Trade Alert – Equity & ETF Models
We adjusted the fixed-income component of our equity and sector models by swapping a portion of our short-term Treasury holdings (IEI) for a mortgage-backed securities ETF (MBB). The trade is to capitalize on the administration’s recent push to lower mortgage rates. The combination of Fannie Mae and Freddie Mac beginning to purchase $200 billion in mortgage-backed securities (MBS), coupled with a shortage of mortgage securities, should help MBS outperform similar-maturity Treasury securities.
We also reduced NLY and REM (mortgage REITs) by 1%. The rationale was two-fold. First, the shares continue to trade at a high premium to their book value, which incentivizes their portfolio managers to dilute shareholders’ holdings through new share issuance. Second, we are concerned that the yield curve could flatten, which would reduce profit margins, even if MBS trade better as we suspect.
Equity Model
- Sell 5% of IEI
- Buy 5% MBB
- Sell 1% NLY
ETF Model
- Sell 5% of IEI
- Buy 5% MBB
- Sell 1% REM
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Michael Lebowitz, CFA is an Investment Analyst and Portfolio Manager for RIA Advisors. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. CFA is an Investment Analyst and Portfolio Manager; Co-founder of 720 Global Research.
Follow Michael on Twitter or go to 720global.com for more research and analysis.
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