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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: reno4 who wrote (43799)	8/9/2011 10:29:13 AM
From: gcrispin	2 Recommendations Read Replies (2) \| Respond to of 78748

From a Bill Gross roundtable interview in Barrons My other pick is a company that borrows short, relatively safely. It owns government-agency mortgages and borrows against them at about 25 basis points, which is the real thrust for both of these investments. The company is Annaly Capital Management[NLY], a mortgage REIT [real-estate investment trust]. It has a $12 billion market cap. The problem with Annaly is that the stock can go down if the company's repo capabilities [its ability to borrow short term using repurchase agreements] are diminished. That happened in 2008 when none of the banks or investment banks would take agency mortgages as collateral. Where is Annaly trading? Gross: It's at 17.75. The stock can't go up much because the minute the price gets above book value the company issues stock, as it did in late December. This is a dividend-earning vehicle. You wouldn't look for Annaly to rise from 17.75 to 22.50 in 12 months. But it produces a 14.5% yield. This is a finance company like AmEx or GMAC or CIT [CIT], although CIT is lower-quality than Annaly. Annaly is changing its personality a little bit, so it has to be watched. But for the most part it owns government-agency-guaranteed mortgages. We're not talking subprime mortgages here. We are talking about floating-rate adjustable mortgages backed by Fannie Mae and Freddie Mac and you and me, the taxpayers. What they own isn't really subject to default risk. It is subject to a lag in interest rates. The rates on these mortgages adjust every six to 12 to 18 months. If interest rates went up by two percentage points tomorrow, Annaly's cost of funding would go up by that amount, but the rates on the mortgages it holds would go up 12 to 18 to 24 months later and the company would have to cut its dividend. So there are risks here, but not in terms of the creditworthiness of the collateral. It is more in terms of the cost of financing, which gets back to my original thesis: the benefits of borrowing at negative real interest rates. Annaly has a book value of about $16 a share. You are basically buying it at book, and giving the company the privilege of investing money for you, levering it 5-to-1, and offering you a 14.5% dividend yield. In the absence of another crisis, you'll do well. Thank you, Bill.