We’re not getting the fourth quarter off to a very good start. Globally, stocks have seen some of their greatest volatility since January, and emerging markets have been hit particularly hard. Mortgage REITs—a generally sleepy corner of the market—have also taken a beating on fears that the Fed will soon raise rates, squeezing margins and crimping dividend payouts.
Let me start by saying that I don’t expect short-term rates to rise any time soon. As I wrote last week, the composition of the Fed’s board of governors will be changing next year, and two of the three most hawkish voices will be retiring. Add to this the Fed’s concerns over low inflation, sluggish wage growth and excessive dollar strength, and I would say it’s a safe bet that rates remain low for a long time to come.
That is fantastic news for mortgage REITs, which—as an asset class—sport double-digit dividend yields and trade below their accounting book value. As Jeff Middleswart noted in this week’s Thursday Thoughts,dividends have been stable for the past year, and interest rate spreads should be fairly stable going forward.
I noted last week in TraderPlanet that insiders in Annaly Capital (NLY, Financial), one of the largest players in the sector, had been buying aggressively. I recommend we follow their lead with an aggressive bet on the entire sector.
Action to take: Buy shares of the UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL, Financial). This position will give you two times the daily price movement—as well as roughly two times the regular dividend—of the mortgage REIT sector. Use a 20% trailing stop.
MORL is volatile; the recent selloff chopped about a fifth off of its market value. But it also provides an aggressive way to invest in what I consider to be the no-brainer trade of the fourth quarter.
