let me get this straight? NLY only buys government backed paper, with absolutely no way of that paper ever going bad now, and NLY mostly holds this to maturity... correct? (unless they seem some huge profit by selling)
NLY borrows money at what ever the rate is that they can get, so they only borrow when they can make a certain spread... correct?
NLY then leverages this by 6 or 9 times, or some odd number like this... correct?
as far as I can tell, with the Government taking over the paper that NLY buys and uses... there is no way that NLY could ever lose money?
not only that, with rates so low, they have a license to print money?
not only that, they have a license to leverage it 7 to 9 times, creating like atleast 8% returns, and in now a days case (low borrowing costs) something like 18% returns?
PLEASE somebody tell me where I am getting this wrong? because I can not see how NLY could NOT make large sums of money?
any real help on this would be appreciated.
1. There could be a supply problem, a shortage of mortages.
2. The Fed could become their biggest competion, keeping the best stuff for themselves.
3. NLY must pay with borrowed money. Much of this borrowed money is from foreign funds, a source that may dry up.The Fed just proved they will not always respect real money (money earned from real labor),they just print the money they need.
4. Maybe this is not so detrimental to the taxpayers as it seems. The Fed handsout freshly printed paper and acquires saleable/rentable real property. Would you trade your living quarters for their pieces of paper, put their printed paper in their bank and live on the street?
I think not, thus the looming shortage of supply for NLY.
According to MSN money central (http://moneycentral.msn.com/ownership?Symbol=NLY) NLY has much larger market cap and higher institutional ownership than it competitors, e.g. CMO or ANH; yet its stock price is moving lower as its competitors are moving up.
Is it possible that institutions are still trying to sell what they can for liquidity purpose?
-NLY buys GSE paper in 75% of cases. Prices of GSE paper have been creamed in the past two weeks and spreads are larger than before the Agency take over. Prices have fallen on what NLY owns.
-NLY has Repo lines based on floating LIBOR. LIBOR has been creamed creating massive losses for NLY.
-Treasury gave a backing that can be rescinded by the new Treas Sec and administration. But they they only guaranty cash flow bu Bond Prices. Prices are what will cause NLY margin calls.
-No license to print money. They are not a commercial bank. They DO NOT BORROW AT FED FUNDS.
Please enlighten us.
What are prices and spreads for, say, 30yr FNMA 5.50s now vs pre-bailout?
Also, if as you say NLY buys GSE MBS "in 75% of cases" what have they bought with the other 25%?
I look forward to your reply.
--------NLY buys GSE paper in 75% of cases. Prices of GSE paper have been creamed in the past two weeks and spreads are larger than before the Agency take over. Prices have fallen on what NLY owns. ------------
ok, but doesn't NLY buy nearly 100% GSE paper? Can someone confirm this? and doesn't NLY hold this paper to maturity in cases where the "prices" are lower than what they bought it at? (always in the 3 year range?) so they always get the price back that they paid... always... can someone confirm this?
and since they only have leverage in the 6 to 9 range, if they were going to get margin calls, wouldn't they have gotten them by now? where are the margin calls?
and NLY is not a commercial bank true, but they say what their lending costs are, and they appear to be the same or nearly the same as what these banks get? is this correct?
Hedgie - The ONLY thing you have been right about is the price of nly stock going down- It has been an easy bet since July, it seems you shortsellers can somehow put a lid on the stock price and beat it down -which you have done for 3 months. Your explanations have NO facts to back it up,just conjecture! You talk a good game, and you confuse many- I hope the hedge funds are paying you- you have a bright future as a propagandist or political consultant!
The assumption regarding the GSE securities in incorrect. When the government stepped in, the yields fell and the value of the securities increased. The fall in NLY today if more likely due to the higher yields on Treasuries and LIBOR. The principal and interest on the GSE securities is 100% backed by the USA.
Regardless of this, NLY will achieve a premium borrowing rate because the loans are secured against US Government guaranteed paper.
Sure, things could go to hell when Palin becomes President, but at least SNL will be funnier.
I'm replying not because I can elucidate, which I can't, but to say that, frankly, I see it the same way you do.
I don't understand the logic of the short sellers. If you and I are right, and obviously I think that we are, these guys are REALLY going to lose their shirts. I too wish somebody would explain to us what their logic is.
There are downside risks--bad management, inverse yield curve, the inherent risk in playing the spread between long and short maturities and yield curves.
Above average yield betokens above average risk in normal times. If we ever get back to those times, maybe NLY's yield will come down with out any dividend reduction. We can always hope! Today, there is still a huge fear factor built in to NLY's price.
----- There are downside risks--bad management, inverse yield curve------
but this is the only "management" who predicted this financial collapse as a "slow motion" train wreck, 2 years before it happened.. and correctly made adjustments in their strategy to prepare. literally the only one.... so how could we ever consider this management as "bad"?
I've never seen anyone more accurate in their analysis as to what "WILL" happen as this management, and i've been looking for a long long time.
I own NLY and have no plans of selling at current levels. However, there are risks.
1) Interest Rates increasing
The likelihood of this is very low in the near future, but long term it's still a risk. Check out the annual report on the SEC page, they provide a chart which details interest rate moves effects on Net Income.
NLY uses 8-14 times leverage. If their sources of credit are pulled quickly this could force them to fire sell assets. However, NLY is currently at 8 times down from 12 earlier in the year, this provides a cushion of extra credit if one of their 30 lines is pulled. The annual report provides some details but no names for their credit lines.
3) Short Selling Gone Wild Volume 3
Were not saved by the SEC short selling ban and it appears shorts have switched from Money Center banks and into NLY at least today.
All in all to me it’s well worth the risk for the great dividend and upside potential.
------ If their sources of credit are pulled quickly this could force them to fire sell assets. -----
this is interesting, and probably a good reason. it could be that someone pulls a NLY credit line, not because of NLY, but because the source is in trouble for some other reason.
that is a good point.
here is another question, Since a lot of institutions are going under, or taken over, they are all regulated by the gov which took them over, meaning they can not leverage as much, meaning they can not make as much money, making NlY's future profits that much more impressive compared to others. even if it is at 8% because some rate goes up, other's returns will be less; making NLY more valuable?