Before I start let me disclose that I'm short on this stock and I will explain why. I'm of the old school of thought that believes the reward is proportionate to risk. The higher the risk the higher the reward.
When I look at this REIT stock with many ambigious lines in its income statement and balance sheet and reports of extraordinary income that beats every other one in its sector by a 4 to 5 fold, I start questioning why? What are these people doing that's so much superior to others. I only can rationalize it by assuming they are somehow extending the practices of mid 2000 that led to the burst of bubble that destroyed so many lives in 2008, or a sophisticated Ponzi scheme.
The extraordinary yield of 20% (i.e. super high reward) in this economic environment should carry a super high risk (i.e. loss of entire investment).
Could someone rationalize such high return without high risk? I will remain indebted to whoever that will.
The reason is that the risk associated with the high return is shared by all US taxpayers through the government guarantee of the agency bond instead of just the population that buy this stock.
The government guarantee of the agency bond essentially transfer the default risk to all tax payers. As long as you are a US tax payer, you are sharing the risk whether you buy this stock or not. Since so many tax payers who share the risk don't get any return (they did not buy this stock), whatever return associated with the risk is shared by the small population who bought the stock. Thus the appearance of high return, low risk.
If one day the US government withdraw the guarantee of the agency bond, this company will not be viable. But it won't happen for a long time, since all the foreign government hold much more agency bonds than this company.
Thank you sir. What you say makes a lot of sense but it still leaves me wondering why this outfit amongst all REITs should do 4 to 5 folds better. There is no innovation here. Why others can't do as well? What is so special about what they are doing that cannot be done by others?
Sucks doesn't it?
The reason is that your brokerage house has to borrow the shares that you sold(they can't be virtual). They have to be tangible shares so that when you buy them back(cover) there will be someplace to get them from...otherwise some outrageous dude could short(think Bill Gates, George Sorros, William Buffet) 50 million shares or even a few million but they would not be able...because in the first instance there aren't 50 million shares out there(float) and secondly there aren't that many free floating shares that the House owns or can borrow.
That's also why you can only short with margin (even writing options) because you are borrowing from the House and they in turn charge you interest AND charge you for the DIVIDEND that they are responsible for paying because guess who owns the stock on the shorters(is that a word) behalf?...the House
You my friend are impatient and lack any sophistication whatsoever. Stick to a cash bank account. If you consider one day's trading to be the indicator of this stocks potential right after ex dividend and right after a major stock offering, you just haven't done any homework and clearly don't know the MREIT sector or the industry. I dare say you may not have a mortgage either, or ever obtained one. You may post all you want, but if the purpose is to discuss among the less informed your poorly informed opinions about something that most of us have been studying for years and successfully trading (perhaps, we are not all long), then you are simply in the wrong board at the wrong time. You may enjoy this small moments where we react to your musings, but belive me there will be further responses and you are ignored. For all of those who remember his name, hit the yahoo message ignore button. However, if you want to tell me how much money you lose by shorting or buying puts (I doubt you even know how to do it or have the broker authority for it), please post on your future losses. Please buy your puts now and and post on December 15.
parv, AGNC makes $7 in loans for every $1 it has. Right now , they can borrow money from the FED at .25 percent, and loan it out at say 4 percent. Thats 3.75 percent per loan times 7 loans = 26% in "earnings". This is rough math, but its how AGNC makes money.
So what's the risk? If the rates change enough, the spread could decrease.
Since we know the FED plans on holding down interest rates, is the risk as high as you perceive?
Thanks Bruce for your explanation. It sounds simple enough on the surface but it overlooks the fact that for every $1 the agency creates $6 in Debt Obligation which is backed by the mortgages it purchases. If those mortgages perform as anticipated then you are right the only risk will be the spread. However, there is a greater risk associated with the underlying mortgages that the shareholders have no clue about their nature.
Isn’t this similar to the CDO fiasco that brought about the collapse of 2008?
Many may think Real Estate market has bottomed out but that is not a certainty. I am not a day trader and many traders may have made a lot of money playing this stock. There are a lot of fund managers who play this game with other people’s money to put some lipstick on their portfolio for a short while. But, that does not change the nature of the risk.
Thanks again for your post.
I don't think anyone is holding AGNC long unless they bought it way back in 08, early 09.
There are 2 types of people that buy. Traders like many on this board that buy at a low of 25, 26, and sell at a high for 29,30.
And dividend chasers that buy it close to the ex dividend date.
As a trader, I thank them with the bottom of my heart for allowing me to make such a nice profit. Thank you.