ARMOUR Residential REIT Inc (ARR)

[Porgie Tirebiter]

What negativity? If they did a reverse split then the options might come to life. The dividend yield wouldn't change based on the R/S alone.

ARR is easy to figure out, it's a straight up yield play. Through much of 2012 the 30 year Treasury yield was under 3% while the spread between the 5 and 30 year hovered around 200 basis points. The average dividend was double what it is now and share price was roughly 75% higher.

At the beginning of 2013 the 30 year yielded 3% and the spread was 225 to 230 bips. At the end of 2013 (which was a disaster year for a holder of ARR) it was 4% with a spread of 221 bips.

Since Jan. 1 we have had a situation where money is leaving the "emerging markets" and flowing into U.S. Treasuries. The yield on the 30 year has dropped to 3.67 as of yesterday while the spread is at 220. ARR's share price is a reflection of the movement in the bonds.

So why is the spread important? Mortgage rates are based on the long bond yield while ARR's cost to borrow is based on the shorter bonds. If rates drop while the spread remains relatively consistent, the effect is much more profound on the short term bonds and ARR's share price reflects this accordingly. The danger for an investor in ARR lies in the fact that if rates were to rise and the yield spread was to fall, ARR would become seriously pinched. That's the double whammy here. Current rates are at historic lows while the 5 to 30 year yield spread is at historic highs.

I saw Alan Greenspan on CNBC yesterday, and that got me to thinking about all this. http://www.cnbc.com/id/101398740

All the mREITS were created to take advantage of an artificial rate environment. That's why they are all externally managed extensions of the parent organizations. As Warren Buffett once said back when they were calling him an outdated dinosaur: "I know what's going to happen, I just don't know when it will happen".