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Annaly Capital Management, Inc. Message Board

  • bjspokanimal bjspokanimal Jul 10, 2013 5:04 PM Flag

    The Market's Overreaction

    I'm not going to sit here and tell you that the slide is over. I learned long ago that market psychology can deviate greatly from fundamentals and hard figures, but I will say this: Eventually, they sync up, because eventually, the market is a reflection of it's fundamentals.

    That said, I'm still thinking about Annaly's disposal of $17 billion of low-yielding assets in Q1 and their assertion that their conservative management philosophy is alive and well. Nobody knows if they re-deployed the proceeds from those sales into additional MBS, but they are professionals, and they did establish a bias trend toward lower leverage. If anybody was going to be hedging and selling during the initial stages of the May/June MBS blowout, odds are that Annaly management would be in the thick of it.

    I also think that the company wanted dry powder for an emphasis on Crexus. With Crexus closing during Q2, the re-deployment of capital from Q1 MBS sales was likely earmarked for that. I would also anticipate that Crexus could provide additional incentive to jettison additional agency MBS during Q2 over and above what a healthy fear of the fed might induce.

    Bottom line: I think Annaly will have played it's hand well during the hugely challenging Q2. They started significant selling in Q1 and likely continued that process in Q2, they're conservative to begin with and more likely than most to hedge proactively, and crexus provides both diversity and a likely delayed application of funding from the sales of MBS.

    The question is, did annaly's book value take a hit that's proportionate with the breathtaking slide in their stock? Given their management style and actions as of march 31st, the answer is clearly no.


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    • Thanks very much for your thoughtful post. Very helpful!

    • In the face of Bernanke continually talking of the Taper and that the US economic
      trend is positive & that long interest rates are at historic lows, how long do you
      mean when you say "eventually"

      I agree with you that eventually things will turn around for the NLY stock price....
      but I think "eventually" for NLY can't start before Q3 2014. By then the long end
      of the MBS yiels will be back in its traditional range, after QE3 operations, then
      NLY can make moves to improve its NII

      • 1 Reply to jackmaster20
      • Good question, jack... the million-dollar question, actually.

        The simple answer is Warren Buffett's answer, which is: "nobody times the market, I just know good value when I see it, and exercise patience".

        Look how long tech stocks were discounting a half-decade worth of stellar earnings with nose-bleed P/E multiples back in the late 90s... the market didn't crash back then until more than 2 years after Warren Buffett screamed "sell" to anybody who would listen.... but by the year 2002, everybody realized that Buffett was, once again, right... and the market finally reverted back to it's fundamentals.

        Right now, mREIT's are significantly discounted because everybody think's there'll be more hits on book value as the fed's tapering ensues. If the market thought the 10-year would plant itself at 2.6% for the next 2 years, then mREIT's would be trading above book value right now. It's all in the anticipation, overlayed over the reality of the past 2 months.

        So, back to your question. My answer is I don't KNOW when, but I do know that it will take the form of a transition from book-value fears to bigger-spreads excitement and that a slow rise in rates is best.
        That said, the fed has SAID they want a slow rise in rates and that fed-funds will remain at 0% until at least 2015. That all spells G-O-O-D from here, but....

        ... ultimately, the market controls the 10-year more than the fed does... the fed was only able to push the 10-year from 2.5% to 1.5% because there was little market resistence. In that vein, remember that as the 10-year rose from 1.5 to 2.6 recently, the fed was still buying $45 billion of long treasuries each month... it just had no impact in the face of the market's determination to react to the fed statement.

        I like NLY under $12, and I would buy my first traunches here via a dollar-cost averaging process. Despite today's snap-back, I still believe NLY could be a "falling knife", however, and I would only move in steps right now.


    • Thoughtful, logical and well said. Thanks.

      Sentiment: Strong Buy

    • I have been a holder of NLY stock for several years and this time the environment seems more complex and difficult than back in 08-09 when the entire market was falling apart. I still think the report card is still unscored for Wellington J Denahan-Norris. She is not a Ferrell and I still think his leadership is missed. You will recall, I think 2011, Wellington made some comments about the MBS market that was completely inappropriate. I am still a holder but watching her actions very closely. These next few quarters will be a big challenge for Annaly management.

      • 2 Replies to anvboy
      • She is the co-founder of the company, but I tend to agree that she may not have the same leadership attributes of Ferrell. I really believe the entire reason behind the external management program is because she doesn't want the brunt of any company deficiencies falling squarely on her shoulders. Regardless, NLY still has the best management team of any mReit!

      • Anvboy, remember that the current fed policy is unlike any that has ever occurred before.

        Usually, the yield curve steepens primarily because of the fed's open-market operations that target fed funds. Thus, when the fed tightens with higher short-term rates, NLY's cost of leverage rises, but they don't necessarily take a significant book-value hit.

        This case is different. This time, the yield curve is steepening, which is a good thing for future spreads, but it's doing so via rising long-term interest rates, which hammers book values on long-dated MBS.

        The question is... if the drop in NLY's price sufficient to fully discount Q2 and future increases in long-term rates? Is the fragile U.S. economy even ABLE to tolerate these rate increases and still grow at more than 2% GDP growth?

        Personally, I think NLY is likely doing a good job managing this, but there will still be an impact. I also think there's a ceiling on how high long rates will go. Even if the fed completely stopped buying MBS, slow growth and any moderation in housing growth would still compel the free market to level the 10-year treasury bellweather rate at 3 or 3.5% and probably not before next year.

        I see the fed trying to hold the 10 year under 3% for the remainder of 2013 just to see how the economy responds. If it responds weakly as the IMF suggests that it will, then the 10 year may just STAY under 3% whether the fed acts to keep it there or not.

        I'm long NLY, but have a lot of dry powder left to deploy further into NLY. I'm in no hurry... dollar-cost averaging this stock may take the rest of this year and part of next, I don't know, but anybody who plunges in while the knife is still falling is ill-advised in doing so. Better to go slowly, but recognize that tremendous value is building in this stock as it falls.


    • I vote animal for ceo. great post someone with some intelligence. Thanks. I'm also very confident with this company. too many doom and gloom people. actually those are the ones who drives the price down. in time fundamentals will prevail. this is at a historically good price. I wish I had a lot more money I'd be buying today.

      • 2 Replies to hardbod775
      • Thx, hardbod. I'm "confident", as you say... and more so with annaly's management than that of anybody else doing primarily agency fixed MBS, but only so much that I know there's a bottom somewhere in the future for annaly. Remember that fear remains out there and that rates are rising off a very low base for MBS and the 10-year.

        Warren Buffett would tell you: "Nobody calls the bottom, but I know good value when I see it".
        That said, I wouldn't grab at a falling knife without a significant amount of "dollar cost averaging" with something like this. The stock is cheap, but given the trend... keep a good sized chunk of dry powder handy for the months to come...

        ... better to see it surge on you with half a position than plummet on you with a full boatload.


      • Agree good post. I feel we will be fine later this year. I expect it to go back up to mid teens by year end.

10.25+0.02(+0.20%)May 22 4:00 PMEDT