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This article is part of our Rising Star Portfolios series. You can read about the Dada Portfoliohere.

Unemployment is obstinate, companies are operating below capacity, and inflation is low.

Are there any companies that can actually benefit from the slump?

Why, yes there are
The name that's caught my interest is Annaly Capital 

(NYSE: NLY)
, one of the largest publicly traded residential real estate investment trusts (REITs).

Annaly's business model seems complicated, but it's actually pretty straightforward: Imagine if you could borrow $10,000 at 2%, lend it at 4% to a guaranteed borrower, and keep the $200 difference.

That's Annaly's business in a nutshell. The company issues shares to raise capital, which it levers up with short-term financing. It uses this capital to buy longer-term mortgage-backed securities (MBS's), collects the interest on these securities or sells them, and then repays its lenders.

Virtually all the leftover profit is returned to shareholders via dividends. This currently works out to a 15% yield. (As a REIT, Annaly is required to distribute least 90% of its earnings as a dividend in exchange for not having to pay corporate income taxes. However, this dividend can be taxed differently than normal dividends.)

The diagram below shows how it all comes together, with arrows representing money flows:

anImage

Shareholders and lenders provide Annaly with capital which the company uses to buy mortgage-backed securities.

The bulk of Annaly's profit is the difference between the short term rates at which it borrows, and the long term rates at which it lends, multiplied by the amount of leverage it employs – currently 6.4 times.

This is similar to the profit model employed by many proprietary traders at banks likeGoldman Sachs (NYSE: GS)

JPMorganBank of America(NYSE: BAC), and Citigroup (NYSE: C). The difference is that Annaly's investments are probably safer (all of them are issued and guaranteed by U.S. government agencies), a greater portion of the rewards are distributed to shareholders rather than as bonuses to traders, and proprietary trading will theoretically become illegal for the aforementioned banks should regulators actually enforce financial reform legislation.

There are other companies similar to Annaly, such as American Capital Agency (Nasdaq: AGNC)Hatteras Financial (NYSE: HTS), and Annaly-managed Chimera (NYSE: CIM). But Annaly's bigger, has an ultra-safe portfolio, a long track record, and a strong management team headed up by Michael Farrell.

Here's where things get good
When inflation is too low and unemployment too high -- as is the case today -- the Federal Reserve lowers short term interest rates to stimulate the economy. The Fed is currently targeting 0%-0.25%, pretty much as low as you can go.

Since short-term rates are more responsive to the Fed's low interest rate targeting and Annaly borrows at short-term rates to purchase longer-term securities, its costs have fallen significantly faster than the interest it collects.

Check out how the declining Fed funds rate (green) drags down Annaly'sborrowing costs (red) much faster than its investments yield (blue). The area between red and blue is Annaly's interest spread (profit):

anImage


Source: Company filings and the Federal Reserve Bank of New York.

This is an awesome environment for Annaly. The current spread of 2.11% (the area between the blue and red lines and the key determinant of the company's profitability) -- is nearly double its historical average of approximately 1.20%.

And it's one that's likely to persist for some time. As it's exceedingly unlikely we're going to see any meaningful economic stimulus to address unemployment emerge from the soon-to-be Republican-controlled House of Representatives and dysfunctional Senate, we can expect the slump – and low interest rates – to continue for some time. Traditional monetary rules prescribe as many as four years (!) of near-zero percent interest rates to cope even with mainstream economic forecasts.

Scenarios galore
Here are a few possible scenarios and their outcomes for our investment in Annaly, ranked from most to least likely.

  • The slump goes on: We continue to collect dividends on a massive interest spread – approximately 10%-15% annually.
  • Fed gets more aggressive: Intensified policies like quantitative easing that seek to lower long-term interest rates could put the squeeze on Annaly's interest spread. Annaly sells its investments at a profit and pays a dividend.
  • Employment recovers or inflation rises: Fed raises interest rates, Annaly's profits decline and investments fall in value. While Annaly is partially hedged and I don't expect this to happen for at least a couple of years, this would be a bad situation for our investment in Annaly.
  • Radical GSE reform: Legislation pulls the rug out from under the mortgage market by removing federal guarantees for Fannie- and Freddie-issued securities. In this unlikely scenario, Annaly could have to switch business models, but our downside is protected somewhat by the stock's modest (1.2 times book value) valuation.

We're buying
We're buying $500 of Annaly shares. The most likely outcome is that the economy will remain sluggish, interest rates stay more-or-less favorable, and the Dada Portfolio collects a large yield for at least a year or two.

We're not expecting much share appreciation from Annaly, as the company, by law, retains very little of its earnings. Growth is often financed with share offerings, though the company has historically done of good job of selling when its valuation is high.

Instead, we're buying the stock for its tasty 15% yield that should remain high so long as the economy lumbers along and the Fed holds interest rates down.

The Dada Portfolio is a part of the Rising Star series of real money portfolios. It is co-managed by Sean Sun and Ilan Moscovitz

Should You Buy High Dividend REITs? The Motley Fool and I Disagree.

The market is already driving interest rates higher.  This is going to narrow profits at all of the REITs.  These high dividend stocks are for short term investors looking for a quick 3.5-5% quarterly dividend.  Remember that they are not qualified dividends that are taxed at 15%.  They are taxed as ordinary income (meaning 25% - 35%) for higher income investors.  Buy these at the bottom of the next crash if you really believe in the sustainability of there business models.

Please click on the Google Ads if you like the content of this blog.  I'm using those clicks to evaluate the profitability of this blog.  Visit my main blog site at www.myhighdividendstocks.com if you don't see the Google Ads.

The Federal Reserve is not currently in control of the Fed Funds rate (the rate that banks charge each other for overnight loans to meet their reserve requirements).  The large commercial banks are in control of this rate because they are flush with over a trillion dollars in excess reserves.  They aren't borrowing from each other overnight.  The short term rates can and will rise outside of the Federal Reserves control.

Recs

108

    Rising Star Buy: Annaly Capital


     | Comments (27)

    Don't let it get away!

    Keep track of the stocks that matter to you.

    Help yourself with the Fool's FREE and easy new watchlist service today.

    This article is part of our Rising Star Portfolios series. You can read about the Dada Portfolio here.

    Unemployment is obstinate, companies are operating below capacity, and inflation is low.

    Are there any companies that can actually benefit from the slump?

    Why, yes there are
    The name that's caught my interest is Annaly Capital(NYSE: NLY), one of the largest publicly traded residential real estate investment trusts (REITs).

    Annaly's business model seems complicated, but it's actually pretty straightforward: Imagine if you could borrow $10,000 at 2%, lend it at 4% to a guaranteed borrower, and keep the $200 difference.

    That's Annaly's business in a nutshell. The company issues shares to raise capital, which it levers up with short-term financing. It uses this capital to buy longer-term mortgage-backed securities (MBS's), collects the interest on these securities or sells them, and then repays its lenders.

    Virtually all the leftover profit is returned to shareholders via dividends. This currently works out to a 15% yield. (As a REIT, Annaly is required to distribute least 90% of its earnings as a dividend in exchange for not having to pay corporate income taxes. However, this dividend can be taxed differently than normal dividends.)

    The diagram below shows how it all comes together, with arrows representing money flows:

    anImage

    Shareholders and lenders provide Annaly with capital which the company uses to buy mortgage-backed securities.

    The bulk of Annaly's profit is the difference between the short term rates at which it borrows, and the long termrates at which it lends, multiplied by the amount ofleverage it employs – currently 6.4 times.

    This is similar to the profit model employed by many proprietary traders at banks likeGoldman Sachs (NYSE:GS)JPMorganBank of America (NYSE: BAC), andCitigroup (NYSE: C). The difference is that Annaly's investments are probably safer (all of them are issued and guaranteed by U.S. government agencies), a greater portion of the rewards are distributed to shareholders rather than as bonuses to traders, and proprietary trading will theoretically become illegal for the aforementioned banks should regulators actually enforce financial reform legislation.

    There are other companies similar to Annaly, such asAmerican Capital Agency (Nasdaq: AGNC)Hatteras Financial (NYSE: HTS), and Annaly-managed Chimera(NYSE: CIM). But Annaly's bigger, has an ultra-safe portfolio, a long track record, and a strong management team headed up by Michael Farrell.

    Here's where things get good
    When inflation is too low and unemployment too high -- as is the case today -- the Federal Reserve lowers short term interest rates to stimulate the economy. The Fed is currently targeting 0%-0.25%, pretty much as low as you can go.

    Since short-term rates are more responsive to the Fed's low interest rate targeting and Annaly borrows at short-term rates to purchase longer-term securities, its costs have fallen significantly faster than the interest it collects.

    Check out how the declining Fed funds rate (green) drags down Annaly's borrowing costs (red) much faster than its investments yield (blue). The area between red and blue is Annaly's interest spread (profit):

    anImage


    Source: Company filings and the Federal Reserve Bank of New York.

    This is an awesome environment for Annaly. The current spread of 2.11% (the area between the blue and red lines and the key determinant of the company's profitability) -- is nearly double its historical average of approximately 1.20%.

    And it's one that's likely to persist for some time. As it's exceedingly unlikely we're going to see any meaningful economic stimulus to address unemployment emerge from the soon-to-be Republican-controlled House of Representatives and dysfunctional Senate, we can expect the slump – and low interest rates – to continue for some time. Traditional monetary rules prescribe as many as four years (!) of near-zero percent interest rates to cope even with mainstream economic forecasts.

    Scenarios galore
    Here are a few possible scenarios and their outcomes for our investment in Annaly, ranked from most to least likely.

    TIP OF THE WEEK - REITs and other stocks don't qualify for lower dividend tax treatment

    REITs and other stocks don’t qualify for lower dividend tax treatment

    Jason Brizic

    Jan. 7, 2011

    On December 17th, 2010 president Obama signed the bill extending the Bush tax cuts for another two years.  Investors who receive qualified dividends will continue to enjoy the same 15% maximum tax rate as capital gains.

    REITs, master limited partnerships (MLPs), and some foreign stocks don’t qualify and are taxed as ordinary income.  Foreign stocks that are American Depository Receipts (ADRs) are qualified.  Annaly Capital (NYSE: NLY) and American Capital Agency Corp(Nasdaq: AGNC) are among the many high-yielding REITs whose dividends don't qualify for the 15% maximum rate.

    REITs, MLPs, and foreign dividends are taxed at the rate of your ordinary income.  For most investors that means 25%, 28%, 33%, or 35% dividend tax depending on your income.

    Tax bracket

    AGNC after tax dividend yield

    @ 19.5% market yield

    NLY after tax dividend yield

    @ 14.6% market yield

    10%

    17.55%

    13.14%

    15%

    16.56%

    12.41%

    25%

    14.63%

    10.95%

    28%

    14.04%

    10.51%

    33%

    13.07%

    9.78%

    35%

    12.68%

    9.49%

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    European Nations Begin Seizing Private Pension Funds

    USA retirement accounts are a trap, so are the tax retirement accounts of many other countries.  Your money is highly visible and accessible to deficit gushing governments.  I stopped contributing to my account about two years ago.  I believe that what is happening in Europe will happen in the USA.  I think that the federal government will offer a government annuity (a new promise for a broken Social Security promise).  Don’t be fooled.  Save your money and start your own business with the capital.  Run a successful business that serves clients needs and you will have a comfortable retirement.

    Please click on the Google Ads if you like the content of this blog and you want more of it.  I'm evaluating the profitability of this blog with the responses to those ads.  If you don't see the Google Ads, then please visit my main site at www.myhighdividendstocks.com and give them a click.  Thanks you for your support.

    A friend wrote the following today.

    * * * * *

    …So a while back I was explaining why I’m less excited about “tax sheltered retirement plants”  Reasons were:

    -          Creatures of the tax code, advantage can evaporate at the stroke of a pen

    -          Users typically left with lackluster choices for investments (usually a smattering of expensive, mediocre funds, in US markets, of course)

    -          You can’t get your money out if you really need it, in most cases, until 60+

    I also invoked the worst-case prospect, that the government just seizes it from you to make up deficits.  Argentina did this fairly recently.  Seems we have some more examples:

    http://www.csmonitor.com/Business/The-Adam-Smith-Institute-Blog/2011/0102/European-nations-begin-seizing-private-pensions

    Chasing “tax advantaged savings” doesn’t look so hot when it’s easy pickings for thieves.

    Corroborating link for Hungary:

    http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201012140603dowjonesdjonline000125&title=hungarian-pension-funds-ask-eu-to-protect-memberssavings

    * * * * *

    Be seeing you!

    Are dividend stocks really less volatile than growth stocks?

    Are dividend stocks less volatile than growth stocks?  I read the following recently:

    Typically, dividend stocks fall much less than the overall equity market as investors flock to the safety net that dividends provide.  During the recent 2000 through 2002 bear market, the DJIA, which is made up of large mature dividend-paying stocks, fell 37.85 percent while the more growth-oriented indexes like the Nasdaq and the S&P 500 fell 77.93 percent and 49.15 percent, respectively (from their highest closing values in 2000 to their lowest closing values in 2002)”

    I’ll accept the above as fact.  Now that we know what happened during the dot.com bubble; what happened to the dividend stocks during the Panic of 2008?

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    During the recent 2007 through 2010 bear market the DJIA fell 52 percent while the Nasdaq and S&P500 fell 53 percent and 56 percent respectively (from their highest closing values in 2007 to their lowest closing values in 2009).  Wait a minute.  Something isn’t right here.  It appears that during the Panic of 2008 the DJIA dividend stocks depreciated as much in price as much as their growth stock buddies in the Nasdaq and the S&P500.  Why can this be?

    HYPOTHESIS - The puny DJIA dividend makes them behave more like growth stocks.

    The DJIA’s average dividend yield in 1944 was 4.47 percent.  Today it is 2.77 percent.

    What was the DJIA dividend yield in 2007 and 2009?  According to one article I read the DJIA yield in October 2007 was 2.89%  It probably approached 4 percent at the March 2009 lows, but I don’t have an exact figure.  Likewise the S&P 500 had a dividend yield of 1.81 percent in October 2007.

    What does the Nasdaq yield?  The Nasdaq 100 currently yields somewhere between 0.70 percent and 0.27 percent depending on the source.

    What does the S&P500 yield?  The S&P500 currently yields 1.71 percent.

    The point is that the DJIA dividend yield is not much greater than the S&P500 although it is about 3 times greater than the Nasdaq.  They all declined about the same percentage in 2007-2009.

    This begs the question - What was the DJIA yielding in 2000?  Was there a greater disparity amongst the three markets back when the dot.com bubble burst?  The DJIA yielded 1.4 percent in 2000.  What was the S&P500 yielding in 2000?  I’m not sure, but it was yielding 1.4 percent in 1998.  What was the Nasdaq yielding in 2000?  I can’t figure out what the Nasdaq yield was for the year 2000, but I’m guessing it was miniscule.

    Now I’m scratching my head.  When the DJIA dropped 37 percent it yielded around 1.4 percent.  The S&P500 dropped 49 percent when I’m guessing it yielded maybe 1.0 to 1.2 percent (I’m accounting for index gains since 1998 and a slightly increasing divided for the index).

    Something else besides strictly dividend yields must be the causation for the similarities in the percentage declines of these indexes in 2007-2009.  In my next article I will examine how some large companies yielding more than 6 percent in 2007 faired during the Panic of 2008.  Perhaps several high dividend stocks from various industries will shed some light on this mystery.

    Dear reader, please click on the Google Ads at my main site (www.myhighdividendstocks.com).

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    Average earnings vs. trend of earnings. An AGNC example.

    Which is more important - 1) the average earnings of a period of years or 2) the trend of earnings over those same years?  The answer is not clear cut.  AGNC, the stock I have been analyzing lately, has only been in business since 2008.  It hasn't been around long enough to even create a trend with three yearly data points.
     
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    American Capital Agency Corporation earned the following per share in recent years:
     
    2008 = $2.36
    2009 = $6.78
    2010 = at least $6.28 (my estimate)
     
    AGNC earned $5.05 in the first three quarters of 2010.  I think it is safe to say that AGNC will earn at least $6.28 per share in 2010.  That is the total of the first three quarters ($5.05) plus a repeat performance of their worst quarter of the year ($1.23).  It will earn $6.73 if it can simply earn the average of the first three quarters ($1.68) in the fourth quarter of 2010.
     
    Here are AGNC's most recent quarterly earnings from their SEC filings:
    1Q2010 = $2.13
    2Q2010 = $1.23
    3Q2010 = $1.69
    4Q2010 = $1.68 (my estimate based on a simple average of the first three quarters of 2010)
     
    Its annual earnings trend appears to be flattening.  If AGNC's earnings stagnates at around $6.00, then the maximum of the stock price could reach and still qualify at a conservative investment according to the late-great Benjamin Graham is $120.00/share ($6.00 earnings time a 20 P/E multiple = $120).  AGNC is currently trading at around $28.74 per share.  That would equate to a multiple of 4.5 times earnings.  That is a very low multiple even for REITs which are averaging around a 8.5 multiple right now. 
     
    Let's assume for a moment that AGNC earns $6.28 in 2010.  In that case the three year earnings average would be $5.14.  Place a twenty multiple on top of the $5.14 figure an you get a maximum value of $102.80 per share.
     
    AGNC's earnings are a function of their portfolio size and their interest rate spread.  Their earnings won't stagnate unless one or both of those change their trends.
     
    Be seeing you!

    How Bad Is the Debt Burden for Students Who Took Out College Loans? Really Bad. How Bad is the Job Market? Really Bad.

    I pay attention to the job market.  The job market should effect the stock market because people without jobs have to cut back on products and services that publicly traded companies provide.  This line a little bit into the article was news to me:

    What young high school students are never told is that not even bankruptcy can get you out of student loan debt. It will stay with you forever until you finally pay it off.”

    Avoid high dividend stocks that are dependent on younger consumers for growth.  After you read this article you’ll know why.

    ------

    How Bad Is the Debt Burden for Students Who Took Out College Loans? Really Bad. How Bad Is the Job Market? Really Bad.

    Gary North

    Dec. 22, 2010

    This appeared on End of the American Dream site.

    As you read this, there are over 18 million students enrolled at the nearly 5,000 colleges and universities currently in operation across the United States. Many of these institutions of higher learning are now charging $20,000, $30,000 or even $40,000 a year for tuition and fees. That does not even count living expenses. Today it is 400% more expensive to go to college in the United States than it was just 30 years ago. Most of these 18 million students have been told over and over that a "higher education" is the key to getting a good job and living the American Dream. They have been told not to worry about how much it costs and that there is plenty of financial aid (mostly made up of loans) available. Now our economy is facing the biggest student loan debt bubble in the history of the world, and when our new college graduates enter the "real world" they are finding out that the good jobs they were promised are very few and far between. As millions of Americans wake up and start realizing that the tens of thousands of dollars that they have poured into their college educations was mostly a waste, will the great college education scam finally be exposed?

    For now, the system continues to push the notion that a college education is the key to a good future and that there is plenty of "financial aid" out there for everyone that wants to go to college.

    Recently, U.S. Secretary of Education Arne Duncan visited students at T.C. Williams High School in Alexandria, Virginia and encouraged them to load up on college loans....

    "Please apply for our financial aid. We want to give you money. There's lots of money out there for you." So where will Arne Duncan be when those students find themselves locked into decades of absolutely suffocating student loan debt repayments?

    What young high school students are never told is that not even bankruptcy can get you out of student loan debt. It will stay with you forever until you finally pay it off.

    Today each new crop of optimistic college graduates quickly discovers that there are simply not nearly enough jobs for all of them. Thousands upon thousands of them end up waiting tables or stocking the shelves at retail stores. Many of them end up deeply bitter as they find themselves barely able to survive and yet saddled with tens of thousands of dollars in student loan debt that nobody ever warned them about.

    Sadly, the quality of the education that most of these college students is receiving is a complete and total joke.

    Take it from someone that has graduated from a couple of very highly respected institutions. I have an undergraduate degree, a law degree and another degree on top of that, so I know what I am talking about. Higher education in America has become so dumbed-down that the family dog could literally pass most college courses.

    It is an absolute joke. The vast majority of college students in America spend two to four hours a day in the classroom and maybe an hour or two outside the classroom studying. The remainder of the time these "students" are out drinking beer, partying, chasing after sex partners, going to sporting events, playing video games, hanging out with friends, chatting on Facebook or getting into trouble. When they say that college is the most fun that most people will ever have in their lives they mean it. It is basically one huge party.

    Of the little "education" that actually does go on, so much of it is so dedicated to pushing various social engineering agendas that it makes the whole process virtually worthless. Most parents would be absolutely shocked if they could actually see the kind of "indoctrination" that goes on inside U.S. college classrooms today.

    A college education can be worth it for those in very highly technical or very highly scientific fields, or for those wanting to enter one of the very few fields that is still very financially lucrative, but for nearly everyone else it is just one big money-making scam.

    Oh, but you parents please keep breaking your backs to put money into the college funds of your children so that they can be spoon-fed establishment propaganda all day and party like wild animals all night for four years.

    It really is a huge scam. I was there. I saw it with my own eyes.

    But if you will not believe me, perhaps you will believe some cold, hard statistics. The following are 16 shocking facts about the student loan debt bubble and the great college education scam....

    #1 Americans now owe more than $875 billion on student loans, which is more than the total amount that Americans owe on their credit cards.

    #2 Since 1982, the cost of medical care in the United States has gone up over 200%, which is horrific, but that is nothing compared to the cost of college tuition which has gone up by more than 400%.

    #3 The typical U.S. college student spends less than 30 hours a week on academics.

    #4 The unemployment rate for college graduates under the age of 25 is over 9 percent.

    #5 There are about two million recent college graduates that are currently unemployed.

    #6 Approximately two-thirds of all college students graduate with student loans.

    #7 In the United States today, 317,000 waiters and waitresses have college degrees.

    #8 The Project on Student Debt estimates that 206,000 Americans graduated from college with more than $40,000 in student loan debt during 2008.

    #9 In the United States today, 24.5 percent of all retail salespersons have a college degree.

    #10 Total student loan debt in the United States is now increasing at a rate of approximately $2,853.88 per second.

    #11 There are 365,000 cashiers in the United States today that have college degrees.

    #12 Starting salaries for college graduates across the United States are down in 2010.

    #13 In 1992, there were 5.1 million "underemployed" college graduates in the United States. In 2008, there were 17 million "underemployed" college graduates in the United States.

    #14 In the United States today, over 18,000 parking lot attendants have college degrees.

    #15 Federal statistics reveal that only 36 percent of the full-time students who began college in 2001 received a bachelor's degree within four years.

    #16 According to a recent survey by Twentysomething Inc., a staggering 85 percent of college seniors planned to move back home after graduation last May.

    Please Share This Article With Your Family And Friends.

    I am sharing it, as requested.

    None of this is debt required to earn a degree from an accredited college.

    http://www.garynorth.com/public/729.cfm

    ------

    Be seeing you!

    Why You Shouldn't Trust the Core CPI Numbers

    This article from The Daily Reckoning’s Addison Wiggin is spot on.  The CPI numbers are rigged to keep Social Security and Medicare solvent a few extra years.  This is why your high dividend stock portfolio must generate at least a 6% - 10% return to beat the real price inflation caused by the FED’s counterfeiting.

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    --------

    Why You Shouldn’t Trust the Core CPI Numbers

    12/15/10 Baltimore, Maryland – Consumer prices rose 0.1% in November…and less than a percent over the past year. If you strip out food and energy – which government number crunchers do, because those prices are allegedly “volatile” – you still get a 0.1% increase.

    That’s the “core” CPI, and that’s what the monetary mandarins at the Federal Reserve care about when drafting plans to buy Treasuries, control interest rates, goose employment numbers, order pizza, drink wine, play Xbox 360 or any of the myriad other things they do during their FOMC meetings.

    As a group, they can’t be pleased with the number. Over the last year, despite trillions of dollars in government stimulus and quantitative easing, core CPI has risen a scant 0.8% – far below the Fed’s “sweet spot” of 1.6-2.0%.

    But whom are we kidding? Even the “headline” figure, the one including food and energy, is suspect.

    Our friends at Casey Research put out this chart a couple months ago. The column in the far right – CPI-U – is actually lower now than it was then, all those other columns notwithstanding:

    Image001

    How does the government pull this off? We ask constant readers to indulge our newer ones as we revisit three of the most common tools the statisticians use…

    • Substitution. If steak becomes more expensive, and you buy hamburger instead, then the Bureau of Labor Statistics reasons your cost of beef has stayed the same – no inflation!
    • Hedonics. If the 2011 model of a car costs more than the 2010 model, but it also comes with more standard equipment, the BLS reasons you’re still getting the same value for your money – no inflation!
    • Geometric weighting. Nothing fancy here: If the price of something goes up, the BLS simply makes it count for less in the CPI relative to everything else. If the price comes down, it counts for more. Voila!

    These changes started with the last round of Social Security “reform” under the auspices of Alan Greenspan in the early ’80s. The idea was that if CPI were lower, Uncle Sam could pay out less in Social Security benefits.

    You can see the end result over time maintained by our friend John Williams of Shadow Government Statistics. Mr. Williams calculates economic numbers the way they did back in the Carter era. The “official” CPI number is in red. The shadow stat is in blue:

    Image002

    In the meantime, the Federal Reserve statement issued after yesterday’s meeting amounted to, “steady as she goes” on the ill-fated QE2. The Fed, looking at current “official” CPI numbers, sees “deflation”…

    And so the plan to goose the system with $875 billion in Treasury purchases that started last month will continue to at least double the official rate from whence it sat while they were kibitzing over bagels before the meeting began yesterday morning.

    Sooner or later, reality is going to catch up to the gamed statistics. Indeed, “an inflationary outbreak is very likely,” says Chris Mayer, editor of Mayer’s Special Situations.

    History is on our side.

    “The dollar has done nothing more reliably than lose its value over time,” Chris points out. “I think the future will be no different. People who worry about deflation – that, somehow, the dollars in our pocket will actually buy more in the years ahead, not less – will not only be wrong. They will be broke.

    “Writer Jason Zweig points out that ‘Since 1960, 69% of the world’s market-oriented economies have suffered at least one year in which inflation ran at an annualized rate of 25% or more. On average, those inflationary periods destroyed 53% of an investor’s purchasing power.’

    “That is why I believe that being prepared for inflation is the most important investment decision we have to face in the coming decade. If you aren’t prepared, then the consequence is a mean hit to your wealth.”

    Addison Wiggin
    for The Daily Reckoning

    Read more: Why You Shouldn't Trust the Core CPI Numbers http://dailyreckoning.com/why-you-shouldnt-trust-the-core-cpi-numbers/#ixzz19LBybZFb

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    AGNC Declares $1.40 Fourth Quarter Dividend - How much longer can they sustain this?

    AGNC just declared that it will pay a $1.40 dividend for the fourth quarter 2010.  According to Google Finance there are 56.85 million shares outstanding.  So that equals a dividend payment of roughly $78.89 million.  Net income last quarter was around $60 million.  Will AGNC earn that much in 4Q2010?  I don’t think so.  If they don’t cover the dividend with earnings, then they will have to raid their piggy bank.

    AGNC Declares $1.40 Fourth Quarter Dividend

     

    BETHESDA, Md., Dec. 17, 2010 /PRNewswire-FirstCall/ -- American Capital Agency Corp. (Nasdaq: AGNC) ("AGNC" or the "Company") announced today that its Board of Directors has declared a cash dividend of $1.40 per share for the fourth quarter 2010.  The dividend is payable on January 27, 2011 to common shareholders of record as of December 31, 2010, with an ex-dividend date of December 29, 2010.

    Here is the link to the press release: http://www.prnewswire.com/news-releases/agnc-declares-140-fourth-quarter-dividend-112091904.html

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    AGNC news: American Capital down after starting offering

    American Capital down after starting offering

    AMERICAN CAPITAL AGENCY CORP.

    NEW YORK | Fri May 14, 2010 8:53am EDT

    NEW YORK (Reuters) - Shares of American Capital Agency Corp (AGNC.O) fell 6.9 percent to $25.65 in premarket trading on Friday, a day after the company commenced a public offering of common stock.

    (Reporting by Ryan Vlastelica; Editing by Theodore d'Afflisio)

    Article link: http://www.reuters.com/article/idUKTRE64D34P20100514?type=companyNews

    Here is the press release courtesy of www.PRnewswire.com:

    AGNC Announces Pricing of Public Offering of Common Stock

     

    BETHESDA, Md., Dec. 9, 2010 /PRNewswire-FirstCall/ -- American Capital Agency Corp. (Nasdaq: AGNC) (“AGNC” or the “Company”) announced today that it priced a public offering of 8,000,000 shares of common stock for total net proceeds of approximately $219 million. Citi and Deutsche Bank Securities acted as underwriters for the offering.  In connection with the offering, the Company has granted the underwriters an option for 30 days to purchase up to an additional 1,200,000 shares of common stock to cover overallotments, if any. The offering is subject to customary closing conditions and is expected to close on December 14, 2010.

    AGNC expects to use the net proceeds from this offering to acquire additional agency securities as market conditions warrant and for general corporate purposes.

    To read the whole press release go here: http://www.prnewswire.com/news-releases/agnc-announces-pricing-of-public-offering-of-common-stock-111598429.html

    Let’s do some simple back of the envelope math.  The press release mentions that AGNC expects $219 million in new capital will be raised by the new offering.  $219 million divided by 8 million shares = $27.38/share.  If the full 9.2 million shares are purchased then the per share price drops to $23.48/share.

    No wonder AGNC dropped from $29.50/share at the close on December 8th, to $25.65 in pre-market trading.  At 9:42 am MST it has climbed to $28.52.

    So how many agency securities can AGNC buy with $216 million dollars in new capital.  AGNC maintained an average leverage level of 8.5x in the third quarter of 2010 according to their latest 10-K quarterly report.  If we apply that leverage level to the amount of new capital to be leveraged we get:

    $216 million times 8.5 equals $1.836 billion dollars in new agency securities.

    Their portfolio size was $9.7 billion at the end of the third quarter 2010.  Add the $1.836 billion in new agency securities and I expect their portfolio to grow to $11.536 billion by the end of the fourth quarter 2010.  I also expect AGNC interest rate spread to tighten.  If I use the tighter interest rate spread of 2.12% from 2009, then I get a total revenue of $244.6 million for four quarters.  Divide that number by four to represent expected net income in the 4th quarter 2010 and you get: $61,140,000 per quarter net income.

    According to Google Finance there are 52.19 million AGNC shares outstanding.  If AGNC keep its dividend of $1.40/share, then it will need to pay a $73,066,000 dividend payment in the 4th quarter of 2010.  That is unlikely to happen because net income in the 3rd quarter was $60.0 million with a $9.7 billion portfolio and an interest rate spread of 2.21%.  The question remains whether AGNC can grow the portfolio and the interest rate spread sufficiently to generate enough income to keep paying that $1.40/share dividend.  I don’t think they can do it.  Time will tell.

    Be seeing you!