Friday, July 29, 2011

An Opportunity To Buy Annaly Capital Management

I pity the fools that sold Annaly today in a panic. It might have been just market makers taking out stop losses at $14.05, but the sellers, either way, were abused as the stock immediately rebounded to the $16 level. I believe it will return to higher levels as people regain rational thought. A debt ceiling issue "may" affect the government's cashflow, but it doesn't hinder mortgage payments. People pay mortgages and GSEs only have to honor their guarantees upon default. A debt ceiling crisis isn't going to cause mortgage defaults.

If the debt ceiling or downgrade crisis affects Treasury rates and all other borrowers have to pay more, then mortgage rates will increase. Annaly will pay more for debt but so will the mortgagees that fund the bonds that Annaly buys. It's a spread business and NLY isn't a trader so they hold to maturity. They don't have to take a haircut if rates rise.

Annaly isn't overly leveraged, invests mostly in agency paper, and pays an enormous dividend which just got nicely bigger over the past couple of weeks. I've added to my position today and may do so again if the panic continues. The yield is now over 15 percent. Never bet the farm, but a few acres is warranted. I pity the fools that sold today and don't buy on Monday.

By the way, I know what I'm talking about because I brought Mr. T to Council Bluffs in the mid 1980s for the town's Pride Week Parade. Mr. T probably doesn't need the income Annaly throws off as his gold necklaces are worth a fortune today, but a retired banker can use dividend income and has thankfully increased his position.

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