I am working pretty hard this weekend with the details but I've decided to launch a 20k on each side short/long mreit portfolio on Monday. I back-tested this strategy and it shows how the portfolio value would change over time. It's a $280,000 portfolio of pairs I am launching but I will have plenty of room to add to those positions when I feel it's appropriate. Why $280,000 exactly? because i wanted it to be a 250k portfolio but I didn't want the numbers uneven.. so for calculation sake i did it this way. I don't want to dip too much into my reserve though, I like plenty of cash on the side to take advantage of other opportunities and with my MTGE options strategy still at play I have to watch liquidity. I may choose to exercise those calls and I want my cash balance to be able to handle that. You can run a similar strategy with less money if you want, but keep in mind your trading costs (14 positions need to be opened * trading commissions)
Anyways. Here is the break down:
Long WMC, short CYS
LONG MTGE, short MITT
LONG CMO, short HTS
LONG TWO, short JMI
Long AGNC, short NLY
LONG NYMT, Short DX
LONG IVR, Short ARR
pair 1: WMC is a better manager and makes more money than CYS. They lose less money too as rates rise. *positive dividend spread here as well* CYS management does not respond back to investor relation's phone calls or email. The management team does not know how to hedge and the CIO is full of it. They lost over 21% of shareholders book value in Q2 vs WMC's 10% decline. CYS's hedges are all short duration and fail to cover their duration risk.
pair 2: MTGE has a stronger management team than MITT. MTGE is better at hedging. The dividend is 2% against you here. But that is based off current yields and is subject to change.. MITT also has lost more book value than MTGE in the Q2 declines. MTGE is the better investment in terms of price history, 5 day, 1 month, 3 month, 6 month. Clearly MTGE wins.
Pair 3: CMO Vs HTS!! Ok. This one.. CMO is perhaps the most conservatively run mortgage reit. yes.. that is true. No one would argue otherwise. It operates in short duration ARMS which should give it a boost to its dividend soon. HTS has longer duration ARMS which are difficult to hedge and they have failed badly at hedging them. The book value is getting killed at HTS and they are being forced to delever some soon if they haven't already. In a rising rate environment you want to be in short duration ARMS.. Can HTS bounce back and start kicking CMO's butt? Only if rates drop meaningfully from here... but the bad taste of major book value losses still grip shareholder nerves and is likely to weigh on the stock. If interest rates continue to rise CMO will strongly outperform HTS.
pair 4: TWO has a strong management team and has constantly delivered for shareholders. The stock price alone does not tell the entire tale as there has been special dividends and a spin off of SBY. However, stock performance vs the peer group has been excellent. JMI on the other hand has poor stock performance and a terrible management team that often does secondaries which dilute shareholders.. they are small potatoes and don't have the expertise to survive a higher rate environment.. ultimately i think they will go to 0. (same management team as ARR but has non agency capabilities)
Pair 5: AGNC vs NLY: AGNC has constantly delivered stronger performance than NLY over the past 5 years in terms of both dividends and book value appreciation. They are better at protecting their book value when rates go up as well.
pair 6: NYMT vs DX. NYMT continually outperforms DX. Price history says it all... pull them up on a chart and click compare. Book value losses are nasty for DX last quarter. Not a fan. NYMT is much better at hedging. small book loss vs DX's large one. Interestingly, NYMT has a better yield too!
Pair 7: IVR vs ARR.. I am not going to go deep into why this is a good pairing but I will say that IVR has had its mistakes but is no ARR that's for sure. Their stock has continually done better than ARR despite its 21% drop YTD. ARR is another one of those companies that I believe will go to 0.