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Would you like to make 44% on your investment with no downside risk? Let me explain.

Would you like to make 44% on your investment with no downside risk?  No, I’m not talking about an extremely high dividend stock.  I’m talking about nickels.

The lowly five cent nickel in your spare change is actually worth 7.3 cents today due to the nickel and copper metal content.  That equates to 144% of face value (hence the 44% gain).  The US government is planning on changing the composition of the nickel to make its metal content less than five cents.  They are doing this because it costs those knuckleheads nine cents to mint a nickel coin.  The nickel remained unchanged since 1946.  The old copper pennies are worth nearly 300% of face value, but they comprise only about 15% of the penny population.  You have to spend time and effort to separate them from the zinc pennies.  Every nickel in that $2 roll is exactly the same.

Visit the website www.coinflation.com to see the current metal value of various American coins.  It even shows you the calculation for the curious members of our readers.

I ask for nickel rolls whenever I break a $5 or $10 bill.  Most young cashiers will immediately fork over one or two rolls.  I accumulate about $20 nickels each month without going out of my way to acquire them.

I recommend that you accumulate a couple hundred dollars in these coins as part of your emergency cash savings.  They can easily be converted back into cash at a bank if you keep them in their paper rolls in the event you need to use the emergency money.  Otherwise, just let them sit there and hedge against inflation as the Federal Reserve inflates the money supply like crazy.  If a deflation occurs, then they will never fall below their face value.  There is no risk.  What are you waiting for?  Take two dollars out your pocket and ask a cashier at the grocery store or the bank inside Wal-Mart for a roll of nickels.

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The Nitty Gritty on Nickels

James Wesley, Rawles

As I've mentioned before in SurvivalBlog, U.S. Five cent pieces ("Nickels") should be considered a long-term hedge on inflation. I recently had a gent e-mail me, asking how he could eventually “cash in” on his cache of Nickels. He asked: "Are we to melt them down, or sell them to a collector? How does one obtain their true 7.4 cents [base metal content] value?" My response: Don't expect to cash in for several years. I anticipate that there won't be a large scale speculative market in Nickels until their base metal value ("melt value") exceeds twice their face value ("2X Face"), or perhaps 3X face.

Once the price of Nickels hits 4X face value, speculators will probably be willing to pay for shipping. By the way, I also predict that it will be then that the ubiquitous Priority Mail Flat Rate Box will come into play, with dealers mailing Nickels in $300 face value increments. The U.S. Postal Service may someday regret their decision to transition to "Flat Rate" boxes for Priority Mail with a 70 pound limit.

Once the price of Nickels hits 5X face there will surely be published "bid/ask" quotations for $100, $300, and $500 face value quantities, just as has been the norm for pre-1965 U.S. 90% silver coinage since the early 1970s. (Those coins are typically sold in a $1,000 face value Bag (weighing about $55 pounds), or a "Half bag" (containing $500 face value.) Soon after the current Nickels are dropped from circulation, we will see $300 face value boxes of Nickels put up for competitive bidding, on eBay.

An Aside: Nickel Logistics

Nickels are heavy! Storing and transporting them can be a challenge.

I've done some tests:

$300 face value (150 rolls @$2 face value per roll) fit easily fit in a standard U.S. Postal Service Medium Flat Rate Box, and that weighs about 68 pounds.) They can be mailed from coast to coast for less than $25. Doing so will take a bit of reinforcement. Given enough wraps of strapping tape, a corrugated box will securely transport $300 worth of Nickels.

The standard USGI .30 caliber ammo can works perfectly for storing rolls of Nickels at home. Each can will hold $180 face value (90 rolls of $2 each) of Nickels. The larger .50 caliber cans also work, but when full of coins they are too heavy to carry easily.

Legalities

Since late 2006 it has been illegal in the U.S. to melt or to export Pennies or Nickels. But it is reasonable to assume that this restriction will be dropped after these coins have been purged from circulation. They will soon be replaced with either silver-flashed zinc slugs, or tokens stamped out of stainless steel. (The planned composition has not yet been announced.)

By 2015, when the new pseudo-Nickels are in full circulation, we will look back fondly on the days when we could walk up to our local bank teller and ask for "$20 in Nickels in Rolls", and have genuine Nickels cheerfully handed to us, at their face value.

Death, Taxes, and Inflation

It has been said that "the only two things that are certain in life are death and taxes." I'd like to nominate "inflation" as an addition to that phrase. For the past 100 years, we've been gradually robbed of our purchasing power through the hidden form of taxation called inflation. Currency inflation explains why gold coins and silver coins had to be dropped by the U.S. Mint in the 1930s and 1960s, respectively. Ditto for 100% copper Pennies, back in 1981. (The ones that have been produced since then are copper-flashed zinc slugs, but even the base metal value of those is now slightly greater than their face value.)

Inflation marches on and on. Inflation will inevitably be the impetus for a change in the composition of the lowly Nickel. Each Nickel presently has about 7.3 cents in base metal ("melt") value, and they cost the Mint more than 9 cents each to make. You don't need a doctorate in Economics to conclude that the U.S. Mint cannot continue minting Nickels that are 75% copper and 25% nickel--at least not much longer.

Without Later Regrets

Don't miss out on the opportunity to hedge on inflation with Nickels. Just like the folks who failed to acquire silver dimes and quarters in the early 1960s, you will kick yourself if you fail to stock up on Nickels. Do so before they are debased and the older issue is quickly snatched out of circulation. The handwriting is on the wall, folks. Stop dawdling, and go to the bank and trade some of your paper FRNs for something tangible.

Safe Bulkers (SB) reported 4Q2010 earnings of $0.47 per share; dividend of $0.15 per share.

Safe Bulkers Inc. (SB) reported 4Q2010 earnings of $0.47 per share and a continuation of the their $0.15 per share dividend.  Their dividend payout ratio is a very low 32%  for a high dividend stock.  SB closed at $8.95 today.  The stock currently yields 6.7%.  They are a dry bulk shipping company with 16 ships in their fleet.  I have written several articles on them because they are one of the best high dividend stocks in my opinion.

http://www.myhighdividendstocks.com/category/high-dividend-stocks/sb

Here are some highlights from the earnings release (these are my words):

·         Their fleet is young.  The average age is only 3.80 years.  The assumption is that they are more fuel efficient and less maintenance costs than older vessels.

·         The dividend is stable and safe even at prevailing low Baltic Dry Index rates.

·         The vessel operating costs are up slightly, but do not threaten their large margins.

·         Earning power is stable.  Their fleet is 78% rented out for 2011, 59% in 2012, and 54% in 2013.  Most of their earnings are already known for the next few years.  Those earnings alone could easily cover their existing dividend rates.

·         They have a strong balance sheet.  Their debt is less than 50% of assets.  Their current ratio is good (current assets are over double of current liabilities

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Here is the Safe Bulkers press release with all the details:

SOURCE: Safe Bulkers, Inc.

 

Feb 09, 2011 16:05 ET

Safe Bulkers, Inc. Reports Fourth Quarter and Full Year 2010 Results and Declares Quarterly Dividend

ATHENS, GREECE--(Marketwire - February 9, 2011) - Safe Bulkers, Inc. (the "Company") (NYSE: SB), an international provider of marine drybulk transportation services, announced today its unaudited financial results for the fourth quarter and the year ended December 31, 2010. The Company also declared a quarterly dividend of $0.15 per share for the fourth quarter of 2010.

Summary of Fourth Quarter 2010 Results

-- Net revenue for the fourth quarter of 2010 increased by 13% to

   $41.3 million from $36.6 million during the same period in 2009.

-- Net income for the fourth quarter of 2010 increased by 34% to

   $31.1 million from $23.2 million during the same period in 2009.

-- EBITDA(1) for the fourth quarter of 2010 increased by 33% to

   $37.9 million from $28.4 million during the same period in 2009.

-- Earnings per share for the fourth quarter of 2010 of $0.47, calculated

   on a weighted average number of shares of 65,878,212, compared to $0.42

   in the fourth quarter 2009, calculated on a weighted average number of

   shares of 54,513,787.

-- Declaration of a dividend of $0.15 per share for the fourth quarter

   of 2010.

Summary of Twelve Months Ended December 31, 2010 Results

-- Net revenue for the twelve months ended December 31, 2010 decreased by

   5% to $157.0 million from $164.6 million during the same period in 2009.

-- Net income for the twelve months ended December 31, 2010 decreased by

   34% to $109.6 million from $165.4 million during the same period

   in 2009.

-- EBITDA for the twelve months ended December 31, 2010 decreased by 29% to

   $133.4 million from $187.6 million during the same period in 2009.

-- Earnings per share for the twelve months ended December 31, 2010 of

   $1.73, calculated on a weighted average number of shares of 63,300,466

   compared to $3.03 in the twelve months ended December 31, 2009,

   calculated on a weighted average number of shares of 54,510,587.

(1) EBITDA represents net income plus interest expense, tax, depreciation and amortization. See "EBITDA Reconciliation".

Fleet and Employment Profile

The Company's operational fleet as of December 31, 2010, was comprised of 16 drybulk vessels with an average age of 3.80 years.

As of December 31, 2010, the Company has contracted for eight additional drybulk newbuild vessels with deliveries scheduled at various times through 2013. The newbuilds consist of two Post-Panamax, three Kamsarmax, one Panamax and two Capesize vessels.

As of December 31, 2010, the remaining capital expenditure requirements for the delivery of the eight newbuilds, were $171.1 million for 2011, $70.4 million for 2012 and $22.2 for 2013. We anticipate satisfying these capital expenditure requirements from existing cash and time deposits, operating cash surplus and existing undrawn loan commitments.

On January 11, 2011, we contracted to acquire a Japanese-built, drybulk, Panamax-class newbuild at approximately $41.8 million, consisting of payments of $18.9 million and JPY 1.9 billion, with an expected delivery date in the first quarter of 2012.

As of January 31, 2011, the company has 1 existing and 8 newbuild vessels unencumbered and a $50 million long-term floating rate note facility against which additional loans can be drawn.

As of January 31, 2011, the contracted employment of the Company's fleet was 78% of fleet ownership days for the remaining days of 2011, 59% for 2012 and 54% for 2013, including vessels which are scheduled to be delivered to us in the future.

Dividend Declaration

The Company declared a cash dividend on its common stock of $0.15 per share payable on or about February 25, 2011 to shareholders of record at the close of trading of the Company's common stock on the New York Stock Exchange (the "NYSE") on February 18, 2011.

The Company had 65,879,916 shares of common stock issued and outstanding as of today.

The Board of Directors of the Company is continuing a policy of paying out a portion of the Company's free cash flow at a level it considers prudent in light of the current economic and financial environment. The declaration and payment of dividends, if any, will always be subject to the discretion of the Board of Directors of the Company. The timing and amount of any dividends declared will depend on, among other things: (i) our earnings, financial condition and cash requirements and availability, (ii) decisions in relation to our growth strategies, (iii) provisions of Marshall Islands and Liberian law governing the payment of dividends, (iv) restrictive covenants in our existing and future debt instruments and (v) global financial conditions. We can give no assurance that dividends will be paid in the future.

Management Commentary

Dr. Loukas Barmparis, President of the Company, said: "We are happy to announce today our unaudited financial results for the quarter and year ended December 31, 2010. Our revenues increased for the second consecutive quarter, supported by long term charters with our clients. Our Board has maintained a stable dividend policy by paying out a low percentage of free cash flows and declaring our eleventh consecutive quarterly dividend, of $0.15 per share, since our initial public offering in 2008. Our selective fleet expansion at attractive prices, funded to a large extent from operational surplus, will support our future revenues as newbuilds enter our fleet. We remain committed to the solid growth of our company, through flexible asset management and consistent chartering policy, for the benefit of our shareholders.''

Conference Call

On Thursday, February 10, 2011 at 9:00 A.M. EST, the Company's management team will host a conference call to discuss the financial results.

Participants should dial into the call 10 minutes before the scheduled time using the following numbers: 1 (866) 819-7111 (US Toll Free Dial In), 0(800) 953-0329 (UK Toll Free Dial In) or +44 (0)1452-542-301 (Standard International Dial In). Please quote "Safe Bulkers" to the operator.

A telephonic replay of the conference call will be available until February 18, 2011 by dialing 1 (866) 247-4222 (US Toll Free Dial In), 0(800) 953-1533 (UK Toll Free Dial In) or +44 (0)1452 550-000 (Standard International Dial In). Access Code: 1859591#

Slides and Audio Webcast

There will also be a live, and then archived, webcast of the conference call, available through the Company's website (www.safebulkers.com). Participants in the live webcast should register on the website approximately 10 minutes prior to the start of the webcast.

Management Discussion of Fourth Quarter 2010 Results

Net income increased by 34% to $31.1 million for the fourth quarter of 2010 from $23.2 million for the fourth quarter of 2009. This increase is mainly attributable to the following factors:

Net revenues: Net revenues were $41.3 million for the fourth quarter of 2010, a 13% increase compared to $36.6 million for the fourth quarter of 2009. Net revenues increased due to increases in the number of operating days and the Time Charter Equivalent ("TCE")(2) rate. The Company operated 15.3 vessels on average during the fourth quarter of 2010, earning a TCE rate of $29,395, compared to 14.0 vessels and a TCE rate of $28,605 during the fourth quarter of 2009. The increase in the TCE rate resulted mainly from higher time charter rates.

Vessel operating expenses: Vessel operating expenses increased by 21% to $6.3 million for the fourth quarter of 2010, compared to $5.2 million for the same period in 2009. The increase in operating expenses is mainly attributed to an increase in ownership days of 9% to 1,409 in the fourth quarter of 2010 from 1,288 in the fourth quarter of 2009 and to a further increase in crew, repairs, maintenance, spare parts and stores costs associated with the delivery of our latest newbuild vessel Venus Heritage. Daily vessel operating expenses increased by 10% to $4,463 for the fourth quarter of 2010, compared to $4,053 for the fourth quarter of 2009.

(Loss)/Gain on derivatives: Gain on derivatives increased to $4.9 million in the fourth quarter of 2010, compared to a loss of $1.2 million for the same period in 2009, as a result of the mark-to-market valuation of the Company's interest rate swap transactions that we employ to manage the risk and interest rate exposure of our loan and credit facilities. These swaps economically hedged the interest rate exposure of the Company's aggregate loans outstanding. The average remaining period of our swap contracts is 3.2 years as of December 31, 2010. The valuation of these interest rate swap transactions at the end of each quarter is affected by the prevailing interest rates at that time.

Depreciation: Depreciation increased to $5.4 million in the fourth quarter of 2010, compared to $3.9 million for the same period in 2009, as a result of the increase in the average number of vessels operated by the Company during the fourth quarter of 2010.

Cash, time deposits & restricted cash: As of December 31, 2010, we had $100.4 million in cash and short-term time deposits, $5.4 million in long-term restricted cash and $50.0 million in a long-term floating rate note, from which the Company may borrow up to 80% under certain conditions. Additionally, we have $82.7 million in an undrawn loan commitments, $24.0 million to be secured by our existing vessel Panayiota K and $58.7 million to be secured by our newbuild with Hull number 1074 expected to be delivered by the third quarter of 2011, whilst our recently delivered post-panamax newbuild vessel Venus Heritage remains debt free.

(2) Refer to definition of "TCE" in Note 6 of Fleet Data Table.

Management Discussion of the Twelve months ended December 31, 2010 Results

Net revenues: Net revenues for the twelve months ended December 31, 2010 decreased by 5% to $157.0 million from $164.6 million during the same period in 2009. The Company operated 14.6 vessels on average during the twelve months of 2010, earning a TCE rate of $29,534, compared to 13.2 vessels and a TCE rate of $34,208 during the twelve months of 2009.

Net income: Net income for the twelve months ended December 31, 2010 was $109.6 million, a decrease of 34% from net income of $165.4 million for the twelve months ended December 31, 2009. The decrease of $55.8 million is mainly attributed to: (i) early redelivery income of $0.1 million, compared to $75.0 million, (ii) zero loss on asset cancellations, compared to $20.7 million, (iii) gain on sale of assets of $15.2 million, compared to none, (iv) a loss on derivatives of $8.2 million, compared to a loss on derivatives of $4.4 million, (v) depreciation of $19.7 million, compared to $13.9 million, (vi) interest expense of $6.4 million, compared to $10.3 million, (vii) vessel operating expenses of $23.1 million, compared to $19.6 million, and (viii) net revenues of $157.0 million, compared to $164.6 million, during the twelve months of 2010 and 2009 respectively.

          Unaudited Interim Financial Information and Other Data

                            SAFE BULKERS, INC.

        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

       FOR THE PERIODS ENDED DECEMBER 31, 2009 AND DECEMBER 31, 2010

                              Three Month Period      Twelve Month Period

(In thousands of U.S.          Ended December 31,      Ended December 31,

Dollars except for share   ----------------------  ----------------------

and per share data)           2009        2010        2009        2010

                            ----------  ----------  ----------  ----------

REVENUES:

Revenues                       37,435      41,908     168,400     159,698

Commissions                      (867)       (621)     (3,794)     (2,678)

Net revenues                   36,568      41,287     164,606     157,020

EXPENSES:

Voyage expenses                   (97)       (134)       (577)       (610)

Vessel operating expenses      (5,220)     (6,289)    (19,628)    (23,128)

Depreciation                   (3,941)     (5,421)    (13,893)    (19,673)

General and administrative

  expenses                      (1,544)     (2,011)     (7,046)     (7,018)

Early redelivery income             -           -      74,951         132

Loss on asset

  cancellations                      -           -     (20,699)          -

Gain on sale of assets              -           -           -      15,199

Operating income               25,766      27,432     177,714     121,922

OTHER (EXPENSE) / INCOME:

Interest expense               (1,523)     (1,652)    (10,342)     (6,423)

Other finance costs               (51)       (147)       (442)       (331)

Interest income                   298         380       2,164       2,627

(Loss)/gain on derivatives     (1,241)      4,882      (4,416)     (8,163)

Foreign currency (loss)/gain      (65)        287         838         281

Amortization and write-off of

  deferred finance charges         (20)        (50)       (106)       (266)

Net income                     23,164      31,132     165,410     109,647

Earnings per share               0.42        0.47        3.03        1.73

Weighted average number of

  shares                    54,513,787  65,878,212  54,510,587  63,300,466

                            SAFE BULKERS, INC.

             CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

               AS OF DECEMBER 31, 2009 AND DECEMBER 31, 2010

                                                  December 31, December 31,

(In thousands of U.S. Dollars)                        2009         2010

                                                  ------------ ------------

ASSETS

Cash, time deposits, and restricted cash               82,714      100,415

Asset held for sale                                    16,969            -

Other current assets                                    5,965        3,861

Vessels, net                                          373,924      541,244

Advances for vessel acquisition and vessels

  under construction                                    93,520       99,014

Other fixed assets, net                                    69            -

Restricted cash non-current                             4,763        5,423

Long-term investment                                   50,000       50,000

Other non-current assets                                  800        5,415

Total assets                                          628,724      805,372

LIABILITIES AND EQUITY

Current portion of long-term debt & liability

  directly associated with asset held for sale          50,242       27,674

Other current liabilities                              15,309       25,309

Long-term debt, net of current portion                420,994      467,070

Other non-current liabilities                          44,960       41,186

Shareholders' equity                                   97,219      244,133

Total liabilities and equity                          628,724      805,372

Fleet Data

                                    Three Months Ended  Twelve Months Ended

          &nbs

AGNC reports $1.26 per share in net income in really small print. The headline was $2.50 per share net income

If you just read the earnings headline, then you are missing the whole story.  Here are a few noteworthy line in the AGNC press release:

·         American Capital Agency Corp. (AGNC) reports $1.26 net income per share, excluding $1.24 of other income (mostly the sale of agency securities and derivatives paying off).  AGNC’s earning power is less than their dividend payments.

·         They paid a $1.40 dividend for 4Q2010.  Their net income doesn’t cover the dividend.  Dividend payout ratio was 111% excluding the irregular income items.

·         Leverage increasing in the quarter.  Leverage for the year equaled 7.8x; leverage for the quarter 8.4x.  AGNC, like all banks, are borrowed short and lent long.  They have a horrible balance sheet.

·         “As of December 31st, 2010, the Company had repurchase agreements with 22 financial institutions.”  They are 22 financial institutions away from a debt rollover problem.  Their current liabilities (repurchase agreements) dwarf their current assets.  That creates a weak balance sheet dependent on other institutions.

Delusional quote from the company’s chief investment officer, Gary Kain:

            “As we look ahead,” continued Mr. Kain, “we believe that the economic and competitive landscape is very favorable for our industry.  The changes we are witnessing at the GSE’s, coupled with the prepayment environment that is likely to be more benign, should provide for an attractive backdrop for mortgage investors.  When you combine this with a very steep yield curve, and a Federal Reserve that is likely to keep short term funding rates low for an extended period of time, we continue to remain optimistic.”

The yield curve will not remain steep with short term rates low and longer term rates much higher.  The front end (the short term) rates will rise and eventually it will invert.  Inverted yield curves occur when short term rates are higher than long term rates.  An inverted yield curve usually signals a recession is coming.  In our case it will be the double-dip recession.  Ben Bernanke said that QE2 would  lower mid-term interest rates.  The opposite is happening.

Conclusion: AGNC lacks earning power and a strong balance sheet.  Mr. Kain is a delusional Keynesian.  He will be speaking on February 10th, 2011.  You can see so for yourself.

American Capital Agency Corp. (Nasdaq: AGNC) ("AGNC" or the "Company") announced today that Gary Kain, Chief Investment Officer, is scheduled to make a presentation at the Credit Suisse 12th Annual Financial Services Forum on Thursday, February 10, 2011 in Miami, FL. The AGNC presentation is scheduled to begin at 2:45pm ET. The presentation will be webcast live and archived for 90 days on the AGNC website at http://ir.agnc.com.

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Here is the press release from AGNC: http://bit.ly/AGNC_4Q2010_earnings

American Capital Agency Reports $2.50 Earnings Per Share and $24.24 Book Value Per Share

 

BETHESDA, Md., Feb. 8, 2011 /PRNewswire/ -- American Capital Agency Corp. ("AGNC" or the "Company") (Nasdaq: AGNC) today reported net income for the fourth quarter of 2010 of $138.1 million, or $2.50 per share, and book value of $24.24 per share.

FOURTH QUARTER 2010 FINANCIAL HIGHLIGHTS

·         $2.50 per share of net income

o    $1.26 per share, excluding $1.24 per share of other investment related income and excise tax

·         $1.64 per share of taxable income(1)

·         $1.40 per share fourth quarter dividend paid on January 27, 2011

·         $0.60 per share of undistributed taxable income as of December 31, 2010

o    Undistributed taxable income was $39 million as of December 31, 2010, essentially unchanged from September 30, 2010

·         $24.24 book value per share as of December 31, 2010

o    Increased from $23.43 per share as of September 30, 2010

o    Increased from $23.78 per share, pro forma, as of September 30, 2010 when adjusted for the follow-on equity offering that closed on October 1, 2010

·         42% annualized return on average stockholders' equity ("ROE") for the quarter(2)

OTHER FOURTH QUARTER HIGHLIGHTS

·         $13.5 billion portfolio value as of December 31, 2010

o    18%(3) constant prepayment rate ("CPR") for the fourth quarter of 2010

o    16% CPR in December 2010 (based on data released in January 2011)

·         7.8x(4) leverage as of December 31, 2010

o    8.4x average leverage for the quarter

·         2.58% annualized net interest rate spread for the quarter

·         $354 million of net proceeds raised from follow-on equity offerings during the quarter(5)

o    $227 million raised from a follow-on equity offering that settled on December 14

o    $127 million raised pursuant to a Controlled Equity Offering(SM) Sales Agreement

o    In January 2011 raised an additional $719 million from a subsequent follow-on equity offering

o    All equity raised was accretive to book value

2010 FULL YEAR FINANCIAL HIGHLIGHTS

·         $7.89 per share of net income

o    $4.50 per share, excluding $3.39 per share of other investment related income, amortization expense associated with the termination of interest rate swaps during 2009 and excise tax

o    34% ROE

·         $5.60 per share dividends declared

o    $6.76 per share of taxable income(6)

o    Undistributed taxable income increased from $22 million as of December 31, 2009 to $39 million as of December 31, 2010

·         $1.76 per share or 7.8% increase in book value

o    Increased from $22.48 as of December 31, 2009 to $24.24 per share as of December 31, 2010

·         33% economic return

o    Represents the combination of dividends paid plus book value appreciation over the year

·         29% total return to shareholders

o    Represents the combination of dividends paid or accrued plus share price appreciation over the year

“We are proud of the performance of AGNC in 2010, successfully navigating multiple challenges in our markets,” said Malon Wilkus, Chief Executive Officer of AGNC, “We delivered a 33% economic return to our shareholders in 2010, counting dividends paid plus book value appreciation and a 34% return on equity.  We accomplished this due to the outstanding insights of Gary Kain our Chief Investment Officer and the AGNC team whose focus on relative value within the agency market proved highly successful.  During the year, we also expanded the team, deepening and enhancing our overall capabilities.  We are excited about the opportunity to perform for our shareholders in 2011 and beyond.”

"2010 was an extremely volatile year," said Gary Kain, Chief Investment Officer of AGNC, "where every quarter had significant and unique challenges in the mortgage market.  Despite this difficult backdrop, we were able to produce strong returns for our shareholders each quarter, broaden our shareholder base, and meaningfully grow our company.  We paid $5.60 per share in dividends for the year and grew our book value per share by $1.76 from $22.48 as of December 31, 2009 to $24.24 as of December 31, 2010.  We view the combination of these two metrics as an essential part of shareholder value creation over the long term.  We are proud of these accomplishments and believe that our emphasis on asset selection coupled with our active approach to portfolio management was instrumental to this success."

"As we look ahead," continued Mr. Kain, "we believe that the economic and competitive landscape is very favorable for our industry. The changes we are witnessing at the GSE's, coupled with a prepayment environment that is likely to be more benign, should provide for an attractive backdrop for mortgage investors.  When you combine this with a very steep yield curve, and a Federal Reserve that is likely to keep short term funding rates low for an extended period of time, we continue to remain optimistic."

INVESTMENT PORTFOLIO

As of December 31, 2010, the Company's investment portfolio totaled $13.5 billion of agency securities, at fair value, comprised of $9.1 billion of fixed-rate agency securities, $3.9 billion of adjustable-rate agency securities ("ARMs") and $0.5 billion of collateralized mortgage obligations ("CMOs") backed by fixed and adjustable-rate agency securities(7).  As of December 31, 2010, AGNC's investment portfolio was comprised of 40% </=15-year fixed-rate securities, 6% 20-year fixed-rate securities, 22% 30-year fixed-rate securities(8), 29% adjustable-rate securities and 3% CMOs backed by fixed and adjustable-rate agency securities.  

ASSET YIELDS, COST OF FUNDS AND NET INTEREST RATE SPREAD

During the quarter, the annualized weighted average yield on the Company's average earning assets was 3.48% and its annualized average cost of funds was 0.90%, which resulted in a net interest rate spread of 2.58%, versus the third quarter of 2010 net interest rate spread of 2.21%.  As of December 31, 2010, the weighted average yield on the Company's earning assets was 3.31% and its weighted average cost of funds was 1.03%.  This resulted in a net interest rate spread of 2.28% as of December 31, 2010, an increase of 12 bps from the weighted average net interest rate spread as of September 30, 2010 of 2.16%.  

The weighted average cost basis of the investment portfolio was 104.9% (or 104.5% excluding interest-only strips) as of December 31, 2010. The amortization of premiums (net of any accretion of discounts) on the investment portfolio for the quarter was $33.2 million, or $0.60 per share.  The unamortized net premium as of December 31, 2010 was $626.3 million.

The Company's asset yields benefited from a decline in the Company's projected CPR for the remaining life of its investments and from purchases of higher yielding securities toward the end of the quarter as the Company invested capital from its December capital raise after interest rates increased. Premiums and discounts associated with purchases of agency securities are amortized or accreted into interest income over the estimated life of such securities using the effective yield method. Given the relatively high cost basis of the Company's mortgage assets, slower prepayment projections can have a meaningful positive impact on asset yields.  The Company's projected CPR for the remaining life of its investments as of December 31, 2010 was 12%. This reflects a decrease from 18% as of September 30, 2010.  The decrease in the Company's projected CPR is largely due to increases in interest rates coupled with new purchases of lower coupon securities near the end of the quarter. The actual CPR for the Company's portfolio held in the fourth quarter of 2010 was 18%, an increase from 15% during the third quarter of 2010.  The most recent prepayment speed for the Company's portfolio for the month of January 2011 was 12%.

The cost of funds at the end of the quarter reflects both a higher relative interest rate swap portfolio to borrowings at the end of the quarter compared to the average during the quarter, as well as a temporary increase in repurchase agreement financing rates extending over the end of the year.

LEVERAGE AND HEDGING ACTIVITIES

As of December 31, 2010, the Company's $13.5 billion investment portfolio was financed with $11.7 billion of repurchase agreements, $0.1 billion of other debt(9) and $1.6 billion of equity capital, resulting in a leverage ratio of 7.5x.  When adjusted for the net payable for agency securities not yet settled, the leverage ratio was 7.8x as of December 31, 2010.  Due in part to the equity raise the Company completed towards the end of the fourth quarter, the Company's leverage at the end of the quarter was lower than the average leverage for the quarter of 8.4x.

Of the $11.7 billion borrowed under repurchase agreements as of December 31, 2010, $3.3 billion had original maturities of 30 days or less, $5.7 billion had original maturities greater than 30 days and less than or equal to 60 days, $1.5 billion had original maturities greater than 60 days and less than or equal to 90 days and the remaining $1.2 billion had original maturities of 91 days or more.  As of December 31, 2010, the Company had repurchase agreements with 22 financial institutions.    

The Company's interest rate swap positions as of December 31, 2010 totaled $6.5 billion in notional amount at an average fixed pay rate of 1.61%, a weighted average receive rate of 0.26% and a weighted average maturity of 3.1 years.  During the quarter, the Company increased its swap position by $2.5 billion in conjunction with an increase in the portfolio size.  The new swap agreements entered into during the quarter have an average term of approximately 3.8 years and a weighted average fixed pay rate of 1.35%.

The Company also utilizes swaptions to help mitigate the Company's exposure to larger changes in interest rates.  During the quarter, the Company added $850 million of payer swaptions at a cost of $4.6 million. The Company also had $200 million of payer swaptions from a previous quarter expire during the fourth quarter.  As of December 31, 2010, the Company still had $850 million in payer swaptions outstanding at a market value of $16.8 million.      

As of December 31, 2010, 55% of the Company's repurchase agreement balance and other debt were hedged through interest rate swap agreements. If net unsettled purchases and sales of securities are incorporated, this percentage declines to 53%.  These percentages do not reflect the swaps underlying the swaptions noted above.

OTHER INCOME, NET

During the quarter, the Company produced $68.5 million in other income, net, or $1.24 per share.  Other income is comprised of $10.4 million of net realized gains on sales of agency securities, $20.6 million of net realized gains on derivative and trading securities and $37.5 million of net unrealized gains, including reversals of prior period unrealized gains and losses realized during the current quarter, on derivative and trading securities that are marked-to-market in current income.  

Sales of agency securities during the quarter were largely driven by actions taken by the Company in the ordinary course in response to changing relative values perceived by the Company.  

The net gains (realized and unrealized) on derivative and trading securities generally represent instruments that are used to supplement the Company's interest rate swaps (such as swaptions, short or long positions in "to-be-announced" mortgage securities (TBA's) and short or long positions in treasury securities); however, these are not in hedge relationships for accounting purposes and consequently are accounted for through current income as opposed to shareholders' equity.  The Company uses these supplemental hedges to reduce its exposure to interest rates, which, given the increase in interest rates experienced in December, resulted in the significant net derivative gains discussed above and helped to protect the Company's book value.

TAXABLE INCOME

For the quarter ended December 31, 2010, GAAP income exceeded taxable net income by $0.86 per share.  This was comprised of $0.18 per share of net temporary differences between GAAP and taxable income related to premium amortization and net realized gains, as well as $0.68 per share of net unrealized gains, net of prior period reversals, associated with derivatives marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled.

NET ASSET VALUE

As of December 31, 2010, the Company's net asset value per share was $24.24, or $0.81 higher than the September 30, 2010 net asset value per share of $23.43, or $0.46 higher than pro forma net asset value per share of $23.78, when adjusted for the follow on equity offering that settled on October 1, 2010.  

FOURTH QUARTER 2010 DIVIDEND DECLARATION

On December 17, 2010, the Board of Directors of the Company declared a fourth quarter 2010 dividend of $1.40 per share payable to stockholders of record as of December 31, 2010, which was paid on January 27, 2011. Since its May 2008 initial public offering, the Company has paid or declared a total of $364.0 million in dividends, or $13.26 per share.  After adjusting for the fourth quarter 2010 accrued dividend, the Company had approximately $39 million of undistributed taxable income as of December 31, 2010, essentially unchanged from September 30, 2010. Undistributed taxable income per share as of December 31, 2010 was $0.60 per share.  

The Company has also announced the tax characteristics of its 2010 distributions. The Company's 2010 distributions of $5.60 per share consisted of $4.93 per share of ordinary income and $0.67 per share of long-term capital gains for federal income tax purposes. AGNC stockholders should receive an IRS Form 1099-DIV containing this information from their brokers, transfer agents or other institutions. For additional detail please visit the Company's Investor Relations website at www.AGNC.com.

(1) Based on the weighted average shares outstanding for the quarter.  Please refer to the section on the use of Non-GAAP financial information

(2) Annualized ROE based on net income and average monthly stockholders' equity for the q

QE2 and Its Effects: Treasury Bond Rates Rise

Treasury bond rates are rising.  The graph below clearly indicates this.  The bond investors do not believe Federal Reserve chairman Ben Bernanke’s bullcrap.  That’s why rates are rising.  They are wising up.  Rising rate indicate that some bond investors are shuffling their feet quietly toward the exit.  There will be a panic at some point.  They all think they can get out of the burning building in time.  The burning building is the bond market.  Not all of them will.

On a related note, American Capital Agency Corp. (AGNC) reports 4Q2010 earnings this afternoon.  I’m curious to see how their net interest rate spread holds up.  Notice that short term rates have barely moved since the Federal Reserve started to implement QE2.  Check back later this afternoon for my blog on AGNC earnings.

QE2 and Its Effects: Treasury Bond Rates Rise

Gary North

Feb. 7, 2011

Here is what the Federal Open Market Committee announced on November 3, 2010.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

http://www.federalreserve.gov/newsevents/press/monetary/20101103a.htm

Here is what has happened to bond rates since then.

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http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx

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Why 20% of you high dividend stock produce 80% of your total portfolio return.

Have you ever wondered why 20% of your high dividend stocks account for 80% of your portfolio’s total return?  Gary North can help you understand the implications of Pareto’s powerful law on your wealth.  You will also learn why republocrat policies never have their intended effects on wealth distribution.

Pareto's 20-80 Law Still Applies Everywhere, Except When It Becomes the 20-85 Law, as It Has in the United States.

Gary North

Feb. 5, 2011

Vilfredo Pareto was an Italian engineer-turned-economist teaching in Switzerland at the turn of the 19th century. In 1896-97, he published a book on economics, Cours d'économie politique. It included a section on the distribution of wealth in Europe. He announced his famous finding: 20% of the population owned 80% of the wealth. He examined several Western European nations. The pattern held.

Ever since then, economists have studied wealth distribution in other nations. The law holds.

This is the single most important social law ever discovered. It is probably the most important economic law. No one has explained it. It defies reason. So, academic economists ignore it. Pareto's Cours has never been translated, despite being a universally acknowledged classic. It is arguably the most important still-untranslated book in the history of economic theory.

No one wants to deal with the 20-80 law in a scientific fashion. Pareto could not explain it. He devoted the last decade of his life to a study of society, trying to explain it. Nothing came of this. His explanation is hardly known. Yet this exercise moved him from an economist to a sociologist.

I list several academic discussions of the 20-80 law at the end of this article.

Pareto's law applies to society. It applies to biology. Pareto discovered that 20% of his garden's pea pods produced 80% of the peas. Here is a summary, found on a site selling a book on 20-80. These observations have been discovered over the years.

(a) 80 percent of the results are achieved by 20 percent of the group.
(b) 20 percent of your effort will generate 80 percent of your results.
(c) In any process, few elements (20 percent) are vital and many elements (80 percent) are trivial.
(d) If you have to do ten things, two of those are usually worth as much as the other eight put together.
(e) 20 percent of the tasks account for 80 percent of the value.

Pareto analysis can be effectively employed for separating the major causes (the "vital few") of a problem, from the minor ones (the "trivial many"). Such an analysis focuses your attention to tackling the major causes of the problem at hand rather than wasting time on the minor ones. The 80/20 rule has been tried and tested over the years but it has withstood the stringent scrutiny that it has been subjected to.

Application of the 80/20 rule in management

The Pareto Principle or the 80/20 rule proves its mettle in practically every area of management some of which are given below:

(a) 20 percent of the customers account for 80 percent of the sales.
(b) 20 percent of the products or services account for 80 percent of the profits.
(c) 20 percent of your stock takes up 80 percent of your warehouse space.
(d) 80 percent of your stock comes from 20 percent of your suppliers.
(e) 80 percent of your sales will come from 20 percent of your sales force.
(f) 20 percent of your staff will cause 80 percent of your problems.
(g) 20 percent of a company's staff will output 80 percent of its production.

It applies all the way up. If you add up the wealth of the ten richest men on earth, the top three -- Buffett, Gates, and Carlos Slim -- own 70%.

In other words, this is a true sociological law. If sociologists were really serious, their discipline would begin with this law, for it really is a law. There is only one law of sociology that is more universal: Some do. Some don't. Pareto's is more useful. But the sociologists can no more explain it than the economists can.

Sociologists are the most left-wing faculty members on any campus. This has been true for at least 50 years. So, their use of Pareto's law is highly limited. They use it to excoriate their own nation's wealth distribution. They produce detailed reports on this wealth distribution, but only for their nation, and only recently They never tell the reader that this distribution applies to every area of social organization. They do not tell the reader that it applies in ever nation ever studied. They do not tell the reader that, after a century of government attempts to bring economic equality, the 20-80 rule has not budged. Yes, some society may get 30-70. The United States today is 15-85. But this is variation around the mean: 20-80.

Why don't they discuss this. Simple. These fact prove that the sociologists' great unproved plans to bring equality will not accomplish this. But they want their reforms to work. It is a matter of religious conviction. So they use the Pareto distribution law to criticize capitalism, business, and Reagan (if they are Americans) or Thatcher (if they are British).

William G. Domhoff is the best example of this approach. He teaches sociology -- the most left-wing academic discipline -- at the University of California, Santa Cruz, which is arguably the most left-wing tax-funded university in the United States. For three decades he has asked this legitimate question: Who owns America. He revises his finding annually. He does the spade work in the economic statistics. I have no quarrel with his findings. I quarrel only wityh his refusal to discuss these findings as a tiny subset of a universal social law that no scholar has explained I criticize him for going on and on about how a truly just society would send men with badges and guns and steal back the wealth in the name of the people. Example (January 2011):

Figures on inheritance tell much the same story. According to a study published by the Federal Reserve Bank of Cleveland, only 1.6% of Americans receive $100,000 or more in inheritance. Another 1.1% receive $50,000 to $100,000. On the other hand, 91.9% receive nothing (Kotlikoff & Gokhale, 2000). Thus, the attempt by ultra-conservatives to eliminate inheritance taxes -- which they always call "death taxes" for P.R. reasons -- would take a huge bite out of government revenues (an estimated $1 trillion between 2012 and 2022) for the benefit of the heirs of the mere 0.6% of Americans whose death would lead to the payment of any estate taxes whatsoever (Citizens for Tax Justice, 2010b).

http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

Notice the term "ultra-conservative." It balances "knee-jerk, envy-driven, bleeding-heart liberals."

Notice his use of the beloved decade-long statistic: 2012-2022. No one ever says "per year" when he is hyping his favorite tax reform panacea. That would not impress anyone. So, hypesters always choose a decade. This strategy is used by the Right and the Left. Whenever you see a decade figure, you know you're being manipulated.

I offer this response to Domhoff.

Billy, Billy, Billy: get real! The graduated income tax came in 1914. The brackets were hiked radically against the rich in World War I and have never come down to 1913. The super-rich use tax-exempt foundations to avoid paying the estate tax. That's why the foundations were invented by the lawyers who served the dynastic families your book shows rule America.

The original 1914 form for 1913 income is all over the Web. The Internal Revenue Service posts a photocopy of it on its site: http://www.irs.gov/pub/irs-utl/1913.pdf It was two pages long. Compare this with today's 1040 form.

Here were the brackets.

1 per cent on amount over $20,000 and not exceeding $50,000
2 per cent on amount over $50,000 and not exceeding $75,000
3 per cent on amount over $75,000 and not exceeding $100,000
4 per cent on amount over $100,000 and not exceeding $250,000
5 per cent on amount over $250,000 and not exceeding $500,000
6 per cent on amount over $500,000

There is a site that has a on-line calculator that lets us find out what our tax would be today, using the original form. Sadly, it fails to mention a crucial fact. The Federal Reserve System has debased the currency, beginning in 1914. According to the Bureau of Labor Statistics, goods and services in 2010 cost 22 times what they did it 1913. It has an inflation calculator that lets you see this. So, the income we receive today should be multiplied by 0.04 to see what it would have been in 1913. Most Americans today would pay no income tax. Of course, almost half of American taxpayers don't pay it today. You know the figures. You are an expert in the figures. You really ought to tell your readers the whole truth.

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http://www.ntu.org/tax-basics/who-pays-income-taxes.html

You also know that Progressive Republican leaders got Congress to promote the Sixteenth Amendment.

After almost a century of the New Freedom, the New Deal, the Square Deal, I Like Ike, the New Frontier, the Great Society, the New Malaise, Morning in America, a Thousand Points of Light, the Abolition of Welfare as We Have Known It, the Ownership Society, and Change We Can Believe In, we still have a more unequal wealth distribution system than we had in 1913. Right?

The voters refuse to change the tax burden. The Federal government extracts pretty much the same percentage, 15% to 20%, year after year.

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http://en.wikipedia.org/wiki/Taxation_in_the_United_States

Your figures show that the distribution is beyond Pareto: more like 15-85. OK, it's bad, as in "more unequal." But it's bad by five percentage points. No society gets below 20-80. Let your readers know that "bad" is measured against 20-80, not 50-50. There is no 50-50, ever.

Lest I be thought of as a mean guy who beats up only on left-wing hypesters, I want to state the case against right-wing hypesters.

Guys, it's time to stop spreading the party line about the free market as an engine of wealth equalization. It isn't. It's time to fess up: trickle-down economics is what the free market produces. So does socialism, which you do mention, and the Left doesn't, but wealth does trickle down. Pareto's law applies everywhere.

You need to come to grips with Domhoff's tables and charts. It is not fair to keep pretending he doesn't have the facts just because he is a Leftie who wants to send out guys with badges and guns to soak the rich. Here is reality.

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http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

You should stop ignoring Domhoff and stop ignoring Pareto, too. Reagan lowered income tax rates in 1981, with the Democrats mostly going along, following Kennedy's tradition of lowering rates, but he signed the TEFRA tax hike in 1982, and he raised Social Security rates in 1983, which Carter had promised six years earlier would not be necessary until 2000. Social Security is becoming the killer, and it's now running a deficit. Look at where the money comes from.

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http://en.wikipedia.org/wiki/United_States_federal_budget

It is time to stop pretending that the inequality of wealth distribution can be cured by a flat tax or a VAT tax or any other kind of tax. The free market will not produce a society in which the top half of the citizens will pull in only half of the income and own half of the capital. The low-tax reforms will not work, any more than the Left's "I like Ike" 91% top income tax bracket worked.

Under the free market, the rich get richer, and so do the poor. The rich get far, far richer.

Under Communism, the rich get a little richer, and the poor get a lot poorer, but the rich in a Communist society are poorer than the middle class in a free market society, and will be poorer than the bottom 20% after a few more decades. The top Communists figured this out in China in 1978 and in the Soviet Union in 1991. They have yet to figure it out in North Korea and Cuba.

Conclusion: Until there is a cogent explanation for the existence of Pareto's law, there can be no government policy that will overcome it. The explanation will probably be that nothing can change it. Get used to it.

On the background of Pareto's 20-80 law, begin here.

http://en.wikipedia.org/wiki/Pareto_principle
http://en.wikipedia.org/wiki/Pareto_index

The best introductory book on this is Richard Koch's The 80-20 Principle: The Secret to Achieving More with Less. A good summary is here: http://personalmba.com/8020-principle.

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Marc Faber: Bernanke Is a Liar.

Marc Faber and several others (e.g. Jim Rogers, Peter Schiff, Ron Paul) who understand Austrian economics predicted the housing crisis and the financial crisis.  Knucklehead Keynesian economists like Ben Bernanke and all the talking heads on CNBC failed to see the coming crisis.  They are ignorant liars.  Enjoy the short video below.
Marc Faber: Bernanke Is a Liar

Bull Source

Investor Marc Faber talks with CNBC about the false economic recovery, Egypt, emerging economies, and inflation.

Faber believes the global economy may be okay for the next six months. “We have to realize that it’s an artificial recovery driven by ultra-expansionary monetary policies and also ultra-expansionary fiscal policies,” he comments. Faber predicts that deficits will lead to renewed problems down the road.

“The annual cost of living increases are more than 5% today and the Bureau of Labor Statistics is continuously lying about the inflation rate, including Mr. Bernanke. He’s a liar. Inflation is much higher than what they publish.”

Faber says the true cost of living increase for most US households is 5-8%, and just below that in Western Europe.

Reprinted with permission from Bull Source. You can subscribe to Bull Source posts for free here.

February 5, 2011

© 2011 Bull Source

Dr. Marc Faber [send him mail] lives in Chiangmai, Thailand and is the author of Tomorrow's Gold.
 
 
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Consider Natural Gas as a non-correlator in your portfolio

Natural gas prices have taken a massive beating over the past several years. Take a look at the chart of UNG over the past three years. Oh, the horror!

http://bit.ly/UNGmassacre

Some of the large oil producers have bought some natural gas producers because they expect marketshare and commodity price of natural gas to rise in the coming decades.

http://bit.ly/NatGasForcast

Natural gas is not immune to government intervention. The coal lobby and the natural gas lobby are both greasing the palms of the politicians who have the unconstitutional and immoral power to interfere in markets.

It might be time to buy some natural gas. Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earnings power and strong balance sheets. You will also learn about non-correlative to the stock market that can protect your savings in future financial crises.

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TIP OF THE WEEK - Powerful, Free Stock Charting Software

Powerful, Free Stock Charting Software
Jason Brizic
Feb. 4, 2011

I love to use www.stockcharts.com to aid the timing of my buying and selling after I have performed my fundamental analysis. Their graphics are crisp. They are the only website that I have found that combines my favorite indicators on one chart: candlesticks, the continuous commodity index (CCI), Bollinger bands, moving average convergence divergence (MACD), and volume behind the price.

http://bit.ly/StockChartsSample

Here are the steps I take to setup my charts in less than 10 seconds:
1. Leave the Type of chart: set to SharpChart.
2. Type in the ticker symbol and click Go.
3. Change the Period to Weekly.
4. Scroll down to Chart Attributes; change Size to Landscape.
5. Check the following checkboxes: Full Quote, Price Labels
6. Uncheck the Log Scale checkbox.
7. Scroll down to the Overlays area. Change the one that says -None- to Bollinger Bands
8. Scroll down to the Indicators area. Change the one that says RSI to CCI

Unfortunately, the free version does not display dividend information on the chart like the way Google Finance does. To learn how I use these indicators to help time my buys and sells please subscribe to www.myhighdividendstocks.com/feed . I will be explaining them in upcoming posts, so don't forget to subscribe the feed while you are thinking about it.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

These charts show the continuation of the housing crisis. This spells trouble for REITs.

The information in these charts below can't be good for high dividend mortgage REIT stocks like American Capital Agency Corp. (AGNC).  Make sure you read the five important points at the end of the charts.
 
I believe that Fannie Mae, Freddie Mac, and Ginnie Mae pick up the tab (pay off the mortgage) when homeowners with these mortgages walk away from their loans.  This results in an acceleration of prepayments to owners of government backed agency securities like AGNC.  Prepayments can also occur from refinancing.  AGNC does not like prepayments.  It hurts their profits.
 
This excerpt from AGNC's 2009 annual report explains prepayments for those of you who have never heard of them:
 

Agency securities differ from other forms of traditional debt securities, which normally provide for periodic payments of interest in fixed amounts with principal payments at maturity or on specified call dates. Instead, agency securities provide for a monthly payment, which may consist of both interest and principal. In effect, these payments are a “pass-through” of the monthly interest and scheduled and unscheduled principal payments (referred to as “prepayments”) made by the individual borrower on the mortgage loans, net of any fees paid to the issuer, servicer or guarantor of the securities.

 

The investment characteristics of agency securities differ from those of traditional fixed-income securities. The major differences include the payment of interest and principal on the securities on a more frequent schedule, as described above, and the possibility that principal may be prepaid at par at any time due to prepayments on the underlying mortgage loans. These differences can result in significantly greater price and yield volatility than is the case with traditional fixed-income securities.

 

Various factors affect the rate at which mortgage prepayments occur, including changes in the level and directional trends in housing prices, interest rates, general economic conditions, defaults on the underlying mortgages, the age of the mortgage loan, the location of the property and other social and demographic conditions. Generally, prepayments on agency securities increase during periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. However, this may not always be the case. We may reinvest principal repayments at a yield that is higher or lower than the yield on the repaid investment, thus affecting our net interest income by altering the average yield on our assets.

 

When interest rates are declining, the value of agency securities with prepayment options may not increase as much as other fixed income securities. The rate of prepayments on underlying mortgages will affect the price and volatility of agency securities and may have the effect of shortening or extending the duration of the security beyond what was anticipated at the time of purchase. When interest rates rise, our holdings of agency securities may experience reduced returns if the owners of the underlying mortgages pay off their mortgages slower than anticipated. This is generally referred to as extension risk. 

New Credit Suisse Recast Chart

 
Credit Suisse has released an updated version of their popular Mortgage Reset & Recast Chart.

Here is the new one:

9085247 New Credit Suisse Recast Chart

Here is last year’s chart:

CreditSuisseResetMarch09 1024x721 New Credit Suisse Recast Chart

And, here is the original:

IMFresets New Credit Suisse Recast Chart

There are some thoughts to consider:

  1. There are about 2.5 years of huge resets and recasting ahead.  Because the foreclosure pipeline is already so backlogged, people who stop making payments during this stretch could easily end up waiting another 1-2 years before their homes are actually foreclosed upon.  Even without all of the foreclosures still to come from unemployment, it is easy to see this foreclosure crisis being with us well into 2014-2015.
  2. Because mortgage interest rates are low, “resets” are less of a problem right now. Today, “recasts” are the real threat.  A recast refers to the changing of payment options for Option-Arm loans.  Many borrowers bought the biggest home they could “afford”, using minimum payments to qualify. When the minimum payment option disappears, their monthly expense will “recast” to a substantially-higher amount, regardless of what interest rates do.
  3. Most Option-Arm loans were concentrated in higher-income areas and generally used to buy more expensive homes.  Banks that are holding lots of these on their books, like Wells Fargo, have been fairly proactive in modifying these loans now, while long term rates are low.  It will be interesting to watch, however, if many of these high-end borrowers will walk away from their mortgages as high-end prices continue to fall.
  4. Though rates are currently low, you can see how sensitive the market would be to rate hikes.  The Fed’s MBS repurchase program, the Euro, Greece, Spain, China’s Treasury holdings…all of these factors will likely weigh on mortgage rates in the coming years and have profound effects on our overall economy.
  5. Note the volume of Agency, Alt-A, and Prime loans that will be resetting over the next few years.  These were generally to more qualified buyers with good credit.  If this crowd begins to feel that walking away from their mortgages is socially acceptable, then the housing market will suffer substantially.

Link to original article: http://bayarearealestatetrends.com/2010/03/new-credit-suisse-recast-chart/

 

Safe Bulkers dividend payout ratio remains low depsite an expected decline in earnings.

Let’s assume that the nameless analysts below are correct in that, “On average, analysts predict that Safe Bulkers, Inc. will post $0.38 EPS next quarter. The company has a market cap of $569.8 million and a price-to-earnings ratio of 5.04.”  Is the Safe Bulkers dividend threatened?

Safe Bulkers has been paying a quarterly dividend of $0.15 per share for two years.  Safe Bulkers dividend payout ratio will equal 39.4% if they continue to payout $0.15 per quarter.  This does not immediately threaten Safe Bulkers dividend.  I would take over a year of earnings erosion to threaten SB’s dividend.

Make no mistake, there is a ton of dry bulk tonnage (pun intended) coming into the market.  Many dry bulk shippers ordered ship to be built during the central bank fueled boom times of 2006-2007.  The Baltic Dry Index was at record high levels.  Then the central bank fueled bust came in 2008-2009.  Suddenly there was no need for all the ships being built in the shipyards.  Many dry bulk companies cancelled or delay delivery.  The delayed deliveries are sliding down into the water when the BDI is at near record lows.  I read last night than the tonnage available in the world wide fleet is about to be nearly doubled. (http://seekingalpha.com/article/250232-dht-the-silver-lining-in-the-shipping-cloud )

However, the need for Capesize dry bulk ships goes up if the Suez Canal gets shut down by Egyptian turmoil.

Safe Bulkers, Inc. (SB) Downgraded by FBR Capital (FBCM) to “Market Perform”

February 1st, 2011 • View CommentsFiled Under • by ABMN Staff

Filed Under: Analysts DowngradesMarket News

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Equities research analysts at FBR Capital (NASDAQ: FBCM) downgraded shares of Safe Bulkers, Inc. (NYSE: SB) from an “outperform” rating to a “market perform” rating in a research note to investors on Monday. The analysts currently have a $9.00 price target on the stock.

Separately, analysts at Zacks Investment Research downgraded shares of Safe Bulkers, Inc. from a “neutral” rating to an “underperform” rating in a research note to investors on Wednesday January 26th.

Safe Bulkers, Inc. (Safe Bulkers) is an international provider of marine dry bulk transportation services, transporting bulk cargoes, particularly coal, grain and iron ore, along global shipping routes for some of the global consumers of marine dry bulk transportation services. As of January 31, 2010, the Company had a fleet of 13 dry bulk vessels, with an aggregate carrying capacity of 1,077,900 deadweight tons (dwt) and an average age of 3.6 years. The fleet consisted of four Panamax vessels, three Kamsarmax vessels and six Post-Panamax class vessels. The Company’s subsidiaries include Efragel Shipping Corporation, Marindou Shipping Corporation, Avstes Shipping Corporation, Kerasies Shipping Corporation, Marathassa Shipping Corporation, Pemer Shipping Ltd., Petra Shipping Ltd., Pelea Shipping Ltd., Staloudi Shipping Corporation, Marinouki Shipping Corporation, Soffive Shipping Corporation, Eniaprohi Shipping Corporation and Eniadefhi Shipping Corporation.

Shares of Safe Bulkers, Inc. (NYSE: SB) traded up 2.13% during mid-day trading on Tuesday, hitting $8.65. Safe Bulkers, Inc. has a 52 week low of $6.50 and a 52 week high of $9.00. The stock’s 50-day moving average is $8.63 and its 200-day moving average is $8.07. On average, analysts predict that Safe Bulkers, Inc. will post $0.38 EPS next quarter. The company has a market cap of $569.8 million and a price-to-earnings ratio of 5.04.

Original link to article: http://www.americanbankingnews.com/2011/02/01/safe-bulkers-inc-sb-downgraded-by-fbr-capital-fbcm-to-market-perform/#

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