Tuesday, May 20, 2014

BXMT and NYMT: Two mortgage trusts

Update 6/9/2015: I've sold the shares that formed the basis of this spectrum of positions in BXMT and NYMT. I had  a small profit on NYMT and a small loss on BXMT. In either case, I can find better uses for those funds.

BXMT shares declined by 3.2% over 385 days, or a +3% annual rate. The position -- shares, options hedge and dividends -- produced -6.7% loss on debit, for a -18% annual rate. (Without the hedge, the position would have produced a 3.7% yield on a debit, for a +4% annual rate. I'm sure there's a lesson to be learned from that about the effectiveness of hedging.)

NYMT shares declined by 2.8% over 376 days, or a -3% annual rate. The position -- shares, hedge and dividends -- produced a 1.4% yield on debit, for a +2% annual rate

Update 8/28/2014: I've closed my bear hedge on BXMT after the price moved above the 10-day (and indeed, the 20-day) price channel.

The rise that triggered the exit appears to be a B-wave to the upside, continuing the downside correction that began on June 5.

Update 8/8/2014: I've closed my bear hedge on NYMT after the price moved past its stop/loss point, defined as twice the average true range opposite the extreme in the direction of the trade. In other words, bearish position, find the low beginning with the entry date, add twice the average true range; that's the stop.

 My practice with this, as in other trades, will be to not calculate profit and loss until the entire series is over.

Elliott wave analysis suggests that NYMT is in the midst of a C wave to the downside, a correction of the rise from Aug. 19, 2013.

The time span matches, but the wave so far is shallow, having paused and reversed near the 23.6% Fibonacci retracement level of $7.55.

Click on chart to enlarge.
NYMT 1 year daily bars
A C wave in a Zig-Zag pattern as defined in Elliott could be expected to drop lower, perhaps significantly so. A Flat might well have seen its low already, but with a greater likelihood of stretching out in time.

The longer range chart, on the right hand of the chart display in the original text of this analysis, illustrates that NYMT's waves are not easily countable in the longer term under the general rules of Elliott wave analysis. 

It is a weird duck, meandering in a sideways channel since 2009. I've imposed an uptrend Elliott count on the rise from 2013, but lacking a broader context, it is a frame of questionable validity.

In terms of strategy, a Flat correction is just fine for my basic bull position in NYMT. It's a dividend play, so let it meander so long as the quarterly payments keep rolling in. A Zig-Zag would force me into another bear hedge, and even a Flat might do so, if the swings are broad enough.

And therein likes the nub of the problem: How can I hedge the position without getting whipsawed brutally in the process? Corollary operational questions: Should I raise my hedge stop/loss so I don't get whipsawed in a rise, or lower the hedge entry so avoid downside whipsaws? 

Or should I simply abandon the automatic hedge entry points and rely on strict Elliott wave analysis to time hedge entries and exits.

Or even -- unthinkable, given my prejudices against buy and hold -- abandon the hedge entirely and trust in the double-digit dividends to be my hedge against loss.

No answers yet. Just the questions. I'm thinking in terms of hedges for lower-/no-dividend plays under my longer-term rules, and relying on the dividend to fulfill that function in the higher dividend plays. But before deciding on that I'll need to run the math and try to formulate a reasonable definition of the boundary between lower dividend and higher dividend. 

Update 7/18/2014: I've opened a bear hedge on BXMT, structuring it as a synthetic short future, simultaneously long the $30 put and short the $30 call 

I opened a bear hedge on NYMT on July 7, also structuring it as a synthetic short future, long the $7.50 put and short the $7.50 call.

Both positions expire Oct. 17.

The hedges were triggered when the stock closed below the 20-day price channel and confirmed the signal by closing below the channel the next trading day.

Update 5/21/2014: I held back from opening a position in NYMT because it lacked a price/earnings growth ratio. The ratio is calculated based on the average of a five-year forward estimate of earnings growth, and NYMT lacks such an estimate. I haven't a clue as to why. And without those estimates, no standard PEG ratio can be calculated.

However, NYMT does have a one-year forward estimate of 2.3%. Using that in a non-standard PEG calculation, I come up with a ratio of 3.08, and a ratio adjusted for the 14.4% dividend of 0.43.

The ratios say that earnings growth implies a "fair" price of $2.49, well below the present $7.71 share price, and when the dividend yield is put into the mix, the fair price is $2.49. By this measure, NYMT is wildly undervalued.

One odd wrinkle is that the earnings growth estimate for the current year is 126%, which seems wildly inflated compared to the 2.3% next-year estimate. I chose to use the lower, and so I hope more conservative, estimate.

With this new information in hand, I'm still interested in opening a bull position in NYMT under my longer-term rules and shall do so soon, perhaps even today. did so today, structuring it as long shares.

Update 5/20/2014: I opened a bull position in BXMT under my longer-term rules, structuring it as long shares, with the intention of holding it for more than a year. I added NYMT to my Watchlist pending further research -- I want to figure out why no Price-Earnings-Growth ratio is available.

Blackstone Mortgage Trust Inc. (BXMT) and New York Mortgage Trust Inc. (NYMT) are real-estate investment trusts that earn their living from mortgages.

Both pay high dividends and so march to a more complex tune than do low-dividend symbols.

If I open a position in AAPL, the chart reflects earnings and the hopes and fears surrounding the electronics industry, mainly smart phones and pads.

The charts for BXMT and NYMT reflect markets within the real-estate industry, but also are subject to the quarterly dividend shock, which knocks down the capital value of shares, and to the policies set my the Federal Open Market Committee, which has the power to raise interest paid on safer investments, thereby lowering the capital vale of BXMT and NYMT shares in order to provide a higher risk premium.

It's like the difference between Twinkle Twinkle, Little Star and Etudes Transcendantales.

The Companies

I'm considering BXMT and NYMT for positions under my longer-term rules.

NYMT went public in June 2008. BXMT is the newer, having begun trading in May 2013, getting past my rule requiring one year of history by less than two weeks.

BXMT is a subsidiary of the Blackstone Group L.P. (BX), a private equity, investment banking and financial services company headquartered in New York City.

In describing its business, BXMT emphasizes the commercial nature of the properties behind its mortages. Its portfolio was backed by properties in 15 states and the United Kingdom, with New York and California accounting for more than half.

Office real-estate accounted for 41% of collateral, followed by multi-family properties at 46% and hotels at 23%.

NYMT, also headquartered in New York City, describes its business in boarder terms that stresses diversification that includes both commercial and residential mortgages.

The capital allocation reported by NYMT is 47% to multi-family properties, 22% to distressed residential loans, 17% to agency interest-only securities and 13% to agency residential mortgage-backed securities. "Agency" refers to entities such as Fannie Mae and Freddy Mac, both of which are in the midst of an intensive reform of their regulatory environment within Congress.

BXMT has a neutral rating from Zacks Investment Research, a leader in the field of equity analysis. NYMT has a strong bullish rating. (Zacks makes those ratings available to non-subscribers, so I'm not spilling any proprietary secrets. I subscribe to Zacks and recommend them to any serious trader.)

Analysts collectively give BXMT a 71% enthusiasm rating. They come down at a negative 67% for NYMT.

BXMT reports return on equity of 4%, quite a low level, with debt running 77% more than equity. NYMT has returns on equity of 14% with debt amounting to 19 times equity. They're mortgage trusts, after all, so high debt is part of the business.

BXMT has an earnings yield of 1.74%, and NYMT has an earnings yield of 3.48%. In other words, BXMT is selling for 57 times earnings, and NYMT for 8 times earnings.

Shares of BXMT are selling at a high premium to sales. It takes $26.72 in shares to control a dollar in sales. NYMT has a much lower premium. It takes $1.91 in shares to control a dollar in sales.

BXMT growth implies a price of $19.66 per share, suggesting that the stock is overvalued by 49%. However, the high dividend means that the "fair" price is 29.60, meaning that the stock is undervalued by 1%.

I have no comparable estimates for NYMT.

Options are pricing in confidence the 68.2% of BXMT trades will fall between $24 and $34.52 over the next year, for a potential gain or loss of 18%, not counting dividends.

In NYMT's case, the 68.2% confidence zone runs from $6.50 to $8.86 over the next year, for a potential gain or loss of 15.4%, with dividends excluded.

BXMT has only five quarters of history, It has been profitable the last four quarters, with the most recent seeing a large increase in earnings. It has produced only one downside earnings surprise, in the 4th quarter of 2013. Three other earnings announcements have surprised to the upside.

NYMT has seen earnings trending downward over the past three years, although it has been profitable throughout. Only two quarters have seen downside earnings surprises, in 2012 and the first half of 2013. Nine quarters have surprised to the upside.

BXMT's dividend yield is 6.55% annualized at today's prices. That's nearly four times earnings. NYMT's yield is nearly double that, at 14.04% annualized, which is more than four times earnings.

I have known to people to exhale slowly when hearing of such high dividends and mutter, 'Whoa! Dude!" I always try to pull them back to Earth with a stern reminder that TANSTAAFL. High dividends mean high risk.

But, of course, risk is the mother of profit. It is the trader's job to try to ensure that Mom is in a kindly mood before making a trade.

Interest Rates

Any stock paying such high dividends will be subject to the same forces as bonds when the Federal Reserve raises interest rates in order to counter inflation. Higher rates mean lower principle value.

For real estate and mortgages, it is a mixed bag. Higher rates can slow the market, putting downward pressure on prices. On the other hand, the Fed raises rates because the economy, in its judgement, is growing quickly, which puts upward pressure on rates.

I don't think the Fed will act anytime soon to slow economic growth. The politics argue against it, as does the lack of high inflation and Fed Chair Yellen's emphasis on the jobs part of the Federal Reserve's mandate.

Plus, we're approaching the fifth year since the end of the Great Recession. The simple reality of the business cycle argues that another downturn, no doubt less severe than the last, is a far greater risk that is inflation.

Liquidity and Volatility

NYMT is more heavily traded of the two symbols, on average 1.4 million shares a day. BXMT's average volume is 481,000 shares per day.

Both symbols offer a small selection of option strike prices, with relatively wide spreads and low open interest except at a few strikes, where it tends to run to three figures and more. The only way they can be used for bearish hedging is as straight calls and puts, or as synthetic short futures. Real-estate funds and bond funds could also be used as hedges.

BXMT's volatility stands at 18%, which is the 20th percentile of its one-year range, compared to 13% for the S&P 500. Volatility has been on the decline since late August 2013 and hit its year low of 11% on May 15.

NYMT's volatility is at 15%, the 8th percentile of its one-year range. It has been declining since late July 2013 and touched its low of 8% on May 9.

The Charts

Elliott wave analysis shows BXMT in an upward trend. The symbol is too new to do any elaborate analysis. Arguably, it is in its 5th wave up, the last of the waves in its rise, and after that wave is complete it will correct to the downside. However, there's no way of saying how much time it will take wave 5 to complete its journey. Nor is there any way to know whether this is happening within a downtrend or not. I've shown the trend channel in red.

NYMT is, basically, unanalyzable. Its high dividend rate has produced a chart that looks like it belongs to a bond. The red price levels mark the range of fluctuaton.

Click on chart to enlarge.
BXMT 1 year daily bars (left), NYMT 6 years weekly bars (right)
Decision for my account

It is hard to know what to make of these two when they're set side by side. NYMT has the higher Zacks rating but the chart suggests limited capacity for capital gains. It is a pure dividend play.

BXMT is a trending stock and so is a more traditional capital gains plus dividends play.

NYMT's holdings seem more diversified than BXMT's, but its risk of being impacted by Congressional action concerning Fanny and Freddy seems great, as well.

BXMT is reasonably priced. Some information about NYMT is missing, and I'll need to work on that and update this posting down the line.

I have place for both of these in my portfolio. I'm more likely to open a position in BXMT first simply because its chart is trending upward and I want to get aboard to capture the capital gains.

In either case, the position will be structured as long shares.

I'll update this posting with any trades I make on these symbols and alert readers via my daily Outcomes posting.


My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my shorter-term trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.

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