How The Fed Is Creating An ‘Incredible Mispricing Of Risk’ Reply

How The Fed Is Creating An ‘Incredible Mispricing Of Risk’

Earlier this week I published a piece on the CFA Institute’s Inside Investing section titled: Mortgage REITs: Does Doubling the Leverage Make Them a Good Investment?  The post was my response to UBS launching an ETN that provides 2x leverage on a basket of already heavily levered mortgage REITs “mREITs”.

In short, I believe it’s a dangerous product as many investors in the underlying REITs have little idea how 10%+ yields are being generated.  Moreover, they don’t understand the scenarios that could lead to a significant decline in share prices.  To paraphrase the great Howard Marks, “…do not confuse adding leverage to an existing investment with increasing return…if you take a 10% return in a security and lever it up 4x and after financing costs generate 15-20% returns, you haven’t increased your returns, you’ve just increased your leverage and significantly increased your risk, but you’ve also got a 20-25% downside threat”.  I think this thinking certainly applies to mortgage REITs today.

A bigger threat is upon us

Last week Annaly Capital’s CEO Wellington Denahan-Norris (who this week replaced the late Michael Farrell who tragically passed away), said some very interesting comments to Bloomberg on the state of the risk markets.  After discussing the impact of the Fed buying Agency MBS she said:

“It’s not just at the mortgage REITs where the returns in this market are being put under assault, It’s the general global landscape where you have an incredible mispricing of risk that’s being delivered at the hands of academics at the central banks of the world.

I could not have said it better myself.  I am firmly in the camp that both credit and duration is being dramatically mispriced due to the actions of the Fed.  They’ve created a reckless chase for yield that is being driven not so much by greed, but rather by needs based investing.  The yield piñata has burst and participants far and wide are scurrying to accumulate what they can across all sectors of the fixed income markets: IG corporates, CMBS, Non-Agency MBS, High Yield, Levered Loans, Munis, and others.

While equity focused investors don’t see the direct impacts of the Fed’s purchases, the spillover is pronounced in fixed income and is causing imbalances far and wide.  When I read the article about UBS’ new 2x leverage mREIT product, I couldn’t help but think that we are starting to see signs of these policies backfiring as the chase for yield has reached a more than unhealthy level.

By: David SchawelEconomic Musings source:


Why I am leaving the Empire, by Darth Vader Reply

TODAY is my last day at the Empire.


‘I no longer have the pride, or the belief’

After almost 12 years, first as a summer intern, then in the Death Star and now in London, I believe I have worked here long enough to understand the trajectory of its culture, its people and its massive, genocidal space machines. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, throttling people with your mind continues to be sidelined in the way the firm operates and thinks about making people dead.

The Empire is one of the galaxy’s largest and most important oppressive regimes and it is too integral to galactic murder to continue to act this way. The firm has veered so far from the place I joined right out of Yoda College that I can no longer in good conscience point menacingly and say that I identify with what it stands for.

For more than a decade I recruited and mentored candidates, some of whom were my secret children, through our gruelling interview process. In 2006 I managed the summer intern program in detecting strange disturbances in the Force for the 80 younglings who made the cut.

I knew it was time to leave when I realised I could no longer speak to these students inside their heads and tell them what a great place this was to work.

How did we get here? The Empire changed the way it thought about leadership. Leadership used to be about ideas, setting an example and killing your former mentor with a light sabre. Today, if you make enough money you will be promoted into a position of influence, even if you have a disturbing lack of faith.

What are three quick ways to become a leader? a) Execute on the firm’s ‘axes’, which is Empire-speak for persuading your clients to invest in ‘prime-quality’ residential building plots on Alderaan that don’t exist and have not existed since we blew it up. b) ‘Hunt Elephants’. In English: get your clients – some of whom are sophisticated, and some of whom aren’t – to tempt their friends to Cloud City and then betray them. c) Hand over rebel smugglers to an incredibly fat gangster.

When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces telepathically. I was taught to be concerned with learning the ropes, finding out what a protocol droid was and putting my helmet on properly
so people could not see my badly damaged head.

My proudest moments in life – the pod race, being lured over to the Dark Side and winning a bronze medal for mind control ping-pong at the Midi-Chlorian Games – known as the Jedi Olympics – have all come through hard work, with no shortcuts.

The Empire today has become too much about shortcuts and not enough about remote strangulation. It just doesn’t feel right to me anymore.

I hope this can be a wake-up call. Make killing people in terrifying and unstoppable ways the focal point of your business again. Without it you will not exist. Weed out the morally bankrupt people, no matter how much non-existent Alderaan real estate they sell. And get the culture right again, so people want to make millions of voices cry out in terror before being suddenly silenced.



Poor US earning season so far and not expected to get any better. Reply

Roughly one third of the S&P has reported earnings so far, with another third reporting in the next five days and almighty AAPL on deck Thursday evening, and if there is one word to describe what has happened so far, that word would be “ugly.” The same word would be used to describe how Q4 is shaping up to be. And that word will be very a optimistic prediction of what 2013 will bring unless a major catalyst develops that pushes Congress to resolve the fiscal cliff situation. So far that catalyst is missing. But going back to Q3 earnings, here is how Goldman’s David Kostin summarizes events to date: “3Q reporting season is roughly one third finished. Two early conclusions: (1) Information Technology results have been startlingly weak with high-profile revenue disappointments by the four horsemen: MSFT, GOOG, IBM, and ORCL. (2) EPS guidance for 4Q has been overwhelmingly negative across all S&P 500 sectors with 18 of 20 firms lowering 4Q earnings guidance by a median of 5%. Analysts have lowered 4Q EPS estimates for stocks already reported by 0.4%. We expect further EPS cuts of 6% loom ahead. Firms reporting next week: AAPL, T, PG, MRK, CMCSA, AMZN, COP, AMGN, OXY, MO, UTX, MMM, CAT, DD, and FCX


Source: ZeroHedge