Shares of Annaly Capital (NLY) are slipping in early trade this morning after JPMorgan analyst Andrew Wessel downgraded the real estate investment trust on valuation.
Wessel downgraded the stock to "Neutral" from "Overweight," and said the stock has recovered to a fair value over the last few months. Wessel thinks the Federal Reserve is going to raise interest rates later this year, which would increase Annaly's expenses and reduce its profits.
Fair enough. But Annaly withstood seven straight quarter-point increases in the federal funds rate during 2004-2005 before the dividend was materially impacted. Furthermore, Annaly is quite efficient at using 2-year swaps to lock in its funding costs, so the mere threat of future rate increases will have no near-term impact on the Company's results.
If one thinks of Annaly's cycle of results as a U-shaped curve, then perhaps we've hit the top of the curve and will be coasting downward for the next few quarters.
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