In a posting earlier today, Ben wrote:
"There is just too much optimism here. The issued a poor earnings report. 2.25 gaap versus 1.20+ taxable. If you do the math, they had better pull a rabbit out of the hat because 1.20 x 4x.9 ain't 1.40. This was in effect a profit warning below consensus because the street doesn't estimate gains included in gaap."
Ben, I am not sure this interpretation of the earnings pre-announcement is correct.
If you look at the AGNC website, their "Q3 investor fact sheet" lists the following figures for GAAP EPS over the past year:
2009 Q4: $1.79
2010 Q1: $2.13
2010 Q2: $1.23
2010 Q3: $1.69
The just released earnings preannouncement lists 2010 Q4 gaap as $2.25. That beats all previous earnings reports. This seems clear enough.
The confusion comes in when the pre-announcement report mentions $1.20. You seem to think this means "taxable income," but look carefully at the language in the pre-announcement and compare with the language in the Q3 earnings report.
The Q3 earnings report lists the following:
$1.69 per share of net income
$1.11 per share, excluding $0.59 per share of other investment related income and $0.01 per share of accrued excise tax
$1.59 per share of taxable income
I believe the $1.20 figure in the recent earnings pre-announcement matches against the $1.11 in the Q3 earnings report. Here is the language in the pre-announcement:
"Net of these items," (meaning non-recurring net realized and unrealized gains on its derivative instruments) "the Company expects earnings per share for the quarter ended December 31, 2010, will exceed $1.20". The previous sentence in the pre-announcement speaks of "non-recurring net realized and unrealized gains on its derivative instruments" or, in the words of the Q3 earnings report "other investment related income".
Go back and read it yourself. If I am reading correctly, per share taxable income is not mentioned at all, and presumably is a higher number than $1.20.
If true, the earnings report is actually quite strong. GAAP is $2.25 vs $1.69 last quarter, and the $1.20 in core income exceeds the $1.11 last quarter. Additionally, the company did very well with trading gains (ie, "other investment related income"), as it seems to do every quarter.
All that aside, I am nervous about the market absorbing an offering of this size, especially on the heels of NLY and HTS. Nevertheless, I think it is important to read the earning pre-announcement correctly.
AGNC should have expressed themselves more clearly. Nevertheless, I do not believe they would have made an earnings pre-announcement at this time unless they felt the news was good.
I concur with everything you said, but I still am left with questions. There are three, "cherry picking" and "nod".
There was one tid bit buried in there about the "cherry picking". I have mean't to, but have not, had the time to go back and tally up how much money is chasing the MBS deals from all of the MREIT fund raising.
I am constantly wondering how I can get data on the state of the MBS market, including non-agency paper.
In summary, there is a lot of money chasing deals. One advantage that AGNC may have is logistical. They are in Bethesda, a stones throw from FNMA and FHLMC. I used to work near their offices and ermember the name from the early years.
Anyway, that to me is the critical issue. What can they buy?
As another point, with this type of platform, I doubt they need to change the scale of the buiness. In other words, with the IT solutions, office space and people, they probably don't need to increase the opearational expenses.
In other words, the new margin from what they buy will drop to the bottom line.
Thanks for helping me understand the need for the release, but I don't see the nod and wink and how March is secure. Are you telling me they told the market that there taxabe income was $1.55 (1.55 x .90 = $1.40) for the last quarter. It said more than $1.20.
I know the math is more complex, but I didn't take it to be forward looking statement, which is why I went into a state of concern.
If you are telling me the prior quarter's taxable income was $1.55, then I don't know how that squares with taxaxble income to date plus $1.55 x 90%. It suggests that the divdiend of $1.40 in December was too low.
So, I am still not sure about the wink and nod part.
Had I bought the calls, which I will when the price is a bet better, I would be buying June as well. I am going to buy June 26's.
We haven't gotten all of the shares digested and the price point has slipped to $28.90.
AGNC is very calculating these days. The pre-release was tactical; a nod and a wink to the underwriters (as well as the rest of us) to let them know that the March dividend is secure. I took a position this morning in JUNE calls. I stepped a little farther out this time due to all of "action" surrounding AGNC in the last 2 months. It's hard to buck AGNC's current momentum, but as we have noted many times before, the trading range, previously well defined, is even in greater focus now, due to management's fund raising activities. I enjoy the trading activities that AGNC presents, but I do have some general questions. As I have alluded to in the past, secondary stock offerings are the fastest way to grow market cap. They are similar to mergers, but without the "pain". They are also a very efficient way to increase BV. Having said that, the scale of AGNC's recent stock offerings relative to their size, is remarkable. In essence, the current offering will increase AGNC's shares/market cap by 50%. Couple that with the offering in 12/10, and AGNC has TRIPLED (back of the envelope) its market cap, in a little over 30 days. I may be off on these numbers, but the concept is clear. The public is betting that management can put all of the new funds to work, and that their current "magic" is scalable. This bet is still open. One good thing about AGNC's increase in size is that when the inevitable mark to market comes for some of their toxic holdings, it will represent a much small percentage of their portfolio and have a smaller negative impact overall. With a larger market cap comes higher visibility and clout. However, it also makes cherry picking the best paper more difficult. NLY, the mature player in the sector, does look like a bond fund as you have alluded, albeit one that pays a health yield. They no long have the agility nor time to get the best of the best. When you get large, its difficult to avoid the homeostasis.
We're close to $29 now. Can't believe this lightening speed! I just hope it ($29) doesn't trigger a quick dumping of the shares from the remaining underwriters and/or those quick flippers who bought in 1.5hrs ago at less than $28.50. I for one margined all my capacity out and bought 4,000sh total below $28.50, and I plan to hold on to them perhaps a little longer this time, as I think this round we might very well be possible to see $30+ price, since the SPO risk is out for the rest of the qtr, and we have a strong earning for Q4 already in the bag (my interpretation any way).
Tax earnings at least 1.20, higher when trading gains realized for tax purposes (later than GAAP).
They are warning us that they are not going to pay out this "extra" income in dividends, and will instead pay the excise tax on it.
They appear to be holding as much cash as possible without upsetting the div yield/stock price. They must see better opportunities ahead and are loading the truck.
I am bullish, just think it stays 28.5-30, and yields 20% for near term
I am not playing. I realised I could, but I decided that until I saw the 27M in the market, I won't trade it. I thought about it earlier and I certainly had the change when it was at $28.36, but I don't really undstadnd how we get from 16.4M to 27M. It may be I have just have to play for a quick turn.
Ben, great to see that you're back to your kind and gentle style!
So how do you interpret the volume so far? Almost 16mil traded in less than 1 and half hour? I think it shows that the appetite for this thing is huge, and underwriters must noticed this therefore they will not dump the rest of shares at any lower price. Instead, they will do the controlled release, drip by drip, And that means, we probably will see all 27mil be release by the days end when AGNC finishes at or above $29. That’s my call. Will see.
If we do finish at $29 today, then we might yet again recover the share price back to pre-SPO level ($29.70) in just 3 days! Wouldn’t that be nice!!!
Thank you Jing, really. It made my day, as did the exchange with everyone. As I keep saying, I love this board. It is part of my life now, since all I do is trade all day. You guys are my community, so I was honestly a bit upset. Anyway, we now know more than we did, which should be the point of this board. I think thus far, it is the best place I have to share investment ideas, and you guys are my colleagues.