Read most of Hatteras' recently mailed Annual Report and was very impressed with the conservative nature of management and the clarity with which they detail the nature of their business - and - the potential pitfalls going forward.
Considering those pitfalls, it appears that there is much more downside in the future, and that the best conditions to maximize revenue has already been met. The best we can hope for going forward is for management to use its expertise to offset mild interest rate increases and using swaps as best they can to offset the other adverse conditions looming in the horizon.
I wonder if other HTS shareholders were impressed with the annual report's communication.
I am holding onto my shares, but given what I read in this report, I am more concerned about share price depreciation and dividend cuts when conditions worsen more dramatically. The trick will be to lessen the load a quarter or two before major adversity rears its head.
Will NLY and AGNC be hit as badly?
Enjoyable thread. IRR analysis (PW(irr) = F0 / (1 + irr)0 + F1 / (1 + irr)1 + F2 /(1 + irr)2 + .... + Fn /(1 + irr)n) has been a solid tool in 2009 and 2010 for discerning between MReit investments. It may continue to be one of many analytical applications, if cash flows do not swing wildly in the coming years. As has been pointed out in this thread, markets tend to factor in interest hikes and other news well in advance, and even if they are not 100% efficient, some factoring will have occurred.
There are many accurate calculators for IRR (or ERR if you are a graybeard). The small amount of time that it takes to project cash flows using various scenarios is well worth one's time. One or two hours would be sufficient to enter 6 MReits, using 20 future dividend periods.
I used to be able to remember the rankings by MReit, but admit that now I have to print them out and rank order them later. NLY, AGNC, HTS investors may find it enlightening to put various Ben-scenarios into play and share their findings on a future thread.
I suppose that it would be a good idea to have some cash ready around the time that the FED really does get near raising rates and then raising them. That would appear to be the danger point regarding share price.
It's ultimately a macro call on when and how rates will be raised. I think there are a number of conditions, one which is the government's fiscal condition, which will require a slow, sure rate increase scenario.
For me, the only issue is watching non energy/food inflation. Does it really take off? In the absence of labor costs taking off, I just don't see the kind of inflation worry that the FED is interested in dealing with.
This is quite a story.
Thanks for commenting on this as you seem able to run some numbers and think it thru. Mostly, what I see is the fear trade. Isn't investment success being on the other side of the fear trade and getting that right?
Thanks for your thoughts. Obviously it's anyone's guess at to what will ultimately come down.
I'm interested in trying to figure out how to capitalize on the Reit/interest rate fear trade - not join it. Not sure how well I'll crack the nut.
I've run various IRR analyses of five year declines in dividends and share prices and seem to end up with positive IRR's in stress conditions and very positive ones in anything less dire. I'm running a leveraged mReit basket - my version of the carry trade - and trading the individual names in the basket within their trading bands and oscillations. A declining band isn't really a problem if its downward slope isn't too steep.
A rational market would drive one to an index fund. An irrational market provides a lot more opportunity. I'm all for wholesale dumping of mReits by trigger happy sellers, especially when everyone is drinking the same elixir. We'll see.
"Therein lies the rub, For in that sleep of potentially higher interest rates, we know not what pps may come.
The multitude of variables gives way to many interpretations of future events and their attendant effects. How we each choose to act, defines our investment style. As regards your "rhetorical" questions, here goes:
1. I mostly trade options. So, my "investment style" is tailored to a much narrower window. I don't want to be anywhere near HTS or AGNC when rates are raised .25 %. Any downward pressure on the pps can reek havoc on short call positions.
2. See "1" above.
3. See "LINE". Beautifully hedged but still takes "irrational" hits when the O&G complex is down.
4. Not familiar with CIM
5. Depends on your risk tolerance.
6. Too many variables for detailed analysis. This is the big one. Due to the unprecedented stimulus, and the historic performance of markets in the year preceding the Presidential Election, I'm handicapping the economy continuing to grow at 60%. (feel free to choose your own rational) However, a market correction and growing economy are not mutually exclusive.
7. IMO, The average investor doesn't understand modulation of leverage and slope rates. The crowd will treat the REIT sector with a broad brush and jump ship, filtering back in when they realize the oversized yields are still available. Again, from my perspective, I don't want to be sitting on short calls when the crowd leaves.
8. Good question. It's certainly possible, but as everyone has access to the same information, in an "efficient" market, the discount should be baked in. I wonder what effect (if any) the higher "relative" yield (compared to lower yielding alternatives), counterbalances the discount.
9.I suspect that the FED will attempt to engineer a "soft" landing, if at all possible. The problem for short time frame traders is not what the FED does, but how investors react. This goes right back to market psychology. I don't want to get caught with a highly leveraged, short position when the investors are "temporarily" leaving. You're right about how a common fact set gives rise to differential perceptions of opportunity, risk & rewards. Suum cuique.
I'd be interested in your assessment of the following:
1. How much will HTS or AGNC or pick your name go down if the Fed raises rates 1/4%?
2. What happens to share prices if transparent Ben says he's expecting to raise rates 1/4% every quarter for a while?
3. What happens when #1 occurs and HTS or any other name reports good results and announces they're well hedged to protect spread and dividend yield and don't expect their results to suffer?
4. CIM announced its lowered dividend on 3/21 - divy was down .03 or 18%. The shares were trading at 4.14 then and have paid a .14 dividend and closed at 3.92. If you throw the .14 back in it's down about .08 or 2% - raising the question of the delta between dividends and share prices.
5. NLY preferred pay about 7.5% - common pays almost twice that. Which is the better deal?
6. What is the chance that with budget reform, high oil, China tightening, Japan, etc. - the economy doesn't really get going and rates don't rise?
7. What if the extant hedges and active trading and modulation of leverage enable the mReits to manage gradual slope rate increases with minimal impact on dividends?
8. Is it conceivable (see CIM above) that current share prices DO NOT discount higher rates/lower spreads/lower dividends? If they do not are they trading at rational yield spreads to preferreds?
9. Is the IRSOD (interest rate sword of Damocles) going to fall like a guillotine or slowly, as a feather? Can one differentiate the impact on shares from different rate scenarios?
Well, I guess I'd better stop. Everyone knows the fact set - at some point rates will rise. However a common fact set gives rise to differential perceptions of opportunity, risk & rewards. Makes life interesting.
As an investor currently holding 9 long option positions mostly targeting April/May distributions, I must confess that my analysis is fairly myopic. I'm looking for actionable data that will inform my exit strategies over the next two to three weeks. For me, therein lies the opportunity for arbitrage. Indeed, you too took advantage of an "arbitrage" opportunity when AGNC's price temporarily dropped due to interest rate fears (those JAN12's). Prognosticating longer term is another proposition. As markets are forward looking, the events stacking on the horizon (e.g., the completion of QE2, the potential Congressional battle over raising the debt ceiling, the renewed concern over EU Debt, higher fuel prices, higher interest rates, the ongoing crisis in Japan, etc.) should be reflected in the current pps valuations, and as each event draws closer or more intense, the negative pressure on pps should increase. This would be an "efficient" response to external stimuli. I do believe that markets behave "efficiently", but I also believe every "market" has a situationally specific "tipping point" where rational behavior ends. Having said that, history has shown that there is no "Bell Curve" when the "mob mentality" takes over. When everyone heads for the exits at once, the imbalance in Buy/Sell orders reeks havoc with the pps. I've been caught in these "landslide" situations, with all sellers and no buyers, and as you know, it's not pretty. As markets eschew uncertainty, I am concerned that the confluence of events will put continued downward pressure on equities. Like you, I also am anticipating a correction later this year. To that end, I have created a safety net by placing stops on all of my equity positions. As regards interest rates; nowhere to go but up. The only question is when. When QE2 ends, the 10 year bond will need a higher yield to sell, and will drive LT rates up. Despite potential for a larger spread (based on the timing of the FED's eventual increase in ST rates), many will see this as a negative harbinger for REITs, and repeating your point, will cycle out of interest sensitive investments. You definitely want a chair when the music stops. With respect to our mutual AGNC holdings, and given the future uncertainty spelled out above, I'm sticking to BATESAT. I'm hopeful that our first opportunity coincides with the Earnings Announcement on 4/25.
Thanks for your convolution gratuity.
Your appear to have completely misunderstood my point and misstated my sentiments. I clearly stated that I did not believe in efficient markets - your attribution to me of a belief in rational markets is entirely unfounded.
I posed a question to Contra as to whether he felt the current share price inculcated (yes, that's a real word some people use) a discount for the scenario he was concerned about. Presumably investors in HTS understand that rates might rise and presumably that affects their view of current value. Are not current high yields clearly suggestive that shares have already been discounted?
I outlined a scenario that I thought could happen wherein the share price is overly discounted for fears that prove not, ultimately, to have the impact on company results that is commonly believed by the market. I didn't predict that would happen - I said it is a possibility - which it is. Were it to happen it would create an investable opportunity for someone with an appropriate time frame, conviction and patience.
If you're a swami or trader I guess it's reasonable for you to believe that fundamentals don't matter. For some they do. I personally like situations where companies are undervalued because of exaggerated market fears of things to come. As I said - that may or may not be the case here.
You are very specific about what you think will happen with the economy, rates, the Dow, share prices, QE2, the summer, clues, declines, etc., which is amusing. Your view may prove correct, of course, but speaking of convolution.....
You also couched your assessment of HTS in terms of what the market might do to share price and not to what the company might do with earnings - the relevant potential dichotomy of the thread. Share price is one variable but so are earnings/dividends and they should be evaluated together, particularly if one is going down (or up) and the other isn't.
I disagree slightly on your interpretation of the Bard's sentiments. In my reading I see he believes , in rather convoluted terms, that the current market interest rate concerns are "inculcated" in the PPS. Animate beings are "impressed or trained" but we will get to my point, and that is that no matter what the reality of the situation, markets are not rational.
We saw this same thing in the 90's with NFI, AHR and ACAS. There were myriad posts touting the structural model of NFI, et al and the greatness of management as we held on believing that the shrinking PPS was simply an overreaction to whispers.
Once panic ensued, much like the tech bubble, and the 2007-2008 market correction, it was over. Fear and greed. I believe we are in the beginning stages of a major market correction that will behave with a number of huge swings starting within the months of April/May.
QE ending in June will further the fear with Dow swings of 300+ down and 200+ back up. This will be a good clue(3-4) of these B4 the steady decline down through summer.
I don't think fundamentals will matter as we will eventually, by late year, see interest rates rise and the continuing cycle out of interest sensitive investments.
Sorry for the downer sentiment, but the market is what it is.
Interesting thread. Always fun to read the Bard. Looks to me like interest rate jitters in conjunction with the renewed concern over Japan, not to mention Pimco's announcement of a new REIT allegedly to be priced at BV. This may be putting pressure on the sector to retrace towards BV. Having said that, the broad brush view of REITs shows the FED holding ST rates in check w/potential movement up in LT rates (predicated on the 10yr Treasures) subsequent to the termination of QE2 in late June(?). All other things considered, the spread still favors REITs. As you have stated, equity markets react based on perception of future events. In essence, everyone wants to "guess right" first. This dovetails nicely with our previous discussion about market psychology and the various opportunities for arbitrage. Stay tuned.