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To: orkrious who wrote (165941)	5/15/2002 8:44:39 AM
From: Oblomov	Read Replies (1) \| Respond to of 436258

It's true that NLY borrows short and lends long - and a flat or inverted yield curve would hamper their ability to do this. During 2000, when there was a flat/inverted yield curve for most of the year, the stock just treaded water. When spreads expanded in 1998, however, the stock tanked. Also, the stock value depends on the continued liquidity of the Ginnie Mae market (which dried up in 1998, also). Note that the stock price has a strong negative correlation with prime mortgage spreads. It does not have as strong a covariance with the slope of the yield curve. Think about why this is the case: they borrow in the repo market, and buy GNMAs. Mortgage spreads could get wider than the spread between GNMAs and T-bills (in fact this has many times been the case in the past). They face greater risk due to spreads growing than they do in yields flattening because 1) widening spreads cause their NAV to decline, and their future profits from selling inventory to decline. 2) flattening yields just make each new tranche less cash-flow positive. Note that their profits from sales are the main source of those juicy dividends. I felt good buying NLY in Jun 2000 at 8.5 with an 11% yield and at 0.8x book value, when it looked dire for the mortgage REITs (Fed had just raised rates again). I felt comfortable selling it at what I consider to be a multi-year bottom in mortgage spreads in May 2002, trading at 1.5x book value (although I admit, I hate to give up the great dividend), when Jim Jubak, Fleck, Jim Cramer, Herb Greenberg, and many others are talking about it. Fleck seems to be late to the party - BWDIK? If you insist on playing this game, NLY is the way to go, IMO.