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No. of Recommendations: 11
4/7/2005
Mike Farrell featured on Strategy session (link on Annaly homepage). Comments that while FNM/FRE stocks have taken a hit, their bonds have remained stable "tightening up" relative to benchmark Treasury bonds. Farrell reminds that MBS produce actual cash flows that his company then uses to re-enter into the market. Remarks on the gov't backed agencies as being a $3.5t market while the total MBS market is $7.6t.

4/202005 on Squawkbox again discussing FNM/FRE - Senate banking committee meeting to discuss FNM/FRE. Remarks "friendly competitors", "too big to fail". Will downsize and go back to original gov't charter. Provides Annaly with a great opportunity. FNM/FRE are "wounded" (hmmm, where have I heard that term before?) People looking to replace FNM/FRE - NLY just opened three funds in Canada and one in London that. Investors are looking for liquidity and high credit quality (what NLY offers) ,

Farrell describes what is happening to 10 year bonds as "a slow motion train wreck" wth GM the first to go through the windshield with AIG to follow. He believes that the MBS market is prepared due to going through 2003 when the Treasury 10 year was at 3% only. He believes that the Senate will do little to hurt the fundamental business of FNM because "no Congressman is willing to lobby for higher interest rates for his constituents."

10-Q
Net income was $59.3 m or 46 cents per share with the former up and the latter slightly down from prior year and about the same as prior quarter. Annualized ROAE was 14%, same as last quarter and down from year ago. This was in environment of the 10 year T bouncing from 3.99% to 4.64%. The annualized yield of investments was 3.75% and the cost of funds was 2.57% for spread of 1.18% (a 50 basis point decrease from previous quarter). NLY used their floating and adjustable MBS and reinvestment of their amortizing principal in the new interest environment as a practical "hedge" against that narrowing spread.

the dividend efficiecny ratio was 11% (G&A/dividend).

The current prepayment ratio (CRP) was down slightly to 25% as would be predicted with interest rates rising and refinancing alling off. The leverage ratio is 10.8 and they still deal exclusively in gov't agencies securities.

FIDAC is making some major gains with net assets under management (AUM) rising from 1.9b to 2.3b and gross assets from 15.9 to 18.6b (all from 12/2004) and collected $4.7m fees up from $4.6m. FIDAC also opened three funds in Toronto (MBS Trsust, MBS Adjustable Rate Income Fund and Sentry Select MBS) and one in London (Prodesse Investment Limited (from prodesse non nocere - proceed without fear). These new funds are not included in the FIDAC numbers for 1Q/2005.

Conference call: http://biz.yahoo.com/cc/8/55648.html

LISTEN TO THIS CALL - Farrell just goes off on gov't lack of discipline/debt, Greenspan, Bush, Congress. Awesome.

Thy discuss some of the numbers given above. they expect the CPR to trend favorably down. Will also open closed US fund in 5/2005. Note that the rate of the tightening of the spread is increasing. Flight to quality is favorable for NLY. Again, remark on FNM/FRE being wounded, great opportunity for NLY, volatility for all classes of assets.

Q&A
what is the duration of assets
A - try to keep duration as short as possible. Comparable assets are 2 points cheaper now than a year ago. Constant re-investment of assets as they emerge back onto the market.

Q: about FIDAC.
A: FIDAC uses the least amount of leverage that it can - not reaching for dollars. Fundamentally, mortgage market is better now with low nominal yield bouncing around in a range due to low Treasury in 2003 (I'm not quite sure I got the reasoning for this statement). FIDAC had 18% growth Q/Q - only at about 5% of gross for REIT purposes. Looking to provide tax advantage structure within geographic context of new markets. No performance bonuses for management and so not a hedge fund. They are finding global pockets of capital looking to invest in the strategy of Annaly - high quality and short duration "keeping their powder dry". They also manage private funds which they cannot discuss due to privacy issues.

Farrel then goes off: time of fat spread is over, yields will be low, time to take cards off the table (from riskier, lower quality investments?) , watching the slow motion train wreck due to derivative transactions that call into question true earnings. Despite 3 years of falling dollar, American companies still can't compete due to pension burdens. Economic growth in the US is not going to be enough to generate the taxes to cover undisciplined government spending.

Something about 350-400 basis spread off of 10 year Treasuries. This is textbook example of how deficits in US/Europe and Japan start to crowd out capital creation. If the Treasury is selling bonds with high yields, why would private banks loan to individual businessmen with lower ratings?

Farrell speculates that Greenspan is The Cop on the Beat- trying to take up the slack of an undisciplined Congress. He is doing the job of the Fed with his interest hikes, stepping on the brake to out of control growth just like Mexico, Orange County were taken out so goes GM. Toyota has offered to raise prices to support Ford?GM but this would be collusion. So Greenspan is not going after inflation anymore.

Mortage market has all ready adjusted due to low T in 2003 (3%).

Q will the market respond, moving the curve
A: Alan will not be able to invert the curve. There has been a 175 basis point increase in interest rates, but the gov't keeps selling Treasuries, so banks are loaning to the gov't not to private businesses.

Q;whence FIDAC
A: they get a call once a week from someone who wants to buy a lot of NLY stock. But he believes that NLY stock is cheap. Careful about raising equity at thispoint. Lots of room for growth.

Made staff more efficient with new equipment, keeping G&A ratio low. Believes that NLY should trde at a premium to book value.

Q about increase in leverage A: just mark to market going down relative to leverage.

Q about yield gets Farrell going off about real estate speculation - draws parallels to dot com, poor underwriting habits ex: debt to ARgentina Growth in housing market is weighted to the coasts, not in Cleveland. Possible massive default, lack of due diligence on part of lenders.

Farrell then goes off on some spread/bond/yield stuff that is beyond my vocabulary.

Remarks that people buy into T bills in times of uncertainty (like now)

NLY had almost a T bill ladder, so as assets mature, they get reinvested into teh new interest rate enviroment. Therefore, the length of asset is not so important.

Farrell sees NLY as a growth stock with great dividend. Thinks FIDAC will ower their cost of capital (FIDAC has all ready done this) and can increase their total leverage while keeping ratio lower (as alternative revenue stream)

some stupid questions about the CPR being zero

Farrell: NLY is redefining its book value and thinks that price to book will be higher in the future.

Assessment: a buy, even at the recent 19. These guys know what they are doing. Listen to Farrell.

I have a lot of reading to do about corporate bonds, but I thnk that I get the picture.

RWS
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