In Too Soon

When Annaly (NLY) dropped through $17.50 a share recently, I started adding to my position.

My golden touch worked again, and the support at $17.40 failed today, putting the latest purchases underwater.

While not the “screaming buy” owning this stock at a discount to book value in our current rate environment would make it, I do think the prospects for continued high dividends for at least another year make it a better value than it’s been since last spring.

Annaly seems to be a charmed stock, in the sense that Wall Street and the institutional buyers like it so much that they let them grow themselves out of difficulty more than any other amREIT.  By that, I mean NLY seems to have access to secondary issues when it gets burdened with unrealized losses more than its competitors.

Diluting unrealized losses is almost as good as doing deals that add to earnings.  In normal circumstances, secondary issues above book value are almost magical, a kind of reverse Ponzi where the new investors bring enough money into the game that all the investors, both old and new, earn more per share after the stock issue.

I’ve marveled for years at Annaly’s ability to keep coming to the well.

From a fundamental standpoint, it’s clear (to me) that the Fed is not finished re-capitalizing the banking system on the backs of savers, so the steep yield curve is likely here to stay for several more years.

I still think this stock has the potential (along with the rest of the group) of dipping below a potentially lower book value after the Fed leaves the QE buying spree behind, but the recent decision to let Fannie and Freddie re-load their portfolios will probably offset that 600 lb gorilla leaving the market by letting two 500 pounders have their way.

If history serves as a guide, my purchases in NLY from $17.40 down to $17.14 won’t be a huge mistake, but you, kind reader can once again benefit from my reverse Midas touch if you want to.

This is NOT a stock advisory service.  You pays your money and takes your own chances, just like I do.



4 Responses to In Too Soon

  1. hhill51 says:

    To clarify and add to my disclosure: I have added to NLY, but still hold around 40% of my assets in cash. I will also see about 5% of my portfolio liquidated when in-the-money calls I wrote are exercised this weekend on IOC, ELN, DNDN and HGSI. I expect to replace those stocks, and write a new series of Feb or March calls. Another series I wrote against hedge instrument SRS will expire worthless, as will some ANH calls I bought in October. It still looks better to be a seller of options than a buyer, but the balance is much closer. I took a flyer today buying some INTC calls, but only with “play money”.

  2. Tom D says:

    NLY, ANH, and CMO (paying 15-17%) have tapered off over the past three months while their preferreds (paying 8-9%) have “tapered up”. I own NLY common and preferreds of the other two. For true current income accounts CMO PrB is a gem since it pays monthly.

    From a simple sentiment point of view it would seem that the bet is for common stocks to get squeezed by the FED but the preferreds will be safe. I know you are thinking the FED will have to continue the unnatural 0% <30 day yield game for 1-2 years. Others think not.

    Thoughts on the preferreds?

    • hhill51 says:

      Preferreds are excellent, and if you can own them at double digit yields, really excellent. I am playing a bit of catch-up right now, having been locked into positions (compliance rules) from 2005 through the meltdown.
      On the bright side, I have $3,000 a year in deductions available even if I live longer than Methusela or Noah. Another preferred that has a nice feature is ANH-B, which adjusts the conversion ratio to maintain yield on the preferred at the yield of the common each quarter.

  3. Tom D says:

    The yield on ANH-B does not change, but the conversion price is adjusted quarterly by the amount by which the common dividend exceeds the 6.5% dividend of the preferred. The conversion price is also adjusted for most other diluitive events such as issuance of warrants, rights, etc.

    It’s like the old-time railroad preferreds my great grandfather loved. 🙂

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