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Linn Energy, LLC (LINE) Message Board

  • jackhiller@ymail.com jackhiller Dec 6, 2012 4:53 AM Flag

    Friendly advice re energy sector and Hybrid MREITs

    Generally, with the hybrid MREITs trading with yields of between 14%-high 16%, I think they are safer plays for making money over the next four years, than any combination of cap gains and dividends. Energy is in oversupply (excluding considerations of supply disruption from the ME), and the major world economies are suffering from two long term problems:
    1) The governments of the major economies are all operating with high debt, and debts are being increased, with payback from monetized currencies (the EC recently sidestepped the Maastricht Treaty arrangement for establishing the euro with monetization barred), and taxes are eating funds that could otherwise capitalize their economies. They are all doing poorly and apt to recede next year, and the next...
    2) Western Europe, Japan, and the USA all have aging populations which produce less, and create an even lower demand for goods and services, except for medical care which is generally subsidized and further adding to government debt.
    Thus, energy is now in a long term oversupply trend, with fracking making supply-demand further imbalanced. Because Linn has been so well managed, it ought to continue to do OK paying a gradually increasing distribution, but not create any substantial cap gains.

    Re the hybrid MREITs (the hybrids deal in both federal agency backed mortgages and commercial mortgages that offer much higher risk-adjusted yields than the agency backed mortgages), their high yields imply high risk, and that is generally true, because they use substantial leverage borrowing against equity at relatively low short term interest rates to buy higher yielding mortgages, and thus could be hurt by a rapid rise in long rates. Although the profit spread between the short term borrowing cost and the long term mortgage rates increases when the long rates go higher, if the rise were abrupt, their mortgage portfolios would suffer a mark to market drop that would trigger harmful margin calls. However, our perilous fiscal deficit is forcing the Fed R to artificially manage the rate spectrum to offer low interest rates, and to keep the rates steady, thus mitigating rate change risk for the MREITs. The market has not discounted this moderated risk condition for the MREITs, but has recognized that rate spread profitability has been decreased by the QE programs. The hybrids have overcome the rate spread profit reduction by using more leverage on their agency backed mortgage portfolios, and by increasing their purchase of commercial mortgages.

    When MTGE rose to over its Book Value, I traded most of it off for other higher yielding hybrid MREITs, WMC and AMTG.

    WMC has recently experienced substantial insider buying (good insider buying too for MTGE). WMC may add a year end special extra dividend of over 25 cents to its current dividend which sports a yield over 16 %. AMTG is also a good buy with a yield over 15% and a possible year end extra that could be in the range of a dollar. MTGE is yet a good buy with a yield over 14%.

    The likely loss of the tax advantage for dividends will not affect the REITs, because they were never afforded the tax break. Any cliff drop and receding economy next year will actually aid the hybrid MREITs by forcing the Fed R to maintain its commitment to stable, low interest rates (now projected into at least 2015).

    Best of luck all

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    • Jack,

      Think I read you live in Vegas. I have been following your posts and advice for some time now. I am planning on flying to Vegas next week for a little R&R and will be staying at the Mirage with the wife. Would love to buy you a drink or a cup of coffee if you are in town and discuss your perspectives.

    • jack

      You seem to trade in and out of MLP's alot. What are your tax implications on this short term holds of trading MLP's so often? Aren't MLP's designed for a long term holdbecause of the tax advantages.

 
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