What happens to Annaly (NLY)?

Whenever the government touches something, it always destroys the value of it. This administration is even more notorious for that. I don't know how this administration can ever expect to generate real job creation and economic growth with the current policies and regulatory environment. Everything they do is just against that. 

In the past 3 years or so, I have always been a fan for NLY because it is truly like a bank without actual counters but with high dividend yields. A few weeks ago, I said NLY would guarantee to make money till mid 2013. It will still be so as long as the current government does not touch it. But I'm not so sure now because the government indeed tries to intervene in their business. Of course, this is something a total surprise for anyone. I had no way to predict this was coming.

In the 1960s, Congress granted the REITs an exemption from the Investment Company Act of 1940, permitting them greater leeway than mutual funds in the employment of leverage and hedging strategies, as long as they were primarily engaged in "purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." On Aug. 31, the SEC announced a "concept release." The agency said that it wanted to hear from professionals and investors by Nov. 7 on the rapidly changing nature of mortgage investments and whether or not the SEC's regulation of the mortgage-REIT sector has been effective. In other words, they are considering to revoke their legal right to be exempted from the Investment Company Act of 1940, if they can. If this really happens, NLY and such companies will be forced to scale down on their leverage, which is their normal and healthy business model,  and their dividend yields could be substantially reduced as a result. This has caused investors worried and panic. They sold off NLY badly.  

I think this is an overreaction, AGAIN!  NLY trades at 5.8x P/E, .95x P/B, has almost 2.5% return on assets and over 17% return on equity, and a 15.5% dividend yield. I highly doubt that SEC can do what they are thinking regardless how much they wanted to. It will really kill the real estate market, which is already extremely fragile. Regardless how stupid the government is, other forces will make their dull mind cleared. Even if they truly want to push it through, the more likely scenario is the grandfather rule: whatever has been established based on previous rules will be maintained but all newcomers will have to follow the new rules.

As I said, I have got quite a large position for NLY and I intend to keep them for now. Of course, my way of investing in it is such that I won't really lose money until it drops another 15% or so from the current price level. If you have bought NLY at higher prices and you are worried about it, you should have an exit plan: if you cannot sleep at night, you should sell it immediately; or at least you should have a stop loss by which you must exit regardless in order to preserve your capital. After all, no one knows for sure what will be the final actual outcome of this saga.

I have my fingers crossed!