I can't help but laugh at some of the posts. Look, for you newbies to NLY here is the formula NLY uses to make money.
NLY sells shares and then uses that money to leverage and borrow more on the short end of the curve investing the money on triple AAA agency backed mortgage securities. Let's break it down a little further. For existing share holders, every time NLY issues stock they are getting 1.40 for every 1 dollar they are agreeing to return because they trade at a premium to book. In essence, new share holders are paying a 40% premium to get into NLY, so not only does NLY get money for issuing shares, for existing share holders they see an extra 40 cents for every dollar raised.
Current trends favor NLY. The short end of the curve is dropping so it costs NLY less to borrow, this is why dividend projections have increased to 13-15% this year when the stock was at 20 dollars. Now in addition to this favorable trend, the yeild on Triple AAA paper is going up because NLY can buy this paper for a few cents less then they could a few months ago. Margin calls, are you crazy? NLY isn't selling this paper they are out there buying. Why do you think they are so quiet? They are taking advantage of this dip in paper and increasing their positions. The spread between where they borrow, and their return has turned even more favorable last week. They just raised a billion dollars in late Jan are they are using that now.
This is not the first time FNM paper has dipped. It happened after 9/11, it happened in 2002, it happened last summer. Each time NLY got aggressive and bought, after all that is their buisness. Who do you think is buying this paper anyway? For every seller there is a buyer, and that buyer is NLY and Redwood and Buffet and other financial institutions.
By my estimates earnings should get a boost thinks to this most recent dip and given the current stock price we are looking at almost 25% dividend returns this year. Once the dust settles the stock price will appreciate to reflect that and you will see that yeild go back down to the mid teens which means NLY will come out of this hitting a new 52 week high just as they did after the last go round last summer.
I agree with everything that you have said and also think that when the dust settles, NLY will move up again. My only concern is the fact that as the FNM paper declines in price, you can get a margin call if that is the asset that backs your borrowing. Remember, even though NLY is not as leveraged as some of the other mortgage REITs, it does stand at 9X borrowing of existing assets. If the situation gets worse, there could be some "calls". I would love to see Paulson come out and reaffirm the implicit guarentee on the FNM paper to firm up the bid. If they did this, lower rates by the Fed. would not be as important and NLY would still spike up.
<For existing share holders, every time NLY issues stock they are getting 1.40 for every 1 dollar they are agreeing to return>
Gineneh, I've heard Mike Farrell say this on conference calls before, and I guess I understand it to a blurry view degree, but can you explain that to me like I'm a six year old?
You certainly don't have to, but I was pleased to see someone provide a reasoned comment on the boards for once, and I guess I'm kind of confused by the "for every 1 dollar they are agreeing to return" statement.
Explain why NLY is immune from a margin call if they are leveraged from 8-12:1. Okay, they raise money through a secondary stock offering, but then borrow money to leverage their position to purchase more MBS. They can cash in some highly liquid securities such as Ginnie Mae backed paper after their cash reserves are depleted, but the Freddie and Fannie paper is becoming cheaper and harder to sell by the day which could eventually trigger a margin call. The only way that I can see that they would avoid a margin call is if their cash reserves plus GNMA paper can cover margin requirements. Their Fannie and Freddie paper is no different than the TMA paper, but their risk exposure is lower due to their limited leverage in comparison to other companies. The only other ways would be for the govt. to state that their is an explicit backing of Fannie and Freddie paper which would destroy the Treasuries or NLY has another stock offering to raise cash which would dilute existing shares. Too much uncertainty for me at this time.
It's not impossible for them to get margin calls that they can't meet. But for that to happen, the whole banking system would have to collapse.
Margin calls are not the issue. Right now NLY can borrow cheap and buy paper at higher yields. The spread is in their favor like never before. They are not meeting margin calls, they are out their leveraging more. Write to NLY IR yourself. The only point Cramer made that may be right (and he did not bring up any concer about margin calls because he knows there are not).... the only point he made that may be true is that it may become more difficult to borrow even though its cheaper and more profitable.
There may be merit to that point, and that would impact future earnings, though it would be off set by the increasing spread on their buisness which means you borrow less but get a greater return. I still think that point is only transient, the FED just moved to essentially let backers of Triple AAA paper print money. Though NLY is not a primary borrower, if primary borrowers can get REPO from the fed in exchange for Triple AAA paper, they have to do something with that money to turn a profit and who better to lend it to then a safe company like NLY. The FED will do what it can to loosen credit, and this tempory change in triple AAA paper didn't last after 9/11, or 2002, or even last summer, and it won't last now. Either way it wasn't worth a 30% stock dive or a current dividend yeild for NLY in the 20-28% range. Big money is not going to let that yeild just sit there. We found a base at 15, and we move back up from here.
Actually, I sometimes go to drive thrus to have morons like you serve it while working for minimum wage. Thanks to idiots intelligent people will always have someone to take money from in the market.