American Capital Agency's Q1 2016 Income Statement And Earnings Projection - Part 2

| About: AGNC Investment (AGNC)

Summary

I am projecting American Capital Agency Corp. will report a material net loss on derivative instruments and other securities for the first quarter of 2016.

Most interest rate payer swaps/U.S. Treasury securities experienced a material decrease in rates/yields, which negatively affected valuations.

I am projecting the REIT will report a minor decrease in its management fees expense for the first quarter of 2016 when compared to the prior quarter.

My projections for the company's net loss and earnings per share for the first quarter of 2016 are stated in the "Conclusions Drawn" section of the article.

My current buy, sell, or hold recommendation for American Capital Agency Corp. is stated in the "Conclusions Drawn" section of the article.

Author's Note: PART 2 of this article is a continuation from PART 1, which was discussed in a previous publication. Please see PART 1 of this article for a detailed projection of American Capital Agency Corp.'s (NASDAQ:AGNC) income statement (technically speaking, the company's "consolidated statement of comprehensive income") for the first quarter of 2016 regarding the following accounts: 1) interest income; 2) interest expense; and 3) gain (loss) on sale of agency securities, net. PART 1 helps lead to a better understanding of the topics and analysis that will be discussed in PART 2. The link to PART 1's analysis is provided below:

American Capital Agency Corp.'s Q1 2016 Income Statement Projection - Part 1

Focus of Article:

The focus of PART 2 of this article is to provide a detailed projection of AGNC's consolidated statement of comprehensive income for the first quarter of 2016 regarding the following accounts: 4) "gain (loss) on derivative instruments and other securities, net" (including four "sub-accounts"); and 5) "management fees". PART 2 will also discuss the company's projected net income (loss) and earnings per share ("EPS") amounts.

For readers who just want the summarized account projections, I would suggest to scroll down to the "Conclusions Drawn" section at the bottom of the article. By understanding the trends that occurred within AGNC's operations during the first quarter of 2016, one can apply this information to sector peers as well. As such, the discussion/analysis below is not solely applicable to AGNC, but to the fixed-rate agency mortgage real estate investment trust (mREIT) sector as a whole. This includes, but is not limited to, the following fixed-rate agency mREIT peers: 1) ARMOUR Residential REIT Inc. (NYSE:ARR); 2) CYS Investments Inc. (NYSE:CYS); 3) Annaly Capital Management Inc. (NYSE:NLY); and 4) Orchid Island Capital Inc. (NYSE:ORC).

4) Gain (Loss) on Derivative Instruments and Other Securities, Net:

- Estimate of ($910) Million; Range ($1.160) Billion-($660) Million

- Confidence Within Range = Moderate to High

- See Boxed Blue Reference "4" in Tables 4 and 6 Below Next to the March 31, 2016 Column

Projecting AGNC's gain (loss) on derivative instruments and other securities, net account is an analysis that involves several sub-accounts. This includes making assumptions within these derivative sub-accounts during the current quarter. One will never "fully" know management's derivatives activities for any given quarter until results are provided to the public via the company's quarterly SEC submissions. However, one can understand management's overall derivative strategy and make a projection on these derivative sub-accounts using the balances that were represented at the end of the previous quarter. Such a detailed analysis is wise to perform due to the typical events that unfold with regard to MBS prices, the fixed pay rate on newly created interest rate swaps, and U.S. Treasury yields. I believe this detailed analysis is critical once again with regard to the first quarter of 2016. When using this methodology, along with deciding specific quarterly assumptions, I have typically provided highly accurate projections within this account over the past several years (within a stated range).

Now let us take a look at the company's gain (loss) on derivative instruments and other securities, net account. I show my projection for this figure in Table 4 below. All past (ACTUAL) sub-account figures within Table 4 are derived from AGNC's quarterly SEC submissions via the company's 10-Q or 10-K, where applicable. All projected (ESTIMATE) sub-account figures within Table 4 below are calculated and derived from multiple tables/charts that will not be shown within this particular article.

Table 4 - AGNC Quarterly Gain (Loss) on Derivative Instruments and Other Securities, Net Projection (All Sub-Accounts)

(Source: Table created entirely by myself, partially using AGNC data obtained from the SEC's EDGAR Database)

Within AGNC's gain (loss) on derivative instruments and other securities, net account is the following four material sub-accounts that will be discussed below:

a) TBA MBS

b) Interest Rate Swaps

c) Interest Rate Swaptions

d) U.S. Treasury Securities

Each of the four material derivative sub-accounts listed above will be separately analyzed and discussed in corresponding order of the blue references under the "Ref." column in Table 4 above.

a) TBA MBS (Net Long Position as of 12/31/2015):

- Estimate of $215 Million; Range $65 - $365 Million

- Confidence Within Range = Moderate to High

- See Black-Highlighted, Blue-Referenced Sub-Account "a)" in Table 4 Above Next to the March 31, 2016 Column

Let us first briefly get accustomed with this type of derivative instrument. Typically, AGNC uses a combination of both long and (short) TBA MBS contracts during any given quarter. The company enters into TBA contracts with a long position where it agrees to buy, for future delivery, MBS with certain predetermined prices, face amounts, issuers, coupons, and stated maturities. AGNC enters into TBA contracts with a long position as an off-balance sheet means of investing in and financing MBS. Since TBA contracts with a long position are ultimately an extension of the balance sheet, this increases AGNC's "at-risk" leverage. The company enters into TBA contracts with a (short) position where it agrees to sell, for future delivery, MBS with certain predetermined prices, face amounts, issuers, coupons, and stated maturities. Since TBA contracts with a (short) position are ultimately a reduction of the balance sheet, this decreases AGNC's at-risk leverage.

There are two main factors that affect this derivative sub-account's valuation in a given quarter. The first factor is the dollar roll income (expense) generated on the net long (short) TBA MBS position. The second factor is the realized valuation gain (loss) upon the "settlement" of all TBA MBS contracts and the unrealized valuation gain (loss) on all contracts that have yet to be settled during the quarter (one instance: a "re-rolled" TBA MBS position).

For the fourth quarter of 2015, AGNC reported a TBA MBS total net valuation loss of ($32) million. When broken out, the company reported "net dollar roll" ("NDR") income of $53 million and a TBA MBS net valuation loss of ($85) million. As of 9/30/2015, AGNC had a net long TBA MBS position of $7.1 billion (based on notional amount). It had a net long TBA MBS position of $7.3 billion as of 12/31/2015. When calculated, AGNC increased the company's net long TBA MBS position by $0.2 billion during the fourth quarter of 2015.

As will be discussed further in PART 3 of this article, MBS prices net increased within most fixed-rate agency MBS coupons during the first quarter of 2016. As such, three general scenarios likely occurred within this derivative sub-account. If the assumption is made that AGNC materially increased its net long TBA MBS position during January 2016, then the company would have a material total net valuation gain for this derivative sub-account (higher end of my projected range). If the assumption is made that AGNC materially decreased the company's net long TBA MBS position during the first quarter of 2016 (including the notion of changing this balance to a net (short) position), then the company would have a minor total net valuation gain for this derivative sub-account (lower end of my projected range). If the assumption is made that AGNC only slightly altered its net long TBA MBS position during the first quarter of 2016, then the company would have a modest-to-material total net valuation gain for this derivative sub-account.

Through interpreting management's comments via several prior investor presentations and earnings conference calls, I have made the assumption AGNC only slightly altered its net long TBA MBS position as of 12/31/2015 during most of the first quarter of 2016. Therefore, I believe the third scenario likely occurred. Through a detailed analysis that will be omitted from this particular article, when combining the company's projected quarterly NDR income of $65 million and a quarterly net valuation gain of $150 million, I am projecting AGNC's TBA MBS had a total net valuation gain of $215 million for the first quarter of 2016.

b) Interest Rate Swaps (Net (Short) Position as of 12/31/2015):

- Estimate of ($950) Million; Range ($1.200) Billion-($700) Million

- Confidence Within Range = Moderate to High

- See Purple-Highlighted, Blue-Referenced Secondary Sub-Accounts "b)" in Table 4 Above Next to the March 31, 2016 Column

Let us first discuss the recent history of this derivative sub-account, which will lead to a better understanding of my projected total net valuation loss for the first quarter of 2016. AGNC had a net (short) interest rate swaps position of ($40.5) billion as of 12/31/2015 (based on notional amount). The company had no interest rate swap additions and interest rate swap expirations or terminations of $4.7 billion during the fourth quarter of 2015.

There was little activity within AGNC's interest rate swaps during the fourth quarter of 2015 for two main reasons. First, as was discussed in PART 1 of this article, the company only slightly decreased its on-balance sheet MBS portfolio during the fourth quarter of 2015 (based on par value). As such, to match a slight net decrease to the company's MBS portfolio, the company slightly decreased its net (short) interest rate swaps position as well. Second, due to the Federal Open Market Committee's ("FOMC") rhetoric regarding a likely increase to the Federal ("Fed") Funds Rate in December 2015, management believed the risks associated with the fixed-rate agency MBS market remained elevated going into the first quarter of 2016. Due to AGNC's continued "cautious" risk management strategy, the company's hedging coverage ratio only decreased from 96% to 87% during the fourth quarter of 2015. I believe this was still a fairly "elevated" ratio, especially knowing what occurred with rates/yields during the first quarter of 2016.

Using Table 4 above as a reference, there are two secondary sub-accounts to discuss when projecting a total net valuation gain (loss) for AGNC's interest rate swaps. The first secondary sub-account is its "net periodic interest costs of interest rate swaps" expense. If one recalls, this figure was first discussed in the company's interest expense account during PART 1 of this article. With regard to its interest rate swaps net (short) position as of 12/31/2015, the company had a weighted average fixed pay rate of 1.89% and a weighted average floating receive rate of 0.40%. However, when excluding forward-starting interest rate swaps, this weighted average fixed pay rate was 1.75%.

When all factors and assumptions are taken into consideration, I project AGNC will record a slight decrease in its net periodic interest costs of interest rate swaps expense for the first quarter of 2016. This is due to the following three assumed interest rate swap factors during the quarter: 1) relatively unchanged average notional balance, as AGNC remained fairly cautious regarding its risk management strategy; 2) notable decrease in the weighted average fixed pay rate on all newly created contracts when compared to terminated/settled contracts (mainly due to the net decrease in rates); and 3) relatively unchanged average floating receive rate on all contracts. Through a detailed analysis that will be omitted from this particular article, I am projecting the company had a net periodic interest costs of interest rate swaps expense of $95 million for the first quarter of 2016. This calculates to a decreased expense of ($7) million when compared to the prior quarter.

The second secondary sub-account to discuss relates to the net valuation gain (loss) on AGNC's interest rate swaps. With the exception of very short tenors/maturities, there was a material decrease in the fixed pay rate of all interest rate payer swap contracts during the first quarter of 2016. As such, results across the mREIT sector (with regard to this particular derivative sub-account) will not vary as significantly as seen in prior quarters.

The fixed pay rate on interest rate swap contracts with a tenor/maturity towards the shorter end of the yield curve had a modest net decrease in valuations during the first quarter of 2016. The fixed pay rate on interest rate swap contracts with a tenor/maturity towards the middle and longer end of the yield curve had a material net decrease in valuations during the first quarter of 2016. It should be noted, a sizable move in valuations occurred throughout the first quarter of 2016. Companies which had a higher hedging coverage ratio heading into the first quarter of 2016 were negatively affected by the sharp decrease in rates/yields, which ultimately led to more severe valuation losses. Companies which had a lower hedging coverage ratio heading into the first quarter of 2016 were not as negatively affected by the sharp decrease in rates/yields, which ultimately led to less severe valuation losses.

There were two main reasons rates/yields materially net decreased during the first quarter of 2016. First, there was weakness within certain pockets of the U.S./global debt/equity markets, which caused a spike in demand for "safe haven" investments (including U.S. Treasuries, agency MBS, and high-grade institutional bonds). Second, several central banks, including the "European Central Bank" ("ECB") and "Bank of Japan" ("BOJ"), continued to implement stimulus measures, which continued to drive global rates/yields lower (negative rates/yields in some instances). Due to the global ramifications of these policies/events, the U.S. market's reaction was that the FOMC would need to lower/delay its projection on the number of subsequent FED Funds Rate increases during 2016. At the start of the year, the FOMC was likely planning on increasing the Fed Funds Rate four times during 2016 (roughly a 0.25% rate hike each quarter). However, mainly due to the policies/events stated above, it subsequently "lowered" its projection on the number of Fed Funds Rate increases during 2016. Currently, I believe the FOMC has implied there will now only be two Fed Funds Rate increases during 2016. More "dovish" market participants have stated they believe there will likely only be one (or even zero) Fed Funds Rate increases during 2016.

Through a detailed analysis that will be omitted from this particular article, I am projecting AGNC's second secondary sub-account had a net valuation loss of ($855) million for the first quarter of 2016. When both secondary sub-accounts are combined, I am projecting the company's interest rate swaps had a total net valuation loss of ($950) million for the first quarter of 2016.

c) Interest Rate Swaptions (Net (Short) Position as of 12/31/2015):

- Estimate of ($17) Million; Range ($67)-$33 Million

- Confidence Within Range = Moderate to High

- See Pink-Highlighted, Blue-Referenced Sub-Account "c)" in Table 4 Above Next to the March 31, 2016 Column

Let us first briefly get acquainted with this type of derivative instrument. Interest rate swaptions are options to enter into underlying interest rate swap contracts. Whereas interest rate swap contracts have no initial "up-front" costs (gains and losses are incurred as interest rates fluctuate over the life of the swaps), interest rate swaptions have implicit up-front costs (similar to an option contract, generally speaking).

Let us discuss the recent history of this derivative sub-account, which will lead to a better understanding of my projected total net valuation loss for the first quarter of 2016. AGNC had a net (short) interest rate swaptions position of ($2.2) billion as of 12/31/2015 (based on the notional balance of the underlying interest rate swaps). The company had no interest rate payer swaption additions and $1.5 billion of interest rate payer swaption exercises, expirations, or terminations during the fourth quarter of 2015. As of 12/31/2015, its interest rate payer swaptions had a weighted average of 4 months until expiration, with an underlying interest rate swaps weighted average tenor/maturity of 7.0 years.

Through a detailed analysis that will be omitted from this particular article, I am projecting AGNC's interest rate swaptions that were either held throughout the quarter or entered into during the quarter had a net valuation loss of ($5) million for the first quarter of 2016. I am also projecting the company exercised, had expired, or terminated interest rate payer swaptions for a net valuation loss of ($12) million (expired worthless). Therefore, when these two figures are combined, I am projecting itss interest rate swaptions had a total net valuation loss of ($17) million for the first quarter of 2016. The probability of AGNC's existing interest rate swaptions eventually being worthless continues to be high.

d) U.S. Treasury Securities (Net (Short) Position as of 12/31/2015):

- Estimate of ($165) Million; Range ($315)-($15) Million

- Confidence Within Range = Moderate

- See Dark Blue, Brown, and Teal-Highlighted, Blue-Referenced Secondary Sub-Accounts "d)" in Table 4 Above Next to the March 31, 2016 Column

Let us first briefly get acquainted with this type of derivative instrument. AGNC purchases (or sells short) U.S. Treasury securities and U.S. Treasury security futures to help mitigate the potential impact of changes in MBS prices (hence, the valuation of a majority of the company's investment portfolio). It borrows securities to cover U.S. Treasury (short sales) under reverse repurchase agreements. The company accounts for these derivative instruments as "security borrowing transactions" and recognizes an obligation to return the borrowed securities at fair market value ("FMV"), based on the current value of the underlying borrowed securities.

Let us discuss the recent history of this derivative sub-account, which will lead to a better understanding of my projected total net valuation loss for the first quarter of 2016. AGNC had the following three derivative secondary sub-account positions as of 12/31/2015: 1) long U.S. Treasury securities of less than $0.1 billion; 2) (short) U.S. Treasury securities of ($1.7) billion; and 3) U.S. Treasury security futures sold (short) of ($1.9) billion. This is based on each secondary sub-account's face amount ("par"). When combining all three secondary sub-accounts together, the company increased its net (short) U.S. Treasury securities position from ($1.3) billion as of 9/30/2015 to ($3.5) billion as of 12/31/2015. AGNC was net (short) U.S. Treasury securities with a 5-, 7-, and 10-year maturity.

Three likely scenarios occurred within this derivative sub-account during the first quarter of 2016. If the assumption is made that AGNC switched back to a net long U.S. Treasury securities position during the first half of the first quarter of 2016, then the company would likely only have a minor total net valuation loss for this derivative sub-account (higher end of my projected range). If the assumption is made that AGNC modestly-to-materially increased its net (short) U.S. Treasury securities position during the first quarter of 2016, then it would likely have a material total net valuation loss for this derivative sub-account (lower end of my projected range). If the assumption is made that the company maintained a minor-to-modest net (short) U.S. Treasury securities position throughout most of the quarter or switched to a minor net long U.S. Treasury securities position towards the end of the quarter, then the company would likely have a modest total net valuation loss for this derivative sub-account. The amount of the total net valuation loss would be dependent on the timing of the net long (short) positions, as yields fluctuated throughout the quarter. These three scenarios are not "every" possible scenario that could have occurred within this derivative sub-account. However, I believe these three scenarios would have caused the greatest amount of FMV fluctuations. To put things in better perspective, yields on 5-, 7-, and 10-year U.S. Treasury securities decreased 55, 55, and 49 basis points ("bps") during the first quarter of 2016, respectively. Simply put, this was a sharp decrease in yields (proportionately speaking) over the course of one quarter.

Unless management modestly-to-materially increased AGNC's net long position very early in the quarter, the company had at least a modest net valuation loss within this derivative sub-account for the first quarter of 2016. Since U.S. Treasury securities are one of the most liquid investments in the marketplace, this is an entirely possible notion to consider. The company trades U.S. Treasury securities throughout the quarter. However, with that being said, I have made the assumption AGNC was not overly "bearish" on U.S. Treasury yields during the quarter. Through a detailed analysis that will be omitted from this particular article, I am projecting AGNC's U.S. Treasury securities and U.S. Treasury security futures had a total net valuation loss of ($165) million for the first quarter of 2016. I would consider this more of a "cautious" projection.

As stated earlier, all remaining derivative sub-accounts within Table 4 above are deemed immaterial for discussion purposes. As such, these immaterial derivative sub-accounts will be omitted from any analysis, even though a projected net valuation gain (loss) has been included in Table 4. This includes valuation projections on the following derivative sub-accounts: 1) interest-only and principal-only strips; 2) debt on consolidated variable interest entities ("VIE"); 3) REIT equity securities; and 4) put options (when applicable).

When combining all the derivative sub-accounts together (both material and immaterial), I am projecting AGNC's derivative instruments and other securities, net account, had a total net valuation loss of ($910) million for the first quarter of 2016.

A Brief Discussion of MTGE's and NLY's Derivatives Portfolio:

I see some general similarities between AGNC and the company's affiliate, American Capital Mortgage Investment Corp. (NASDAQ:MTGE), regarding hedging strategies. However, there usually are a few differences between AGNC's and MTGE's derivatives portfolio as well. One difference was each company's TBA MBS position as of 12/31/2015 (proportionately speaking). As stated earlier, AGNC had a net long TBA MBS position of $7.3 billion as of 12/31/2015. This was equal to 14% of its on-balance sheet MBS portfolio. In contrast, MTGE had a net long TBA MBS position of less than $0.1 billion as of 12/31/2015. This was equal to only 1% of its on-balance sheet agency MBS portfolio. Another difference to note was MTGE had a modestly lower net (short) interest rate swaps position as of 12/31/2015 when compared to AGNC (proportionately speaking). When all derivative sub-accounts are taken into consideration, AGNC and MTGE had a hedging coverage ratio as of 12/31/2015 of 87% and 77%, respectively.

When it comes to AGNC's sector peer NLY, I see several differences that would affect the derivative sub-accounts described above. I will note a few of these differences. AGNC and NLY had a modest difference in each company's TBA MBS position as of 12/31/2015. As discussed earlier, AGNC had a net long TBA MBS position of $7.3 billion as of 12/31/2015. In contrast, NLY had a net long TBA MBS position of $13.8 billion as of 12/31/2015. Since NLY had a material net long TBA MBS position as of 12/31/2015, the probability of the company generating a modest-to-material amount of NDR income during the first quarter of 2016 was relatively high. Simply put, NLY continued to utilize the financing advantage of the TBA forward market. In addition, it likely had a larger net valuation gain within the company's TBA MBS portfolio when compared to AGNC during the first quarter of 2016 (proportionately speaking).

Second, AGNC and NLY had a material difference in each company's hedging coverage ratio as of 12/31/2015. As stated above, AGNC had a hedging coverage ratio of 87%. In sharp contrast, NLY had a hedging coverage ratio of only 53%. As such, NLY was more vulnerable if mortgage interest rates/U.S. Treasury yields modestly-to-materially increased during the first quarter of 2016. However, this specific scenario did not occur. In fact, basically the opposite occurred, as mortgage interest rates/U.S. Treasury yields across basically the entire yield curve sharply decreased. As such, NLY's lower hedging coverage ratio at the start of the first quarter of 2016 was an advantage for the company regarding a less severe total net valuation loss within its derivatives portfolio. Further analysis of NLY's MBS and derivatives portfolios was discussed in the following two-part article:

Annaly Capital's BV, Dividend, And Valuation Compared To 17 mREIT Peers (Post Q4 2015 Earnings) - Part 1

Annaly Capital's BV, Dividend, And Valuation Compared To 19 mREIT Peers (Post Q4 2015 Earnings) - Part 2

5) Management Fees:

- Estimate of $27 Million; Range $24-$30 Million

- Confidence Within Range = High

- See Boxed Blue Reference "5" in Tables 5 and 6 Below Next to the March 31, 2016 Column

AGNC has a base management fee paid in arrears equal to an amount that is 1/12th of 1.25% of the company's equity balance. Equity is defined as the company's month-ended stockholders' equity, adjusted to exclude the effect of any unrealized gains (losses) included in either retained earnings or accumulated OCI/(OCL).

I show my projection for this figure in Table 5 below. All past (ACTUAL) figures within Table 5 are derived from the company's quarterly SEC submissions via its 10-Q or 10-K, where applicable. This excludes all recalculated figures and ratios. I have gathered specific information derived from multiple tables/charts for a more detailed analysis of AGNC's management fees expense account.

Table 5 - AGNC Quarterly Management Fees Projection

(Source: Table created entirely by myself, partially using AGNC data obtained from the SEC's EDGAR Database [link provided below Table 4])

Using Table 5 above as a reference, I am projecting AGNC's management fees expense to decrease by ($1) million for the first quarter of 2016 when compared to the fourth quarter of 2015 ($27 million versus $28 million). Further analysis of this account is unwarranted.

Side Note: Two remaining accounts within AGNC's consolidated statement of comprehensive income that affect the company's net income (loss) amount are the following: 1) general/administrative expenses; and 2) income tax provision (benefit). These two accounts are immaterial for discussion purposes and will be excluded from any analysis within this article.

A) Net Income (Loss):

- Estimate of ($717) Million; Range ($967)-($467) Million

- Net Loss Available to Common Shareholders of ($2.16) Per Share (Excluding OCI/(OCL)); Range ($2.91)-($1.42) Per Share

- Confidence Within Range = Moderate to High

- See Red Reference "A" in Table 6 Below Next to the March 31, 2016 Column

Finally, let us look at my projection for AGNC's quarterly net loss for the first quarter of 2016. This information is provided in Table 6 below.

Table 6 - AGNC Quarterly Net Income (Loss) Projection

(Source: Table created entirely by myself, partially using data obtained from AGNC's quarterly investor presentation slides)

Table 6 is a summation of the following consolidated statement of comprehensive income accounts for the first quarter of 2016: 1) interest income of $325 million; 2) interest expense of $88 million; 3) loss on sale of agency securities, net of ($10) million; 4) loss on derivative instruments and other securities, net of ($910) million; 5) management fees of $27 million; 6) general and administrative expenses of $7 million; and 7) excise tax of $0. Therefore, when these seven accounts are combined, I am projecting the company had a net loss of ($717) million for the first quarter of 2016. After accounting for AGNC's quarterly preferred stock dividends, this would be earnings available to common shareholders of ($2.16) per share.

Conclusions Drawn (PART 2):

To sum up the analysis above, I am projecting AGNC will report the following account figures for the first quarter of 2016 (refer back to Table 6 above):

4) Quarterly Net Loss on Derivative Instruments and Other Securities of ($910) Million

5) Quarterly Management Fees of $27 Million

I am projecting AGNC will report the following net loss and EPS amounts for the first quarter of 2016 (refer back to Table 6):

A) Quarterly Net Loss of ($717) Million and Earnings Available to Common Shareholders of ($2.16) Per Share

AGNC's projected net loss of ($717) million for the first quarter of 2016 is materially worse when compared to net income of $588 million for the fourth quarter of 2015. This is mainly due to the company's projected net valuation loss of ($910) million pertaining to its derivatives portfolio for the first quarter of 2016. For the same account in the prior quarter, it recognized a net valuation gain of $331 million.

Even though I am projecting AGNC will report a material net loss for the first quarter of 2016, readers should also understand I am projecting the company will report a material OCI amount, which will be projected in PART 3 of this article. As stated in PART 1 of this article, AGNC's OCI/(OCL) amount is part of the company's consolidated statement of comprehensive income, but EXCLUDED from the net income (loss) and EPS amounts.

As such, I strongly suggest holding off on a "final verdict" regarding AGNC's projected results for the first quarter of 2016 until PART 3 of this article is released. In my professional opinion, I believe AGNC's "comprehensive income (loss)" amount is more important than the company's net income (loss) and EPS amounts.

My BUY, SELL, or HOLD Recommendation:

I typically do not provide my BUY, SELL, or HOLD recommendation for AGNC until all parts of an article are provided to readers. However, for this quarter, I decided to provide my recommendation to readers so there is a better sense on my thoughts regarding the company's current valuation (without having to wait until PART 3). I would stress beforehand, this recommendation is based on ALL my AGNC account projections, even accounts that will be discussed in PART 3. All I ask is to please be patient for PART 3, as I am busy this time of the year (see my profile page - pertains to my professional career). Also, please do not ask for my AGNC "book value" ("BV") projection as of 3/31/2016 until it is provided in the applicable future article.

From the analysis provided above, including additional factors not discussed within this article, I currently rate AGNC as a SELL when I believe the company's stock price is trading at less than a material (10%) discount to my projected BV as of 3/31/2016, a HOLD when trading at or greater than a (10%) but less than a (20%) discount to my projected BV as of 3/31/2016, and a BUY when trading at or greater than a (20%) discount to my projected BV as of 3/31/2016.

Therefore, I currently rate AGNC as a HOLD.

This recommendation considers the following mREIT factors: 1) projected future MBS price movements; 2) projected future derivative valuations; and 3) projected near-term dividend per share rates. It also considers the recent lowered probability of several Fed Funds Rate increases by the FOMC during 2016 due to recent macroeconomic trends/events.

Final Note: PART 2 of this article is only a PARTIAL analysis of AGNC's consolidated statement of comprehensive income for the first quarter of 2016. As such, a "final" conclusion will not be provided yet. PART 3 of this article will just pick up where PART 2's analysis ends. PART 3 of this article will discuss AGNC's projected OCI/(OCL) and comprehensive income (loss) amounts. This will be followed by a projection of its BV as of 3/31/2016 and 4/22/2016, which will be available to readers prior to the company's earnings press release for the first quarter of 2016 in late April.

Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader's current investing strategy. By reading this article, I hope readers can better understand how AGNC (or any mREIT) generates income, incurs expenses, values assets held for investment, and mitigates risk.

Disclosure: I am/we are long AGNC, MTGE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I currently have no position in ARR, CYS, NLY, or ORC.

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