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American Capital Agency Corp. Message Board

  • terroir2 terroir2 Jun 11, 2011 12:25 PM Flag


    As you know all the reits have suffered concerns for the impacts of lower mortgage rates (30 yr mtge rate down 8 consecutive weeks) on spreads and repayments. These factors have affected the reits, both agency and non-agency, while non-agency reits have also been inflicted by concerns about increases in defaults as housing prices continue to slip and employment weakens.

    All are trading at lower than "typical" ratio's to Quarter ending book values, and Q2 BV's are expected to increase to the degree that mtge rate decreases have caused net value increases through mark to market of the MBS book less change in value of swaptions and other hedges.

    One REIT, MFA, is trading at a discount to book.

    Here are the current ratios to Q1 BV's using Friday's close prices:

    115% 103% 116% 99% 110% 105% 111%
    Which can be compared with the Q1 high ratios (PPS reached pre-exdiv and spo)
    118% 120% 127% 113% 124% 117% 113%

    Each REIT has its own peculiarities relating to portfolio composition so impact to rate change and defaults will not be felt evenly across all reits.

    Here's how much the current PPS would have to increase before the next exdiv and spo's to return to Q1 PPS/BV ratios:

    2.5% 16.7% 9.1% 13.9% 12.7% 11.3% 1.4%

    Here's where the PPS would have to go if recent history were repeated:

    $18.63 $4.14 $32.85 $8.84 $32.41 $24.89 $13.27

    On balance the agency reits are better placed to regain some lost ground as the change in spread caused by lower mortgage rates will not affect income significantly unless they have to reinvest a very large portion of the portfolio or invest proceeds of a major SPO. Meanwhile libor has decreased to below 20 BPS and this will almost immediately lower borrowing costs as these are typically stacked toward 30 day paper. On balance there are more positives than negatives for agency reits:

    *BV will increase through mark to market pricing of portfolio MBS less swaption's

    *lower rates will have a net benefit on spreads to the extent that borrowing costs are at historical lows and lower mortgage rates will only affect the turnover portion of the portfolio

    * defaults don't count

    On the other hand:

    * prepayments will increase causing increased turnover, and the need for increased liquidity to meet counter party covenents (offset to a substantial degree, if not totally offset by increased security values)

    * the market looks scared and even though the reits have low beta, they are affected.

    AGNC as a agency reit is well positioned against these winds:

    * the last spo was invested before rates decreased
    * strategy has been to increase 15 year and 30 year fixed 62% Q4, 66% Q1, and new SPO + leverage money intend to further increase the ratio; these will have biggest value change compared to ARM's due to rate decreases
    *Repayments are a concern but management seems to stress portfolio selection to protect from change in repayment rates.

    Disclosure: I am long AGNC and intend to stay there and if I had more b****s I'd be buying into the ex.

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    • Whehhhhhh....

      Thanks Taymere....nice video....I hope WE won't die B4 it's over. ;-)

    • Great clip, Taymere.

    • HI Doc, lol, but I certainly don't decry gambling, there are those like me who make tons of money off of call options and I'll keep buying them. I still own all the ones I bought on the last SPO with ~1/2 my capital, still hoping for a 2-3 bagger on those between now and Monday's close. I'd call that enthusiastic gambling. As far as puts go I don't buy them on anything that I think is fundamentally undervalued like AGNC. I believe that pro money often bids up the price on AGNC puts buying protection when they open AGNC share positions I don't AGNC puts either because that would tie up capital that I'd rather use on calls if AGNC sells off.

      Yes I feel unsettled about being both an AGNC investor and an AGNC gambler with all my bets on the bullish side because the combined positions tie up 75% of my capital in one single name which is quite risky. The line gets blurry with my LEAP calls, with 1.5 years until expiration they are somewhat like leveraged non-dividending shares that drop dead like Roy Batty. I'm betting heavily that Roy Batty will win the fight before he keels over. "I've seen gains you people wouldn't believe"

    • Taymere,

      I agree that AGNC has blown any and everything out of the water since 2008 and with the safety net of Agency, as you said, incredible. So do I glean a conversion experience Taymere?

      "Alas, poor Yorick! I knew him, Horatio, a fellow of infinite
      jest, of most excellent fancy."

      I could always rely on your erudite posts re. Option strategies...and now you decry the practice as "gambling"? You sound like you will be a long share holder to partake in the safe and boring accumulation of dividends. Never to risk it all with deep ITM calls and disparaging puts altogether!! You were a light Yorick to the brotherhood(DD's)

      " He hath bore me on his back a
      thousand times, and now how abhorr'd in my imagination it is!"

      To think you would descend to the same tier as Randy et al, who look at the DD's as renegades on the fringes of the market, ruffians and rogues all...OMG you even borrowed his mantra.."gamblers!".

      You now want to wear a shirt and tie and be "respectable", like all the Randy's with their briefcases and horn rimmed even admitted it said you now want to become one of them, a member of their said it"INVESTOR"!!!

      "My gorge rises at it."

    • Yes, dividends protect you. I no longer invest in companies that do not pay a strong yield.

    • Hi Doc,
      "Further AGNC was a start up with pretty wide fluctuations during that last Q in 2008. If you waited until the next quarter you would have been back to negative gain even after the divi's"

      That's why I specified exit flat within a year, not three months, but thanks because you're making my point for me. For the particular example that you gave one would only have to have held for nine months to earn a very juicy total return. The very following quarter, 2Q 2009 the last dividend day close was $23.75 so had one bought on the last dividend day of 4q 2008 at $21.6, collected those two dividends, then sold on the last dividend day of 2Q 2009 at $23.75 one would received a total return of $4.20 in nine months, that's a 19.4% gain on the $21.60 invested or 25.9% annualized. Not bad at all considering those 9 months encompassed the worst recession I hope either of us will ever see, fixed income, equities, real estate all went through the wringer during those nine months. The reason you are helping me make my point is that although I said at worst case one might have to hold for a year to exit flat if SHTF again your example brings up the point that one cannot find even a 9 month period for AGNC's admittedly brief history in which a buyer at last dividend day's close had a negative total return selling at the last dividend day's close 9 months later. Yes you are correct that inraquarter there were dizzying sell offs with AGNC yielding up to 40%, but buyers always came back around for the dividend the next quarter. The lowest yields on the divvy run up of each quarter starting at 4Q 2010 and going backwards to 3Q 2008 are:
      18.25% 18.67% 18.61% 19.30% 19.66% 19.65% 19.10% 14.14% 22.32% 17.79%
      This demonstrates the power of dividends and that's one of the reasons I don't bother with puts. The dividend, provided it's maintained, is my safety net on shares. On calls I have no safety net and I could fall and break my neck even if the dividend is maintained. My shares are investing and my calls are gambling.

      AGNC's history is brief and your point that it wasn't around in 2007 when SHTF initially in sub' is well noted. There is risk that AGNC's divvy wouldn't be maintained next time SHTF, but as long as the Fed is on hold I find it easy to tolerate that risk.

      Doc, I appreciate your discussions.

    • reits -

      Well - it's all about reward risk and how differential perceptions thereof affect investment strategy.

      You said - "my love is when the hard science reveals itself in empirical outcome based evidence". Obviously we're not going to have much evidence about the future so we'll be stuck with some other operand.

      My IRR analysis did not purport to illustrate the worst case for share or dividend behavior for AGNC, nor did it depend on a sample - as it's not "empirical outcome based evidence" - it's just math. And the math was intended to debunk a popular pseudo calumny that rising rates (and their chain of consequences) imply a bad investment outcome. And the values selected for the IRR certainly didn't purport to be a prognostication - merely values within probabilistic outcomes given judgements about the interest rate outlook, etc.

      Clearly defense against a black swan outcome doesn't reasonably include holding an unhedged long position - but one might reasonably make a judgement that such a possibility is unlikely and assign it corresponding significance in position design.

      Investors are paid to assume risk. Different takes on risk lead to psychological arbitrage opportunities. The IRR exercise provides one quantitative perspective in evaluating reward risk.

      Structurally, I think owning AGNC for the dividend puts one much closer to the underlying business economics than the average (non Reit) holding for which cap gains are an indispensable element of return. And the business economics for the group appear visible, stable and favorable for the moment - affording an illuminated runway, as it were.

      Having said all of that, I suspect we'll see lower highs and lower lows in the cycle - which means being nimble and over balanced to risk management will likely be warranted.


    • Hey Taymere! You don't sleep either huh(lol). It's 1:00 AM for Taymere and myself for all those all tucked in and snoring. I was just about to call it quits when an interesting thought came to mind......see new post( options 4)

      Have a good morning Taymere!

    • Nice chart Doc, thanks.

    • Reits,
      Always enjoy your option strategies.
      I've never tried any really comlicated option plays as every layer of complexity adds more risk. (just my opinion, I probably am just too dense to understand anything but a oneway bet}
      Keep posting my friend, also enjoy your forays into philosophy.

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