In my Q107 Investor Letter, posted on my website (hurleycapital.com), I talked about why we bought Annaly Capital. Herewith is a paragraph I've just deleted from my upcoming Q307 Investor Letter about the circumstances surrounding our sale of Annaly in August:
As described in our First Quarter 2007 Investor Letter, we thought Annaly Capital would be a great investment to take advantage of difficulty in the housing and mortgage markets and potentially a lower short-term interest rate. Annaly is the most conservative player in the mortgage investing space, investing exclusively in government-backed AAA-rated mortgages using leverage of 9-11x their equity on hand. As the turmoil in the mortgage market unfolded, all mortgages and mortgage products of ALL credit qualities were marked down. Like The Three Little Pigs, first the subprime players fell, then Thornburg Mortgage, who invests in only AAA mortgages, though no government-backed lost 1/3 of its book value and our judgment was while it was unlikely that the big, bad, wolf would blow down Annaly’s brick house, the risk (Thornburg is still down 50% from its June 2007 levels) outweighed the reward (20-30%) by enough to warrant exiting the investment at a small loss. While Annaly’s stock has recovered to its springtime highs, we’re in the risk mitigation business and believe the decision was an appropriate execution of our investment mandate
