When interest rates rise, my basic understanding is that the value of the underlying mortgage securities will decrease. It also seems that the current PPS of mReits trade partially on the BV. Thus people have been implying that when QE starts to taper off the BV will get hit and there will be a sell off. To counter this, the net interest spread should widen and hopefully the dividends would increase.
But, it seems that before all of the QE’s the PPS of the mREITS were higher. So, my question is how were these valued before QE? How could the PPS be higher if the BV was lower (for example NLY was between $16 and $18 from 2002 – 2005)? Does this imply there would be some short term pain as people don’t understand that the mReits are in better shape without QE?
The same thing happened in my Merrill Edge account. The reason is that while the press release said the conversion ratio is .049:1 the actual conversion is .048825853. So they originally gave you 49 based on the .049 and adjusted it based on the actual conversion ratio. I hope that helps.
Based on that it seems that history tells us that there won't be an SPO this close to ex-date. I wonder if there comes a point that the price is so high they just have to take advantage and do an SPO no matter how close to ex-date. I think at today's price of $7.58 the stock is about 17% above book value. Other than TWO, I can't think of any other mREITs that high and most are trading right around book value.
In just under a month this stock has run from about $6.85 - $7.60. That is highly unusual for this stock and it obviously makes everyone think about if there is an upcoming SPO. So to begin that debate here are some reasons why doing one right now wouldn't make sense:
1. Per the last earnings release they said that the last SPO was taking longer to invest. So to do another one right now wouldn't provide much value.
2. Ex-dividend is only a couple weeks away so why do a SPO right now and be forced to pay a dividend on the new shares with no corresponding income from putting the proceeds to work. The ideal time to do the SPO would be just after Ex-Dividend.
Reasons to do an SPO:
1. The price is above net book value and would be accretive.
2. The yield has slightly expanded since the beginning of the year and it would be good to take advantage.
So let the guessing begin and thoughts would be appreciated.
Doc...sorry to say I am someone who lurks the board and rarely posts and I don't know who Hgft101/hxh is?? But I am familiar with your strategy and was just trying to look for other ways to try and protect myself without putting out much money. The stampede out of these stocks can be sudden and I don't want to caught with my pants down. But I hate paying so much for those Puts....especially when like you said 85% of them exipre in a loss position.
Or I'm just trying to understand if my current way of thinking is correct. For example it seems from other posters that the big risk is how fast these rates increase. So how would one define a fast increase? What "tells" should we look for and follow to try and stay ahead of the crowd?
Just 1 word of caution....you can't always buy it back at the lower price equal to the dividend. I have tried this strategy and many times I have seen the price open on ex-dividend at a difference less than the dividend and then over the next couple of days make back 100% of the dividend and I never had a chance to get back in.
With the latest labor reports and signs that the economy is recovering there has been a lot more media focus on the fact that the Fed will scale back or stop its quantitative easing sooner, ex. late this year, rather than later, ex. late next year. So I wanted to open the discussion regarding the good and the bad of interest rates going up, the effect on the prices of mREITS and the potential strategies to protecting ourselves.
The good (as I currently see it):
There is a chance of increase in spreads
There will be less prepayments
The bad (as I currently see it):
Book value decreases
The yields increase too fast and the mREITS can’t take advantage
Investors will sell mREITS and move to more stable income producing alternatives that benefit from the increasing yields
The possible effect on prices:
I would suspect to be some sort of panic or herd mentality selling as rates rise so a short term sell off would be in order. But over the longer term if the mREITS can take advantage and increase the dividend then that should stabilize and potentially increase the price over the longer term
Strategies to protecting ourselves:
Purchasing long term puts, probably a year or so out
I’m interested in hearing people’s opinions and possible strategies.