I admit I have given up trying to understand the logic of the market valueing companies like NLY, HTS, and especially AGNC the way they do.
Given that NLY and HTS are perceived as highly risky and due for a drop justifying the high yield, the reality of AGNC's business is even more improbable for a decent investment for income. Otherwise, why would these stocks not have higher share prices driving their yield down? Must be that any day now, divs will be cut dramatically, income will drop, and the improbably higher yields will drop as common sense returns.
Discussion in the AGNC CC by management referred to the better return of AGNC over its peers. Discussion on the yield curve benefiting AGNC, the lower prepays, and other positives going forward. With a relatively small degree of volatility in the markets and rates, AGNC's business model seems well-suited to benefit, and worse case scenario, its share price should not deflate any greater than its peers. Efficiency with a higher portfolio to manage was one of several challenges management mentioned that has no track record at the level it is reaching. Given last year's income generation and resulting divs, I don't know why fixed income investors are not running in masses to own shares, even if just for the next two or three quarters.
Uncertainty has been stated with NLY for years yet its share price has traded within a small trading range. If economic conditions stay relatively stable for the next year, it would seem reasonable for the share prices of NLY, HTS, and AGNC to continue to trade within a narrow trading range ... unless the market decides that owning shares of such stocks whose share price doesn't fluctuate much and getting paid 14 to 19 percent to wait until a more major signal comes indicating it is time to exit, as income is about to drop off dramatically with the accompanying big cut in divs.
disclosure: long with AGNC, NLY, and HTS.
(This was the first AGNC CC I had listened to, and noted the down to earth nonflashy presentation by management along with its conveyance of gratitude. They could have played up more the performance of the company, but chose to present themselves as more level-headed, even stating the importance of knowing that conditions can change daily and that they cannot rest on their laurels of what happened yesterday.)
Since AGNC's dividend fluctuates with earnings, can it even qualify for the "income" category?
Despite the fact that it pays in dividends rather than share gains, and despite the fact that the dividend has happened to be constant for several quarters, it's really a speculative stock, not a fixed-yield investment.
You need to pay attention to the rate spreads and how they may behave (with hedgin to cushion any unexpected sharp moves as AGNC had successfully done over the past year.
From now at least until the 2012 elections are held. the Fed will keep the short rates low, vbery low to promote economic expansion and job growth--raising the rates would be perceived by this Administration (and any other as well) as hostile to reelection prospects. In the meanwhile, if a double dip is avoided, the long rates will move higher as inflation either grows or threatens to grow. THe rate spread widens driving higher profit.
Once the short rate is moved higher to dampen the economy and inflation concerns, the long rate would also be moving higher over the same inflation concerns. Thus, the rate spread may persist.
At some distant point (not in sight now), while the Fed is moving the short rate up to combat inflation, and the markets are predicting recession, the long rates can move down, contracting the rate spreads or even reversing for a while. NLY and AGNC managements have shown they are adept at working the rate spreads and economic cycles, so your concerns appear exaggerated if fundamentally sound.
Great summary. To the point and easily understood. Thank you Jack.
Regarding the hedging strategies for the enviornment you mention in which spreads can tighten, or even reverse, can you share a little more about the how they actually do this? I understand commodity and currency hedging, but I've never seen an explanation how a REIT hedges.
I've read many of your posts on the LINE board and it's obvious you have a very strong grasp of that company. May I assume you are also invested in AGNC and/or other REITs?