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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (24814)	10/31/2002 7:30:27 PM
From: interesting man	Read Replies (1) \| Respond to of 74559

I picked up some SASOY today. I discovered the stock by reading some of your past posts.

To: TobagoJack who wrote (24814)	11/1/2002 2:26:05 AM
From: energyplay	Read Replies (1) \| Respond to of 74559

Hi Jay - Annaly NLY is an interesting mortgage REIT. I heard their CEO, Mike Farrell, speak at a Grany's conference about 2 years ago. This was a confernce run by Jim Grant, of Grant's Interest Rate Observer. This tends to be a bear conference, to put it mildly. Paraphasing his talk (this is not my opinion, just reporting) - *** Mike started out by saying that there had been something like 26 mortgage REITs formed in the 1970s, and all but one of them blew up in about 15 years. Mike then posed a question what had they learned and how is NLY different. Instead of originating mortgages, they buy blocks and obligations from FannieMae & FreddieMac, etc. So they aren't making credit judgements - that killed about half the mortgage reits. And these blocks are liquid and can be moved. They finance this long term paper by borrowing short term. They have multiple credit lines they pay for in case there is a crisis. Even two years ago, they started borrowing for longer terms, even at slightly higher rates, since it was a better match of the duration of assets and liabilities. Mike seemed very aware of the potenial for financial crisis. He was aware that a very big crisis coudl wipe out NLY. ** My opinion - I got the impression he expect some problems, and in some way was looking forward to them...;-) They are basically a bank or more specically, a hedge fund strategy. They try to be a very efficent bank, and manage the risk. In the Grant's Interest Rate Observer of about 3 weeks ago, they had a discussion of about 4-5 mortgage REITS, including NLY, and their safety. I have made money long NLY last year. I sold some to buy other things, and sold the rest because I thought it was risky. I think they may not blow up - they hang around too many bears, and they seem to have some humility. Okay, energyplay, how could they NOT blow up ? Some steps - 1) Shift to Freddie Mac securities, which are better balanced for duration and out of Fannie Maes. 2) Short Fannie Mae Stock. This is a standard bond hedge technique, especailly for convertible bonds. 3) Short or buy puts on banks and insurance comapnies who issue credit risk insurance 4) Use some of their surplus to buy more credit lines & long Treasuries 5) Buy swap options to swap some of their long term Fannie paper for short term Fannie paper All the above techniques reduce the spread (profit) and in soem cases the leverage. I think NLY is willing to do to some degree. They are a compound interest machine - the trick is to stay in business, not maximize each year. SO in a crisis I expect them to lose money and the stock to lose value - but not go to zero or BK. This can take the fun out of shorting...;-) I also don't like to short stock that pay 15% interest, either. *** What I want in a short is someone whose is arrogant - like the guy who ran Providian credit cards, PVN. $50 to $3 in about 3 months ! For financial shorts I'm looking at COF - Capital One - look at their balance sheet growth (assets) for the past 4 quarters - they have been adding about 2 + billion in assets per quarter to a 24 Billion base. They are picking up all the sub prime customers from Providian and others. Unfortunately, COF stock is all ready down. I currently have lots of AMGN puts - AMGN was suggested by "gravity rules" a poster who said the chart looked 'toppy' .