Be on the lookout for statements like "Net short position in Agency MBS", because you could see something very horrific, M-REIT's performing cannibal shorting of anothers stock in order to hedge for rising interest rates. I wouldn't put it past them. I wouldn't be surprised if some of these promoters of M-REIT's were shorting them now, after earning fees and promoting them for the SPO's just not even a year ago. BEWARE OF THE CANNIBALISM of net short positions.
I will answer the last question, will mREIT stock prices decline further when the QE taper is implemented.
You seem very inexperienced in investing in Mortgage Backed Securities. I take it you are a YIELD CHASER or PERF (PERF is an abreviation for the pigeons and squirrels who buy IPO's of stocks with big dividends, it is an abreviation for "PERFECT FOOL". No offense, just trying to help you. M-REIT will decline further, much further and could go out of business because rising rates hurt them dramatically, especially if the taper is done very slowly or fast, either way they get socked. This is probably a question of how long with these highly leveraged M-REIT's last in this interest rate trend and cycle. Interest rates run in 30 years cycles, we just ended in 2009 the 30 year low down cycle, we are just starting the 30 year up cycle. Buying MBS when the government was buying and supplies were scarce made no sense from an investment standpoint, because you were buying assets at all time 'HIGH PRICES" and record low yields, very very BAD INVESTMENT and then M-REIT's went and leveraged 10 to 1 to grow their assets managed to profit off the management fee as % of total assets. MY ADVICE, if you are looking for yield, buy some beaten down Utilities, like Tampa Electric (TE) or preferred stocks yielding 8-9%. But remember, with taper, any bond-like investment bought for yield will drop in price. M-REIT'S are set for massive levered losses.
I began my career in banking and mortgages back in 1972, when Atico Mortgage Investors, a mortgage REIT issued and initial public offering at $20 per share and an anticipated yield of 10%. I have been in banking and mortgage loan officer (licensed with the state), so I think I know a little about mortgages, especially agency mortgages that get sold that are called MBS (Mortgage Backed Securities). This asset has what is called "NEGATIVE CONVEXITY", just do a search on yahoo to see the discussions on it. Short and simple, it means that MBS prices can go up just a little but can go down al lot. The reason, if interst rates decline, the borrower can refinance, this attribute doesn't allow a big premium by investors. If interest rates rise, mortgage backed securities can fall sharply since their perceived maturity or duration extend, since the borrower would not want to refi since rates are higher than what he is paying.
The M-REIT strategy is to buy long 15 yr and 30 yr fixed MBS securities and borrow funds at low interest rates to buy even more so that the spread is positive and then they pay out 90% in dividends to shareholders. But what alot of M-REIT's did was used leverage, 5 -10 and some went even to 12 times inorder to produce BIG FAT DIVIDENDS so as to attract more perfs into buying their stock and for increasing their book value. Their motivation was to make money off this strategy since they are paid a percentage of total assets (book value) managed.
When RATES RISE, the value of collateral declinses and the borrowing cost can also rise, hurting the spread or profits to pay the dividends. No M-REIT to my knowledge, has ever hedged to neutralize 100% of this loss. Hence, as the taper starts and draws on, look for losses to continue and multiply.
Listen to what you just said, Perpetual Preferreds are fine when rates start rising, only case that is true if you plan to hold them forever. Market prices will plummet. I wouldn't want anything longer than 5-8 years to the call date, reason, that is what the M-REIT's are trying to get too, I think they really believe rates will rise from now on.
You guys have already lost big from $36 to $21. Get out now and wait for the MBS genius, Gary Kain signal when to buy. He is not done rebalancing the portfolio, or protecting the book value. Rates will rise further into next year and possiblly till 2015. Capital loss probability is too high. Wait for Gary's signal. When he buys back with the latest stock buyback funds. He know better than anyone what the best time to buy, he is one of the best in timing the dynamic shifts after the shock of the initial start. He got caught off-guard with the taper, but now he knows it started, HE GOT BEN's message loud and clear. The FED has been warning banks to watch their exposure to low yield long term bond like investments and low interest short term carry loans. The last time they warned, rates hikes followed 6-12 months later. Get out of perpetuity time bonds with no call dates, those will become worthless like MBS did when Lehman went under.
Your logic is not following the facts. They have sold 30 yr assets and replaced with 15 year maturities to reduce duration risk for a rising interest rate environment. What you imply "the spike in rates is probably done" is not very accurate or consistent with the circumstances and facts. They are adjusting their policy not on hindsight, but on FUTURE EXPECTED increases in interest rates. This information is very valuable, because this guy is a genius from Freddie Mac, 18 years of experience managing $700 Billion in MBS.
If Gary Kain strongly believes that rates are rising that he is repositioning his $130 B. AGNC portfolio for less duration risk, then that is very very very important fact, Jack. I am in Gary's camp, INTEREST RATES ARE HEAD HIGHER FOR NEXT TWO YEARS. If Gary thought rates popped up for 3 mos. and that its over, he would not be cutting the yield spread this dramatically to protect BV. In fact, if you read the text, he actually said "PRIMARY GOAL IS TO PROTECT BOOK VALUE". He will not protect the dividend, it will go down as much as he needs it as long as book value stays up. Reason is the short term carry loans from the banks, which the banks are raising the cost on as long rates rise. Don't be fooled by short treasury rates that indicate short treasury bills have not move up, BUT THE SHORT CARRY TRADE FUNDING THAT REITS USE HAS MOVED UP SMARTLY, which contributes to yield spread compression. He is also smart in getting a large share buy back program approved, because the stock price is expected to drop significantly and he can be ready to buy these shares, possibly in single digits when book is in double digits. This guy is brilliant but can make mistakes, like we saw the past two years, going gangbuster on MBS at extremely high prices and record low yields.
They can take expenses and writedowns and change assumptions to expense more, plus they have till the end of the financial reporting year to meat the 90% with adjustments. You don't think they really made $1.50 per quarter, alot of stuff was estimated on expected outcomes, those expectations have to be marked to market or reality and they bring it down by end of the financial year.. The trend is down and the spread is down, quarter after quarter.
I think this is the max. if they wanted to get ahead of the trend and stabilize it for 2-4 quarters, they could cut it to $.40 or maybe pay out a .50 divy in stock only.
Check out FMCC and FNMA, because this could end up like these from 2004 to 2009, $72 to $2. The index is littered with REIT's and corporations who took over what was left. Check out Bimini Capital Management (BMNM) or Orchid Investors. I've got to stop laughing, but this story of MBS mortgage back securities getting resurected and then come crashing down to earth has repeated now 2-3 times in the last decade. When the economy slows like in 2008-2009, MBS is illiquid and has really no market value. This is just one of many risks here. The game to fool the pigeons is to come up with a scheme to show a double digit yield, no matter how big the risks involved and you can always sell this to the unwary.
It is, I forgot the punch line. The same behavior is displayed by investors when the FED announced QE. It is suppose to create jobs. It didn't, there are less jobs now than there was three years ago, millions of unemployed gave up looking or retired early, those are the facts. QE was like invisible food and the markets just went higher from all the "perfs" who didn't want to put their money in the bank and get 0.1% return. This was a ponzi scheme, perpetrated by Wall Sreet, the Big Banks and Big Government. In the end, the "perfs" will be left holding the bag.
Why isn't there any? This is very superstitious behavior and should be discussed. The last earnings report was terrible and this is not random variance at work. The information disclosed is non-random and hence has a "trend" which is my hypothesis of this problem. To verify this hypothesis, I will test the trend or non-randomness of the data points, and yes, since May, 2013, the trend has been down.
Lots of factors showing that leverage is being reduced, assets being sold and replaced with new assets. This last item doesn't make economic sense, because it is costly, hence it is being done at an expense now based on some future expected ourcome which will be more costly.
I think divy going down to $.40 - .50, my gut is telling me. My numbers show .55-.60 for the next quarter. But by next spring which is just around the corner, we could be at $.40/qtr.......
There was an experiement in which pigeons were presented with food at fixed intervals. Most of the pigeons developed a ritualistic ritual of timing come look for the food and eat it. The food after a while was removed and the pigeons came exactly at the alotted time and went through the maneuver of eating the food that wasn't there. They actually repeated the behavior with no food and believed they were actually eating thus reinforcing the belief and the relationship. This experiment was performed in 1948 by B. Skinner. The appearance of the food seemed real and the pigeons actually believed they were eating, even though the food was removed and the behavior repeated with out end, superstition to infinity. This superstition is a byproduct of a search for patterns between events, which is essential for the continuation of the species. I have notice birds, squirrels doing the same thing my backyard, the squirrel making a circular pattern after finding one klump of bread, and circling and action like he found another a few inches away, becasue that is the way I trained him when I threw out a hand full of bread klumps. The pigeon or squirrel is trained in the false belief, that food exists a few inches to the right in a circular pattern. They will oftern force themselve to make many incorrect associations in order to establish that that are essential to survive. The ability of infer cause and effect, based on frequency with which one event occurs is called adaptive or Bayesian learning. One thing that separates humans from pigeons and squirrels, is for our ability to evaluate if there is really food there and adjust our actual mechanistic behavior to improve our odds. When we stop looking for those links to change behavior, we give up the benefits of human intelligence and exchange them for the reflexive impulses of lemmings, sheep, pigeons, squirrels and yield chasers.
I can picture it now, President Obama, Arnie Duncan, Education Secretary, and Gary Kain, Obamacare Secretary at the Whitehouse.
I already did. Do like Gary Kain, write a mathematical model with all the variables, use applied physics, like he is doing, you will be able to predict him pretty easily, he is an Electrical Engineering geek who loves modeling and equations, that is what is telling him what to do, the MATH. His down fall may be that he relied totally on the math, you have got to put some emphasis on the Arts and Humanities, in order to be a good investor. Like I said before, if you can figure the variables and the weights assigned to them and do future expectation calculations, you can come pretty close to setting up ranges, with risk to reward profiles and base very easy and simple buy/sell decisionmaking to profit off all of this. Remember, you don't really need to know where all those hedges, TBS's, etc are heading at a static period in time, all you need to know is a reference calculation of the trend in those paraments and the effect on the expected outcome. I told you before, of the 5 year rule in M-REIT's, 2 year rule on dynamic shifts, etc. There are lots of rules and data, but this is headed lower, as TAPER gets factored in slowly over the next two years.
Gary Kain is an electrical engineer, he can not be held accountable for being a financial wizard in a court of law, that is why Freddie hired him, if he was an expert, all the Execs. at Freddie would be in jail now, because the law would say they knew better.
This has to be treated like a crime scene and profiled, like in a CSI investigation. You have to look back far, in order to see further into the future. Looking for comments etc is one way, but you can predict Gary based on what he has done in the past. He spent his whole career minus his ( 3 + years at AGNC and 18 mos. at Johns Hopkins University's Applied Physics Lab). He graduated with a degree in Electrical Engineering. He sold himself for a job doing financial models for cash flows in Freddie Mac's financial research team, he then went into trading and then management of Investments and capital markets.
Clue 1: Electrical Engineer hired to do financial modeling (Freddie Mac)!
Clue 2: Moved into trading with his modeling experience, theory dependent (Freddie Mac)
Clue 3: Moved into Management as VP of Investments & Capital Markets (Freddie Mac)
Clue 4: Freddie Mac Seized by Government - Massive Losses
Clue 5: FED drives rates to zero, MBS prices to record highs, gets hired as CEO of M-REIT!
Clue 6: Goes on record exponential growth $5 to $130 B. when MBS prices at all time high!
Amazing accomplishments for someone who is a master in OHM's laws:
P = EI, P = I(2) x P, I = E/R, P=Power, I=current, E= voltage(energy), P=Power
The past should not enter into your decision, you are extremely emotional when you do this. You have to only look objectively at the future expectations of all the variables involved here, just like Gary Kain did at Freddie Mac and at the John Hopkins Univerisity's Applied Physics Lab. You also have to be cognizant of the fact that your CEO is an Electrical Engineering Geek who only worked at one other company before coming to AGNC, which was seized by the government (FREDDIE MAC).
Looking at your double digit yield and hoping for a miracle doesn't make you money, if it did, all those people who bought Freddie Mac at $10 after it fell from $80 would be rich now. Ask Gary Kain how much money he made on his last companies shares in Freddie Mac. Get the picture. This is an Electrical Engineer, who wrote heuristic models for Freddie Mac. When FED starts to taper, and the regulators show up on Friday afternoon to seize the mortgage operators, I think Kain will be a great candidate to take over Obamacare debacle, he has the right credentials.
Gary Kain is an Electrical Engineer with a degree in Electrical Engineering from University of Pennsylvania. He wrote computer models for mortgage cash flows in Freddie Mac's financial team before going into trading. By 1995 he was Manager of trading decisions and hedging mortgage positions at Freddie Mac. His main responsibility seemed to be hedging for changes in interest rates. The portfolio he managed was HUGE, $700 billion for his last few years with the company. The portfolio included mostly agency but some non-agency MBS,including subprime debt that fueled the housing collapse, that contributed to Freddie Mac's losses and government rescue.
He primarily was concerned with refinancing risk, so he bought bonds with lower risk for refi's. One area that has to be addressed is that AGNC grew EXPONENTIALLY from its start when 3 years ago from $5 B. to over $100 B., but this was during a time when the FED started its extraordinary easing in credit markets coupled with easy policies put in place by Obama for homeowners to refi. and sending borrowing costs to records lows (record high MBS prices). This forced M-REIT's to make new MBS investments at some of the lowest ever yields, increasing the risk of losing value when rates do rise, like this spring. THE ULTIMATE TEST will be when the FED exits QE and people start to dump MBS and bonds and when mortgage securities spiral down in value. Kain seems to be loyal and stayed with Freddie until it was seized by the government and it started to shrink the Freddie portfolio. What will Kain do, when REIT's come under New Regulations, it is drawing attention as M-REIT's have been mentioned frequently by gov. regulators and querries to US banks about their exposure to M-REIT's.
Is that $77 K for teaching how many semesters or quarters, is it a 12 mo. gig. How many hours do you put in out of class. Break down you class times, class time outside of class, including faculty meetings, student meetings/activities, etc. Also, any research and papers you prepared, the time spent. I want to develop a mathematical expression to define your fundamental activity, like I did with AGNC valuation equation. Why haven't looked into one of the Financial Engineering fields in banking, investment banks or even the FED.