By thelongshorttrader What did NOT got me interested (i.e. the usual bulls’ spew):

  • It’s cheap on a __ and __ basis.
  • Dividend yield is ___.

What got me interested:

  • Yesterday’s announced dividend cut  appears to have been less worse than the street expected (or was it?).
  • NLY shares are down ~30% in 2013 (counterpoint: down does not mean cheap, nor does down mean it can’t go down further)
  • Many of the NLY promoters from earlier this year (both the smart and not-so-smart) have been thoroughly humbled and humiliated. I love these kinds of situations (which doesn’t mean shares cannot decline further).
  • A cursory examination of the NLY historical stock price seems to show that very negative down years tend to be followed by positive years. The pattern recognition side of me tells me to BUY BUY BUY (but past patterns are not indicative of future trajectory).
  • One rarely sees a best-in-class operator (that has survived even as its competitors went out of business) shares beat up this badly, in a year’s time.

What concerns me, what needs to be better understood:

  • True Capitulation? – A bull who has been dead wrong for quite some time has not capitulated. I’d love to see him capitulate, as he seems to be long NLY for all the wrong reasons.
  • Understanding the Business, and its Economics – I would need to do a deep dive to understand the business model and its economics, especially as it pertains to macro (specifically interest rates, spreads, mortgages, housing). A friend wrote: “Agency reits are basically long interest rate risk always and can’t go to duration neutral by mandate because they don’t take on credit risk.  Correlation between mortgage rates and treasuries is strong enough for housing and credit to be more of a secondary concern.”
  • Management Quality is of Paramount Importance– Michael Farrell passed away last year. Annaly has been around forever, and its management respected the entire time. How honest and competent are the original management’s successors? How much time does the old guard have remaining? Is this your father’s NLY?

I may initiate a long today (“trade first, analyze later”). My continued analysis may be updated in this post.