk, if it indeed plays out as an 11, which may be a sign that there's a bigger problem with the enterprise itself. The environmental liability is also wild card that makes modelling diff, but we'll see if (when) there's an actual filing with the assets and liabilities all laid out...

    BTW: I've followed your high yield debt strategy on your blog, and you've managed to find your way into several of these scenarios. You're a terrific, disciplined investor, but you're facing a huge headwind, as I'm sure you realize. By and large, the only junk debt available to retail in small lots is the stuff that people are trying to get rid of.
    May 24 11:28 AM | Likes Like |Link to Comment
  • Why Exide Could Be A Compelling Speculative Buy [View article]
    Debtwire reporting Exide in talks for DIP financing in preparation for Ch. 11 filing

    http://bit.ly/13POYME

    Gasp. Who could <ever> have predicted this?

    South Gent: looking ahead, have you run the numbers for the long-side on the seniors in a bk scenario? If this plays out as it now looks, I'm assuming you're correct that the subs will be out of the money and the seniors will end up as the fulcrum, taking all the equity in the post-reorg entity. Have you run the #s on what the cash flow or the enterprise value would be post-reorg? Depending on the #s, the seniors could get really interesting in the 40s and 50s...
    May 24 10:59 AM | Likes Like |Link to Comment
  • Don't Panic: Survival Guide To Prospering With Mortgage REIT 12% Yields [View article]
    Always enjoy your articles, CK, and keep the excellent analyses coming!
    May 22 11:57 AM | 1 Like Like |Link to Comment
  • 18.4% Dividend Payer Western Asset Mortgage Disappoints - What's The Outlook? [View article]
    CK has this exactly right. The non-agencies are a negligible part of their total portfolio at this point in time (and thus a proportionately negligible fraction of the equity if you divide total portfolio by effective leverage), and they're using these as IR hedges to reduce effective duration (while picking up some carry from owning them).

    On the dividend: the only reason I can foresee for a reduction in the divvy below .90 is if they were to do a mid-earnings period SPO resulting in dilution of earnings across the new shares. While there's uncertainty with the book value, the earnings power looks transparent at this stage of the game. They're earning a 2.17% NIM and running 9ish effective leverage, which is gives them a ballpark ROE of 21%. Take out 2% for mgmt fees and overhead, and this gives you a predictable 19%. They've shown themselves for several quarters now to be effectively insulated against prepays (the flip-side of which is the negative convexity that bit them in the rear last quarter on a whiff of rising rates...).

    Book value is going to fluctuate, but the spread income should remain constant absent a major change in course.
    May 22 10:34 AM | Likes Like |Link to Comment
  • Don't Panic: Survival Guide To Prospering With Mortgage REIT 12% Yields [View article]
    Hi CK,

    Nice, clear analysis. You do a good job of putting the two most fundamental tensions with mreits into perspective: namely, (a) that NAV and spreads are inversely related; and (b) that you can't hedge away every risk, and thus diff companies make difference choices. These are mathematical truisms, but investors tend to lose sight of these in all the hand-wringing, headlines, and hysteria.

    With respect to (a), I think it's quite ironic that last summer/ fall in the face of QE3, many folks were declaring the end of the mreit model as net interest margins were relentlessly compressing. Like everything else, this was overblown, but in some sense (and I said this at the time) it was mathematically correct. Had QE3 succeeded in driving up the price of FNMA 3s (and even launched a 2.5 as the current coupon), the mreit model would have been in run-off mode. There would have been a hell of a build in NAV along the way, but absolutely no way to earn spread income on new investments and dividends would eventually have had to be hacked. Market reaction?: panic and mreit sell-off in fall 2012.

    Thankfully, that *hasn't* played out. You saw a big run-up in NAVs with the peak of the QE3 "front-run the fed" trade, but unfortunately the ones that benefited most from this pop couldn't hold the book gains. Disappointing? Sure. But what people aren't realizing is that with the sell-off in mbs, mreits just got a new lease on life. At current mbs prices, there's the poss of being able to reinvest and make new purchases at more attractive spreads. The divvys for AGNC, MTGE, and WMC look solid and sustainable on spread income alone. What's WMC now, almost 19% at these prices?Once again: the market reaction? Panic and sell-off...

    The glass is always half-empty in mreit land, but these inefficiences put food on the table for those who can keep their heads.
    May 22 08:13 AM | 2 Likes Like |Link to Comment
  • After Dismal Earnings, 3 Hybrid REITs I Am Considering To Replace American Capital [View article]
    +/- 10% hit to NAV, which is disappointing, but the NIM is stronger than before and core earnings clearly support a .90-.95 cent divvy. That's the best you'll get in this mbs market...
    May 15 08:35 AM | 1 Like Like |Link to Comment
  • Why Exide Could Be A Compelling Speculative Buy [View article]
    Hey South Gent,

    You're fighting an uphill battle here on SA by providing actual FACTS about things like free cash flow, debt load, and bond prices. How dare you cite objective factors that show the equity to be worthless! Stop talking like a bond investor and tell some just-so stories about what might happen in a diff world with pixies and unicorns.

    Your exchange with IM is a fantastic case study in confirmation bias.

    PS: always enjoy your Stocks, Bonds, and Politics blog.
    May 14 05:11 PM | 2 Likes Like |Link to Comment
  • After Dismal Earnings, 3 Hybrid REITs I Am Considering To Replace American Capital [View article]
    Murray,

    I respect your caution about WMC and don't want to discourage you sticking with AGNC. In fact, AGNC and MTGE are currently on blue light special, so there's reason to add as they fall further.

    But I think your concerns about WMC are overblown.

    Are they new? Yes, but they're managed by the mortgage guys at Western Asset--the Pimco of Pasadena. Other than the Kain team that came from Freddie, or the NLY folks who've been around forever, they've probably had more experience running more money than almost anyone else in the mreit business. But most importantly, the fact that they're new means that their hedges are fresh (cheaper) and they don't have some of the legacy costs on swaps that others face. They're also smaller (nimbler) but are backstopped by the buying power of WAMCO.

    I think there's every reason to be optimistic about their dividend. We know their NIM, and that their CPRs are in the low single digits. These won't change even in the face of the backup in agency mbs prices. In fact, if you've locked in the kind of rich spreads they've put together, the last thing you want is for mbs prices to drop and prepays to kick in.

    Yes, they run more leverage than AGNC, but they also hedge more fully across the whole yield curve. I've been trying to model this (albeit with imperfect and dated info), but spit-balling, I think that we're going to see much less deterioration in NAV than people are expecting, prob <5%. They were heavier in 3.5s than you'd like, and I'm thinking they also got suckered into the TBA drop income gimmick like AGNC, but they also were expecting to pick up a decent amount of negative duration from the long end of the curve. MBS fell more relative to 10s (which is partly what screwed up AGNC's hedging), but there was a bigger relative dip from the 15-30 year portion of the curve where WMC has some nice swaps in place.

    Hard to say at this point, but I'm betting that just as WMC didn't pick up as much NAV in the QE3 runoff as the Kain operations, they won't lose as much on the flip-side...
    May 14 08:04 AM | 2 Likes Like |Link to Comment
  • The mortgage REITs are lit up bright red (MORT -1.9%), again led by American Capital Agency (AGNC -3.5%) and American Capital Mortgage (MTGE -3%), with Annaly (NLY -3.1%) not far behind. Yes, the 10-year Treasury yield is a 3 bps higher, but there's also rare action in Fed Funds futures, now pricing in a whopping 50 bps in rate hikes by this time 2016. AGNC presents at the JMP Conference at 2 ET. [View news story]
    Recent book value drops are the flip-side of the big gains in NAV you saw from QE3. I'm usually all for trading these with an eye to book value, but here I think you have to keep your eye on NIM/ spreads. Even if there's a 10% decline in NAV, does it make sense to sell out of a co like WMC, with a NIM of 200 bps, CPRs in the 3.5% range, and close to 20% annualized ROE? MTGE is also starting to look like a screaming bargain down here.

    Want out? I'll take your cheap shares...
    May 13 03:37 PM | 1 Like Like |Link to Comment
  • Caesars Entertainment Equity Still Has Essentially No Value: A Capital Structure Arbitrage Trade [View article]
    Great call on CZR--exactly how a capital arb trade ought to work. Something in their capital structure has to give, in one direction or the other. I'd bet that it's going to end in a prepack or some version of an 11 in which the equity gets hosed. But with the uncertain timing, owning the debt gives not only a hedge but generates some carry.
    May 11 09:34 AM | Likes Like |Link to Comment
  • Short Candidates For When The Tide Goes Out [View article]
    Hey Brad,

    Your screen seems like a pretty crude way of identifying candidates--although you pulled up RSH, which is near the top of my 2013 conviction short list. There are far better ways of identifying companies with crushing debt-loads and declining businesses. Start with distressed bonds and the capital structure, working backward, and you'll find dozens of potential shorts where the equity is theoretically worthless.

    But regardless of your methodology, I want to emphatically second the insight behind your article. This current bull market has proven incapable of pricing the risk of bankruptcy, but at some point the inefficiencies have to get re-priced. The frustrating thing is that most of today's distressed cos are like zombies: the equity is not going to crack until the minute the ch. 11 filings come through...

    Coal, solars, distressed retailers, casinos, media--these train wrecks are going to continue to shamble along until suddenly one day they don't. A brutally frustrating market for shorts, on the one hand, but on the other hand, it creates some *amazing* inefficiencies to arbitrage away.
    May 9 04:51 PM | 1 Like Like |Link to Comment
  • Mortgage REITs: Sell In May? Not If Spreads Hold Up [View article]
    BTFD.

    Shares on sale tomorrow with a 28 handle!
    May 2 06:28 PM | 1 Like Like |Link to Comment
  • American Capital Agency Corp. Reports $(1.57) Comprehensive Loss Per Common Share And $28.93 Net Book Value Per Common Share [View article]
    You're about to get a haircut, but hold on for the ride...

    And, FWIW, if you don't understand what this means, you prob shouldn't own mreits.
    May 2 06:23 PM | 1 Like Like |Link to Comment
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