patrick.net

I was talking with E-man about selling out on this, when it mentioned the squeeze on their spread, and then "rebounded" to about $33. Then I got distracted for about a week.... Just noticed it took a real hit today again.

When institutions bail, do they allow the price to recover before attempting to sell? Is it worth waiting for a small uptick and dropping my small position, or is this likely going to correct downwards for quite some time? Book value is going to really be hurt by this, and with low rates and QE3 expected for 2-3 years, it doesn't even have a chance to recover.

Thanks for your insight on that -- helpful and appreciated. I have about 25% of my retirement money collecting dust right now, and I'm trying to find a home for it. I'm gunshy of the "100% in a target retirement account", so I'm trying to do something with it. I am fairly exposed to equities, but have been looking elsewhere (my Lending Club experience has been great so far)...trying not to put too many eggs in any basket, though. REITs seem to come up pretty often on these forums as a good place to have retirement money, hence my interest in AGNC.

Any thoughts on HYI or HIO?

Based on SFace's number, the spread is getting squeezed from 2.2% to 1.4%. Just from eyeballing it, AGNC has a good shot of dropping to $20-$22/share.

SFace says

A 10% dividend yield net of tax in 2012 may be 7.5%. Actually CA prop 30 is retroactive so they already have to pay the higher rate on income earned in January 2012.

This sucks. Basically, there's no place to shield your investment. That would make real estate even more attractive because you can offset your positive cashflow with depreciation.

Remember that good investment properties will always yield positive cashflow even after offsetting the depreciation and maintenance.

Where do you put your money now? In bonds? :)

Hmm, wish I had remembered to sell these reits the other day. Thanks for the dividend update, I thought it was 15% to 25%, but clearly it's a lot larger than that! Wow.

I might look at dropping a few good dividend plays then. It can't hurt, and would preserve the capital until this is all over with. I can see a messy ending to this year.

Well, it's the moment of truth. SPY is sitting right at the 200-DMA. Get ready to buy or hedge your bet.

Good luck to all. :)

It's ironic that Prop. 30 passed while Prop. 38 didn't. Talking about soaking the rich. Well, gotta take it from the haves and give it to the have nots. Someone gotta foot the bill.

SFace says

A 10% dividend yield net of tax in 2012 may be 7.5%. Actually CA prop 30 is retroactive so they already have to pay the higher rate on income earned in January 2012.

A 10% dividend yield net of tax in 2013 may be 4.8%.

Are you pointing this out because it will put downward pressure on prices, or because it cuts the return? More to the point: if I hold this in a tax sheltered account (IRA), how does that affect things?

It's less about how it will effect you, and more about how it will effect the rich, who clearly have large stakes in these companies. While you might see the return as pretty good due to your tax status, the rich might revalue their positions and sell.. and sell.. and sell... This in turn will affect how they value a stock and how much they will be willing to pay for it.

Even if you look at it as a great stock, they might say it's a horrible deal until it mints them the 7.5% rate of return again, which might mean cutting the stock price in half to get it there.

It might turn out to be a great deal eventually... and it might give you some great yields at that time too!

SFace,

Right on. Obamacare is 3.8% tax.

I was calculating my taxes for long-term gain the other day and this is what I came up with. 20% capital gain + 9.8% state tax + 3.8% obamacare = 33.6% in taxes. So for a $3M in gain, I will get to write a check for over $1M in taxes. I'm trying to figure out a way to shelter this gain when I cash out near the top of the next housing market. 1031 will not be a good vehicle at that time. Any ideas?

Well this clearly make sense on why the republican had so many large donors, and why they simply wouldn't give up on these bush tax cuts. They make a huge difference, far more than I realized! I thought it was a general 10% increase, but those cuts were clearly a massive boon to the very wealth for the last decade.

Shoot, had I know that, I would have sold most of my holdings a week before elections :(

I don't have any stock trading account so there's no losses to offset. All the stocks are in my and wife's IRA accounts.

1031 to defer taxes near the top of the housing market may not be the best idea.

Another idea is to sell houses on installment contract to break up the gain. Since the gain maybe sizable, this strategy may not work either.

There must be a way to shelter this gain & leave it to the kids when I drop dead & they get a step-up in basis. :)

pkennedy says

Well this clearly make sense on why the republican had so many large donors, and why they simply wouldn't give up on these bush tax cuts. They make a huge difference, far more than I realized! I thought it was a general 10% increase, but those cuts were clearly a massive boon to the very wealth for the last decade.

Shoot, had I know that, I would have sold most of my holdings a week before elections :(

Well, if you knew Obama would get re-elected, you should have sold those stocks on 11/6 morning. Remember those qualified dividend, which used to be taxed at 15%, now will be taxed up to your bracket, which could be as high as 39.6%, plus another 3.8% obamacare tax.

I was debating on flipping a couple of my rentals, which would net me close to $200k gain. That means about $18k worth of saving on taxes. However, the timing wasn't ideal. :)

Having never owned stocks before the bush tax cuts, I never looked at the tax implications, I didn't know they were going from qualified to ordinary! I figured 10% extra, not a huge deal. Now it makes total sense.

@SFace if Mitt had released his real taxes (not the year he knew he was going to have to release them) and shown us all his great techniques, I'm sure you would have been hitting yourself with so many great techniques you'd over looked over the years :)

There must be a way to shelter this gain & leave it to the kids when I drop dead & they get a step-up in basis.
Prop 58 allows $1 million (x 2) in tax basis to pass onto the kids without being stepped up. Estate tax exemption drops to $1million in 2013 (barring any changes before year end).
Transfers of the first $1 million of real property other than the primary residences. The $1 million exclusion applies separately to each eligible transferor.

@SFace,

Sorry, I didn't see this until now. It has been all real estate this year. I'll have to look at its balance sheet although its book value has decreased from the last time I looked at it. All I know is that the spread on this sector has been squeezed, and many mREITs have been reducing their dividend pay-out.

Say at worse case scenario and AGNC cut its dividend to 75 cents/quarter from $1.25, that's still a 12% yield on a $25 stock. At $1.00/quarter, that's a 16% yield. That's very good compared to its peers. I like my chances at $25. I'd say it's a good place to load up 1/2 position on AGNC.

E-man says

This sucks. Basically, there's no place to shield your investment. That would make real estate even more attractive because you can offset your positive cashflow with depreciation.

Remember that good investment properties will always yield positive cashflow even after offsetting the depreciation and maintenance.

Where do you put your money now? In bonds? :)

You can try paying taxes at least once in a while. With so many write offs, why sweat the last few pennies?

FortWayne says

E-man says

This sucks. Basically, there's no place to shield your investment. That would make real estate even more attractive because you can offset your positive cashflow with depreciation.

Remember that good investment properties will always yield positive cashflow even after offsetting the depreciation and maintenance.

Where do you put your money now? In bonds? :)

You can try paying taxes at least once in a while. With so many write offs, why sweat the last few pennies?

It has nothing to do with paying taxes or not. It was about return of capital, and a hedge against a black swan.

SFace says

any thoughts on AGNC now? at 25 and change (and 80 - 90 cents in built in dividends), I am looking to buy. What effects on government MBS will it have on AGNC's MBS yield and value of the current portfolio?

I have kept my eye on it since getting out at around $30 a while back. At

SFace says

any thoughts on AGNC now? at 25 and change (and 80 - 90 cents in built in dividends), I am looking to buy. What effects on government MBS will it have on AGNC's MBS yield and value of the current portfolio?

I have kept my eye on it since getting out at around $30 a while back. At about $25 I'm tempted to get back in, but it wouldn't be a very informed buy. I just don't have a clear understanding of how the business is affected by the rest of the economy. I may buy a few hundred shares, but that's about all I could stomach.

I'm also interested in X and HIO. The volatility in X looks exciting. :)

@swebb,

AGNC has collapsed since early May. Buying now is bottom fishing. The price action is saying that dividend cuts are coming. Its book value is at $29/share, but looks like the book value is going down in the coming quarters.

I'll let the dust settle before jumping back in although it looks very attractive now.

Why is this dropping so fast?

epitaph says

Why is this dropping so fast?

I think the drop today was related to this news item / sentiment:

http://www.businessweek.com/news/2013-07-05/bernanke-seen-holding-to-qe-tapering-plan-after-payrolls-report

I don't claim to know how it all works (maybe someone else can chime in?) but my understanding is that AGNC makes money by buying and re-selling mortgages (I don't think they hold anything for very long). In order to do this and make good returns, they use leverage (around 6:1, I think)...the spread between the interest rates they are borrowing at and the interest rates of the loans they are buying is a critical factor in how much money they make....The Bernanke QE / liquidity party keeps the borrowing rates lower, maintaining a bigger spread....if that cheap money gets throttled back, rates will rise, spreads will shrink and along with it profits. Since they use leverage, even small changes can have a big impact.

Also I would think that the lower interest rates for mortgages would eventually impact the spread since recently originated mortgages will be at lower rates on average...So the AGNC business model works in a declining rate market, but not so well in an increasing rate environment...

I'm out of my depth, here, so I will stop speculating and let someone else explain it.

As SFace said,

Going forward, the spread will improve on the new MBS purchases as the higher rate will improve the spread everything else being equal. I noticed AGNC cut its dividend to $1.05 this last round. Looks like more dividend cuts are coming.

Is this a double bottom for AGNC? It went sideways for a month and a half. It's currently selling about 20% below book value although we know its book value will keep on deteriorating in the near future. Dividend was recently cut from $1.25 to $1.05/quarter, which is about a 19% yield.

Gotta keep on eye on this one, but I don't think it's time to jump in yet. Let the dust settle a bit more.