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Brendan: How about you, Matt? What about financials?

Matt: I've got to say that a company that I just haven't been thrilled with is Annaly Capital. I think a lot of investors are drawn to that one and a lot in the mortgage rate space.

Brendan: You've got to watch the spread, right?


Matt: Right, yeah, and they've got those huge dividends. From the outside, those look great and there have been some environmental factors that have been really in the favor of the mortgage rates. With interest rates coming down, basically what happened is that the funding costs that they have, which are very short term, came down really fast.

They came down right away, but then the assets that they hold, which is where they make their money, the rates on those didn't come down quite as fast, so at first what you had was the spread exploding, so they were making a ton more money. 

But now what's happening is that's creeping back and creeping back, as their assets are coming of age and they're having to roll over to these new, lower interest rate assets, so that spread is compressing.

When you think of a good business environment for a particular company, this past three to five years has been about as good as it can get for that business model. When you look at going forward, and you think about, "What could possibly happen? Where is the Fed going to go from here?" Unless they're going to start paying me to take my money, there's really nowhere for them to go.

Eventually, interest rates are going to come back up and this environment's going to reverse, and that's not really a great thing for Annaly or the other mortgage rates.

I'm not crazy about that business. What I would think is longer-term, like a few years out, as it starts to turn, as people realize, "Oh, this isn't that great," and they start running from it because they thought that this was going to last forever.

At that point, if it gets beaten down, then it could start to get a little bit more interesting.

The article 1 Stock to Avoid in 2013 originally appeared on Fool.com.

Fool contributor Matt Koppenheffer has no positions in the stocks mentioned above. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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