Looking Back

October 30, 2010

Jessbee’s comment on the last post raised a question regarding high ROCE and high dividends. Basically, the question was why that shouldn’t automatically be the preferred investment, under the assumption that all are doing the same business model, anyway.

You can get a start seeing the distinctions by checking out this post about two imaginary amREITs, one called Risky REIT, and the other called Conservative REIT. There are literally as many variations on these themes as there are management teams in the sector.

I’m going to go back and read my previous summaries of the group before putting out the promised group report based on the latest round of earnings reports and calls.

As before, I won’t be giving investment advice, nor will I be trying to predict earnings or dividends. I will try to spot any shifts in strategy from what I thought the management teams were doing when I wrote those summaries last June and July. I’ll also be able to see mistakes or omissions I made, and learn from them.

Since I had to look them up anyway, I thought I would put all the links together here for my current task, and share the list with readers so they can also have an easy way to refer back.

After the break, I’ll list the companies I reviewed and provide a link to each write-up.
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Coming Attractions

October 29, 2010

Like last week, I’ve found myself working out several ideas that will result in longer “thought piece” columns. Check back this weekend to see what comes out.

I think I’ve gotten a new insurance company, after days of phone conversations, meetings, etc. with several insurance agents. I won’t believe it until I have the policies in my hot little hands, and read every word (this time).

I’ve also been following the earnings announcements, research pieces and conference calls from the mREITs. Only a couple of stragglers have delayed their calls and announcements until next week. First impression – no real surprise (to me) though some analysts were caught wrong-footed by the big decline in book value and GAAP earnings at the Big Dog, NLY.

I’m also giving fair warning that one or more posts will be about the upcoming election. I’ve been looking at the likely policy actions by the new crop heading for Washington, and I’ve got bad news for the hopeful “small government” fans among us. Virtually to a person, the candidates that are riding in under that banner will actually cost us more, make government more intrusive, and trample our rights under our Constitution and its Amendments. They are like the current crop of politicians, only worse. True believers in the Tea Party myth can just avoid reading that post or posts so you don’t raise your blood pressure. You’ll find out soon enough, anyway.

hh


mREIT Note

October 25, 2010

As I’ve said before, I’m not here to do what equity analysts at Wall Street firms do.

They model these amREITs and mREITs, take their best guess as to changes to the portfolio each quarter, and then predict earnings, dividends, book values and the like.  I don’t.  This job doesn’t pay enough to do that.

So, I’ll summarize what I’ve seen in Q3 earnings prediction research from the handful of Wall Street firms whose work I’ve seen so far.

1. Lower book values due to a decline in underlying MBS prices

2. Steady earnings due to continued favorable financing spread.

3. Potential for upside surprise from those who increased leverage or nimbly played for trading profits on their portfolio or their hedges.

4. More secondaries coming if the stock prices increase.

If you listen to all the conference calls this week, you’ll probably get more of a sense of the managements.  That still remains my main emphasis.  The market always changes, so the strategy and temperament of the various management teams is how I make distinctions among them.

hh


Weekly Reader

October 25, 2010

For me, Merrill Ross (Wunderlich Securities) is one of my Monday essentials.  She puts out an overview of all things mREIT called Real Estate, Weekly Crossroads.

Today it struck me that her initial editorial (before going into the numbers, charts, etc.) was right on the money.

While professional opinionators like Mauldin certainly get wider distribution with their New Apocalypse views, Merrill has seen the current round of problems in mortgage land much as I had:

  1. That the real winners will be lawyers;
  2. That delinquent borrowers will get to stay even longer without paying;
  3. That the system needs to get away from being 90% Agency guaranteed; and
  4. Risk-based pricing is likely to increase the cost of borrowing, but that risk (and associated additional profit) will have to be retained by the banks or the mortgage aggregators, not the end investors.

After the jump, I’ll include her initial comments that came with today’s report, and her cool relative value scatter chart of the mREITs she covers.  I’m willing to bet that you can also get on her mailing list with a simple e-mail to her at mross@wundernet.com

Please be aware that there are disclosure statements that are part and parcel of her analysis.  They are in the full pdf document and recommended reading before anyone takes action on their investments in this space.

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Backdoor Foreclosure

October 23, 2010

I know I haven’t shown a lot of sympathy for the subprime mortgage “victims” who borrowed more than they could ever afford.  I also don’t think bank screw-ups on the paperwork should give free houses to deadbeats, but the lenders should go back and get the paperwork right before foreclosing, even if it does give the borrowers a few more months of rent-free living.

I hope it’s also clear that I think conventional Fannie and Freddie borrowers that put up 20% cash or paid for mortgage insurance and fully disclosed their income are not the villains in this play.

With that background, I am now in the middle of a very strange change in the rules of the game that I find grossly unfair.

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I Had to Laugh

October 23, 2010

In an investment forum I enjoy, I saw a comment that made me laugh.

One investor, responding to a lengthy discussion of asset mix, hedging, funding and risk in Agency mortgage REITs (amREITs) said that they would stick with easy-to-understand banks, and let the experts play in mortgage REIT land.

Why did I laugh?

Because every bank I know of has a mortgage REIT inside it.  Not only that, banks run at far higher leverage ratios on their mortgage portfolios than any of the publicly traded mREITs or amREITs.

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Mutually Assured Destruction

October 23, 2010

We’re all familiar, I hope, with the reason we had an arms race with the Soviets for three decades.  It certainly cost us enough, but the payoff was that we never had a third World War.

To me, this phrase also summarizes the reality behind “Too Big to Pay,” my personal version of the very similar phrase (Too Big To Fail) attached to the world’s largest financial institutions.

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