We invest in a lot of different situations, so I get confused about once a week. When this happens, I reduce things to their simplest possible terms and get out my little library of reference books.
First, in the present interest rate environment, the mere fact that anyone is offering a 13% return on anything should tell you that risk is involved. This "premium" is what attracts investors. The only question is: "is the premium high enough?"
Second, we have a firm here that invests in mortgage securities only--a medium sensitive to interest rate changes in both directions. They are leveraging these investments by a factor of 10X, (apparently customary and reasonable in the sector.) This means that they are extremely sensitive to any contractions in liquidity, which is what happened this summer.
Third, the "insiders" you refer to are professional investors, holding "beneficial interests" in Annaly, (greater than 5% with no intent to control.) When the banks began to restrict credit this summer, they began to sell en masse; because they knew that the risk premium was no longer high enough and that their
competitors in the stock would feel the same.
In other words, this is inherently a risky situation. It is not suitable for those requiring day-to-day stability of principal.
On the other hand, the price volatility built into the stock by risk factors of the business makes it attractive to other kind of investors--especially when compared to the earnings and dividend yields of stocks or the coupons of bonds.
At some point, the big guys will be back. You can then sell out your position for whatever capital gain exists, plus the accumulated income return for the holding period.
Not a bad deal. The key here is to have no immediate need for the money invested.
I'm glad that I'm not Jim Grant! He's trying to write for MONEY about investment opportunities not usually covered for that audience. He must get about 60 angry letters a week!
Hey, does anyone have anything to say about Annaly's approach realtive to other mortgage REITS? Is this really a conservatively managed company?