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Annaly Capital Management, Inc. Message Board

  • bjspokanimal bjspokanimal Jul 10, 2013 5:47 PM Flag

    Deep Thinkers: Consider the Validity of Each Of These Statements...

    Will continued strength in housing compel the fed to stay on track to end MBS buying? Yes.

    Will the record surge in long-term interest rates in Q2 compel the fed to try to slow the rate of increase in MBS yields in the months to come? Yes... more gradual means less disruptive.

    Will economic conditions compel the fed to boost the fed funds rate off of zero prior to 2015? No.

    Why? Because in spite of all the stimulus, both monetary (0% fed funds, QE3, Operation Twist) and fiscal (huge deficits), there is little capital spending in America given our high tax rates on business and investment and the prospects for only sluggish growth. Without sufficient money velocity borne out of more than 2% GDP growth or capital deployment, there's little fuel for inflation and insufficient growth to hit the fed's 6.5% unemployment rate by 2015. And yes, Virginia... the fed DOES look at the record low levels in the "labor participation" rate.

    Given the above, will MBS spreads widen? Yes, and quite significantly. Not only will MBS rates rise without a corresponding rise in fed funds (eg; repos), but the rise in long term rates will help to #$%$ the economic growth that's necessary for the fed to begin considering a rise in fed funds. We could well end up just like japan has been for the last 2 decades over the next few years in in America.

    How about the current book-value inspired declines? They are/will impact annaly... more than they will impact m-REITs that buy variables or commercial... but less than other m-REIT's that invest primarily in fixed agencies. Crexus diversification, a continuation of Q1's $17 billion in MBS sales, and a conservative philosophy at NLY that compels management to hedge first and worry about earnings after the storm has blown through... are all part of the reason why NLY will continue to fare better than other fixed, agency buyers.

    For more discussion, see the nearby, accompanying post.


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    • Wrong on capital spending. Corporate taxes, with all the tax breaks companies get, are exceedingly low. Apple pays nearly no U.S. taxes and dozens of other huge companies do the same. {GE} The reason for weak capital spending is LACK OF DEMAND. You show expansion-minded managers a way to sell more of what they produce and they will spend money big time. But you don't won't to increase capacity too much faster than demand or you get stuck with unsold inventory. I have headed three substantial businesses in my lifetime. I am certain what solid, aggressive managers believe. More companies now do prefer to hire people for less than 30 hours a week so they can be classified as part-time and benefits are reduced accordingly. Some are letting full-time people go and replacing them with part-time people. More people are going to have to work two jobs to make an adequate living because every company has to stay competitive or close its doors. Reducing cost of labor is a way to keep the machines humming.

      • 1 Reply to t4two45
      • You are a "keynsian", t4two45. You believe that demand is more necessary to compel business to expand capacity than low taxes and financial incentives are (eg: supply side).

        Currently, and for the past 4 years, the U.S. has been pumping out huge and massive amounts of the keynsian stimulus that you advocate... car buying consumer incentives... home buying consumer incentives... and most importantly, massive, trillion dollar deficits that pump way more spending power into people's pockets than is taken out of them now that 47% of americans pay no federal income tax.

        The fed has also poured gasoline onto all that keynsian stimulus... with QE3, operation twist and 0% fed funds... the first 2 being stimulus measures that are un-precedented in any prior economic cycle.

        The result of all that "demand-stimulating keynsian stimulus" that you advocate?

        4 years of dismal capital spending in America, and the slowest GDP growth in any post-recession period since world war 2.

        The best economies of the world gun their businesses growth with favorable tax and regulatory incentives. The worst economies have high business taxes and shoot up keynsian stimulus on a regular basis.

        China's economy has been growing at a solid clip since the incentives of capitalism were introduced many years ago. The growth has occurred without any real keynsian stimulus to spur demand within china. It is only now that the country is looking at ways to stimulate consumer demand.

        Above all else, Keynsian stimulus is a way for liberal politicians to say that we can both grow the economy and have a great time doing it with lots of good 'ol american consumption. It also allows them to say that they don't have to favor the wealthy in the process...

        ... the wealthy are all those people who are avoiding America's ultra-high taxes by investing in other countries... building THEIR businesses and hiring THEIR citizens...

        ... or diving into un-productive tax shelters.

        Hope this helps.


    • I agree with most of what you write, but do not understand your comment concerning there being "little capital spending in America given our high tax rates on business." The present corporate tax rates were adopted in 1986. If those tax rates are inhibiting capital spending now, why didn't they inhibit investment during the phenomenal economic expansion during the 90's, when 21 million jobs were added between 1993 and 2000?

      • 1 Reply to c_stan22
      • The figures on capital spending in the U.S. are self explanatory. Cap-ex took a hit everywhere during the crash and "great-recession", but have recovered only tepidly in the U.S. in recent years. Again, you can have all the keynsian stimulus you want to, but you can't grow the economy when companies are only spending what's necessary to optimize the capaicty they have rather than growing thier capacity.

        The corporate taxes have many explanations that are too numerous to detail. You have the double taxation of dividends, indexing, and exclusions to consider. Since the crash, other countries have been lowering their taxes to attract investment capital and corporate expansion whereas the U.S. has not... leaving top US rates the highest in the world. A large percentage of other countries also don't tax their domiciled companies for the difference between what their foreign subsidiaries pay in other countries and what the rate is at the hope country... Compare that to a U.S. company that pays an additional 25% tax on re-patriated earnings made in another country where the corporate rate was 10%... a Hong Kong company would have only paid the 10% and could have re-patriated the money back to Hong Kong without additional taxes.

        I could go on, but hopefully you get the point. There was even a time early in Barack Obama's presidency when he proposed charging foreign earnings the ENTIRE 35% rate REGARDLESS of what they paid in the country where the money was made...

        ... fortunately, even congressional democrats saw that as the extreme proposal that it was, and rejected it.... so... it could be even worse than it IS, c-stan.

        Hope this helps,


    • Thank you, Ben Bernanke, for confirming the second point in this post yesterday afternoon.

      This is no boast... just common sense and listening to what the fed has been saying all year... that they want the "taper" to be "gradual". If the 10-year T-bond yield rises 40% in barely 2 months, that's not gradual and it runs counter to the fed's intentions. That has everything to do with Bernanke's soothing words and reassurances yesterday that there's no hurry with the taper.

      Just a couple of weeks, and we'll find out if Annaly continued it's $17 billion worth of MBS selling from Q1 right into Q2. There would have to be a certain amount of "luck" for Annaly to have liquidated and hedged heavily ahead of the surge in rates...

      ... but I would bet that a company with a conservative bent would do it before a more aggressively managed company would.


    • The bond market traders, not Bernanke, now control the MBS and 10 year
      Treasury market pricing....

      Re-fis are gone but new home mortgage activity remains good.

      Bernanke NOW can not determine gradual or disruptive.....that's now
      being done by the market. Bernenke can try & has some impact but
      the markets are in charge now.

      And lastly, the repo market has remained steady. Cost of funding is
      not the issue presently.

      • 1 Reply to jackmaster20
      • Good point, jack, but consider this:

        The fed is like a 170 pound man leading around 1,100 pound, domesticated horse, which represents the market.

        Under normal circumstances, the fed can lead the horse, because the fed is persuasive and is backed up with infinate resources. However, if the horse is "spooked", by the fed or otherwise, it can easily escape the fed's noose and run around completely independently of the fed's control. Under such a circumstance, the fed would have to excercise immense persuasive abilities to re-gain control over the horse...

        ... which is what Bernanke was doing yesterday.

        To expand... with the 10-year and MBS, the fed is a 170 pound man leading an 1,100 pound horse.
        With fed funds, the fed is a 170 pound man leading a 24 pound Jack Russell Terrier.

        My thoughts, anyway. Appreciate your point.


    • I agree, but don't the largest hits come from repo's? From my understanding repo's can not be adjusted or maybe I'm wrong?

      • 1 Reply to apdamic
      • No. Repurchase agreements are the short term instruments with which m-REIT's fund their leverage. They usually mature in 40 to 50 days time. Their yields reflect movements in the fed funds rate. The fed funds rate is currently 0 to 1/4% and likely to stay there until 2015 or later.

        The "hits" in book value come from rising rates on the MBS that companies like NLY buy. Since they are long term maturities, their market value fluctuates widely with changes in long term interest rates.

        Annaly sold it's $17 billion of MBS late enough in Q1 to be left with an overhang of repos that were associated with leveraging the MBS that they sold. They only mentioned that because there was about a month or so late in Q1 where the cost of those repos were not offset by the intestest income that had previously come from the MBS that were sold and leverage was briefly over-stated until they matured.

        Hope this helps,


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