My High Dividend Stocks Blog

My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.

TIP OF THE WEEK - The Yield Curve: The Best Recession Forecasting Tool

The Yield Curve: The Best Recession Forecasting Tool

Jason Brizic

June 17, 2011

There is a lot of talk about the economy going into a double-dip recession.  Keep your eye on the yield curve.  Gary North explains.  Visit his site www.garynorth.com.  There is a lot of good free stuff there.  This came from the free portion.  An inverted yield curve will destroy the profitability of mortgage REITs like Annaly Capital (NLY) and American Capital Agency Corp. (AGNC).

The Yield Curve: The Best Recession Forecasting Tool

Gary North

It was on the basis of this indicator that in the November 2006 issue of my Remnant Review newsletter, I predicted a recession in 2007. It arrived in December 2007, according to the National Bureau of Economic Research.

The yield curve is a "curve" of interest rates for debt certificates.

The interest rates for more distant maturities are normally higher the further out in time. Why? First, because lenders fear a depreciating monetary unit: price inflation. To compensate themselves for this expected (normal) falling purchasing power, they demand a higher return. Second, the risk of default increases the longer the debt has to mature.

In unique circumstances for short periods of time, the yield curve inverts. An inverted yield occurs when the rate for 3-month debt is higher than the rates for longer terms of debt, all the way to 30-year bonds. The most significant rates are the 3-month rate and the 30-year rate.

The reasons why the yield curve rarely inverts are simple: there is always price inflation in the United States. The last time there was a year of deflation was 1955, and it was itself an anomaly. Second, there is no way to escape the risk of default. This risk is growing ever-higher because of the off-budget liabilities of the U.S. government: Social Security, Medicare, and ERISA (defaulting private insurance plans that are insured by the U.S. government).

What does an inverted yield curve indicate? This: the expected end of a period of high monetary inflation by the central bank, which had lowered short-term interest rates because of a greater supply of newly created funds to borrow.

This monetary inflation has misallocated capital: business expansion that was not justified by the actual supply of loanable capital (savings), but which businessmen thought was justified because of the artificially low rate of interest (central bank money). Now the truth becomes apparent in the debt markets. Businesses will have to cut back on their expansion because of rising short-term rates: a liquidity shortage. They will begin to sustain losses. The yield curve therefore inverts in advance.

On the demand side, borrowers now become so desperate for a loan that they are willing to pay more for a 90-day loan than a 30-year, locked in-loan.

On the supply side, lenders become so fearful about the short-term state of the economy -- a recession, which lowers interest rates as the economy sinks -- that they are willing to forego the inflation premium that they normally demand from borrowers. They lock in today's long-term rates by buying bonds, which in turn lowers the rate even further.

An inverted yield curve is therefore produced by fear: business borrowers' fears of not being able to finish their on-line capital construction projects and lenders' fears of a recession, with its falling interest rates and a falling stock market.

An inverted yield curve normally signals a recession, which begins about six months later. The stock market usually begins to fall six months prior to any recession. So, the appearance of an inverted yield curve normally is followed very shortly by a falling stock market. Fact: The inverted yield curve is an anomaly, happens rarely, and is almost always followed by a recession.

There have been exceptions, as this report by the Cleveland Federal Reserve Bank indicates.

Here is a great page, published by Fidelity, that explains the four major slopes of the yield curve and how they form. There is even an animated graph that lets you run through almost 30 years of curves, month by month. You can click the Play button, and the graph scrolls by. Stop it at any point. Click here.

For skeptics who want a detailed explanation of the relationship between the inverted yield curve and recession, they can read a 2004 Ph.D dissertation by Paul F. Cwik, which is available on-line at The Ludwig von Mises Institute's web site.

The yield curve for U.S. Treasury debt certificates is the one that investors use to predict the economy. Investors assume that the Treasury is the safest lender -- the least likely to default -- and therefore the rates on Treasury debt are least affected by risk.

The Treasury publishes the various rates here: Treasury debt rates

For more tips, go here:

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

American Capital Agency Corp. (AGNC) Risk Factors. Have you read and understand them?

AGNC published its 2010 annual report a month or so ago.  There are 18 pages of risks.  I have summarized them for you here.  Many of them will occur in the future due to the fragile nature of the fractional reserve banking system and the national socialist government interference into the mortgage markets.  I urge you to read and understand these risks before you invest your hard earned capital into American Capital Agency Corp.

I have said many times in the past that AGNC will continue to be a ultra high dividend stocks for the near term, but they will be decimated in the long term.  Plan and invest accordingly.  I believe that there are much better high dividend stocks out there in the stock market attractively priced with a safe dividend and a strong balance sheet.  I like the dry bulk shipper Safe Bulkers (SB) the best.  See my articles on this company for an example of a quality high dividend stock.

For a better understanding of the fraud that is fractional reserve banking read Murray Rothbard’s “The Mystery of Banking”.  This is the book that the FED would most want burned.  http://mises.org/resources/614/Mystery-of-Banking-The

For a brief introduction and warning on GSE’s (Fannie Mae and Freddie Mac) written back in the early 2000’s: http://mises.org/freemarket_detail.aspx?control=391

Item 1A. Risk Factors

You should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K, including our annual consolidated financial statements and the related notes thereto before making a decision to purchase our securities. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our securities could decline, and you may lose all or part of your investment.

Risks Related to Our Investing, Active Portfolio Management and Financing Strategy

1.     We may experience significant short-term gains or losses and, consequently, greater earnings volatility as a result of our active portfolio management strategy.

2.     The potential of the U.S. Government to limit or wind down the role Fannie Mae and Freddie Mac play in the mortgage-backed securities market may adversely affect our business, operations and financial condition.

3.     To the extent that we invest in agency securities that are guaranteed by Fannie Mae and Freddie Mac, we are subject to the risk that these U.S. Government-sponsored entities may not be able to fully satisfy their guarantee obligations or that these guarantee obligations may be repudiated, which may adversely affect the value of our investment portfolio and our ability to sell or finance these securities.

4.     New laws may be passed affecting the relationship between Fannie Mae or Freddie Mac, on the one hand, and the U.S. Government, on the other, which could adversely affect the availability and pricing of  agency securities and the ability to obtain financing against agency securities.

5.     Market conditions have disrupted the historical relationship between interest rate changes and prepayment trends, which make it more difficult for our Manager to analyze our investment portfolio.

6.     Continued adverse developments in the broader residential mortgage market may adversely affect the value of the agency securities in which we invest.

7.    Federal Reserve programs to purchase securities could have an adverse impact on the agency securities in which we invest.

8.    Changes in the underwriting standards by Freddie Mac or Fannie Mae could have an adverse impact on the agency securities in which we invest.

9.    Failure to procure adequate repurchase agreement financing, or to renew (roll) or replace existing repurchase agreement financing as it matures, would adversely affect our results of operations and may, in turn, negatively affect the market value of our common stock and our ability to make distributions to our stockholders.

10.  Pursuant to the terms of borrowings under our master repurchase agreements, we are subject to margin calls that could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.

11.  If our lenders pursuant to our repurchase transactions default on their obligations to resell the underlying agency security back to us at the end of the transaction term, or if the value of the underlying agency security has declined by the end of the term or if we default on our obligations under the transaction, we will lose money on these transactions.

12.  Differences in timing of interest rate adjustments on adjustable-rate agency securities we may acquire and our borrowings may adversely affect our profitability and our ability to make distributions to our stockholders.

13.  Interest rate caps on mortgages backing our adjustable rate agency securities may adversely affect our profitability.

14.  An increase in interest rates may cause a decrease in the volume of newly issued, or investor demand for, agency securities, which could adversely affect our ability to acquire assets that satisfy our investment objectives and to generate income and pay dividends, while a decrease in interest rates may cause an increase in the volume of newly issued, or investor demand for, agency securities, which could negatively affect the valuations for our agency securities and may adversely affect our liquidity profile.

15.  Because we invest in fixed-rate securities, an increase in interest rates on our borrowings may adversely affect our book value or our net interest income.

16.  Changes in prepayment rates may adversely affect our profitability.

17.  Changes in accounting rules may adversely affect our profitability.

18.  Our hedging strategies may not be successful in mitigating the risks associated with interest rates.

19.  Our use of certain hedging techniques may expose us to counterparty risks.

20.  Pursuant to the terms of our master swap agreements, we are subject to margin calls that could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.

21.  We may fail to qualify for hedge accounting treatment.

22.  Our strategy involves significant leverage, which may cause substantial losses.

23.  Our rights under our repurchase agreements will be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders under the repurchase agreements.

24.  Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future offerings of equity securities, which could dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

25.  We have not established a minimum dividend payment level and we cannot assure you of our ability to pay dividends in the future.

26.  The stock ownership limit imposed by the Internal Revenue Code for REITs and our amended and restated certificate of incorporation may restrict our business combination opportunities.

27.  The stock ownership limitation contained in our amended and restated certificate of incorporation generally does not permit ownership in excess of 9.8% of our common or capital stock, and attempts to acquire our common or capital stock in excess of these limits will be ineffective unless an exemption is granted by our Board of Directors.

28.  Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws could discourage a change of control that our stockholders may favor, which could also adversely affect the market price of our common stock.

Risks Related to Conflicts of Interest in Our Relationship with Our Manager and American Capital

1.     The management agreement was not negotiated on an arm’s-length basis and the terms, including fees payable, may not be as favorable to us as if it were negotiated with an unaffiliated third party.

2.     We have no employees and our Manager is responsible for making all of our investment decisions. Certain of our Manager’s officers are employees of American Capital and are not required to devote any specific amount of time to our business and each of them may provide their services to American Capital, its affiliates and sponsored investment vehicles, which could result in conflicts of interest.

3.     We are completely dependent upon our Manager and certain key personnel of American Capital who provide services to us through the management agreement and the administrative services agreement and we may not find suitable replacements for our Manager and these personnel if the management agreement and the administrative services agreement are terminated or such key personnel are no longer available to us.

4.     We have no recourse to American Capital if it does not fulfill its obligations under the administrative services agreement.

5.     If we elect to not renew the management agreement without cause, we would be required to pay our Manager a substantial termination fee. These and other provisions in our management agreement make non-renewal of our management agreement difficult and costly.

6.     Our Manager’s management fee is based on the amount of our Equity and is payable regardless of our performance.

Risks Related to Our Business Structure

1.     Loss of our exemption from regulation pursuant to the Investment Company Act would adversely affect us.

2.    We are exposed to potential risks from legislation requiring companies to evaluate their internal control over financial reporting.

3.    We are highly dependent on information and communications systems. Any systems failures could significantly disrupt our business, which may, in turn, negatively affect our operations and the market price of our common stock and our ability to pay dividends to our stockholders.

Risks Related to Our Taxation as a REIT

1.    If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.

2.    Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

3.    REIT distribution requirements could adversely affect our ability to execute our business plan.

4.    Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

5.    Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.

6.    Complying with REIT requirements may force us to liquidate otherwise attractive investments.

7.    The failure of agency securities subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT.

8.    Liquidation of assets may jeopardize our REIT qualification.

9.    Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

10.  Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.

11.  As a REIT, if we derive net income from prohibited transactions (as defined in the Internal Revenue Code provisions) it is subject to a 100% tax.

Risks Related to Our Common Stock

1.    Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business.

2.    The market price of our common stock may fluctuate significantly.

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

TIP OF THE WEEK - See if Insiders are Buying or Selling Their Stocks

See if Insiders are Buying or Selling Their Stocks

Jason Brizic

June 3, 2011

It’s always a good idea to see if company insiders are net buyers of the high dividend stock you are considering purchasing.

Sometimes this can give you a warning even if you haven’t done the deep analysis on a company yet.

You can use Morningstar.com to see insiders transactions and total shares held.

I was curious to see how much American Capital Agency Corp. (AGNC) stock insiders own.  Go to www.morningstar.com.  Type in AGNC in the text box and then select Insiders tab.  There are several sub-tabs.  I like the one called Insider Activity.  There is table below that with the tabs Transaction History and Holding Summary.

Image001

Several executives of AGNC own no shares of the company.  That’s not a good sign.  Do the same on a stock you are curious about.

For more tips, go here:

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

AGNC 2010 annual report and millions of more shares next year.

American Capital Agency Corp. (AGNC) issued a press release today that focuses on the rescheduling of its annual meeting of stockholders.  The press release failed to mention the inclusion of its 2010 annual report available from the link to the proxy materials.  Follow this link to download the annual report:

www.AGNC.com/2011proxymaterials

The annual report can be downloaded in PDF format.  I will read through it and begin blogging on new information that could jeopardize AGNC’s high dividend yield.

Why did AGNC delay the stockholders meeting?  According to them they wanted to give stockholders additional time to consider and vote on the amended proposal.  What is special about the amended proposal?

            “… and to modify the requested increase in the Company's authorized shares of common stock.  The amended proposal now only requests an increase in the authorized number of shares of the Company's common stock to 300,000,000 instead of 500,000,000. “

AGNC has 128.83 million shares currently outstanding.  It is currently paying a $1.40 quarterly dividend on those shares.  That totals $180.36 million dollars per quarter in dividend payments.  The company must periodically issue new shares of common stocks, to bring in capital, in order to leverage around 8x, to buy the agency securities yielding an average of 3.44% with repurchase agreements costing an average of 1.02%, to keep the difference, and to pay a whopping dividend of $1.40 per share per quarter.

It is a Catch 22 situation.  The trouble is that each additional outstanding share comes with an expectation of a large cash dividend.  The huge 18% dividend yield is the main reason that investors speculators are purchasing shares of AGNC.  The more shares the harder it is to keep the dividend the same or growing. 

Let’s assume for a moment that AGNC issues all the shares it can until it hits the 300 million limit proposed.  Will the company be able to sustain its $1.40 quarterly dividend?  Heck no!  300 million shares times $1.40 per share equals $420 million in dividend payments per quarter or $1.6 billion per year.

AGNC only earned $177 million in net interest income in 2010.  AGNC still wouldn’t have enough income to pay the $1.40 quarterly dividend even if it was able to triple its net interest income in 2011 to $531 million.  Couple this reality with an increasing risk of higher interest rates and AGNC’s current price of $30 per share looks like it has less upside than downside.

Disclosure: I don’t own AGNC; nor do I ever plan to.  It is a house of misallocated cards.

American Capital Agency Corp. Reschedules 2011 Annual Meeting of Stockholders

BETHESDA, Md., May 25, 2011 /PRNewswire/ -- American Capital Agency Corp. (Nasdaq: AGNC) ("AGNC" or the "Company") announced today that it has rescheduled its 2011 annual meeting of stockholders, originally scheduled for May 31, 2011. The new meeting date and time is Friday, June 10, 2011 at 9 a.m. (ET). The annual meeting will be held at AGNC, located at 2 Bethesda Metro Center, 14th Floor, Bethesda, Maryland 20814.  

The Company also announced that it has supplemented its proxy statement for the 2011 annual meeting to amend the charter amendment proposal to eliminate the proposed increase in the Company's authorized shares of preferred stock and to modify the requested increase in the Company's authorized shares of common stock.  The amended proposal now only requests an increase in the authorized number of shares of the Company's common stock to 300,000,000 instead of 500,000,000.  The Company rescheduled its annual meeting in order to provide its stockholders with additional time to consider and vote on the amended proposal.

The annual meeting will be held for the purposes set forth below.

1.     To elect the Board of Directors, with each director serving a one-year term and until his successor is elected and qualified;

2.     To approve an amendment to the Company's Amended and Restated Certificate of Incorporation to increase the total authorized number of shares of common stock from 150,000,000 to 300,000,000;

3.     To ratify the selection of Ernst & Young LLP to serve as the Company's independent public accountant for the year ending December 31, 2011; and

4.     To transact such other business as may properly come before the meeting or any adjournment thereof.

The Board of Directors of the Company has recommended a vote "FOR" all of the director nominees and "FOR" proposals 2 and 3 above.

Formal notice of the rescheduled meeting and the supplement to the Company's proxy statement and revised proxy card are being mailed today to the Company's stockholders.  More information on the items to be discussed at the meeting can be found in the Company's proxy statement, which is available at www.AGNC.com/2011proxymaterials.

Stockholders of record at the close of business on April 11, 2011 are entitled to notice of, and to vote at, the 2011 annual meeting and any adjournment of the meeting. If you wish to vote shares held in your name or attend the annual meeting in person, please register in advance by emailing Investor Relations at IR@AGNC.com or by phone at (301) 968-9300. Attendance at the 2011 annual meeting will be limited to persons presenting proof of stock ownership on the record date and picture identification. If you hold shares directly in your name as the stockholder of record, proof of ownership could include a copy of your account statement or a copy of your stock certificate(s). If you hold shares through an intermediary, such as a broker, bank or other nominee, proof of stock ownership could include a proxy from your broker, bank or other nominee or a copy of your brokerage or bank account statement. Additionally, if you intend to vote your shares at the meeting, you must request a "legal proxy" from your broker, bank or other nominee and bring this legal proxy to the meeting.

For further information or questions, please do not hesitate to call the Company's Investor Relations Department at (301) 968-9300 or send an email to IR@AGNC.com.

Original link to the press release: http://www.prnewswire.com/news-releases/american-capital-agency-corp-reschedules-2011-annual-meeting-of-stockholders-122583503.html

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

Most FED officials prefer raising interest rates prior to selling their MBS. How would this affect AGNC?

Of course most Federal Reserve officials would prefer to raise interest rates rather than sell toxic mortgage backed securities.  Nobody in their right mind would pay full face value for those toxic MBS.  The Fed knows this and it is already suffering a public relations crisis.  It doesn’t want the public to know how ineffectual their actions have been since late 2008.

They will also find that raising the Fed Funds Rate will be pushing on a string.  The commercial bankers have over $1.3 trillion in excess reserves in their digital vaults.  They are not loaning money to each other overnight at the Fed Funds Rate to meet reserve requirements (duh! Because they have $1.3 trillion in excess RESERVES.)  The Federal Reserve could raise this rate to 20% and nothing would happen.  Actually something would happen.  People would notice that the Fed is not in control of all interest rates like they were taught.

If the Federal Reserve does sell toxic MBS into the market, then that is very bad for high dividend stocks like American Capital Agency Corp. (AGNC) and other mortgage REITs.  There would be an increased supply of MBS for sale and no new demand at the old prices.  Prices of MBS would go down.  The asset value of AGNC’s MBS portfolio would go down.  If the Fed flooded the market with enough MBS, then it is even possible that AGNC would have to sell some agency MBS to satisfy margin calls for its repurchase agreements.  Leverage is a two way street.

The interest rates that the Fed doesn’t control are going to rise and that will hurt AGNC’s net income derived from the spread of various interest rates.  AGNC will lose money if interest rate yield curves invert (that would be a signal of a double dip recession).  Enjoy the high dividend yields while they last because lower future asset values and rising interest rates are going to torpedo AGNC’s investment prospects.

Disclosure: I don’t own AGNC and I don’t plan on owning it ever.

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

* * * * * * *

(Reuters) - Most Federal Reserve officials prefer to raise benchmark interest rates before selling assets when the time comes to tighten policy, minutes of their April meeting showed on Wednesday.

During an extensive discussion of how the central bank might pull back its massive support for the world's largest economy, officials agreed they would eventual shrink the Fed's much expanded portfolio over the medium term, and that getting rid of mortgage-related debt would be a priority.

"A majority of participants preferred that sales of agency securities come after the first increase in the (Fed's) target for short-term interest rates," the Fed said.

"And many of those participants also expressed a preference that the sales proceed relatively gradually, returning (Fed holdings) to all Treasury securities over perhaps five years," the minutes said.

Discussion of the removal of monetary stimulus should not be seen as an indication the Fed is ready to start down that road any time soon, policy makers said.

(Reporting by Mark Felsenthal; Editing by Neil Stempleman)

AGNC hires two investment executives from the failed Freddie Mac and Bear Stearns.

The executives at American Capital Agency Corp. know that interest rates are going to skyrocket in the not so distant future.  So they have hired some ex-Freddie Mac executives to help them game the system until it can no longer be gamed.  There is nothing wrong with that.  Caveat emptor "buyer beware".  I would not be proud to hire people at the failed Freddie Mac or Bear, Stearns & Co.  I wish them success, but I know that AGNC and its high dividend stock buddies in the mortgage REIT sector are a house of leveraged cards that will crumble at the beginnings of an inverted interest rate curve.
 
Why not hire some guys from Enron's risk management department?  How could they do any worse than Freddie Mac and Bear Stearns.  Hiring collosal risk management failures is just plain stupid.  I would avoid AGNC just for their hiring practices.
 
Here are the links to the wikipedia entries for Freddie Mac and Bear Stearns if you can stomach the financial insanity of these dead corporations:
 
 
BETHESDA, Md., May 16, 2011 /PRNewswire/ -- American Capital Agency Management, LLC, the external manager of American Capital Agency Corp. (Nasdaq: AGNC), announced today that Peter J. Federico and M. Song Jo are joining the company.
 
Mr. Federico will join as Senior Vice President and Chief Risk Officer and will be responsible for overseeing all risk management activities relating to AGNC.  Mr. Federico was previously Executive Vice President and Treasurer of Freddie Mac, primarily responsible for managing that company's investment activities for its retained portfolio and developing, implementing and managing risk mitigation strategies.  He was also responsible for managing Freddie Mac's $1.2 trillion interest rate derivative portfolio and short and long-term debt issuance programs.  Mr. Federico previously served in several other capacities at Freddie Mac, including Senior Vice President, Asset & Liability Management.  Mr. Federico joined Freddie Mac in 1988.
 
Mr. Jo joined American Capital Agency Management as Vice President, Mortgage Structuring.  He previously served as Vice President, Mortgage Structuring, Investment & Capital Markets at Freddie Mac, where he was primarily responsible for managing mortgage structuring activities, including creating, managing and trading structured activities to enhance that entity's risk, return and liquidity profile.  Mr. Jo served Freddie Mac in various other capacities from 1997 to 2010.  He previously worked at Alex. Brown & Sons and Bear, Stearns & Co. Inc.
 
"We are excited about expanding our investment team with seasoned professionals," commented Gary Kain, President, American Capital Agency Management, LLC.  "Peter and Song both have extensive experience in investing, trading and managing risk associated with mortgage-backed securities.  Prior to joining us, Peter spent most of his 20 year career involved in the management of one of the largest interest rate derivative portfolios in the world.  We believe that his extensive experience in asset/liability management will further our efforts to generate attractive risk adjusted returns for American Capital Agency Corp. over a wide range of economic environments and interest rate scenarios," he added.
 
"In addition, Song's experience analyzing and executing Agency REMIC transactions at Freddie Mac will significantly enhance our ability to use mortgage structuring to supplement American Capital Agency Corp.'s returns and develop alternative funding strategies," Mr. Kain continued.  "We continue to build the strongest possible investment team with the necessary skills and industry experience to help us enable American Capital Agency Corp. to capitalize on the wealth of opportunities within the agency mortgage market, while appropriately managing risk."
 
 
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
 
Be seeing you!

Large bank debt is frequently a sign of weakness. Safe Bulkers (SB) vs. AGNC.

Large bank debt due shortly is frequently a sign of weakness.  I’m comparing two of the stocks that I’ve been analyzing the most: Safe Bulkers (SB) and American Capital Agency Corp. (AGNC).  Both are high dividend stocks.  SB yields about 7.4% and AGNC yields a whopping 19%.  See how each of them deals with their short term debts.

Safe Bulkers (SB) looks like it is financially sound.  Safe Bulkers (SB) has $28.6 million in short term debt as of Q1 2011.  Short term debts were $8.2 million in 2006.  It has $53.2 million in total current liabilities.    Total current liabilities were $172 million in 2006.  Short term debt is on a slight uptrend, but total current liabilities are in a five year downtrend.  Safe Bulkers has an annual net income of about $109 million.  It can pay down the debts it owns with the money the business earns and continue to pay its high dividend (even in the beaten down dry-bulk shipping market; shipping rates have plummeted since 2008).  The same can’t be said of AGNC.

American Capital Agency Corp. (AGNC) is not financially sound because it is leveraged 7-9 times and like a bank it is borrowed short (through repurchase agreements due in 30-180 days) and lent long (agency securities).  AGNC has $21.9 billion in short term debt according to the company’s latest quarterly report.  The company’s total current liabilities is virtually the same as its short term debts.  AGNC has an annual net income of about $288 million.

You can see the huge difference between AGNC’s short term debt and net income due to their leverage.  I expect the company’s net income to decrease in the next year or so due to rising short term interest rates.

The point is that AGNC does not payback its short term debts with the money it earns.  Its dividend payment is also in jeopardy.  It issues more stock to raise capital and it rolls over its debts.  The music stops when the financial institutions refuse to rollover its short term debts (credit crisis) or they charge higher rates for short term borrowings (rising interest rates).

I will not invest in banks, mortgage REITs, and insurance companies for this reason.  They are too opaque and difficult to understand their asset values.  The details of the business operations are also difficult to understand.  Don’t be charmed by their siren’s song of a whopping dividend yield or you may find a portion of your dividend portfolio smashed upon the rocks when the interest rate yield curve inverts.

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

* * * * * * *

Large Bank Debt Frequently a Sign of Weakness. Financial difficulties are almost always heralded by the presence of bank loans or of other debt due in a short time. In other words, it is rare for a weak financial position to be created solely by ordinary trade accounts payable. This does not mean that bank debt is a bad sign in itself; the use of a reasonable amount of bank credit —particularly for seasonal needs—is not only legitimate but even desirable. But, whenever the statement shows Notes or Bills Payable, the analyst will subject the financial picture to a somewhat closer scrutiny than in cases where there is a “clean” balance sheet.

The postwar boom in 1919 was marked by an enormous expansion of industrial inventories carried at high prices and financed largely by bank loans. The 1920–1921 collapse of commodity prices made these industrial bank loans a major problem. But the depression of the 1930’s had different characteristics. Industrial borrowings in 1929 had been remarkably small, due first to the absence of commodity or inventory speculation and secondly to the huge sales of stock to provide additional working capital. (Naturally there were exceptions, such as, notably, Anaconda Copper Mining Company which owed $35,000,000 to banks at the end of 1929, increased to $70,500,000 three years later.) The large bank borrowings were shown more frequently by the railroads and public utilities. These were contracted to pay for property additions or to meet maturing debt or—in the case of some railways—to carry unearned fixed charges. The expectation in all these cases was that the bank loans would be refunded by permanent financing; but in many instances such refinancing proved impossible, and receivership resulted. The collapse of the Insull system of public-utility holding companies was precipitated in this way.

Wunderlich Securities analysts have no clue on economics and AGNC.

I have one question for the unnamed Wunderlich Securities analyst(s).  Do you think that short term interest rates will rise faster than longer term interest rates in the next one or two years?  Their answer has to be no.  Otherwise, they wouldn’t have said what they said in the article below.

The research firm expects “market trends could support higher debt to equity ratios going forward because collateral is relatively dear in the marketplace.” While not every Index member is a dividend payer, the Index does sport a yield of 10%.

Wunderlich notes wider spreads and adequate liquidity will support returns on equity of over 17% on average this year and could provide support with the potential for multiple expansion.

Interest rates will rise from these artificially low rates manufactured from Federal Reserve digital money creation.  I have posted about this here: http://bit.ly/RatesRise .  Interest rate spreads will tighten when the Federal Reserve’s quantitative easing (QE2) ends in June.  If the Fed stop printing money for a year like they did for most of 2010, then the recession will continue.  Short term interest rates will rise faster than long term rates.  This is the precursor to an inverted yield curve.  The inverted yield curve has preceded almost every recession since the end of World War II.

If the Federal Reserve starts printing money again (QE3) before the onset of another recession, then perhaps the interest rate spreads won’t tighten as quickly.  But the Fed will be sowing the seeds of a bigger calamity later.  American Capital Agency Corp. (AGNC) and the other mortgage REITs are going to have to slash dividends and their stock prices will take huge losses because their asset values will erode.

Ask yourself this question: Did Wunderlich Securities warn their clients that a financial crisis was eminent in 2007?  I can’t find any warnings using the search terms “Wunderlich Securities” + “financial crisis”.  I do know that Peter Schiff, EuroPacific Captial, is an advocate of the Austrian school of economics.  He is on the list of those who warned of the financial crisis: http://marketplayground.com/2010/11/20/twelve-who-forecast-the-financial-crisis/   No one from Wunderlich saw the crisis coming.  Why should you trust them now on mortgage REIT dividend stability?

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

* * * * * * *

Wunderlich Sees Stability In Mortgage REIT Dividends (NLY, AGNC, NRF, CIM, CLNY)

by Jason Smith | May 2nd  |  Filed in: Stock Sector News

The Mortgage Investment Stocks Index is up 0.1% after Wunderlich Securities said metrics reported by the firms in this group that have reported first-quarter earnings speak to the stability of dividends currently in place. Wunderlich notes fewer than half the mortgage REITs under coverage have delivered first-quarter results, but company reports and current market trends indicate stable payouts for investors.

The research firm expects “market trends could support higher debt to equity ratios going forward because collateral is relatively dear in the marketplace.” While not every Index member is a dividend payer, the Index does sport a yield of 10%.

Wunderlich notes wider spreads and adequate liquidity will support returns on equity of over 17% on average this year and could provide support with the potential for multiple expansion.

Shares of Annaly Capital Management (NLY), the largest Index member by market value are fractionally lower today. Annaly has a yield of 13.9%, based on past distributions. With a yield of 19.2%, based on past distributions, American Capital Agency (AGNC) is modestly higher while Northstar Realty Finance (NRF) with a yield of 7.9%, based on past distributions, is soaring 3%. Chimera Investment (CIM) and Colony Financial (CLNY) are both lower by half a percent. Those stocks yield 13.8% and 6.9%, based on past distributions, respectively.

Investors can track dozens of high-yielding indexes at tickerspy.com.

Link to original article: http://www.tickerspy.com/newswire/?p=4402

Jefferies likes AGNC's innovative approach to risk management. Yikes!

Jefferies thinks American Capital Agency Corp. (AGNC) is fairly valued.  Words like “innovative approach to risk management” makes me think of Enron and their “innovative approaches”.  Likewise, words like “sophisticated hedging strategy” sounds to me like a house of cards propped up with counterparty risk.  The financial health of AGNC’s unnamed hedging counterparties cannot be determined.  Would you want to enter into a hedge with Lehman Brothers, AIG, or any other bankster?

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

* * * * * * *

American Capital Agency's (NASDAQ: AGNC) reported 1Q11 results were $0.12 above consensus and book value grew 7% Q/Q. Despite substantial ROE outperformance and the most innovative approach to risk management in the REIT space, Jefferies views the shares as fairly valued. AGNC currently trades to a 1.15 multiple of book value, a justifiable premium to the pure-play Agency REIT average of 1.1x.

During the quarter, AGNC doubled the size of their investment portfolio. Surprising to Jefferies was the company's focus on fixed-rate product, which represented 82% of the total portfolio at quarter-end. Importantly, AGNC does not own TBA mortgages, but rather the company tends to focus on specified pools.

In 1Q11, AGNC increased its exposure not only to plain vanilla interest rate swaps, but also swaptions, synthetic I/O securities, and TBA and Treasury positions in order to increase the duration of their hedge portfolio. AGNC clearly employs the most sophisticated hedging strategy in the mortgage REIT space, Agency or non-Agency.

Jefferies has a $29 PT and Hold rating on AGNC

American Capital Agency closed Tuesday at $28.83

Read more: http://www.benzinga.com/analyst-ratings/analyst-color/11/04/1036131/jefferies-comments-on-american-capital-agency-following-#ixzz1KlL2IMiU

American Capital Agency (AGNC) reports 1Q2011 earnings; dividend still not safe.

American Capital Agency Corp. (AGNC) dividend is not safe.  It has a current dividend payout ratio of 107.6%.  Any payout ratio above 100% is a warning to the dividend investor to expect a cut in the future.  The company earned $1.30 per share for its reoccurring business operations of borrowing short (repurchase agreements) and lending long (agency securities).  But that wasn’t enough to cover the $1.40 quarterly dividend per share.

The company earned another $0.18 per share from the net realized gains on sales of agency securities, derivatives, and trading securities.  You can’t count on reoccurring income from these sales and hedges.

The company reported an improvement to its book value from $24.24 to $25.96.  Remember this – AGNC’s liabilities are real, but its asset values must be questioned.  The housing market is not done being clobbered and the government guarantees on agency securities are empty promises.  I place little faith in the book values of financial companies.  Think Lehman Brothers and their nice book value prior to their implosion.

The company remains highly leveraged 7.4 times.  I don’t like this.  It is a house of cards with an attractive dividend yield.  Net interest rate spreads remain the same as last quarter.  This will not change until interest rates rise.  Interest rates will rise.  It is only a matter of time before this house of financial cards comes crashing down.  Austrian economists predicted the the 2007-2008 crash back in 2005.  They are predicting another crash in the next few years depending on the actions of the Federal Reserve and the commercial bankers.

In summary:

·         Dividend - AGNC has a spectacular 19% dividend yield based on shaky leverage and an inflationary Federal Reserve.  A cut is coming in the next year.

·         Earning power - Its dividend is not supported by its reoccurring operations.  Its three year average earnings per share of $1.18 would only be slightly improved by a continuation of this quarter’s performance for the rest of 2011.  Only new capital issues and the occasional sale of some agency securities at a gain are keeping it afloat.

·         Balance sheet - Its balance sheet is horrible because its like a banks: borrowed short and lent long.  The moment that its 25 unnamed credit suppliers cease to rollover its short term debts the whole house of cards will come crumbling down.

You can view the earnings press release here: http://prn.to/AGNC1Q

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

BETHESDA, Md., April 25, 2011 /PRNewswire/ -- American Capital Agency Corp. (“AGNC” or the “Company”) (Nasdaq: AGNC) today reported net income for the first quarter of 2011 of $133.5 million, or $1.48 per share, and book value of $25.96 per share.

FIRST QUARTER 2011 FINANCIAL HIGHLIGHTS

·         $1.48 per share of net income

o    $1.30 per share, excluding $0.18 per share of other investment related income

·         $1.68 per share of taxable income(1)

·         $1.40 per share first quarter dividend

·         $0.42 per share of undistributed taxable income as of March 31, 2011

o    Undistributed taxable income increased $16 million to $55 million

·         $25.96 book value per share as of March 31, 2011

o    Increased $1.72, or 7%, from $24.24 per share as of December 31, 2010

·         22% annualized return on average stockholders’ equity (“ROE”) for the quarter(2)

OTHER FIRST QUARTER HIGHLIGHTS

·         $28 billion investment portfolio value as of March 31, 2011

·         13% constant prepayment rate (“CPR”) for the first quarter of 2011(3)

o    11% CPR for the month of April 2011(4)

·         7.6x leverage as of March 31, 2011(5)

o    7.4x average leverage for the quarter

·         2.58% annualized net interest rate spread for the quarter

o    2.42% net interest spread as of March 31, 2011

·         $1.75 billion of net proceeds raised from equity offered during quarter

o    $1.61 billion raised in two follow-on offerings

o    $141 million raised pursuant to a Controlled Equity Offering(SM) Sales Agreement and via direct share purchase plan share issuances

o    All equity raised was accretive to book value

Here is the press release in its entirety:

BETHESDA, Md., April 25, 2011 /PRNewswire/ -- American Capital Agency Corp. (“AGNC” or the “Company”) (Nasdaq: AGNC) today reported net income for the first quarter of 2011 of $133.5 million, or $1.48 per share, and book value of $25.96 per share.

FIRST QUARTER 2011 FINANCIAL HIGHLIGHTS

·         $1.48 per share of net income

o    $1.30 per share, excluding $0.18 per share of other investment related income

·         $1.68 per share of taxable income(1)

·         $1.40 per share first quarter dividend

·         $0.42 per share of undistributed taxable income as of March 31, 2011

o    Undistributed taxable income increased $16 million to $55 million

·         $25.96 book value per share as of March 31, 2011

o    Increased $1.72, or 7%, from $24.24 per share as of December 31, 2010

·         22% annualized return on average stockholders’ equity (“ROE”) for the quarter(2)

OTHER FIRST QUARTER HIGHLIGHTS

·         $28 billion investment portfolio value as of March 31, 2011

·         13% constant prepayment rate (“CPR”) for the first quarter of 2011(3)

o    11% CPR for the month of April 2011(4)

·         7.6x leverage as of March 31, 2011(5)

o    7.4x average leverage for the quarter

·         2.58% annualized net interest rate spread for the quarter

o    2.42% net interest spread as of March 31, 2011

·         $1.75 billion of net proceeds raised from equity offered during quarter

o    $1.61 billion raised in two follow-on offerings

o    $141 million raised pursuant to a Controlled Equity Offering(SM) Sales Agreement and via direct share purchase plan share issuances

o    All equity raised was accretive to book value

“Our American Capital Agency team delivered another strong quarter with our strategy of actively managing the portfolio,” said John Erickson, AGNC Executive Vice President and Chief Financial Officer. “This strong performance occurred in a quarter marked by significant global economic and political events, which required the periodic reconsideration of investment strategies. Even in this challenging environment, we grew our book value by 7% to $25.96 per share and earned $1.48 per share of net income while taking steps to reduce risk. In addition, we have added to our AGNC investment staff to broaden our expertise, improve our depth and address the Company’s significant growth.”

“We continue to believe the combination of strong asset quality and diversification, coupled with a thoughtful hedging strategy, which includes some optional protection, remains critical to our ability to achieve our dual mandates of generating attractive returns for our shareholders and protecting book value within reasonable bands,” said Gary Kain, President and Chief Investment Officer of AGNC. “During the first quarter of 2011, the Company raised over $1.7 billion in new equity and continued to produce solid returns across a wide range of different measures.  Book value, undistributed taxable earnings and what many analysts call ‘core earnings’ were all higher during the quarter, despite lower leverage resulting from the typical time lags associated with deploying new capital.”

INVESTMENT PORTFOLIO

As of March 31, 2011, the Company’s investment portfolio totaled $28.2 billion of agency securities, at fair value, comprised of $22.9 billion of fixed-rate agency securities, $4.9 billion of adjustable-rate agency securities (“ARMs”) and $0.4 billion of collateralized mortgage obligations (“CMOs”) backed by fixed and adjustable-rate agency securities(6).  As of March 31, 2011, AGNC’s investment portfolio was comprised of 44% </= 15-year fixed-rate securities, 5% 20-year fixed-rate securities, 32% 30-year fixed-rate securities(7), 18% adjustable-rate securities and 1% 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 3.39% and its annualized average cost of funds was 0.81%, which resulted in a net interest rate spread of 2.58%, unchanged from the fourth quarter of 2010.  As of March 31, 2011, the weighted average yield on the Company’s earning assets was 3.47% and its weighted average cost of funds was 1.05%(8).  This resulted in a net interest rate spread of 2.42% as of March 31, 2011, an increase of 14 bps from the weighted average net interest rate spread as of December 31, 2010 of 2.28%(9).  

The weighted average cost basis of the investment portfolio was 104.4% (or 104.0% excluding interest-only strips) as of March 31, 2011. The amortization of premiums (net of any accretion of discounts) on the investment portfolio for the quarter was $48.0 million, or $0.53 per share.  The unamortized net premium as of March 31, 2011 was $1.2 billion.

The Company’s asset yield benefitted from purchases of higher yielding securities late in the fourth quarter of 2010 and during the quarter as the Company invested capital from its recent capital raises subsequent to recent increases in interest rates and from a decline in the projected CPR for the remaining life of the Company’s investments. 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 projected CPR for the remaining life of the Company’s investments as of March 31, 2011 was 10%; a decrease from 12% as of December 31, 2010.  The decrease in the projected CPR is largely due to purchases of lower coupon securities during the quarter coupled with increases in both spot and forward interest rates. The actual CPR for the Company’s portfolio held in the first quarter of 2011 was 13%, a decrease from 18% during the fourth quarter of 2010.  The most recent CPR for the Company’s portfolio for the month of April 2011 was 11%.

The Company’s average cost of funds declined 9 basis points from 0.90% for the fourth quarter of 2010 to 0.81% for the first quarter of 2011, due largely to timing differences between asset settlements and the initiation of new interest rate swap contracts. These differences led to lower effective swap costs during the quarter than is expected to occur in future periods. The cost of funds as of March 31, 2011 includes both current and forward starting swaps balances, net of expirations, within three months of quarter end.

LEVERAGE AND HEDGING ACTIVITIES

As of March 31, 2011, the Company’s $28.2 billion investment portfolio was financed with $22.0 billion of repurchase agreements, $0.1 billion of other debt(10) and $3.3 billion of equity capital, resulting in a leverage ratio of 6.6x.  When adjusted for the net payable for agency securities not yet settled, the leverage ratio was 7.6x as of March 31, 2011.  The average leverage for the quarter was 7.4x as the Company deployed capital from its recent equity raises.

Of the $22.0 billion borrowed under repurchase agreements as of March 31, 2011, $5.7 billion had original maturities of 30 days or less, $8.7 billion had original maturities greater than 30 days and less than or equal to 60 days, $5.8 billion had original maturities greater than 60 days and less than or equal to 90 days and the remaining $1.8 billion had original maturities of 91 days or more. As of March 31, 2011, the Company had repurchase agreements with 25 financial institutions.    

The Company’s interest rate swap positions as of March 31, 2011 totaled $15.1 billion in notional amount at an average fixed pay rate of 1.79%, a weighted average receive rate of 0.25% and a weighted average maturity of 3.6 years.  During the quarter, the Company increased its swap position, including forward starting swaps ranging up to twelve months, by $8.5 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 4.2 years and a weighted average fixed pay rate of 1.93%. The Company intends the use of swaps with longer maturities to protect its book value and longer term earnings potential.

The Company also utilizes swaptions to mitigate the Company’s exposure to larger changes in interest rates.  During the quarter, the Company added $1.6 billion of payer swaptions at a cost of $17.2 million and $0.3 billion of receiver swaptions at a cost of $0.4 million. During the quarter, $0.3 billion of payer swaptions from a previous quarter expired or were sold.  As of March 31, 2011, the Company had $2.1 billion in payer swaptions outstanding at a market value of $21.3 million.

As of March 31, 2011, 68% 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 60%.  These percentages do not reflect the swaps underlying the payer swaptions noted above, which have an average maturity of 6.1 years.

OTHER INCOME, NET

During the quarter, the Company produced $15.8 million in other income, net, or $0.18 per share.  Other income is comprised of $4.2 million of net realized gains on sales of agency securities, $31.0 million of net realized gains on derivative and trading securities and $19.4 million of net unrealized losses, 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.  

The net gains and losses (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 and short or long positions in “to-be-announced” mortgage securities (TBA’s), Markit IOS total return swaps(11) and  treasury securities). Under accounting rules, these positions are not in hedge relationships and consequently are accounted for through current income instead of shareholders’ equity.  The Company uses these supplemental hedges to reduce its exposure to interest rates.

TAXABLE INCOME

Taxable income for the first quarter of 2011 was $1.68 per share, or $0.20 higher than GAAP net income per share for the quarter. The primary difference between tax and GAAP net income is unrealized gains and losses associated with derivatives marked-to-market in current income for GAAP purposes but excluded from taxable income until realized or settled. Taxable income for the first quarter of 2011 benefited from the settlement of gains derived from short TBA positions and payer swaptions entered into during the fourth quarter of 2010. As of March 31, 2011, net unrealized gains that have been recognized for GAAP, but excluded from taxable income, totaled $10 million. Assuming no change in market prices as of March 31, 2011, the Company anticipates recognizing most of these net gains as taxable income during the second quarter of 2011.

NET ASSET VALUE

As of March 31, 2011, the Company’s net asset value per share was $25.96, or $1.72 higher than the December 31, 2010 net asset value per share of $24.24.  

FIRST QUARTER 2011 DIVIDEND DECLARATION

On March 7, 2011, the Board of Directors of the Company declared a first quarter 2011 dividend of $1.40 per share payable on April 27, 2011, to stockholders of record as of March 23, 2011. Since its May 2008 initial public offering, the Company has paid or declared a total of $499.2 million in dividends, or $14.66 per share.  After adjusting for the first quarter 2011 accrued dividend, the Company had approximately $55 million of undistributed taxable income as of March 31, 2011, an increase of $16 million from December 31, 2010. Undistributed taxable income per share as of March 31, 2011 was $0.42 per share.  

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