Annaly 4Q14 Earnings Call Notes

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Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

Fed Governor says: no sign of bubbles

“When a Fed Governor was asked recently if he saw any evidence of an obvious bubble, he replied and I quote “I don’t think there is anything on the scale of the housing or internet bubble right now. The only candidate is bonds, government debt, and other kinds of debt. But I am not counting that, I guess because that’s us”.”

We always think we’re sophisticated and our predecessors naive

“As if often the case with humanity, we fancy our present selves as the most intellectually sophisticated and tend to look back upon our predecessors as somewhat naïve in light of our current knowledge base. There are certainly good reasons for that attitude, here are a few examples. Up until the late 1800s bloodletting was a popular prescription for many ills, in fact George Washington was reportedly a huge proponent and after awakening with a bad sore throat he asked to be blood let. During the next 16 hours five to seven types of blood was drained from his body, four days later he was dead.

Before microscopes and cell theories, many scientists believed in spontaneous generation as the explanation for how life arose. Right up until the 19th century scientists still believed in it and some even wrote recipes for making animals. One such recipe called for basil placed between two bricks and left in sunlight to produce a scorpion. It wasn’t until 1859 that Louis Pasteur finally put the popular belief to rest. I mention these extreme examples of our lack of intellectual sophistication to emphasize how wrong humanity can prove to be with the benefit of time, discovery, and hindsight.”

History is littered with long standing theories…

“History is littered with long standing theories and beliefs that ultimately prove incorrect. My hope is that as policy makers of the world continue to prescribe their remedies for the ailing economic patients that they do not render it worse off. As with their predecessors, I suspect that there is no doubt in the minds of our central bankers that they are the smartest they have ever been. Yet I fear that they are not the smartest they will ever be.”

We expect more consistent volatility

“Our current view on the next four leading up to June and the potential Fed lift off and for many months to follow quite frankly is that more consistent volatility will return to the markets we operate in.”

We’re positioned for volatility

“I will put it simply, volatility equals opportunity for Annaly. Given our size and liquidity we are prepared to be opportunistic during windows of cheaper pricing for our targeted assets. Our current leverage ratio now is 40% below the industry average. A level we expect to increase when clear relative value opportunities present themselves. One term leverage at today’s spreads can produce approximately 15% of incremental annual earnings for our shareholders.”

We don’t care when the Fed does it

“The timing of the Feds lift off does not preoccupy us. We have maintained our conservative posture as a competitive advantage. We believe this conservatism which has been ignored during the relative calm over the last few years will be rewarded as volatility means something once again in the market.”

The expectations for the pace of tightening are not as aggressive as they were

“rates certainly are lower and the expectations for the pace of tightening is not as aggressive as it was before but nonetheless we do think that the tightening that is priced into the market is we would say not overly aggressive. If anything we think it will be slightly less aggressive than that which is priced in.”

Mortgage spreads usually do widen in flat yield curve

” typically mortgage spreads do widen in a flatter curve environment and we expect that that will be the case as well.”