This morning in the mREIT aisle the spinning blue light attracted alert shoppers. In particular, seveal amREITs completed what looks like an “air pocket” end to a week-long trend of dramatically lower prices.
As always, there are both fundamental and emotional reasons for the price movements, but today’s early plunge looks like a mini-capitulation.
Among the stocks I watch, AGNC traded briefly under $30 a share, and ANH traded to just a penny higher than $6. Those were the “screaming buys” in my opinion, but NLY flirted with the $15 level, and TWO traded solidly under $11, albeit briefly.
MITT also traded down, but I haven’t got a feel for its price action yet, though I admire the bond-picking talents at Angelo Gordon.
But don’t get too upset that you missed the sale.
I’ll explain after the break.
Today could have been “big money” or hedge funds new to the sector pulling the plug, or it could have been shaky retail holders that aren’t sure about the alchemy of the carry trade. Probably some of both.
But we have to look at the reasons the hedge funds and mutuals might be lightening up in here, even though the family of mREITs still pay well above 10%.
First and foremost is the reality that dividends are trending down as underlying MBS prices go up. With the Fed now in the game and absorbing $40 billion a month ad infinitum, that problem of lower yield spreads vs. the cost of financing won’t be going away, and may get worse.
Second, housing looks like it has bottomed. That means people can afford to refinance if they can qualify (and the house has enough value to support the new loan). So a market that is nearly 100% premium bonds will now see the long-anticipated increase in prepayment rates, especially for MBS that originated in 2009, 2010 and 2011. And the amREITs have been growing their capital base like mad these past three years, so every one of them has a pantload of newer MBS. Remember, if you buy a bond for 102 and it gets paid back at 100 three months later, you lose money, even if you were getting a positive carry from holding a 3.5% MBS and financing at lower short term rates.
Third, and maybe the most troublesome, is the reality that none of amREIT management teams I know are willing to give up on the basic business model and sell their MBS to hold cash. Even if they were, their shareholders would punish them for interrupting the dividend (spread earnings) stream just to preserve capital by selling off MBS that may well go down in price. Just won’t happen.
So those are all the “funnymental” reasons to sell, borrowing an apt word from my friend Tom Drake.
Having been around the block (and down its dark alleys) once or twice, I also know that fear accompanies any selloff, and fear is actually a very easy sell when your investors are safety-minded income investors. There are plenty of people out there who assume that something bad is happening (or coming) when stock prices go down, so they sell first and ask questions later.
I can’t help thinking that, for some, this morning’s blaring political news that Romney edged into the lead on several national polls may have had something to do with the sell-off as well. Whatever their personal politics may be, professional money managers know that the likely result of the advertised tax cuts and domestic spending cuts will be much larger deficits and a much slower economy. That’s never good for markets.
For mREIT bargain hunters, there will be more fear, and maybe even some loathing over the next few months. You’ll get another chance to buy at these low prices, but maybe not the chance to do two-point daytrades.