Annaly Capital Management, Inc. (NLY)
Q4 2008 Earnings Call Transcript
February 5, 2009 10:00 am ET
Michael Farrell – Chairman, CEO & President
Wellington Denahan – Vice Chairman, Chief Investment Officer & COO
Kathryn Fagan – CFO & Treasurer
Jason Arnold – RBC Capital Markets
Mike Widner – Stifel Nicolaus
Andrew Wessel – JP Morgan
Steve Delaney – JMP Securities
Ken Bruce – Bank of America Merrill Lynch
Stephen Mead – Anchor Capital Advisors
Bruce Silver – Silver Capital
Previous Statements by NLY
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The earnings call may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions, some of which are beyond our control, may be identified by reference to a future period or periods by the use of forward-looking terminology such as may, will, believe, expect, anticipate, continue, or similar terms or variations on those terms or the negative of those terms.
Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors including, but not limited to, changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities for purchase; the availability of financing, if available; the terms of any financing; changes in the market value of our assets; changes in business conditions and the general economy; and risk associated with the investment advisory business of FIDAC, including the removal by FIDAC's clients of assets FIDAC manages, FIDAC's regulatory requirements and competition, and the investment advisory business; changes in governmental regulations affecting our business; and our ability to maintain our classification as an REIT for federal income tax purposes.
For a discussion of the risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see risk factors in our most recent Annual Report on Form 10-K and all subsequent quarterly reports on Form 10-Q. We do not undertake and specifically disclaim any obligation to publicly release the results of any revisions, which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
I will now turn the conference over to Mr. Michael Farrell, Chairman, CEO, and President of Annaly Capital Management. Please go ahead, sir.
Thank you, Wayne. Good morning, everyone, and welcome to the fourth quarter earnings call. I'm joined here today by Wellington Denahan, our Chief Investment Officer and the Chief Operating Officer; Kathryn Fagan, our Chief Financial Officer; Nick Singh, our General Counsel; and Jay Diamond, the Managing Director. As usual, we will open up with some opening comments and then we will open it up to Q&A to go through the numbers and your questions.
Some brief comments first. The title of this missive is Just Save, Baby, Just Save. As we sit on the precipice of the greatest fiscal stimulus package in our nation's history, the question we are asked most often during our discussion with market participants is, when will it end? Well, we can't tell you the exact date, but I can believe that a precursor to the stabilization of mortgage flows will be the clue. I can say that with certainty because from where we sit with the current instability in the economy began showing its teeth in the mortgage market in 2002 and it will ultimately end once those cash flows stabilize again.
When this occurs at some uncertain future date, property valuations will have found a bottom and new run rates and GDP will have been established. The sooner this happens, the better. But in the interim, we, as a nation, are faced with policies designed to maintain the consumption during the course of our domestic economy. My view that this is what got us into the problem in the first place and it runs counter to what Americans are now doing as rational economic human beings, we are reducing consumption and increasing savings.
The following is a construct of Newton's principles. For every action there is an equal and opposite reaction. We are witnessing the reaction of America's primary gross domestic component, its consumers, as they retrench and repair their own balance sheets. As the title of these remarks infers, I believe that consumers are embarking on a reversion to the mean of the national personal savings rate as a percentage of disposable personal income or the savings rate.
The average since 1953 has been almost 7%, but with a very sharp downward trend at the end of the subsequent half-century. The average savings rate from 1953 to 1989 was 8%, with peaks over 12% in 1975 and 1982. In the ten years ended December 2008, however, the average has been less than 2% with a low of a minus 2.7% in 2005. In the closing months of 2008, terrified consumers have pushed this rate positive again.
The just released data for December shows a savings rate of 3.6%. The average for the fourth quarter is the highest quarterly average since the second quarter of 1999. A rising savings rate is consistent with slower economic growth. According to Merrill Lynch's David Rosenberg, because of multiplier effects every 1% rise in savings takes away about 1.3% in consumer spending. In the mid-1970s and the early 1980s, the savings retrenchment led to negative GDP trends as consumers acted to preserve their balance sheets.
Encouraging savings to preserve the nation's fiscal house is exactly what is needed to provide the capsized ship of capitalism and truly secure the national interests. As a citizen, one would hope that in its noble rush to save the economy the Obama administration would also be considering the long-term solution of the nation funding its own debt by jumpstarting the savings rate instead of the consumption rate.
At the same time, I recognize that it would be very painful to initiate such a program, as there is clearly no corporate or political constituency for a remedy that virtually guarantees a recession. It would be a recognition that the thriftiness of Aesop's ant is purposeful. It also means fewer cars in the driveway; fewer travel vacations; fewer dollars allocated to private education choices; fewer dinners out; difficult choices about healthcare; smaller homes that are colder in winter and warmer in summer; fewer must-have electronic toys; delayed retirements and, in general, tougher choices about personal disposable incomes to the detriment of consumption-based and export-based economies.