Status of Annaly

Annaly (NLY) plunged on Friday, lowest at -15% at one point. What happened? The major concern is about the possibility of a credit rating cut for the US debt, from AAA to AA. As I have explained before, NLY invested all in the mortgages backed up by the US government. With a AAA rating, their investment is considered risk-free and no one has ever questioned about the safety of anything backed up by the US government.

Now a crack starts to appear. With the ever worsening debt problem for the US and the amazing childish political fighting between the president and republicans regarding the debt ceiling, now S&P has warning that there is a 50-50 chance that they may downgrade the US credit rating. If so, the cost for NLY to borrow and invest will increase and it may have to cut its dividend.  While I'm a firm believer that the US has already been bankrupt and its debt rating should have already been cut many times since long time ago, I doubt S&P and any rating agency will have the gut to really cut the US credit rating. These official credit rating agencies have already lost their own credibility in the past few years as they are actually one of the major causes leading us to where we are now with all kinds of financial messes. My gut feeling is that the market is a bit overreacting as always. NLY recovered quite a bit late Friday, which probably indicated that.

Let me be clear. This is an uncharted water and no one has any experience about it. I don't want to leave you with an impression that I have a crystal ball that I know for sure NLY won't drop further. I DON'T KNOW! If you have bought NLY, the best thing for you to do is to stick to your exit strategy. The wisest strategy for me is a stop loss or a trailing stop. If it drops to the price level you set for exist, you should honor it and sell it immediately. Otherwise, keep it with a close watch.