Annaly Capital 4Q13 Earnings Call Notes

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A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Not a good year for the mortgage REIT

“2013 was not a good year for the mREIT. A cloud of uncertainty surrounding the timing and magnitude of the Fed pullbacks from the market and the potential impact that would have on book value plagued the sector for most of the year.”

Focus shifting to Fed policy

“With tapering underway, monetary policy will now center on the forward guidance of the Fed fund’s target rate. The focus will remain on the timing and magnitude of the potential change in the cost of carry.”

mREITs are kind of like inverse floaters

“I think of the mREIT sector broadly as a type of inverse floater. When short rates rise generally earnings go down. With an inverse floater when LIBOR rises the coupon goes down.”

Never seen this type of stimulus before

“this economy has never gone through a period where you’ve had this level of stimulus injected and then slowly removed. So I do think that there is no precedent for what aspect of the economy has been supported by this tremendous amount of liquidity that has gone in. I mean we see it directly in the mortgage market but it has trickled through to a lot of other sectors of the economy and helped out.”

supply of new mortgages will be low

“over the near-term when we look at the supply projections both gross and net supply, we obviously are going to be in year where supply is relatively low.”

Fed wil still be soaking up a lot of agency supply this year

” think when we look at what actual net supply or growth of the agency MBS market will be this year, most estimates have it ranging from about $100 billion to $150 billion in net supply. The Fed even with the taper will absorb that much supply in the first four to five months of this year”

Fed’s purchase of MBS has removed negative convexity from the market

“They’ve removed a lot of negative convexity for the market — from the market and when we look beyond even 2014, the cost associated with hedging MBS for MBS holders will be relatively lower even beyond the exit of the Federal Reserves.”

Lots of beneficiaries of stimulus that will have to deal with the reduction

“here has been a tremendous amount of beneficiaries from this policy that whether you look at stock market or you look at the housing market, or you look at the economy in general, that we will have to deal with a reduction in that stimulus. And none of us have ever dealt with that. Our economy has never dealt with the type of stimulus withdrawal that we’ve just been through”

Fed rate guidance more important to us

“Now with that said, the forward guidance in the low rate policy out of the Fed is much more meaningful to a position that carries assets via short-term interest rate. So as much as they — I think they will continue to taper come hell or high water but with respect to the Fed fund’s target I think that’s another story altogether. ”

We’re being opportunistic as the 2/10 spread widens, there will be volatility but rates not going to 4 in a straight shot

“I just want to let people know that we are going to be opportunistic when we are evaluating the market that 2/10s this time last year was around 160 versus 240 today, yeah do I think the long end is going to bear some volatility as the reality of this tapering sets in? Absolutely. But do I think we are going to have a straight shot at 4% on 10, no looking back and this economy is going to be just fine with it? Absolutely not.”