Wednesday October 12, 2011
by Dr. Marvin Appel, editor Systems & Forecasts
Mortgage REITs, including my favorites Hatteras Financial (HTS) and American Capital Agency (AGNC) have taken big hits in recent trading; nevertheless, I continue to recommend both.
In a rare act of tying its own hands, the Fed has assured us that rates will not go up for at least two years.
Federal Reserve policy is a problem in that “Operation Twist” is designed to force down long-term mortgage rates, and indeed has already succeeded in doing so.
That will make future investments in mortgage-backed securities less proﬁ table.
On the other hand, shareholders should beneﬁ t from the increase in the value of existing mortgage backed securities.
It seems that most of the dangers are already widely recognizedand should therefore be reﬂected in share prices.
The one threat that is hard to gauge is whether or not the SEC will act to limit the amount of leverage mortgage REITs can employ.
My own feeling is that the SEC already has a huge task in implementing Dodd-Frank and in registering thousands of hedge funds that now fall under its jurisdiction for the ﬁ rst time.
Of course, the threat of recession makes mortgages that are not guaranteed risky, and I would stay away from such companies.
Mortgage REITs that hold unguaranteed mortgages have suffered worse than the others. The two stocks in the sector that I recommend -- AGNC and HTS -- employ only government-guaranteed mortgages.
I consider both to be buys. Plan on continuing to ride the roller coaster while collecting fat dividends until the Federal Reserve starts to raise short-term interest rates.
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