Chimera Investment Corporation

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MORL: Dividend Yield Of 27.4% Makes It Still Compelling


My projection for the April 2016 monthly MORL dividend is $0.6918.

I remain bullish on MORL despite, and in some respects because, of the recent collapse in mREIT prices.

The new normal will be lower interest rates for much longer. Negative interest rates around the world support this.

The Federal Reserve is not keeping interest rates abnormally low, other factors are in play.

I remain bullish on the UBS ETRACS Monthly Pay 2X Leveraged Mortgage REIT ETN (NYSEARCA:MORL) despite, and in some respects because, of the recent collapse in mREIT prices. My view is based primarily on my outlook for interest rates and MORL's enormous yield. The mREITs that comprise MORL's portfolio have been under selling pressure since the 2013 "taper tantrum." The bearish argument against the mREITs was then and is now that higher interest rates are imminent. I disagree and think that interest rates will remain relatively low for longer than many market participants believe.

My projection for the April 2016 dividend for MORL and its' new, effectively identical, sister the UBS ETRACS Monthly Pay 2X Leveraged Mortgage REIT ETN Series B (NYSEARCA:MRRL) is $0.6918. Most of the MORL components pay dividends quarterly. Only two of the 25 MORL components: American Capital Agency Corp. (NASDAQ:AGNC) and ARMOUR Residential REIT Inc. (NYSE:ARR) pay dividends monthly. The January, April, October and July "big month" MORL dividends are much larger than the "small month" dividends paid in the other months since most of the portfolio components pay quarterly, typically with ex-dates in the last month of the quarter and payment dates in the first month of the next quarter.

Only the components that have ex-dates in March 2016 will contribute to the April 2016 dividend. The table below shows the weight of each of the mREITs that now comprise the index upon which MORL and MRRL are based. For the components that will contribute to the April 2016 dividend, the price, ex-date, dividend and the contribution to the dividend are shown. The projection for the $0.6918 April 2016 dividend is calculated using the contribution by component method. The Market Vectors Mortgage REIT Income ETF (MORT) is a fund that is based on the same index as MORL and MRRL. However, MORT is a fund rather than a note and thus does not employ the 2X leverage that MORL and MRRL do. MORT also pays dividends quarterly rather than monthly.

Chimera Investment Corp (NYSE:CIM) paid a special $0.50 dividend with an ex-date in March 2016, which adds to the April 2016 dividend. Two Harbors Investment Corp (NYSE:TWO) reduced its' quarterly dividend to $0.23 from the previous $0.26. Pennymac Mortgage Investment (NYSE:PMT) did not declare a quarterly dividend with an ex-dates in March 2016 as of this writing so it did not contribute to the April 2016 dividend. Istar Inc (NYSE:STAR) has not paid any dividends since 2008.

There was also an increase in the net asset or indicative value of MORL from $11.63 at the end of February 2016 to $12.51 on March 24, 2016. As the value of the closed-end funds in the portfolio increase, portfolio assets must be increased to maintain the leverage level. This increases the dividend, separate from any changes in the dividends paid by the mREITs in the portfolio. The relationship between the net asset value of a 2X leveraged ETN and the dividend is explained more fully in "MORL's Net Asset Value Rises - Implications For The Dividends."

The belief that interest rates will rise significantly is held by many market participants who think that the Federal Reserve is artificially depressing rates below what would be a "normal" level. I disagree. As I indicated in "The Federal Reserve is actually propping up Interest Rates and what that means for Mortgage REITS," one benchmark rate that he Federal Reserve has absolute control of is the rate paid on reserves deposited at the FED. That rate is now 50 basis points, and was 25 basis points in until December 2015 after being zero since the inception of the FED in 1913 and almost a hundred years after that.

At the biannual monetary policy hearings, required by law, congressmen were becoming upset about the billions of dollars that were being directly transferred to the banks from the American taxpayers as a result of paying banks interest on reserves. From the inception of the Federal Reserve in 1913 until a few years ago banks never were paid on reserves deposited at the Federal Reserve. This was true even when the prime rate reached 21% in 1981. Janet Yellen, Federal Reserve Chair, explained that Federal Reserve was paying banks on reserves because that was the only way to get market interest rates up. She asserted that the traditional Federal Reserve tools of raising the target rate on Federal Funds or raising the discount rate would not be effective in forcing banks to increase the interest rates they charged borrowers on loans or paid depositors. Congressmen from both parties were no completely satisfied by Yellen's explanation.

I regard Yellen's explanation as supportive of my assertion in the above mentioned article that absent the policy of paying banks on reserves, the rate on US treasury bills would be actually negative. Throughout the industrial world, in many countries their equivalent of treasury bills are actually negative. Among major developed countries only in the USA are the monetary authorities trying to increase interest rates. In Europe and Japan many central banks have allowed short-term rate to fall into negative territory. German 10-year bonds are now only 0.15%. Japanese 10-year bonds now have negative interest rates.

More important than the issue of whether interest rates would be negative absent Federal Reserve policy, is the question of why interest rates have been so low for so long. The world is clearly not in the grip of 1930's style unemployment or deflation. My view is that interest rates are low because of the tremendous imbalance between the amount that savers have to lend and invest as compared with opportunities such capital to be deployed.

One does not have to be a Keynesian to see that shifts in income...