Annaly Selloff is Overdone

Annaly Capital Management (NLY), the bellweather for the publicly-traded agency mREITs has suffered a serious setback in its stock price after private agency investor Carlyle Capital was margin called to the point of bankruptcy this morning. The Carlyle situation, which was brought by historically wide spreads between Treasury bonds and agency-backed securities, rattled investors who thought GSE-sponsored securities were immune from the credit crisis. Even long-time Annaly bull, Jim Cramer, dumped his buy rating on the stock last week and sold out of the position.

But is Annaly really that much at risk? The Company's leverage was 8.7 to 1 at December 31, 2007, and Annaly completed a $1 billion equity offering shortly after year-end. With respect to repurchase agreements, the Company did not have an amount at risk greater than 10% of the equity of the Company with any counterparties as of December 31, 2007, indicating that Annaly has a diverse array of counterparties for its repurchase agreements, so there is little risk that one nervous counterparty could deliver a fateful margin call. Through December 31, 2007, NLY did not have any margin calls on its repurchase agreements that it was not able to satisfy with either cash or additional pledged collateral.

The credit markets are volatile and unpredictable, as shown by the Thornburg Mortgage situation. However, I believe Annaly is too far up the food chain and has sufficient liquidity to fall victim to the credit crunch. If Annaly's securities become illiquid, then Fannie and Freddie are both at risk. The government cannot allow this to happen for fear of a complete systemic economic meltdown. With a dividend yield of 14% and a stock price that's just 1.06x book value, Annaly is delivering solid risk-adjusted returns. It's well worth rolling the dice on.