Hi Grace, here is how matters started on RAD ... and how the nightmare, oops, I meant to say 'the next mania' is starting ... with a post crony lunch e-mail:0)
-----Original Message-----
From: mac@xxxx.com.hk
Sent: Friday, May 03, 2002 2:33 PM
To: Jay; Brooke; Peter
Subject: Annaly Mortgage
Per our lunch conversation today, some nice things said about Annaly in the second half of the article. I've met Bill before and he seems to be quite on top of things. (he lives in Seattle). Annaly was touted in Q4 of last year by Jim Grant of Grant's Interest Rate Observer. I've bought enough already for my IRA already, but you might want to take a better look at it for yourselves if we get a pull-back. It surged earlier this week. Comfortable buying this sucker with a $16 handle.
Mac
BTW - Pete, sorry you missed our Lamb Ka Bab lunch at the FCC today. I gave you my recommendations a couple of weeks ago. What specifically do you like here?
The SOX Is Beaten With the Ugly Stick
By Bill Fleckenstein
Special to TheStreet.com
05/02/2002 06:06 PM EDT
Last night, the foreign markets snoozed once more, with our equally lethargic futures for company. They were under a small amount of pressure by casino time, which kicked off yet again with a selloff. Today, it was cut short by a better-than-expected number for factory orders, which engendered a modest sprint of about 0.5%, plus or minus. But as we have frequently seen of late, no sooner did the news print on the tape than the market was slammed, such that within a couple hours, it was trading at a new low for the day. The S&P and the Nasdaq were down about 0.5%, and the Dow was hanging in there, kind of unchanged. The bank stock index was up about 1%, with financial stocks firm and the brokers catching a small bounce after their recent drubbing.
SOX Drowns Sorrows in Nasdaq Daquiris: The weakest area was big-cap high-tech, as the Nasdaq 100 was hit for 1% and change, and the SOX was down nearly 2%. Interestingly, this sector continues to shoulder the lion's share of the angst, while pockets of strength remain in the housing stocks (many of which have made new highs), and lots of smaller-cap stocks continue to motor. Yesterday I noted that IBM (IBM:NYSE - news - commentary
- research - analysis) had made a nice little turnaround after having been down.
During the early selloff today, it quickly dropped a buck, recasting yesterday as just another one-day wonder. In any event, if one wanted to describe the tape action this morning, "just plain lame" would fit the bill.
Over the course of the day, things did not improve in tech land, as the Nasdaq, Nasdaq 100, and SOX essentially closed on the low tick. People can see from the box scores that those were percentage moves of 2%, 3.5%, and almost 5%, respectively. The S&P, though suffering several sinking spells during the day, did manage a heroic rally going into the close, cutting its loses to just a fraction of a percent. And the mighty, mighty Dow actually closed up on the day, as did the bank stock index, which was up nearly 2%.
Connect-the-Tech Dots: What accounts for these odd crosscurrents? Basically, I think people are starting to understand how inflated tech stocks still are, and there is a move afoot to get out of them. In classic mania fashion, the Jello is moved around the plate, such that people are buying the Dow (because it "acts well"), housing stocks, and various and sundry other issues. Right now, only tech is being sold.
Tomorrow, we'll see what the unemployment number shows, and that probably will inspire a large move, either up or down. Maybe they'll be able to put Humpty-Dumpty back together again, and techs will be dragged up with the rest of the market. Or perhaps the big averages will join tech stocks on the downside. I would say that tomorrow is a sink-or-swim day for the SOX. If it can stabilize at 500, maybe it can bounce. If it gets underneath there, the trend could even accelerate. So, Friday looks like it will be a pivotal day. Though I can't predict how it will turn out, I suspect that the action will provide a clue as to the trend of the next few weeks.
O Kneeling Before the Almighty Dollar: Away from stocks, fixed income was also down, which is not something one normally associates with a weak stock market. The metals were back and forth across unchanged to finally close mixed, with silver up $0.01 and gold down $0.80. The dollar had a bit of a bounce after yesterday's selloff, which was aided, apparently, by the performance of our illustrious Treasury Secretary before the Senate Banking Committee, in which he basically reiterated his long-held view that intervention would be ineffective (I happen to agree with him on that.)
But then he mouthed the platitude that the current account deficit -- and any other problems you might like to cite -- won't really matter, due to the relative attractiveness of investing in the U.S. That attitude carried the day during the mania, but I don't think it will work as people abandon their fantasies and come to grips with the reality of the economy and the stock market.
Smokey Bear Signals: As far as the dollar is concerned, the worm has turned. I believe it, too, is now in a bear market, and I expect that this will cause all sorts of problems down the road. Often, the way a market reacts to news tells you the direction, i.e., going up on bad news, inability to go up on good news, or moving on a piece of neutral news, such as this was. And that is why yesterday's action in the dollar was significant.
Debt-Service Announcement: Turning now to where turmoil takes center stage, I'd like to comment on the telecom sector. This is an area that attracts a lot of media coverage, which is why I haven't had a lot to say about it, but some comments by a friend prompt further discussion, specifically about AT&T (T:NYSE - news - commentary - research - analysis). At present, the company's debt trades at near junk status. The 6%'s of '09 traded around 83, which is a current yield of 7.2% and a yield at maturity of 9.2%. (Of course, its longer-dated telephone paper yields north of 10%.) I mention this not because the prospect strikes me as attractive but because the transformation of its debt from pristine to tottering on junk strikes me as rather stunning. I'm also told that there are some covenants/triggers related to EBITDA coverage and ratings.
In any case, I was just quite taken aback to see where AT&T paper trades. The point of it all is, how can this debt be trading at near junk status -- with the debt market apparently thinking there are some real questions about the value of the business -- when the equity market capitalizes the business at early $50 billion? (Telephone's stock was up a dollar
yesterday.)
That is the question. It would not seem that the debt market can be right and the equity market can be right on the same subject. Usually, the debt market is correct, which bodes poorly for the common stock holders. So, for the many people out there who own the shares, I suggest that you talk to your advisers or whomever you consult to find out what's going on.
Semi-Concurring on Cash: Along the lines of doing research, Arne Alsin of RealMoney.com penned a fine piece this morning that I think people should read, titled "Five Mistakes to Avoid." My only disagreement with his primer is "Mistake No. 1: Going to Cash." Were we in normal times, I would concur that holding all cash is a bad idea, but these aren't normal times. So, given where we are in the unwinding of the mania, I think it's entirely okay if people want to keep all their money in cash.
TA-DA, NLY!: Finally, for all of you who have patiently anticipated my promised long recommendation, the wait is over. When I was in New York, I visited a company that I thought might make for an interesting recommendation. Upon returning home and doing some more work, I have concluded that it merits investigation on the part of all readers (and I purchased some shares for my IRA at around today's closing price). The company's name is Annaly Mortgage Management (NLY:NYSE - news - commentary
- research - analysis). This is a yield vehicle, something that I think is going to be in big demand over the course of the next couple of years.
What Annaly does is what banks used to do: It borrows short and lends long. In essence, the company is a virtual bank. The difference is that it only "lends" money for mortgages, i.e., it buys them. So it makes the spread between borrowing at short rates and lending at slightly longer rates, and of course that moves around, depending on the company's view. (It buys government-sponsored mortgage debt.) It uses leverage, as well. Basically, what you are buying is the Annaly fixed-income management team.
Complementary Beverage with Leverage: Now it might seem strange that I am recommending something that is leveraged and owns mortgage paper, but I think people are being compensated to do just that. The company is structured as a REIT. Therefore, it isn't taxed at the corporate level, and all the money that it makes is paid out to the shareholders. So, if one has an employee benefit plan, i.e., an IRA, 401-K, or profit-sharing plan, this is a perfect way to capture a fat dividend and keep all the money after taxes.
Warning: Curvaceous Yields Ahead!: Now comes the juicy part. Based on the trailing four quarters' earnings, which in all likelihood won't be what the next four quarters hold, Annaly yields about 13%. That's right, 13%. The company's stated goal is to earn the long bond, plus a few hundred basis points. If they are able to meet it, their returns will in all probability be superior to the stock market --arguably, with less risk. (In fact, Annaly has beaten the S&P 500's total return in each of the past three
years: in 2001, it returned 101.9% to the SPX's -10.92%.)
The risk for them would come from a flat yield curve. Obviously, it would be difficult to earn a big spread if the yield curve were flat, and things would be worse if it inverted. Similarly, there could be a problem in the mortgage market that could cause the company some interim grief, as well. But if one studies Annaly's record since June 1997, and if one thinks about all the wild and crazy things that have happened to the fixed-income market in the last five years and then sees what the company has been able to produce in that extreme environment, one could be pretty confident, as I am, that even when events sour, it will do a pretty good job.
Cushioned REIT-urns: Annaly's trailing 12-month earnings are about $2.24. If one were to say, what if the company earned only enough to generate 5%, it would have to make $0.90, and one can see that this would allow for a huge drop, relative to where earnings are. The way I look at this, if over a full cycle (i.e., good periods and bad periods) I can earn greater than 8% or 9%, I'm going to do better than the stock market, and that's something I find pretty attractive.
One of the things that I really like about this organization is that it's totally transparent, and all its securities are held "available for sale," as opposed to "held to maturity," which means they're marked to market every day. Based on my investigation, I see no way that this company could play any games with derivatives or illiquid securities, even if they wanted to. It would necessitate a change in its operating procedure, which would be a red flag for everyone.
Before Taking Your Income Vehicle for a Spin...: Now the stock price obviously can bounce around, relative to what its earnings are. Recently, Annaly had quite a good quarter, and the stock has squirted a bit. In any case, I advise people to check the company out for themselves to see if it makes sense as an investment. If one wants to buy it, one needs to do so carefully. Because it's an income vehicle, if you buy it "sloppy," you can't make the money back by a massive stock-price movement over time.
Further, let's be clear about one thing. This is leveraged interest-rate speculation, even though there are talented people involved. So, people who allocate money should recognize what it is, and their own tolerance for risk. This is suitable for a slice of a portfolio, potentially. It certainly shouldn't be a huge chunk of anyone's net worth, at least in my opinion.
But I think it's an idea that over the next five years is likely do dramatically better than the stock market, and to repeat, arguably with a lot less risk. So, I suggest that people dig into this one and see if it's suitable for their portfolio. The Web site is www.annaly.com
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