I think one of the more intriguing things about the HTS trade is when the run will take place. It has been noted before it is a hockey stick. I think you have to take into account that market seems to reward HTS for its core earnings but toward the of ex-div, and I am also picking up on Rim Boomers earlier work which shows that HTS has good spreads. The dividend is covered by EPS, which constitute core earnings. That is what is appealing about HTS and why the market is willing to pay up for a lower yield.
I just did some more work on HTS EPS versus to divdiend to figure out the risk of my calls. I now have 141, Aug. and November 27's. I think the risk of a low dividend is minimal, but.....
Now, on to June. The market consensus about 90 days ago was for a consensus earnings of $1.09, now it is $1.03. So, at $1.03, we see a dividend of $1.00 or $1.10. It seems that we are destined to see $30.50 on a dividend of $1.00; $31+ on $1.10. If I am wrong, the worse it a breakeven trade, but I just have a feeling that you have to just trust that the hockey stick will be there.
"The dividend is covered by EPS, which constitute core earnings. That is what is appealing about HTS and why the market is willing to pay up for a lower yield."
I agree. I believe AGNC relies more heavily on non-core earnings to cover the dividend, which is at least part of the reason it has a higher yield. Whether or not the perception of a riskier dividend is justified is a question best left to each individual investor, obviously. But I like AGNC's management team.
As for HTS, I did a bit of similar analysis and drew similar conclusions this past April. My only reservation is that I am not as familiar with the HTS portfolio. I have a fair idea how the macro environment could impact AGNC, but HTS involves a little more guesswork for me.
It will be interesting to see what happens in the 2nd & 3rd quarters this year. Lots of factors coming into play.
I don't hold these shares; I trade calls in them. Okay, I buy some shares in my IRA's. I appreciate the fundamental views on EPS, spreads, etc., but actually, I just don't care in as far as others might. I just want someone to buy this dividend, and AGNC is not going to get me where I want to be at this point. So who might be the best pair trade; I just think HTS, but am ready to be wrong. I am up already.
If it gets me a $1.00 to $1.50 run from $29.00 and holds true to form, then I will be seeing $30.50, and I will sell all then. If I get to $30.25, I might do the same. I just want to make some profits.
I would never suggest to substitute HTS for AGNC as a core holding, but if i were inclined to hold some shares long them three months, I might consider HTs with further analysis.
Reik, trying to figure the timing out on this is difficult to be sure. Hope I got my timing right this time. It seems flat in the second month. When it crossed 29, I decided to go for it. I don't see an offering, but I have been wrong many times, so I have august and November calls. Don't like the puts on the merits, and I don't like using my capital on the short side. I just hope we see upside.