What do all of you think of this glowing NLY report below by Motley fool? And you, big daddy? -)
So, where's the opportunity? The picture painted above is not a pretty one at all for the mortgage REITs. The miniature interest rate yields, combined with an asset base that remains in flux due to massive prepayments, spell all sorts of trouble. But, here's the thing -- as the dividend yield for Annaly (and its competitors) will attest, everyone knows all of this.
Annaly's management has made a very conscious choice: It only deals in mortgage securities backed by single family mortgage loans. They're issued by agencies of the United States government -- Fannie Mae (NYSE: FNM - News), Freddie Mac (NYSE: FRE - News), and Ginnie Mae, all of which have actual or implied credit ratings of AAA. As such, Annaly has not gone out chasing after higher yielding (and higher risk) mortgage securities. Further, Annaly management does not use any fancy derivatives, swaps, options, or other hedge tools to insure its portfolio (all of which come at a cost). Rather, they simply use what's known as a barbell strategy. They match their adjustable rate assets with variable rate borrowings, so that if there is a rapid change in interest rates, a large part of their portfolio will move in correlation. They also hold a balanced mix of fixed-rate assets and floating ones, the former acting as a hedge against prepayment, the latter against moves in interest rates.
All of this means Annaly takes no credit risk whatsoever. In its SEC filings, under credit losses, you see a short, terse paragraph that basically says "none," using a few additional words. Plus, all of Annaly's assets are marked "available for sale," so they are carried on the balance sheet at estimated current market value rather than the potentially distorting historical amortized cost.