Through The Fly's Eyes: Annaly Capital Management

from Theflyonthewall.com







A Way To Play Slowing Economy

You have to be hard pressed to find economic data indicating the economy is not slowing down. Retail sales, almost universally, are weakening, if not in a material decline. Annaly Capital Management (NLY) might be a way to play it.

Annaly is a real estate investment trust that invests in mortgage-backed securities backed by Fannie Mae (FNM) and Freddie Mac (FRE). It makes money based on the spread of its cost of capital versus the return on its mortgage portfolio. And is required, due to its REIT nature, to pay out at least 90% of its profits to investors.

If the yield curve steepens due to the Fed dropping rates and the longer end of the curve does not change much or rates going higher, Annaly earns more money. The risk to Annaly is if short-term rates go higher. Also, portfolio-management risk exists but the company has a good track record of managing that.

Annaly formerly sold at $21 when the yield curve was considerably steeper. For 2006, Annaly earned a meager $0.44 per share, down from $2.67 in 2002. As one would expect, the dividend last year was lower at $0.57, down from $2.67 in 2002. If the Fed lowers rates by 100 bps, Annaly could earn $2.00 per share and revisit the $20 level. Taking into account the dividend and potential for capital apprecation, not a bad total return.