stock here:
Once I am back in Hawaii it is going to be a mad rush to finish the year with some solar work and service work. So I am looking for less trading opportunities, and more fairly safe dividend stocks with decent yield. Those that are making loans are likely to see less revenue as they have to compete with the Fed Funds Rates as the Fed has, amazingly promised to drop rates .25% in both November and December. That should prevent an insurrection come January "transfer of power". Notice it is not a "transfer of Authority" it is not a "transfer of responsibility".
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AI:
The claim that "the majority of these REITs are agency mortgage REITs, which means they own bonds guaranteed implicitly or explicitly by the U.S. Federal government" refers to the nature of agency mortgage-backed securities (MBS) that these real estate investment trusts (REITs) often hold.
Here's a breakdown of this guarantee:
Agency Mortgage REITs: These REITs invest in mortgage-backed securities that are issued by government-sponsored enterprises (GSEs) like Fannie Mae (FNMA), Freddie Mac (FHLMC), and Ginnie Mae (GNMA).
Fannie Mae and Freddie Mac are implicitly guaranteed by the U.S. government. This means that while the government does not explicitly guarantee their securities, it is widely expected that it will support them in case of financial trouble, as seen in the 2008 financial crisis.
Ginnie Mae securities, on the other hand, are explicitly guaranteed by the U.S. government. This means the government ensures the timely payment of both interest and principal to MBS investors.
How This Applies to the REITs Mentioned:
Annaly Capital (NLY), Dynex Capital (DX), Armour Residential (ARR), and others often invest in agency MBS, which are backed by these GSEs. This provides a level of credit risk protection due to the implicit or explicit backing by the U.S. government.
REITs like Ellington Financial (EFC) and Rithm Capital (RITM) may also hold non-agency MBS, which do not have government backing, exposing them to higher credit risk.
Government Guarantee:
Implicit Guarantee: For Fannie Mae and Freddie Mac, the federal government has historically provided support, although there is no formal, written guarantee. However, investors often treat it as highly likely.
Explicit Guarantee: Ginnie Mae securities come with the full backing of the U.S. government, making them more secure in terms of credit risk.
Supporting Evidence:
Fannie Mae and Freddie Mac MBS are considered safer than non-agency MBS because they are assumed to be supported by the government in times of distress, even though there is no formal written guarantee.
Ginnie Mae MBS is explicitly backed by the full faith and credit of the U.S. government, providing the highest level of security against default.
Conclusion:
The statement is largely accurate, as agency mortgage REITs invest heavily in MBS from GSEs like Fannie Mae, Freddie Mac, and Ginnie Mae. The level of guarantee depends on the issuing entity—Ginnie Mae securities are explicitly guaranteed, while Fannie Mae and Freddie Mac MBS carry an implicit guarantee.
For further reading on how these guarantees work, you can explore these resources:
Fannie Mae & Freddie Mac Overview
Ginnie Mae's Explicit Government Guarantee
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The concept that lenders will see reduced revenue due to having to compete with the Fed Funds Rate is generally accurate. Here's how it works and some further elaboration on the economic mechanisms involved:
1. Fed Funds Rate and Lending Revenue:
Lending Rates and Revenue: Banks and financial institutions typically generate revenue through loans, which are tied to interest rates they charge borrowers. When the Fed Funds Rate decreases, it can push down the rates on various loan products (like mortgages, personal loans, and business loans).
Competition with Fed Rates: As the Fed lowers its target interest rate, commercial banks must lower their own rates to stay competitive, which squeezes profit margins. Lower interest rates make loans less profitable because banks earn less on the spread between what they borrow at (the rate at which they acquire funds) and what they lend at (the interest charged to borrowers).
2. Future Rate Cuts:
Potential Cuts in November and December: If the Federal Reserve is expected to cut rates by 0.25% in both November and December, it could further reduce the revenue from lending operations. As rates drop, the yields on loans (such as mortgages and business loans) also decrease, especially when banks lend at fixed rates.
The Fed cuts are often implemented to stimulate the economy, but from the perspective of lenders, they reduce the profitability of lending operations by forcing lower interest rates on loans. This particularly affects smaller banks or institutions that rely more heavily on loan interest as their primary revenue source.
3. Political Context—Preventing Insurrection:
The phrase “transfer of power” likely refers to the peaceful transfer of political control after elections. In the context of rate cuts
