Annaly: a guaranteed winner at least till mid 2013

I have talked about Annaly (NLY) many times in my blogs (here, here and here). Personally I have got quite some money in it for many years as its business model fits the best to the current financial environment. In a nut shell, the worse the US economy goes, the more money NLY can make, which then translates into more dividends for share holders. A few weeks ago, NLY prices started to stumble. When S&P began to threaten to downgrade the US credit rating, people started to be worried about NLY's bottom line. NLY is 100% relied on the no-risk credit rating of the US government. No one knew what it would mean if the US credit rating was downgraded. People worried that NLY's cost base could increase if the US triple A rating was removed. Investors hate uncertainty. So they dumped NLY en mass end of July. As I said I still very much believed NLY and thought it was likely an overreaction that was typically seen among investors. Indeed, this is exactly what has happened. NLY's prices have bounced back very quickly in the past 2 weeks.

Now why am I so sure that NLY will guarantee to make good money at least till mid 2013? This is related to the latest Fed announcement a few days ago. Not sure if you paid any attention to what the Fed said. One of the key statements from the Fed was that they had made a very clear timeline for the near zero interest policy, i.e. the interest rate will be kept near zero till at least mid of 2013. NLY jumped immediately and it was traded at around $18 again. Why so? The critical premise for NLY to be able to make good profits is that it can borrow cheap money. In other words, the lower the Fed interest rate is, the better it is for NLY to get cheap money. That's why it can be such a good business during the bad economy period because the Fed dares not to raise the interest rate. Although we knew the Fed would likely keep the low interest rate for a long time (I expected at least till end of 2012), no one knew for sure how long it would be. Uncertainty is simply not good for any stocks. Now it is crystal clear that the Fed rate will be low in the next 2 years, which is absolutely good news for NLY. Given what is going on in the US and around the world, I even doubt whether the Fed will be able to raise the rate after mid 2013 but this is not my immediate concern at the moment. I will keep my NLY shares till before mid 2013 and then decide whether it will be the time to unload. In the mean time, I simply enjoy high dividends quarterly from Annaly with an annual yield of 14%. It may be much safer than your bank savings and definitely more profitable. Hope you have got in with some positions for NLY. An alternative is AGNC (see details here).