Topic: How To Invest

Pat: I would like your view of Annaly Capital Management.

Article Excerpt

Annaly Capital Management, $16.53, symbol NLY on New York (Shares outstanding: 1.0 billion; Market cap: $16.5 billion; www.annaly.com), is a New York City-based real estate investment trust that owns and manages a portfolio of mortgage-backed securities. Annaly uses leverage to enhance its returns. It can borrow up to $10 for every $1 of capital invested. Right now, its leverage ratio is 7.66. This, however, also heightens its risk. Annaly has gained from predicting lower interest rates and positioning its portfolio to benefit from that prediction. However, no one can consistently foresee interest rate trends. When the company guesses wrong, as it inevitably will, its use of leverage will tend to balloon its losses. Its policy of investing only in highly liquid AAA mortgage securities will help limit the damage, but bond ratings have been less accurate recently than they have been in the past. Annaly recently cut its dividend. That was because of prepayments that the company makes to homeowners who refinance their…

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