OK. I screwed up. I should have sold all my mortgage REITs when they started tumbling.
The market is obsessive. If it likes something it bids it up irrationally. If it doesn’t, it takes it to the woodshed and beats the living daylights out of it. That’s what happened in the last few days with my favorite mortgage REITs. They lost some (but not all) of this year’s gains). The high dividends have been a bonus.
Agency MBS yields have compressed 50 bps since the Fed’s QE3 announcement as the mortgage spread has tightened. Here’s the chart.
As CRT’s Ken Hackel points out,
“the basic business model has 3 major hot buttons that can shut off the earnings power – asset yields, liability costs, and access to leverage. However given that1) REIT portfolios are mostly owned at significant premiums; that
2) prepay speeds on those portfolios are in the process of accelerating quite sharply, and
3) that reinvestment opportunities are miserly, thanks to Fed activities resulting in low interest rates and tight spreads, potential risks to that dividend paying ability are visible.
The next few weeks and months are likely to be a challenging time for the MBS REIT industry, as each company takes steps to shore up its balance sheet and replace runoff in ways that keeps equity investors on board.”
We think it’s important to watch all 3 hot buttons, wary of any signs of further stress as yet another unintended consequence of Bernanke’s action comes to bear – this time perversely on the exact sector he believed would benefit.
The chart and words come from here.
Reports to read on mortgage REITs:
+ Credit Suisse, “While lower, returns still attractive in current environment; Favor hybrids.” For the full, small report, click here.
+ Keefe, Briyette & Woods. “We expect generally lower earnings for most of the residential MBS REITs in 3Q12 versus 2Q12, driven by lower spreads on new investments and slightly higher prepayments.” For the full report, click here.
Here’s what’s happened to AGNC. Still up on the year, with three dividends paid (in blue).
Some brokers are coming out with reports saying the sell-off is overdone. And yesterday there was a bounce and one broker emailed me that “capitulation” had been reached. Which means no more panic selling. Maybe.
Skip the mattress. Where now? Business Insider has a story:
From FORGET GOLD: Here’s Where Die Hard Skeptics Are Storing Their Wealth. Places:
1. Guns and ammo
2. Canadian bonds
3. Farm land
4. Japanese Yen
5. Watches
6. Timber
7. Stamps
8. Scandinavian bonds
9. Artwork.
The Mei Moses index, which tracks the price of artwork, has beaten the S&P 500 six times over the past decade. Bond expert Jeff Gundlach called artwork a more portable version of gold that achieves the same store of value. Since 2009, Sotheby’s stock has gone from a low of 6.47 to a current price of 30.58, a reflection of the bull market for artwork.
The Scream sold for $119,922, 500 at Sotheby’s on Wednesday, May 2, 2012, I didn’t buy it.
10. Diamonds
11. Liquor, wine
12. Japanese bonds
13. Rare coins
For the whole Business Insider story, click here.
Favorite recent New Yorker cartoons: Remember to watch the debate this evening.
Harry Newton who remembers an old trick Bill McGowan, the charistmatic leader behind the success of MCI (from 3 people to 30,000):
The first thing you do every morning is to write a list of the five most important things you need to accomplish that day. Make your list. Then order it, starting with the hardest at the top. Get the hardest one done first, the rest of the day would be a breeze.
My addition is to reward myself for an accomplishment. Perhaps a handful of grapes. Or a bike ride. Or a tennis game for big accomplishments? IN the old days my partner and I, after a great seminar we’d just delivered would relish a chocolate milkshake or two. But that was when our metabolisms were higher.
Jojoma doesn’t understand mtg reits, they have been stellar performers over the past several years . Just because their returns are weakening now doesn’t mean they CAN be good investments at certain times.
In this economy investing in liquor and wine makes good sense. Sign me up.
How did he live that long: In his role at MCI, McGowan established a reputation as a hard worker by
routinely working fifteen-hour days. He was also a three-pack-a-day smoker and drank over twenty cups of coffee each day until his first heart attack
Harry – You are in denial. Your excuse that the “market is obsessive” as the reason your mortgage REITs have done so poorly lately is completely wrong. The market is efficient albeit sometimes takes time to make adjustments and correct inefficiencies. Quality companies with real businesses (not MBS spread strategy your REITs play) pay 3%-4% dividends and historical dividend yields on S&P is under 3%. You have been promoting and touting these REITs for a year. They pay astronomical and unrealistic yields – 12 -16%! If “normal” traditional div yields are closer to 3-4% and JUNK Bond yields are 8 -12% what does it tell you about a stock/REIT that pays 15%? It was and still is a giant bright RED flag! As you have said many times – when something is too good to be true it probably is. Now the market is catching up with this game – stocks are plummeting and dividend will certainly be cut. You and any of your readers that followed your advice have seen their gains vanish and in many cases are in the red. I distinctly remember your blob recommending NLY at $18 and AGNC at $ 35 (now $15.5 and $32 respectively). Had anybody bought at those prices they are down 10-15% even after dividends. These were and are bad stocks to own. They exist to buy and sell MBS and make a spread. If rates go up they implode. If rates continue lower “pay downs” / prepays accelerate and they implode which is exactly what is happening. Its not about the market being obsessive its about fooling investors with unsustainable dividends and bad business model. you got fooled!