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THORNBURG MTG INC Message Board

  • moodygrasshopper2001 moodygrasshopper2001 Sep 16, 2005 11:32 AM Flag

    BUY, BUY

    When the market gives you an opportunity to buy at a bargain price, do it. This is a rock solid company with terrific management that buys their own stock whenever the yoyos panic.

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    • Let's take another look at your hedge...
      In ARM world, your mortgages are adjusting to rate changes over time, that is, rates may increase 25 points, which will take say 4 months before your ARMs adjust to the higher rate. Your spread before the rate change was 100 points and now its only 75 points, but each month it goes up until in reaches 100 points in 4 months. TMA hedge is to offset some of the time it takes for the ARMs to adjust over that 4 month period (it has nothing to do with tomatoes).

      The last info from TMA was 2 months duration of cost to ARM adjustment, and 4.5% hedge coverage.

      True, it is a game and if you guess wrong, then you will have a paper lose, or real if you sell out or gain and pay to govt. some $$$$.

      To ignore book value is to ignore the value of the company. TMA is not a BANK and does not have the cost structure of a bank, its pure assets and liabilities.

      Enough words.
      J.

    • Thank you for your excellent explanation. It is exactly what I thought hedging could accomplish. What got me confused is the numerous posts by bullish investors on this board who seem to believe that hedging can protect against a flat/inverted yield curve.

    • I bought into TMA at $27.50 and sold at $27.10 because I got cold feet. It is difficult for me to understand how anyone could be absolutely bullish about any REIT in a climate of rising interest rates, the probability of a real estate bubble burst, and the probability of an increase in forfeitures in real estate. I don't understand the sleight-of-hand explanations of the safety of TMA's business model, so I have to depend on the fundamentals, and they don't look good to me.

      rolohi

      • 2 Replies to rolohi36
      • I think you were wise to get back out. I did roughly the same thing 2 1/2 years ago, because right after I bought they announced they were selling a very large number of 8% bonds. Meanwhile, they were getting less than 5% on mortgages. It didn't make sense to me. I sold for a small loss, but, luckily, it went XD while I had it, so I came out a few bucks ahead. I have watched the stock and the message boards, off and on, ever since; and occasionally post a msg. To me it's a fascinating situation; I wonder how long they can continue the dividend without reduction.
        Since I have been watching, they have also sold an 8% pfd, and, more recently, have issued additonal common at, I believe, around $30 per share. Good luck, JJ

    • Hedging (which TMA has done a good job of implementing), works fine to protect against general market interest rate risk of rising or falling rates when there is a normal spread between short and long rates. However, it can't protect against the narrowing spreads associated with a flat/inverted yield curve but simply lock in the relative spreads that exist when the hedges are purchased. For example, if 1 year rates are 3% and 10 year rates are 5% today, you protect against short term rate increases by purchasing certain instruments which will increase in value if rates go up thereby locking in today's 2% spread. However, if 1 year rates are 5% and 10 year rates are 5%, you can still protect against rising interest rates but you aren't earning anything on the spread between short term borrowing costs and longer term interest rates on which the mortgage products are priced. This is an oversimplification but the basic principal is the same. Similar to retailers selling tomatoes for $2.00 per pound when they buy them wholesale at $1.00 per pound. They make $1.00 per pound profit and can protect the value of their inventory to assure this margin by buying tomato future "puts" (assuming tomato futures and options were actually traded) which will increase in value if the wholesale price of tomatos decreases. However, once they use up the existing inventory, the profit on any new inventory will be based on the difference between the retail and wholesale prices at any particular time. Imagine we're now entering a period where the retail market price is still $2.00 per pound (lets say due to increased competition) but the wholesale prices are now $1.50 per pound. The retailer's profit is now 50 cents per pound instead of $1.00. He can hedge the 50c profit at that time but his profit margin is still only 50 cents.

    • Nice post. People on this board seem to believe that TMA is immune to the flat/inverted yield curve due to it's hedging strategy, which, I must confess, I don't fully understand. Because of this belief, they apparently do not believe the dividend is in danger of being cut. I was wondering what you think of the effectiveness of the TMA hedging strategy.

    • You ask why I think TMA "could" trade below book value. Stocks, particularly financial institutions, are valued much more on expectations of future cash flow and book value isn't very relevant. Keep in mind, book value is valid only for a particular point in time and may decrease or increase in the future. Mortgage portfolios are constantly changing in "value" as interest rates/prepayments/default projections are revised. A lot of banks in the 1980's traded for a huge discount to book value and I believe TMA was selling at less than BV as recently as the late 90's. As a REIT, most owners are paying for the dividend. If a flat/inverted yield curve exists for an extended period of time (likely if the Fed raises rates a few more times), TMA's margins will shrink along with the dividend. Again, if you read my original post, I said I like TMA long term and have held for many years. However, in this particular environment, I think there is still "potential" for a major price decline from current levels and the risk/reward isn't very favorable for now. I'm generally not a market timer and hold most of my stocks for the long term. Regardless, when I see the odds of a decline outweighing the odds of an increase, it sometimes make sense to get out and hopefully buy back at a lower price once the market conditions are more favorable. TMA just happens to be in a phase of the interest rate cycle that seems pretty bearish for now. I sold all of my common shares about four weeks ago and converted all of the proceeds to the Pref-C which pay a nice 8% dividend without much risk of losing any principal.

    • comin_out_for_a_new_point comin_out_for_a_new_point Sep 16, 2005 12:07 PM Flag

      The last time I looked at NLY, I rejected it because of the significantly unhedged postions in its portfolio.

      TMA has paid a dividend in January of each year which, for income tax purposes, has been treated as if it had been paid in the prior month. That same dividend could be paid in January of 2006 and be treated as a January dividend, instead, depending on what management determines to be the "record date" (or ex-div date).

      Although the troubles leading up to the cut in the NLY dividend could indicate a similar problem at TMA, I feel that the market reaction to the impact on TMA's value is an overstatement of the problem.

      There are no assurances. We have a highly leveraged investment here; any error of management would be magnified in results.

      Therefore, I am not ready either to buy or to sell at the current price and will continue to keep the present long position as it is.

    • There are 1000's of other companies that provide a consistent 3.5-4% or lower and there stock is higher. We blink if this stock only pays 7%...this is a great company, might as well be a financial institution with no realestate. Takes money in, lends it out and makes it out the spread, with little expense.
      Someday maybe the public will discover this gem

      • 1 Reply to Larrysd_98
      • I agree TMA is a good company with competent management. I've owned it for many years since it was in the low single digits and planned on holding for my retirement years. However, I got out a few weeks ago (trading all my common for the 8% preferred) due to the current rate environment. No matter how good the company is, it will suffer with the flat (and probably soon to be inverted) yield curve. TMA has been great at hedging interest rate risk (ie. losses from general market rate increases/decreases). However, there's no practical way to hedge against a yield curve where long rates (which are used to price their mortgages) are equal to or less than short rates (which are the source of their borrowing). In this environment, I'm afraid TMA's spread will continue to weaken from market conditions not controllable by management. For this reason only, I'm negative short term on the common price. Whenever we see long rates start to move up again, I'll jump back in to the common without hesitation as I think TMA will continue to grow by offering superior products to the competition and increasing originated loans as a percent of the portfolio. For now, I'd rather get the secure 8% dividend and preserve capital than 10% with a risk of a major capital loss. TMA will survive and continue to do better than other Mortgage Reits but as the old saying goes, a falling tide lowers all boats, even the ones without leaks. Holders will do okay long term but not as well as those who get out now and buy back at a lower price six to twelve months from now.

 

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