Why Did Annaly and Peers Get Crushed in the Fed's Wake?

When I wrote yesterday about mortgage REITs and the upcoming press conference regarding the Federal Reserve's two-day meeting, the entire financial sector -- including mortgage REITs -- was lit up bright green. I noted that investors seemed to have come to peace with the idea of a tapering of QE3, though I didn't think it likely to begin right away.

A mortgage REIT massacre
Fed Chair Ben Bernanke did, to my surprise, address the issue of tapering off the bond-buying spree known as QE3 in a definitive way, giving a tentative timeline of "later this year" for a reduction of its monthly purchases, as long as the economy cooperates. Bernanke also said that it would want to see the unemployment rate sitting around 7% at the end QE3, which he estimated to be mid-2014, with a commensurate inflation rate of less than 2.5%.

Blood immediately began to flow in the mREIT sector, with Annaly Capital dropping by 2.77%, while fellow agency player Armour Residential fell by 3.30%. Despite staying high on the day it announced a dividend cut, American Capital Agency took a plunge, too, registering a share price loss of 3.55% by the close of trading. Even hybrid Two Harbors suffered a sizable dent in its share price, experiencing a plunge of 3.23%.


What happened? Obviously, the market wasn't really ready to hear about a taper, no matter how calm it appeared on the surface. Granted, the possible slowdown has been identified by Uncle Ben as happening sometime later in the year, but it will happen only if certain criteria are met. Some analysts predicted a tapering in early 2014, so granted, the new reality is that it might happen a few months early. Is that really so awful?

Lots of good news, too
Even as Annaly managed to gain after-hours after announcing a dividend trim, the sector was, nevertheless, fairly buried by twitchy investors. It's worth noting, however, that the entire market was down late in the day: Financials lost more than 1.50% throughout the day, and both the Dow and the S&P 500 ended up with losses greater than 1%.

The possible speed-up of a QE taper was, really, the only bit of bad news -- and that is also something to keep in mind. Not only did the Fed note in a statement that it would, for the time being, continue with its bond and security buying program, but it was clear that the Fed committee is not in favor of raising interest rates until at least 2015.

For mREITs, this means another long span of low borrowing rates. With long-term rates ticking upward, many trusts have seen their spreads widen -- a very good thing, indeed. Another plus is the fact that the committee said the Fed will retain the mortgage-backed securities it has been buying -- which means there won't be a sudden deluge of MBSes being dumped on the market, which would very likely be detrimental to the trusts' book values.

Time to chew, and digest
Investors knew this day would come, and once the shock wears off, things should normalize. It's important to remember that the Fed sees some definite improvement in the economy, which is great news. Really, wasn't that the whole idea behind quantitative easing in the first place?

There's no question Annaly Capital's double-digit dividend is eye-catching -- even with the just-announced cut. But can investors count on that payout sticking around? With the Federal Reserve keeping interest rates at historically low levels, Annaly has had to scramble to defend its bottom line. In The Motley Fool's premium research report on Annaly, senior analysts Ilan Moscovitz and Matt Koppenheffer uncover the key challenges the company faces and divulge three reasons investors may consider buying it. Simply click here now to claim your copy today!

The article Why Did Annaly and Peers Get Crushed in the Fed's Wake? originally appeared on Fool.com.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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transpower

I paid $18.80 per share of Annaly many years ago. The dividends have been great, but the stock price has been falling for years. Management has continued to water-down the stock with more and more offerings. What they need to do is buy back huge amounts of shares!

June 20 2013 at 8:22 PM Report abuse rate up rate down Reply