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American Capital Agency Corp. Message Board

  • taymere_lane taymere_lane Feb 11, 2013 12:58 AM Flag

    Conference call highlights

    I used to follow AGNC quite closely and am just returning to doing so. The following are what stood out for me from the 4q12 ernings conference call. Please comment and let me know what stood out for you.

    * GK practically promised to maintain the div at $1.25 at ~4:51 into the call. It sounded a lot like guidance, and it was as close as one could publicly come to declaring without a board decision.

    * BV rose from $29.41 to $31.64 in 2H2012 which beat their long term average 80 cent/q BV gain. I still find the sequential quarterly BV loss slightly disappointing. I remember when AGNC was small, nimble, and hungry enough to quickly exit positions that were turning against them. Their portfolio size has grown immensely over the years of SPO's, and "...larger pockets of value..." are harder and harder to find. AGNC can no longer sell out of huge positions without moving the market. If they did sell what could they have reinvested in? I believe that if the portfolio was still the same size as it was a few years ago they would have been able to dodge that quarterly BV hit by selling.

    * They didn't mention IO strips during the call. IO strips were absent as a hedging strategy, they were sorely missed IMO, and again I think that's a natural consequence of their burgeoning size. There was a time when they could buy enough IO strips on carefully selected slow prepaying pools to significantly move their earnings results needle. A synthetic proxy Markit's IOS.FN30.350.10 (a synthetic IO strip of a fannie 3.5 coupon 30 year fixed rate) illustrates the dramatic price swings that they missed out on. The price of IOS.FN30.350.10 moved from $16 in August 2012, to $11 in September 2012, back up to it's current $15. There was a time when AGNC was small enough to play those kind of huge moves for a meaningful profit on real, rather than synthetic, derivatives. Those days are gone.

    * There was a question from the Jeffries analyst about the risk of decoupling between UST's and MBS possibly leading to an unhedged divergence during a future QEIII cessation inspired bear steepener, around minute 47:28. GK had a fascinating answer, said that previous Fed absorption of all that low coupon duration would probably overwhelm the Fed flow change after the cessation of QEIII just like it did after QEI ended. My understanding of his remarks is that the Fed, a completely unhedged, non commercially motivated player, has cornered the market on all that low coupon duration. The Fed would just stand there flat footed and take the hit during a bear steepener instead of selling out to avoid losses. Because the Fed has largely cornered the market on on low coupon 30 year FRM there aren't any major commercial holders to flood the market. However UST's are a larger market which the Fed hasn't been able to corner, so those cornered MBS could actually outperform UST's. I had to listen to his portion of the call five times to understand what he meant, I think I understand him now but I'd really like to hear your color on it.

    *Peter Federico stated that their swaptions would certainly outperform during the volatile market turmoil following QEIII's end.

    Overall they sound very confident with their leverage and hedging strategies. I trust them not to blow themselves up. However I over-weighted WMC vs AGNC last Friday on valuation, and becuase WMC is still small enough to make huge upside surprising trading gains on real IO Strips whereas AGNC is can't anymore. AGNC could still potentially play synthetic IO strips, but the the days when they could be ultra selective and find meaningful amounts of real IO strips like WMC can are long gone.

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    • Question about WMC. Yahoo says that their book value per share is $50.78 yet the stock price $21.67. This implies that they could liquidate their holdings for a 150% gain for share holders. Does this make since to you? How could their book value get so large? It would seem to me that this implies that they are not leveraged as high as the other mREITs. It would also imply that it would make no since for them to have an SPO in the near future and that they should be buying back their own shares. Am I missing something?

    • Hey Taymere,

      Thanks for the terrific breakdown of AGNC's 4Q report. If we are not derailed by an SPO or the ineptitude of our members of Congress, I like AGNC's chances for a strong dividend run this Q.

      FWIW, The typical subscriber discount associated with AGNC's SPOs has been around 4%. Using the MRQ reported BV/share of 31.64 would allow an accretive (to BV/share) SPO at a share price of around 33. One salient question regarding the potential for an SPO might be the availability of MBSs yielding enough not to dilute the yield of the existing portfolio (obviously, increasing the leverage could compensate for a decreased spread based yield, but leverage adds risk). Stay tuned.


      • 1 Reply to ddjim2
      • Hi Jim, I think you're right, and in fact I think I'll try to ignore Washington DC as best I can. I saw a bumper sticker yesterday that read "If You're Not Outraged Then You're Not Paying Attention" and I thought hmmm... what a brilliant strategy to achieve serenity. I'll try to ignore the smoke and theater and swing trade value.

        MTGE is going for a huge 1.5x sharecount SPO, and they closed at 1.03(BV) today before the announcement. I will trade that in the morning if they sell off to a good discount to BV.

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