Bitterness over the financial bailouts seems to have waned a bit, but there’s certainly a strong vein of anger to mine … and that’s exactly what copywriters are paid to do.
This time, it’s in an ad for Jim Nelson’s Lifetime Income Report — and this is the investment idea he’s got for you:
“This is easily the safest double-digit dividend play on the market today.
“It’s assets are 100% backed by the U.S. government…
“And yes, as I write this, it pays 17.25%, which you can lock in if you act quickly.
“What’s more, it keeps on paying at least as long as this recession lasts…
“And when you’re done, you can “flip” this move for as much as 56% more gains.”
And he goes on to explain this “bailout loophole” a little bit …
“I call it the ‘Bailout Loophole.’
“And, even though millions of Americans know nothing about it…
“It could easily be one of the best ways for you to cash in thousands of dollars in extra “bailout” income checks… each and every year that it takes America’s economy to recover.
“Including as much as $17,500 or more for this year alone. This is perfectly legal.
“In fact the “loophole” I’m about to show you was actually ordered by Congress, in special mandate HR-3221. And the assets behind this play have the FULL backing of the United States Treasury.
“Just about the only other income-producing assets backed by a more solid government-guarantee are U.S. Treasury notes, still considered one of the safest investments in the world.”
OK, so the HR 3221 they’re talking about is not this year’s bill, but the bill from the last Congress — that was the housing “rescue” act from last July that formalized the increased assistance for Fannie Mae and Freddie Mac and included the new homebuyer tax credit along with a bunch of other stuff that let realtors start breathing again.
The HR 3221 for the current Congress, by the way, is about student loans, not quite as sexy … but then again, in the previous Congress HR 3221 was a proposal to cut the duty on insecticides, which makes student loans look like Marilyn Monroe.
So yes, this is all about housing, and 100% guarantees from the federal government, and high dividends … which means we’re once again looking at Mortgage REITs.
Mortgage REITs are Real Estate Investment Trusts that hold real estate debt instead of actual property — they raise investor capital, lever it up with short term debt, and buy mortgages (or occasionally, make direct mortgage loans themselves), then, like all REITs, they are required to pay out the vast majority of their income as dividends to shareholders.
The margin between what it costs them to borrow and what they can make from income from the mortgages they hold is their income — it’s a tight margin of often just a couple of percentage points, but since they’re borrowing a big chunk of money that can turn into a double digit yield for investors.
Mortgage REITs, sometimes also called MREITs, had a very tough year last year, as one might imagine — but, in many cases, there’s still a solid underlying business for these guys, especially given the government’s expanded role in the housing market, and they’ve all bounced back nicely in 2009. So which ones does Nelson think we should buy?
Let’s take a quick look at how he explains their business first:
“Turns the Government’s ‘Free Money’ Program Into Your Own Private BailoutAre you getting our free Daily Update
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“Here’s an even simpler way to visualize this.
“Imagine someone gives you a wad of cash — almost interest free — and tells you to park it an income-paying savings account. You get to keep all the money above the tiny cost of carrying the loan.
“Would you take that offer?
“Of course you would.
“Especially if the accounts paying you income were fully government-backed.
“Well, this ‘loophole’ opportunity isn’t an account. But what it does do is almost that simple.
“See, the moment Congressional Mandate HR-3221 earmarked billions of dollars for buying up income-paying assets… plenty of Americans saw red… but a handful of smart investors saw a once-in-a-lifetime opportunity, instead.
“In fact, a chance to claim back piles of that bailout cash — legally — using extremely cheap loans to invest in those newly government-backed, income-bearing assets.
“Like the example with the account above, this means they get to keep all the interest above the almost invisible cost of the loans as income.
“In turn, the alliance doles out that income to its own shareholders.”
And of course, there’s a rush!
“One word of warning…. You’ll want to move fast. Because right now, the payouts run about 17.5% on every dollar involved in this play. If you wait too long, the size of that payout could start going down.”
And he squeezes in a nice reference to the NY Times, to make us all understand that this is something real:
“The New York Times recently called these special shareholder alliances ‘hidden gems’ that can ‘rise above the rubble and even thrive as the economy falters.'”
Well, OK, so that’s fine … as long as 18 months is “recent” for you — that article in the NY Times appeared in February of 2008 … and incidentally, if you had read it and gotten excited about Annaly, the focus of the article and the most prominent name in this sector, you would have lost 25% of your money within about a week, and the shares still have not recovered to that level (though if you adjust for the hefty dividend, the stock is trading right now for about the same price you would have paid before the article ran — it fell to a dividend-adjusted $12 or so shortly thereafter).
And Mortgage REITs have actually been coming out of the woodwork over the last year or two — there have been recent IPOs and I’m sure there are more planned, since folks see dollars in those agency mortgages (agency mortgages are Fannie Mae, Freddie Mac and Ginnie Mae mortgages — the ones that carry federal backing).
So which one is Nelson touting here? Well, it must be one that focuses entirely, or almost entirely on agency mortgages, since he mentions the federal backing over and over, with the solidity that implies.
And the only specific clue that he gives is that the income yield from this investment is currently running about 17.5%, and that it trades at a about 1.23 times book value.
That helps to narrow it down slightly, though there’s no guarantee since, though it’s still being actively mailed out, the letter was actually signed in July 2009. Most of these investments had their big moves earlier this year, but they’ve still moved a bit since mid-Summer.
Still, if we’re making an educated guess here I’ll tell you that I expect this is …
Capstead Mortgage (CMO)
Capstead, like Annaly (NLY), is one of the older players in this business, which makes them feel a bit safer than the Johnny-come-latelies. But they are also a bit riskier than Annaly, which is why their dividend yield is tracking at right around 17.4% while Annaly’s yield is at about 13.7% (both trade at about the same ratio to book value, a bit below the teased 1.23X).
Why riskier? Well, Annaly has a reputation for very solid management of their portfolio, and they have reported hedging against possible interest rate changes … and I don’t know if they really are better at hedging or not, but Wall Street thinks they are, and trusts them more than the other mortgage REITs. That’s the basic reason that they trade at a bit of a premium to their brethren — they’re also much larger, and better at communicating with investors.
Capstead has also had a long history of managing mortgage assets, but they focus more on adjustable rate mortgages, and they have tended to use a little bit more leverage than some of the other players in the business.
Both have seen their leverage levels drop lately, not because they’re borrowing less but because the demand for mortgage bonds has recovered, thanks in part to the government’s continuing backing, and theFed’s purchases of mortgage bonds, so they can now w