there is a reason why CIM mgmt sees more risk in non-agency paper. I believe CIM had to take a large loss from non-agency paper this quarter and the losses are probably going to continue.
There is no point in trying to "capture" higher profits while risking the value of the porfolio. What good is a 17-18% dividend if the price of the stock falls due to loss in the value of CIM's assets????
Right now, i am underwater in my CIM investment, despite receiving the last quarter dividend payout..
real estate 'recovery' is nothing but a mirage.........look at Fannie and Freddie who are now begging Uncle Sam for more bail out money due to recent losses in their portfolio...Real estate prices are likely to drop at least another 20% from here befoe the shake out is over and there is nothing Barry, Little Timmy, or Ben the printer can do to stop it....housing has always been priced as a function of family take home income until about 6or 8 years ago....it will again be that way and most people will be having much lower incomes than in the last ten years....THERE IS NO RECOVERY....the only paper to hold is agency paper so long as Uncle Sam is still solvent which is probably for another 12to 15 months.
Like i said, its a trade off in risk. While non-agency prices will certainly fluctuate more than agency debt in the short term, the "risks" of default are already priced into non-agency debt. There is a great interview on morningstar.com of the TCW managers regarding this (they find non-agency debt particularly attractive when held to maturity because of the reasons stated above ie: risks already priced in). CIM's decision to allocate more to agency debt and use leverage to do so indicates that they believe the yield curve will remain unchanged in the short-intermediate term, and that they will be nimble enough to switch out when rates increase. As a shareholder I hope they are right, but I am also somewhat skeptical since QE2 will be ending in June and the market will automatically begin to re-price the additional risk of longer term treasuries, particularly in the absence of the FED's artificial suppression of the 10 yr yield. Suffice it to say that the market will not blindly throw money at treasuries in the face of inflation for a 3.7% yield.
actually CIM is taking on LESS risk, as seen by their increase of agency paper in their portfolio
Quote from the article:
This would support Matt Lambiase's comments during the conference call. The CEO suggested that the company sees risk going forward in the non-agency arena, and Chimera sold all of their non-agency senior re-REMICs into a favorable pricing environment in response. They also lowered their non-agency repurchase agreements to zero. Any excess proceeds were then transferred to agency securities
its a risk trade-off, they assume less credit/default risk since agency debt is presumed "safer", but they take on significantly more interest rate risk since the agency debt trades with lower yields and is fixed rate as opposed to ARM.