Q1 2024 Orchid Island Capital Inc Earnings Call
Operator: Good morning, and welcome to the first quarter 2024 earnings conference call for Orchid Island Capital. This call is being recorded today, April 26, 2024.
Good morning, and welcome to the first quarter 'twenty 'twenty four earnings conference call for Orchid Island capital. This call is being recorded today April 26 2024.
Operator: At this time, the company would like to remind the listener that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on management's good faith belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements.
At this time the company would like to remind the listeners that statements made during todays conference call relating to matters that are not historical facts are forward looking statements subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Listeners are cautioned that such forward looking statements are based on information currently available on the managements. Good faith belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward looking statements.
Operator: Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking statements. Now, I would like to turn the conference over to the company chairman and chief executive officer, Mr. Robert Cauley. Please go ahead, sir.
Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K.
The company assumes no obligation to update such forward looking statements to reflect actual results changes in assumptions or changes in other factors affecting forward looking statements.
Now I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead Sir.
Robert E. Cauley: Thank you, operator, and good morning. I hope everybody's had a chance to download the deck.
Robert E. Cauley: Thank you operator, and good morning, I hope everybody's had a chance to download the deck as usual that will be the <unk>.
Robert E. Cauley: As usual, that will be the centerpiece of today's discussion, so I'll be walking you through the deck, and then at the end of that, we'll have a Q&A session. Now, as usual, I'll just give you a quick rundown of the agenda. The first thing we'll do is go over our results for the quarter, then we'll talk about the market developments that shaped our results and provide our outlook for the future, and then we'll get deep into the details of the portfolio and our hedge position. Turning to slide 5, for the first quarter of 2024, our net income was $0.38 versus $0.52 for Q4 of last year. Our book value increased slightly by $0.02 over the last quarter.
Robert E. Cauley: Centerpiece of today's discussion so I'll be walking you through the deck and then at the end of that we'll have a Q&A session as usual I'll just give you a quick rundown of the agenda. So first thing we'll do is go over our results for the quarter and we will talk about the market developments that shaped our results and provide our outlook for the future.
Robert E. Cauley: I will dig into the details of the portfolio and our hedge position so turning to slide five for the first quarter of 2024.
Robert E. Cauley: Net income was 38 cents.
Robert E. Cauley: Versus 50 to Q4 of last year, our book value increased slightly by two <unk> over the last quarter total return was $4 one 8% versus 6.05 in Q4 and the dividend was unchanged for the quarter.
Robert E. Cauley: Our total return was 4.18% versus $6.05 in Q4, and the dividend was unchanged for the quarter. The average NBS portfolio appears to have declined on slide 6, but that's somewhat misleading because in the fourth quarter of last year, early in the quarter, we had the delever when rates were peaking, and so that calculation is just a simple average of the beginning and ending, so it makes it look like it was higher, but if you looked at where we were at the end of Q4 versus where we were at the end of Q1, it was not a meaningful change.
Robert E. Cauley: The average MBS portfolio appears to have declined on slide six but that's somewhat misleading because in the fourth quarter of last year early in the quarter. We had the delever when rates were peaking in so that calculation is just a simple average at the beginning it anything so it makes it look like it was higher but if you look at where we weren't yet in this Q4 versus where we were.
Robert E. Cauley: Q1 was not a meaningful change.
Robert E. Cauley: Average loan amounts increased slightly from 6.7 to 7, speeds increased slightly, that's probably more seasonal and just aging of the portfolio slightly, and then liquidity slightly improved over where it was at the end of the fourth quarter, but again, right in the middle of our kind of target range. Slide seven provides just our preliminary balance sheet income statement. We expect to release our 10-Q sometime today, so you'll get the final numbers. We do not expect these to change. With respect to slide eight, this is what we call our adjusted economic income. I'd just kind of like to do kind of two things here.
Robert E. Cauley: Average <unk> increased slightly from six 7% to seven speeds increased slightly.
Robert E. Cauley: It's probably more seasonal and just aging of the portfolio slightly and then liquidity slightly improved over where it was.
Robert E. Cauley: The fourth quarter, but again license in the middle of our target range Slide seven provides just our preliminary balance sheet income statement, we would expect to release our 10-Q sometime today. So you'll get the final numbers, we do not expect these to change.
Robert E. Cauley: With respect to slide eight this is what we call our adjusted economic income just kind of like to do two things here. One is just walk you through these numbers on the top of the page and just show you where they come from and then at the bottom just show you on a per share basis and make a couple of comments about the dividend so with respect to the top.
Robert E. Cauley: One is to just walk you through these numbers on the top of the page and just show you where they come from, and then at the bottom, just show you on a per share basis and make a couple comments about the dividend. The interest income number, that comes right off the balance sheet, so that's just interest or the income statement, rather; that's a GAAP number; it is representative of the number we would report for tax.
Robert E. Cauley: The interest income number that comes right off the balance sheet is that just interested in the income statement either that's a GAAP number. It is representative of the number we would report for tax so if youre thinking in terms of our taxable income and what drives the dividend that number is representative although not exactly the same we didnt calculate interest income slightly.
Robert E. Cauley: So if you're thinking in terms of our tax income and what drives the dividend, that number is representative, although not exactly the same. We do calculate interest income slightly differently for tax purposes, but again, that's representative. The next number is just the accretion or premium amortization; it's down slightly this quarter, just reflecting the fact that it's calculated based on beginning of period prices, and they'd been marked up at the end of Q4, so the discount was a little less than it had been.
Robert E. Cauley: Different for tax, but again Thats representative of.
Robert E. Cauley: The next numbers just the accretion of the premium amortization down slightly this quarter, just reflecting the fact that it's calculated based on beginning of period prices and they've been marked up at the end of Q4.
Robert E. Cauley: So the discount was a little less than it had been again. This number is not exactly what we report for tax but it is representative.
Robert E. Cauley: Again, this number is not exactly what we report for tax, but it is representative. The next item is interest expense, and that's not only a GAAP number, but it's actual dollars paid in interest expense, so that would be the same for tax.
Robert E. Cauley: Next item is interest expense.
Robert E. Cauley: Is that a GAAP number but thats actual dollars paid.
Robert E. Cauley: <unk> expense, so that would be the same for tax and then finally, the last to the gains on the hedge.
Robert E. Cauley: And then finally, the last two, the hedge number, that is a very close proxy to what we report for tax. That's basically taking the change in the open interest of our hedge positions and allocating it between the portion that pertains to the current period versus all future periods, and that's similar to the process you would use for tax, so that number is also representative. And then finally, just expenses, that's just right off the income statement, and that again is very close to tax.
Robert E. Cauley: Hedge number that is a very close proxy to what we report for tax that's basically taking the change in the open interest of our hedge positions and allocating it between the portion that pertains to the current period versus all future periods and thats. So much in the process you would use for tax. So that number is also representative and then fine.
Robert E. Cauley: Just expenses, that's just right off the income statement.
Robert E. Cauley: And that again is very close to tax so that's kind of the long and the short of it. So this number is a very good product summation of what we would call taxable income its not exact but it is at least a representative and then just on a per share basis, you can see below 47 and 50.
Robert E. Cauley: So that's kind of the long and the short of it, so this number is a very good approximation of what we would call taxable income, it's not exact, but it is at least representative. And then just on a per share basis, you can see below, $0.47.50 the last quarter above the dividend, so it appears that we're comfortably earning the dividend, and then we will reassess as we always do as we move through the year to see if there's a need for an adjustment to the dividend, kind of thinking about doing that after the second quarter as of now, so we'll see, but for now, you never know, markets can change very dramatically, so when we think of dividend policy, you also, you've got to look backward, but you also have to look forward, so we'll be doing that as I said in the near future.
Robert E. Cauley: <unk> 50 in the last quarter above the dividend. So it appears that we are comfortably, earning the dividend and then we will reassess as we always do as we move through the year to see if there is a need for an adjustment to the dividend.
Robert E. Cauley: Thinking about doing that after the second quarter as of now so we'll see but for now you never know markets can change very dramatically. So when we think of dividend policy and you also got to look backward, but you also have to look forward. So we'll be doing that as I said in the near future.
Robert E. Cauley: Turning now to market development, the top left is an interesting slide; I want to kind of walk you through this, and you know this is a Q1 discussion, so the bookend dates would be 1231 and 331 and those are the two bottom numbers, but we've added these extra two just to give you some context. The orange line kind of represents the peak in rates last October, and if you see what happened between then and the end of the year, we had this strong rally, and we all know why that was, it appeared the Fed was about to pivot, and the market rallied, and since then, we've kind of retraced, so the green line is how we were at the end of the quarter, and then the blue line is where we were last Friday.
Robert E. Cauley: Turning now to market developments.
Robert E. Cauley: The top left is an interesting slide I wanted to kind of walk you through this.
Robert E. Cauley: This is a Q1 discussion so the booking dates would be $12 31, and $3 31, and those are the two bottom numbers, but we've added these extra to just to give you. Some context. The orange line kind of represents the peak in rates last October.
Robert E. Cauley: And if you see what happened between then and the end of the year, we had the strong rally and we all know why that was it appeared the fed was about the pivot and the market rallied and.
Robert E. Cauley: Since then we've kind of re trades. So the Green line is how we were at the end of the quarter and then the Blue line is where we were last Friday. So we have been re tracing.
Robert E. Cauley: The rally since that we saw last November and December and we at Oregon did thoughts at that rally was overdone in our hedging strategy and positioning reflected that and then again if you look on the bottom. It's just the inversion of the curve as you can see the most recent data point last Friday, we are off the lows.
Robert E. Cauley: And then again, if you look at the bottom, it's just the inversion of the curve; as you can see, the most recent data point last Friday, we are off the lows and tending in a steepening direction but still inverted and still fairly well inverted. On to the next slide.
Tending and a steepening direction, but still inverted and still fairly well inverted.
Robert E. Cauley: Onto the next slide this is just the current coupon spread a couple of comments I want to make if you look at where we were at the end of the quarter, there's kind of a range that had been in place since the end of really 'twenty one early.
Robert E. Cauley: This is just the current coupon spread. A couple of comments I want to make. If you look at where we were at the end of the quarter, this is kind of a range that had been in place since the end of really 21, early mid-22, at least, which is when we were in the tightening cycle. We were kind of at the local lows.
Robert E. Cauley: Mid 'twenty two at least.
Robert E. Cauley: Which is when we were in the tightening cycle, we were kind of at the local loans mortgages did quite well in the first quarter. Since then we've kind of backed off some but we're still quite a ways from where we were last fall so not quite as tight as we were.
Robert E. Cauley: Mortgages did quite well in the first quarter. Since then, we've kind of backed off some, but we're still quite a ways from where we were last fall, so not quite as tight as we were, but still a long way from the wides. But then, on a historical basis, if you look back since this data goes all the way back to 2010, we are still wide by historical standards. On the bottom left, you just see the absolute price change in these various coupons. These prices, of course, have been normalized to 100 going back to the beginning of the year.
Robert E. Cauley: Still a long way from the Wides, but then on a historical basis. If you look back since this data goes all the way back to 2010, we are still wide by historical standards on the bottom left you just see the absolute price change in these various coupons. These prices of course have been normalized to 100 going back to the beginning of the year and if you look.
Robert E. Cauley: And if you look at where we were at the end of the quarter, they were all down in absolute terms, but most mortgages have done fairly well on a relative basis, relative to hedges. Since quarter end, they've widened, so they're down in absolute price, but also versus hedges. With respect to rules, most rules are negative, except for the production coupons, and that's, as you can see, has been the case for quite a long time. Turn to slide 12 now.
Robert E. Cauley: Where we were at the end of the quarter. They were all down in absolute terms, but most of mortgages have done fairly well on a relative basis relative to hedges.
Since quarter end they've widened.
Robert E. Cauley: So they are down in absolute price, but also versus hedges.
Robert E. Cauley: With respect to roles most roles are negative except for the production coupons and.
Robert E. Cauley: And Thats as you can see has been the case for quite a long time.
Robert E. Cauley: Turning to slide 12 now this is all obviously volatility is a very important driver of mortgage performance and I just want to put out if you look at where we were at the end of the year versus the end of the quarter volatility came off meaningfully that's very supportive of mortgage performance, but it's not the only thing that helped during the first quarter. We also.
Robert E. Cauley: This is volatility. Obviously, volatility is a very important driver of mortgage performance. And I just want to point out, if you look at where we were at the end of the year versus the end of the quarter, volatility came off meaningfully. That's very supportive of mortgage performance. But it's not the only thing that helped.
Robert E. Cauley: During the first quarter, we are also aware that there was quite a bit of inflows into money manager funds, presumably out of equities. And so you got inflows of cash, banks getting re-engaged, and volatility off. So it made for a good quarter.
Robert E. Cauley: We're aware that it was quite a bit of inflows into money manager funds, presumably out of equities and so you had inflows of cash thanks getting re engaged in ball off so it made for a good quarter to date, it's got reversed, but we're still not at that place and then.
Robert E. Cauley: To date, it's kind of reversed, but we're still not in a bad place. And then if you look at where vol is on a very long-term historical basis, again, going back 10 years, it's still elevated. But we're well off the local highs.
Robert E. Cauley: If you look at where <unk> is on a very long term historical basis again going back 10 years, it's still elevated we are well off the local highs, but on a historical basis, it's still elevated.
Robert E. Cauley: But on a historical basis, it's still elevated. Slide 13 is just prepayment activity. It really hasn't changed.
Robert E. Cauley: Slide 13 is just prepayment activity, it's really hasnt changed the Red line on the top left is the average rate, it's probably up a little bit since then, but it's still very very elevated and the refi index is at extremely low levels going all the way back to the nineties with respect of primary secondary spreads still somewhat elevated.
Robert E. Cauley: The red line on the left is the average rate. It's probably up a little bit since then, but it's still very, very elevated, and the refi index is at extremely low levels going all the way back to the 1990s. With respect to primary, secondary spreads, they are still somewhat elevated and still volatile. We still see volatility in there. That's really driven more by the originator community and their business decisions and where they want to try to price mortgages.
Robert E. Cauley: And still volatile we still see volatility in there that's really driven more just by the originator community in their business decisions and where they want to try to price mortgages.
Robert E. Cauley: We've had a lot of volatility in rates, and so that probably is somewhat capturing these spreads. And then this final slide, before we move on to the portfolio, I'll call this food for thought. I just threw this in there, and I think it's worthy of some discussion.
Robert E. Cauley: We've had a lot of volatility in rates and so thats somewhat probably is captured in the spreads.
Robert E. Cauley: And then this final slide before we move on to the portfolio items kind of I'll call. This food for thought.
Robert E. Cauley: Through the sitting there and I think it's worthy of some discussion I don't want to draw any two stronger conclusions here, but what you see here. The top line is it goes back really to the end of the financial crisis. This is GDP U S. GDP just in dollar terms. So nominal dollar terms not adjusted for inflation and as you can see it.
Robert E. Cauley: I don't want to draw any too strong conclusions here, but what you see here, the top line, this goes back really to the end of the financial crisis. This is GDP, U.S. GDP, just in dollar terms. So, nominal dollar terms, not adjusted for inflation. And as you can see, it's been increasing at an amazingly steady rate up until the pandemic. And it's kind of interesting when you think about all the time and energy spent by economists and market participants hashing over all the economic data and policy decisions. But yet, growth over this very long period of time up until the pandemic was amazingly steady. So that's an interesting point.
Robert E. Cauley: Been increasing at an amazingly steady right up until the pandemic and its kind of interesting. When you think about all the time and energy spent by economists and market participants cashing overall, the economic data and policy decisions, but yet when you look at growth over a very long period of time up until the pandemic was amazingly steady.
Speaker Change: So that's an interesting point and endpoint Joe as you can clearly see that it's accelerated since the pandemic and its also become a little choppy in the Red line just represents money supply. That's M. Two most money aggregates are kind of been taboo for quite some time there have been.
Robert E. Cauley: And then point two is that you can clearly see that it's accelerated since the pandemic, and it's also become a little choppy. The red line just represents money supply; that's M2. Most money aggregates have kind of been taboo for quite some time; they're no longer really viewed as appropriate measures for looking at economic behavior or performance or forecasting. But when you look at this, there's no question that M2 very closely tracks the growth of the economy. So that's one interesting observation.
Speaker Change: No longer really viewed as appropriate measures have been looking at economic behavior or performance or forecasting, but when you look at this is there's no question that this debt and two very closely tracks.
Speaker Change: The growth of the economy in fact it.
Speaker Change: Relations essentially one it is a dollar for dollar increase.
Robert E. Cauley: Another one is we put these lines in here, these are just kind of our trend lines, and as you can see, the red line, M2, is clearly above its long-term growth trend. And I guess, I don't know if this is a bit of a stretch, but the relationship between growth and the money supply in the economy, which was so steady for so many years, has changed. You know, now it's kind of out of kilter.
Speaker Change: So that's one interesting observation another one as we put these lines in here that you just kind of our trend lines and as you can see the Red line. Two is clearly above its long term growth trend and I guess I don't know if this is bit of a stretch but kind of the.
Speaker Change: Relationship between growth in the money supply and the.
Speaker Change: The economy, which was so steady for so many years has changed now it's kind of out of kilter. So now the money supply is growing much more rapidly than the economy, although the growth rate of the economy has picked up now I don't know if its appropriate but if you were to say that this growth in the money supply is kind of a function of fiscal spend.
Robert E. Cauley: So now the money supply is growing much more rapidly in the economy, although the growth rate of the economy has picked up. Now I don't know if it's appropriate, but if you were to say that this growth in the money supply is kind of a function of fiscal spending, we've had outsized fiscal deficits of late. You know, there's been deficits, no question, by the government for years, but they're very much outsized as we speak, starting with the CARES Act in response to COVID and the various follow-on programs and even today when the government's running $1.5 to $2 trillion deficits.
Speaker Change: <unk>.
Speaker Change: We've had outsized fiscal deficits of late there's been deficits no question by the government for years, but theyre very much outsized as we speak starting with the cares Act in response to Covid and the various follow on programs and even today when the government is running one five to two children deficits I don't know if this growth in the money supply is pure.
Robert E. Cauley: I don't know if this growth in the money supply is purely a function of that, but to the extent it is, it's interesting to note how this has had an impact on the growth rate. One thing I think you can conclude here is that if you go back to the immediate past, he would talk when he spoke to Congress about monetary policy being basically as accommodative as they could. They had the funds rate at zero. Hence, they were doing QE. They pretty much couldn't do anything more.
Speaker Change: Really a function of that.
Speaker Change: But to the extent it is it's interesting to note. How this has had an impact on the growth rate one.
Speaker Change: One thing I think you can draw a conclusion here is that if you go back to the immediate aftermath of the financial crisis, when Chairman Bernanke you, Mr. President Chairman of the fed.
Speaker Change: He would talk when he spoke to Congress about.
Speaker Change: Monetary policy being.
Speaker Change: Lee is comdata was they could you know they had the funds rated zero they were doing QE make protein much couldnt do anything more.
Robert E. Cauley: Fiscal policy was somewhat accommodative, but not that much, so they were at least in line. They were doing the same thing, maybe not as much as the Fed had hoped. There was the sequester back then, but monetary and fiscal policy were more or less in alignment. If you look at today, monetary policy is very restrictive. The Fed has raised rates over 500 basis points, they're doing QT, but fiscal policy coming out of Washington is not in alignment whatsoever. It's very much stimulative, and a huge deficit.
Speaker Change: <unk> policy was somewhat accommodated that not that much but at least in line. They were doing the same thing maybe not as much as the fed had hoped there was the sequester back then, but monetary and fiscal policy, where more or less in alignment.
Speaker Change: You look at today monetary policy is very restricted the fed has raised rates over 500 basis points Theyre doing qt.
Speaker Change: Fiscal policy coming out of Washington is not an alignment whatsoever, it's very much still.
<unk> huge deficit, so monetary policy and fiscal policy of working at <unk> and that.
Robert E. Cauley: So monetary policy and fiscal policy are working at odds, and that kind of leads you to think, well, maybe that's why the Fed is not having the success that they had hoped for. Now moving on to the portfolio, and so forth. I kind of want to just set the stage before we get into the details of the portfolio.
Speaker Change: Kind of lead you to think well, maybe that's why the fed's not having the success that they had healthy growth is still fairly robust inflation is still strong the labor market is still strong so anyway food for thought but I just thought just an interesting picture I wanted to throw it in here just just for that reason.
Speaker Change: Now moving on to the portfolio and so forth and I kind of wanted to set the stage before we get into the details of the portfolio. If you want to understand what happened in this quarter and what we've done I think you have to understand where we were coming into the year and so in the fourth quarter of 'twenty three.
Robert E. Cauley: If you want to understand what happened in this quarter and what we've done, I think you have to understand where we were coming into the year. And so, in the fourth quarter of twenty-three, the Fed had clearly appeared to pivot not long after we'd hit the cycle highs and rates. Chairman, various members of the Fed had spoken pretty openly about, you know, interest rate cuts on the horizon. And so in the market's eyes, the Fed had pivoted, the market quickly moved the price of six cuts in 2024, and the market rallied, and we just discussed and saw that in the pictures above. You know, we actually didn't buy that; we thought that a lot of that was overdone.
Speaker Change: Yes.
Speaker Change: The fed had clearly appear to pivot after we had not long after we hit the cycle highs at rates that chairman various members of the fed had spoken pretty openly about.
Speaker Change: Interest rate cuts on the horizon and so the market size the fetid pivoted the market quickly moved to price in six cuts in 2024, and the market rallied and we just discussed and saw that in pictures above.
Speaker Change: We actually Didnt buy that we thought that a lot of that was overdone.
Robert E. Cauley: As we enter 2024, what we've seen in the first quarter is the data has remained quite strong, inflation's been strong every month so far, payroll growth is strong, GDP, even though it was reported somewhat low yesterday, you know, a lot of that was because of inventory and trade. And so I think it's safe to say that, you know, pivot is on hold, and not only is it on hold, but we don't necessarily know when it's going to happen or maybe even if it's going to happen. So that's kind of the background.
Speaker Change: And it turns out as we enter 2024, what we've seen in the first quarter as the data has remained quite strong inflation has been strong every month, so far payroll growth is strong.
Speaker Change: Even though it was reported somewhat low yesterday, you know a lot of that was because of inventory and trade and so I think it's safe to say that in our pivot is on hold and noise. It not on hold on hold but we don't necessarily know when it's going to happen or may be even if it's going to happen. So that's kind of the background.
Robert E. Cauley: And so in our minds, what that means is, you know, we're kind of looking at a status quo outcome where things don't necessarily change, where monetary policy stays high, rates stay high, and we basically have to continue to exist in this environment for the foreseeable future. And the takeaway from us is that it's not a bad outcome. Our hedge positions, as you know, when, as I mentioned on 23, when the market rallied, we didn't buy into that rally; we thought it was overdone. So we kept our hedges at a very high level. As a result, we were very adequately hedged coming into this year, and our NIM has not only not really decreased, it's actually increased.
Speaker Change: So in our minds what that means is we're kind of looking at a status quo outcome, where things don't necessarily change where monetary policy stays high rates stay high and we basically have to continue to exist in this environment for the foreseeable future. The takeaway from US is that there is not a bad outcome.
Speaker Change: Our hedge positions us as I mentioned in 2003, when the market rallied we didn't buy into that rally we thought it was overdone. So we kept our hedges at a very high level. As a result, we were very adequately hedged coming into this year and our NIM has been not only is it not really decrease it's actually increased and so.
Robert E. Cauley: And so we're basically taking positions now to basically position for this kind of condition existing for some time. What we did during the quarter, going to the slide here on slide 16, we continued to increase the average coupon of the portfolio by another five basis points. The realized yield on the portfolio increased from 471 to 503 for the quarter.
Speaker Change: So we're basically taking positions now to basically positioned for this kind of condition existing for some time, what we did during the quarter going to the slide on slide 16, we continue to increase the average coupon of the portfolio was up another five basis points the realized yield on the portfolio increased from $4 71 to $5 <unk>.
Speaker Change: <unk> for the quarter and inclusive of our hedge instruments, our economic net interest spread.
Robert E. Cauley: And inclusive of our hedge instruments, our economic net interest spread was 247 for the quarter versus 2.04 for the last quarter. Now, this next slide is really, I think, illustrative of what we've done. So on the bottom right here, you see our portfolio existed at the end of 2022. Now, keep in mind at that point in time, a lot of the higher coupons that exist today really didn't exist then. They hadn't been produced yet, and there were a lot of coupons outstandingly even to the left of threes here.
Speaker Change: <unk> was $2 47 for the quarter versus 2.0 for for the last quarter.
Speaker Change: Now next slide is really.
Speaker Change: Illustrative of what we've done so on the bottom right here you see our portfolio has existed at the end of 2022 now keep in mind at that point in time, a lot of the higher coupons that exist today really didn't exist than they had been produced and there were a lot of coupons outstanding even to the left of threes here, but.
Robert E. Cauley: That was the portfolio at the time, and as you can see, as you move through time, moving to the left at the end of last year and then the end of this quarter, we've continued to migrate the portfolio higher in coupon, and the current, basically, target structure is more of a barbell construction where we have overweights to lower coupons and higher coupons. We may add belly coupons opportunistically over time, but they're not our ideal target holding for a long time. So we're trying to increase their exposure. We're trying to build this kind of barbell.
Speaker Change: That was the portfolio at the time and as you can see as you move through time moving to the left at the end of last year and then at the end of this quarter. We've continued to migrate the portfolio higher in coupon in the current.
Speaker Change: As we target structure is more of a barbell construction, where we have an overweight to lower coupons and higher coupons, we may add belly coupons opportunistically over time, but they are not our ideal target holding long time. So we're trying to increase the exposure. We're trying to build is kind of a barbell, while we are able to use.
Robert E. Cauley: We are able to use paydowns and or proceeds from our ATM offering over time. They've been relatively modest, but still a source of funds we can use to do so. And basically, that's kind of the direction we're heading. The belly has been very directional. By belly, I mean coupons.
Speaker Change: Whose paydowns <unk> proceeds from our ATM offering over time, they've been relatively modest but still a source of funds. We can use to do so.
Speaker Change: And <unk>.
Speaker Change: Basically that's kind of the direction, we're heading out of the valley has been very directional value I mean coupons those coupons have been moving with interest rates. So when we sell off they tend to perform poorly when we rally they tend to perform well.
Robert E. Cauley: Those coupons have been moving with interest rates, so when we sell off, they tend to perform poorly. When we rally, they tend to perform well. And we make it a construction using the wings, if you will, of that strategy that makes more sense.
Speaker Change: We make the construction using the wings. If you will of that strategy makes more sense. So now turning to slide 18 kind of focus more on our funding and hedging side.
Robert E. Cauley: So now, turning to slide 18, I kind of focus more on our funding and hedging side. As I said, we were very aggressive in maintaining our hedges going into the end of the year, and even with the expansion of funding that we saw over that two-year period, we've been able to protect, as you see in this graph on the right-hand side, the red line is our cost of funds, the gray line is SOFR, and you saw that rapid expansion, but you can see our economic cost of funds has been very flat for some period of
Speaker Change: As I said, we were very aggressive in maintaining our hedges going into the end of the year and even with the expansion of funding that we saw over that two year period, we've been able to protect as you see in this graph on the right hand side. The Red line is our cost of funds less Gray line is so far and you saw that rapid expansion, but you can see.
Our economic cost of funds has been very flat for some period of time as a result of our hedging strategy. In fact, if you if you look.
Robert E. Cauley: That's a result of our hedging strategy. In fact, if you look, the economic cost of funds actually decreased this quarter from 2.67% to 2.56%, and the reason that happens is that the market is sold off, and it is priced cuts out of the future. So if you think about, for instance, in a swap where you have a pay fixed, receive floating rate, the fixed rate is very much fixed; you pay a prescribed fixed rate on a known notional balance, and so the present value of those cash flows is absolutely known.
Speaker Change: The economic cost of funds actually decreased this quarter from $2, 67% to 256 and the reason that happens is as the market has sold off and is priced cuts out of the future. So if you think about for instance in our swap where you have a paid fixed received.
Speaker Change: Noting the fixed rate is very much fixed pay as prescribed fixed rate no notional balanced and so the present value of those cash flows is absolutely known the floating leg is where youre receiving a floating rate on the same notional balance and as the market prices out cuts in the future the present value of those cash flows.
Robert E. Cauley: The floating leg is where you're receiving a floating rate on the same notional balance, and as the market prices out cuts in the future, the present value of those cash flows on that side becomes higher just because your projected funding rates in the future are higher, and so as a result, our NIM is actually expanded in this quarter, and that means that, for instance, if we move into the future and the market prices out even more, it will go up, Of course, if they did actually hike, then the repo side would actually be higher as well, but in any event, we can stay in this position for some time, and our NIM appears very, very solid.
Speaker Change: On that side become higher just because you are projected funding rates in the future are higher and so as a result, our NIM has actually expanded in this quarter and that means that for instance, if we move into the future and the market prices are even more of it will go up and eventually if they start to price in hikes. It would go up even more of course, if they did actually heighten.
Speaker Change: And then the.
Speaker Change: The repo side would actually be higher as well, but in any event.
Speaker Change: We can stay in this position for some time and our NIM appears very very solid.
Robert E. Cauley: Just moving on to slide 19, this is more of a bigger picture hedge focus here, but basically, we have 91% of our repo funding hedged, excluding our TBA shorts and interest rate swaps. But at the same time, the migration up into higher coupons, lower duration assets in conjunction with our lower coupon positions, which are well hedged, really helps protect our book value as well. And I just want to reemphasize this point: in Slide 20 just gives you our hedge positions in greater detail. Our interest rate futures positions are unchanged for the quarter.
Speaker Change: Just moving on to slide 19. This is more of a bigger picture hedged focus here, but basically we have 91% of our repo funding is hedged excluding our TBA shorts and interest rate swaps, but at the same time, the migration up into higher coupons lower duration assets into.
Speaker Change: Junction with our lower coupon positions, which are well hedged.
Speaker Change: Really helps protect our book value as well.
Speaker Change: We just want to reemphasize. This point in Q4, we did have the rally we did not.
Speaker Change: Extend our duration, we kept our hedges very high and that's worked very well for us in Q1 and into Q2.
Speaker Change: Slide 20, just gives you our hedge positions in greater detail.
Speaker Change: Our interest rate futures positions are unchanged for the quarter.
Robert E. Cauley: TBA positions were increased slightly. We actually added some TBA shorts at the very beginning of this quarter, you know, as the market tried to sell off or started to sell off. And then just yesterday after the number, when the market sold off very much, we actually took that kind of a back off. So, the position now is at about 400 million short versus 370 at the end of the quarter. So, we've got a round trip there.
Speaker Change: <unk> positions were increased slightly we actually added some TBA shorts at the very beginning of this quarter as the market tried to sell off or starting to sell off and then just yesterday. After the number when the market is sold out very much we actually took that kind of back off so that position.
Speaker Change: Position now is at about $400 million short versus $3 70 agenda of the quarter. So we've done a round trip there. It worked very well for the first whatever 20 odd days of the quarter.
Robert E. Cauley: It worked very well for the first, you know, whatever, 20 odd days of the quarter. But we think, you know, we've moved off quite a bit in a short time. So, we've taken some of that off. With respect to the swaps, we added slightly to our swap positions. Otherwise, the changes there are just the passage of time.
But we think we've moved quite a bit in short time, so we've taken some of that off.
Speaker Change: With respect to the swaps, we added slightly to our swap positions otherwise the changes there just the passage of time.
Robert E. Cauley: Some of the swaps that were greater than five years are no longer, longer than five, or less, and so on, and we did add what is called a dual digital option. On the bottom right, that is a hedge strategy that basically is kind of binary. We pay a premium, and if certain conditions are met, there have to be two, you get a very nice payout, and those payouts are tied to both the level of rates and the S&P 500.
Some of the swaps that were greater than five years ago now longer longer than fiber less and so it appears that it moved and we did add what is called a dual digital option.
Speaker Change: On the bottom right that is a.
Hedge strategy that basically is kind of binary we pay a premium and if certain conditions are met there has to be to you get a very nice payout in those payouts are tied to both the level of rates and the S&P 500.
Robert E. Cauley: The idea being that if rates are much higher for longer, that that would probably cause the stock market to sell off. If both of those conditions are met, Now let's just change slide 21, and this is really what's driving a lot of what we're doing here. So, these are the numbers we look at on a regular basis, so these are the various coupons in the coupon stack, and using Yieldbook, we can project the effect of duration, convexity, and then returns under these different scenarios. And I want to point out a couple of things.
Speaker Change: Being that if rates are much higher for longer that that would probably cost the stock market to sell off if both of those conditions are met we have a very nice payday.
Speaker Change: Now lets us chain slide 21, and this is really what's driving a lot of what we're doing here. So these numbers we look at on a regular basis. So these are the various coupons in the coupon stack and using yield book, we can project the effective duration convexity and then returns under these different scenarios and I want to point out a couple of things first off.
Robert E. Cauley: First off, while we look at this very regularly, we also look at empirical or observed results, and we factor in both in decision-making, but when you look at the convexity column, If you look at what we call the belly coupons, fives, five-and-a-halfs, and six, very clearly the worst convexity in our world, very negative convexity means very hard to hit.
Speaker Change: While we look at this very regularly we also look at empirical or observed results and we factor in both in decision, making but when if you look at the convexity column. If you look at the what we call. The belly coupons 55566, very clearly the worst convexity and in our world.
Very negative convexity means very hard to hedge.
Robert E. Cauley: So, for instance, if you look at the lower coupons, that very low negative convexity makes it easy to hedge. And so even if you look at these securities in a rally, you can see they have a very great return. And a sell-off, it's, of course, equally bad, but they're easy to hedge, and so we can use swaps or futures and fairly effectively hedge those, and then the lack of negative convexity really helps with that process.
Speaker Change: So while for instance, if you look at the lower coupons that very low negative convexity makes.
Speaker Change: It makes it easier to hedge and so even if you look at the securities in a rally you can see they are very great returns.
Speaker Change: Sell off its of course equally bad, but they are easy to hedge and so we can use swaps or futures and fairly effectively hedge those and then the lack of negative convexity and really helps with that process and then when you look at the higher coupons.
Robert E. Cauley: And then when you look at the higher coupons, again, very low negative convexity, and they do very well in a sell-off. And so that's kind of what's driving what we're doing here. We're looking at a situation where we think we could be here for a long time, but if we do move in either direction, this kind of barbell strategy is going to be very effective, and we don't have to deal with trying to hedge the belly, which can be very expensive and very challenging.
Speaker Change: Again, very low negative convexity and they do very well in a sell off and so thats kind of whats driving that what we're doing here. We're looking at a situation, where we think we could be here for a long time, but if we do move in either direction.
Speaker Change: Kind of a barbell strategy, but it is going to be very effective and we don't have to deal with trying to hedge the belly, which can be very expensive and very challenging so.
Robert E. Cauley: So, for instance, if you look at some of those belly coupons, in a meaningful sell-off, they could extend and underperform hedges meaningfully, and again, in a big rally, the same thing can happen. So this construction allows us to position ourselves to do well if nothing changes, but at the same time, do pretty well if we move meaningfully in either direction.
Speaker Change: So for instance, if you look at some of those belly coupons in a meaningful sell off they could extend and underperformed hedges meaningfully and again in the big rally and the same thing can happen. So this construction allows us to position ourselves to do well if nothing changes, but at the same time do pretty well, if we move meaningfully in either direction and so that's kind of what we are.
Robert E. Cauley: And so that's kind of what we're focused on in the strategy. Slide 22, this is just our interest rate shocks, our duration gap. I just want to point out the bottom two numbers there; those are basically the changes in equity given these plus or minus 50 basis point rate shocks, and ideally, you want those numbers as low as possible. And again, this is only modeled, so you don't necessarily know that you'll realize that, but we're comfortable with that positioning.
Speaker Change: <unk> focused our strategy on slide 22.
Speaker Change: This is just our interest rate shocks.
Our duration gap.
Speaker Change: I want to point out the bottom right two numbers here those are basically the changes in equity given these plus or minus 50 basis point rate shock since ideally you want those numbers as low as possible.
Speaker Change: And again, it's only models. So you don't necessarily know that you'll realize that but we're comfortable with our positioning.
Robert E. Cauley: And then slide 23 is just our speeds for the portfolio. We showed January, February, and March, as well as Q1 and Q4. Speeds have picked up somewhat over the course of March, but that's really just coming out of the seasonal trough, so that's why we were kind of faster in March, I suspect, with the backup in April. Even though we're still moving towards the seasonal peak, which is around June, the net effect would probably be an uptick in speeds, but not as much as you might have seen otherwise.
Speaker Change: And then slide 23 is just our speeds.
Speaker Change: For the portfolio, We show January February and March as well as Q1, and Q4 speeds picked up somewhat.
Over the course of March that's really just coming out of the seasonal trough.
Speaker Change: So that's why we're kind of faster in March I suspect with the backup in April even though we're still moving towards the seasonal peak, which is around June the net effect would be probably uptick in speeds, but not as much as you might have seen otherwise.
Robert E. Cauley: And then finally, just to kind of sum up and provide our outlook, I think if you look back at where we've come from, the market very much got ahead of itself with the pivot, basically didn't work out. The developments I just described have driven rates higher in Q1 and early Q2. Volume is much higher.
Speaker Change: And then finally, just to kind of sum up and provide.
Speaker Change: <unk> our outlook.
Speaker Change: I think if you look back at where we've come from the market very much got ahead of itself with the pivot.
Speaker Change: Basically didn't work out of developments I. Just described has driven rates higher in Q1 and early Q2 vol is much higher and really theres, even uncertainty in the market about what the fed's going to do I mean current market pricing is one cut this year and there are some who would take the next move actually it could be.
Robert E. Cauley: And really, there's even uncertainty in the market about what the Fed's going to do. I mean, current market pricing is one cut this year, and there's some who think the next move actually could be higher. I think that's a very, very low probability, but it just points to the uncertainty in the market and is in sharp contrast to the outlook at the end of the last year, where everybody was assuming significant cuts. As a result of all this, mortgage valuations have cheapened and are attractive, so that's very good for us. So, looking forward, all of these developments are not bad for us. They're actually quite nice.
Speaker Change: Increased I think thats, a very very low probability, but it just points to the uncertainty in the market and in sharp contrast to the outlook at the end of last year, where everybody was assuming significant cutting.
Speaker Change: As a result of all this mortgage valuations are have cheapened and are attractive. So that's very good for us. So looking forward. All of these developments are not bad for us, they're actually quite quite nice.
Robert E. Cauley: Investment opportunities are very attractive. Our funding costs have been very well-contained due to our hedging strategy. We're in a position where we can protect book value, absent some extreme moves higher. We have been maintaining very good protection of book value, and we have potential upside through our exposure to lower coupons to the extent we rally back. So that's kind of what we did and where we are and what we look at going forward. So Operator, that is it.
Speaker Change: The investment opportunities are very attractive our funding costs have been very well contained to our hedging strategy. We're in a position where we can protect book value absent some extreme moves higher.
Speaker Change: Have been maintained very good protection of book value and we have potential upside through our exposure to lower coupons to the extent, we rallied back. So that's kind of what we've done and where we are and what we look at going forward. So operator that is yet.
Robert E. Cauley: I guess I will say, just before we conclude, I'll give you the bio. I'm sure everybody wants to know where the book is. As of last Friday, we were down about 5%. As of yesterday, about 5.5%. The market rallied hard on Tuesday when we had a very soft PMI number, and risk assets rallied, but Wednesday and Thursday we gave some of that back. So down about 5.5% is our best estimate as of last night, and about 5% last Friday. So with that, I will turn the call over to questions.
Speaker Change: I guess I will say.
Speaker Change: We conclude our book value I'm sure everybody wants to know.
Speaker Change: Is.
Speaker Change: As of last Friday, we were down about 5%.
Speaker Change: As of yesterday about five and a half market rallied hard on Tuesday, when we had a very soft PMI number and risk assets rally, but Wednesday, and Thursday, we gave some of that back so down about five 5% is our best estimate as of last night and about 5% last Friday.
Speaker Change: So with that I will turn the call over to questions operator.
Operator: Thank you. The floor is now open to questions. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Please ensure your line is unmuted if called upon. Your first question comes from the line of Matthew Erdner with Jones Trading. Your line is open.
Speaker Change: The floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad, if you would like to withdraw your question.
Speaker Change: Darwin again, please ensure your line is on mute if called upon.
Speaker Change: Your first question comes from the line of Matthew <unk> with Jones trading your line is open.
Matthew: Hey, good morning, Thanks for taking the question can you talk about the repo markets and the overall health and just kind of how they're functioning right now.
Matthew Erdner: Hey, good morning. Thanks for taking the question.
Robert E. Cauley: We see no signs of distress. We've actually added some counterparties, and we have a few more in the works, and we're looking at some both sponsored repo and State Street DR. I can't think of the term, but anyway, no, I don't see any stress in the repo markets. We have more than adequate funding, and we haven't seen changes in haircuts.
Speaker Change: We see no signs of distress.
Actually added seven Counterparties and we have a few more in the works.
Speaker Change: And we're looking at some bulk sponsored repo.
Speaker Change: <unk>.
Speaker Change: <unk> H D D.
Speaker Change: I can't think of a term, but any way no I don't see any stress in the repo markets, we have more than adequate funding haven't seen changes in haircuts.
Robert E. Cauley: I will say this, like I said, maybe some people are thinking Fed's going to raise rates. The repo market will be very quick to jump on that. They love to price that into term repo, and so even if you go out six months, there's almost no cuts priced into it, but other than that, I don't see any signs of distress. Occasionally, we'll get some weird money movements around month and quarter ends, but which might, you know, drive, rates up a few bits, but in general, we've been able to really diversify our funding book across twenty-five-ish lenders and are actively having conversations about having new counterparties so and haircuts have on average come down a little bit there are a few counterparties have been willing to decrease haircuts from like fives to fours so it's seems seems pretty healthy but as you know that can change in moments notice
Speaker Change: No.
Speaker Change: I will say this that.
Speaker Change: Like I said, maybe some people were thinking the fed's going to raise rates I mean, the repo market will be very quick to jump on that they love to price that into term repo and so even if you go out six months. There is no almost no cuts priced into it but other than that I don't see any signs of distress.
Speaker Change: Occasionally we will get some weird money movements around month in quarter ends, but which might drive.
Speaker Change: Rates up a few bps, but in general.
Speaker Change: We've been able to.
Speaker Change: We diversify our funding book across.
Speaker Change: Yes.
Speaker Change: 25 ish.
Speaker Change: <unk> lenders and are actively having conversations about adding.
Speaker Change: New Counterparties, so and haircuts have on average come down a little bit there are a few counterparties have been willing to decrease haircuts from like five to force. So it's seems pretty healthy, but as you know that can change in a moment's notice.
Matthew Erdner: Yeah, that's helpful, Kala, there. And then, you know, I see the move up slightly in coupon kind of hitting the lows and the highs there in the stack. Have you continued to add higher coupons in the second quarter, consistent with the strategy that's been laid out?
Speaker Change: Yes, that's helpful color, there and then I see them move up slightly and coupon kind of hitting.
Speaker Change: The lows and the highs there.
Speaker Change: In the stack, maybe you continued to add I guess higher coupons in the second quarter.
Speaker Change: Consistent with the strategy that that's been laid out.
Robert E. Cauley: Not yet, but that's on the immediate horizon. We haven't been able to use the ATM in the quarters because we've been in more or less a blackout.
Speaker Change: Not yet.
Speaker Change: That's on the immediate horizon.
Speaker Change: Haven't been able to use the ATM in the quarter, just because we've been in Orleans blackout and we did get paid out holiday were very modest but the plan is to continue to do that.
Robert E. Cauley: And we did get paid back, although the amounts were very modest. But the plan is to continue to do that in the immediate future. So when we talk at the end of the second quarter, hopefully, there will be much more progress to discuss in that regard. I think there was a slide at the beginning of the deck that showed how pronounced the rate movements have been from October to December and then back to where we are today.
Speaker Change: In the immediate future. So when we talk at the end of the second quarter, hopefully there'll be much more progress to discuss in that regard it's been.
Speaker Change: I think there was a slide at the beginning of a deck that shared how pronounced that rate movements have been from October to December and then back to where we are today.
Robert E. Cauley: Back then, 5.5s and 6s were consistent with the barbell strategy we discussed. So it may stick out that we are exposed to some belly coupons, but we'll continue to maintain the strategy of trying to own low negative convexity, fully extended, deep discount securities that are easy to hedge, along with higher coupons that have lower duration and less convexity because they're just not right in the middle of the stack where the extension gets the worst.
Speaker Change: <unk>.
Speaker Change: Back then.
Speaker Change: 500, fives and sixes were consistent with that barbell strategy. We discussed so as we so it may stick out that we have some we are exposed to some belly coupons, but we will continue to.
Speaker Change: Two to maintain our strategy of trying to own.
Speaker Change: Low negative convexity fully extended.
Speaker Change: Deep discount securities that are easy to hedge along with higher coupons.
Speaker Change: That are have lower duration and less convexity, because theyre just not right in the middle of the stack, where the extension and stores.
Matthew Erdner: Thank you, guys.
Speaker Change: Got it thank you guys.
Speaker Change: Thank you.
Operator: Your next question comes from the line of Mikhail Goberman with Citizens JMP. Your line is open.
Speaker Change: Your next question comes from Ryan Mckenna Guberman with citizens JMP. Your line is open.
Mikhail Goberman: Hey, good morning guys. Hey, Mikhail.
Speaker Change: Hey, good morning, guys, Hey, Macau.
Mikhail Goberman: Hey, I hope you guys are doing well and thanks again for the slide deck. I didn't know it was possible to make. I always tell people it's the best agency mortgage rate slide deck for like a crash course in agency MBS investing, and somehow, you guys made it even better, so congrats. Thank you. It's really good stuff, especially slide 16 and 17, the disclosure is very nice.
Speaker Change: I Hope you guys are doing well and thanks again for the for the slide deck and I know as possible to make I always tell people is that it's the best agency mortgage REIT slide deck, where like a crash course in agency MBS investing somehow you guys made it even better so congrats.
Speaker Change: Really good stuff, especially slide 16, and 17 disclosure is very nice.
Mikhail Goberman: Thank you for that. Just if you could perhaps flesh out your comments on the dividend early in the call, Bob. I believe you mentioned something about the second quarter. I don't know if I heard that correctly, but maybe you could just flesh out your comments about the dividend going forward. Sure.
Speaker Change: Just if you could perhaps flesh out your comments on the dividend early in the call. Bob I believe you mentioned something about the second quarter I don't know if I heard that correctly, but.
Speaker Change: Maybe just flush out your comments about the dividend going forward.
Robert E. Cauley: Sure, it's obviously 12 cents, and if you look at that slide Whatever it is, when we show the..., slide 8. We're running above the, you know, our proxy for taxable income is running above the dividend, so we will reevaluate it if there's a need for an adjustment. I mean, the obvious adjustment there would be higher, but as I said, you have to look backward and forward, so, you know, we don't like to change the dividend all the time, and so if conditions are changing in the market at the time, and it looks like there might be downward pressure on that, that's going to very much affect our decision-making, but we do intend to revisit it mid-year after the end of the second quarter.
Bob: Sure. It's obviously 12 cents and if you look at that slide.
Speaker Change: Whatever it is where we show that.
Bob: Slide eight.
Bob: We're running above that.
Bob: Our proxy for.
Taxable income is running above the dividend.
Bob: So we will reevaluate it if theres a need for an adjustment I mean, the obvious adjustments it would be higher but as I said you have to look backward and forward. So we don't like to change the dividend all the time and so if conditions are changing in the market over the at the time and it looks like there might be downward pressure on that.
Bob: Much affect our decision, making but we do intend to revisit mid year. After the end of the second quarter.
Robert E. Cauley: What we'll do is we'll update more precisely our taxable income estimate year-to-date and see if there's a need, and then weigh that against what we see on the ground at the time of the outlook going forward for the balance of the year and beyond.
Bob: What we'll do is we'll update more precisely our taxable income.
Bob: We estimate year to date and see if there is a need and then weigh that against what we see on the ground at the time of the outlook going forward for the balance of the year and into next.
Mikhail Goberman: Okay, so I guess. Is that adjusted economic income per share line, the one for Q2 that you will report in July-August, is that sort of what's going to drive any sort of decision?
Speaker Change: Okay. So I guess.
Speaker Change: Net adjusted economic income per share line.
Speaker Change: The one for Q2 that you reported in.
Speaker Change: In July August is that sort of what's going to drive any sort of decision.
Robert E. Cauley: Yeah, I think so. And again, it will be a discussion. We'll weigh that, but we'll also weigh kind of the outlook from that point forward, you know, whether we think it's going to stay at that level, go up, or go down. So, as I said, you don't like to change the dividend frequently. And so you try to pick a level that, you know, is going to be the most appropriate for the medium term.
Speaker Change: Yes, I think so and again it will be a discussion.
Way that will also weigh kind of the outlook from that point forward, whether we think it's going to be stay at that level or go up or go down so.
Speaker Change: So as I said, you don't like to change the dividend frequently.
Speaker Change: And so you try to pick a level that is going to be the most appropriate for the medium term.
Robert E. Cauley: And, you know, if that means you over or under earn at any given month, that's okay. You know, we don't earn exactly what we pay every month. But, you know, that's kind of the thinking that goes into that decision.
Speaker Change: And if that means you over under earn at any given month that's okay.
Speaker Change: Earn exactly what we pay every month.
Speaker Change: But that's the thinking that goes into that decision.
Mikhail Goberman: Got it. Thank you for that. Best of luck going forward, guys. Thanks.
Speaker Change: Got it. Thank you for that best of luck going forward guys. Thanks. Thank you.
Operator: Your next question comes from the line of Christopher Nolan with Lindenburg-Selman. Your line is open.
Speaker Change: Your next question comes from the line of Christopher Nolan with Lindenberg Thalmann. Your line is open.
Christopher Whitbread Patrick Nolan: Hey guys, I echo that. The deck is great, and Bob, I always like your comments about your stuff on the M2 Money Supply. It was really interesting.
Christopher Whitbread Patrick Nolan: Hey, guys without the deck is great and Bob I would like your comments I thought you Stefan the M. Two money supply was really interesting food for thought.
Robert E. Cauley: It is. That's right off of Bloomberg, by the way. You can pull that up.
Christopher Whitbread Patrick Nolan: Yes. It is.
Speaker Change: The write off of Bloomberg by the way you can pull that up.
Christopher Whitbread Patrick Nolan: Anyway, I mean, you're dealing with a lot of cross-currents here at the macro level. You know that. You're basically pursuing the same strategy of going to more high-coupon stuff. They have a barbell portfolio. Going forward, assuming that the economy continues to muddle along and the Fed doesn't really do anything, what do you see benefiting more, earnings or book value, or neither? A little clarification on that might be helpful.
Speaker Change: Anyhow.
Speaker Change: You're dealing with a lot of cross currents here on the macro level at Sam's.
Speaker Change: You know that.
Speaker Change: Youre basically pursuing the same strategy of.
Speaker Change: Two more high coupon stuff that you have a barbell portfolio.
Speaker Change: Going forward as you just assuming that the economy continues to muddle, along and the fed doesn't really do anything what do you see benefiting more earnings or book value or neither.
Speaker Change: Look clarification on that might be helpful. Yes.
Robert E. Cauley: Yeah, that's a good outcome, I mean, as long as we don't get a violent sell-off on the long end. You know, if we start heading north of 5% on TENS or something, we stay around here, the curve stays inverted, book should be stable, and we can earn the dividend. I think the question is like...
Speaker Change: Good outcome as long as we don't get a violent sell off on the long end.
If we start heading north of 5% on tangible something we stay around here that curve stays inverted.
Speaker Change: Books should be stable and we can earn the dividend.
Speaker Change: I think the question is like.
Robert E. Cauley: This week, the curve's been inverted for longer now than it's ever been inverted. And I used to always say on, you know, road trips way back when, "What happens when the curve inverts? How are you going to pay a dividend?
Speaker Change: This week the curve has been inverted longer now than it's ever been inverted and I used to always say.
<unk> chips way back when or what happens when the curve inverts, how youre going to pay dividend I used to say well if the curve inverts that means that the market thinks that the fed is going to be easing in the future and either the fed's wrong and they do ease or the market's wrong and they don't in long term rates go up and then you get a normal curve shape, while we've been like this for a long time and so today.
Robert E. Cauley: I used to say, well, if the curve inverts, that means that the market thinks that the Fed is going to be easing in the future, and either the Fed's wrong and they do ease, or the market's wrong and they don't, and long-term rates go up, and then you get a normal curve shape. Well, we've been like this for a long time. And so today, you know, the yield on the two-year is still well below Fed funds.
Speaker Change: The yield on the two year is still well below fed funds. So the market's still saying we think the fed is getting east.
Robert E. Cauley: So the market's still saying, we think the Fed's going to eat. We'll see what happens but, you know, eventually, you would think the curve should be going back to a more normal shape, and the question is when and how.
Speaker Change: We will see what happened, but eventually you would think the curve should be going back to a more normal shape. Now. The question is when and how does that mean short rates rally or does that mean long rates go up.
Robert E. Cauley: Does that mean short rates will rally, or does that mean long rates will go up? When you look, you referenced my M2 slide, that kind of tells me that fiscal policy the way it is, you know, that's stimulative, you know, they're pumping money into the economy, and if you look at that surge in M2 as a proxy for deficit spending, excessive deficit spending, that would tell you that inflation is probably not coming down anytime soon and growth is going to stay fairly high, which might lead you to believe that The market still thinks they're going to be easing, it's just a question of how much, so I don't know. We don't know for sure.
Speaker Change: When you look you have referenced my.
Speaker Change: To slide.
Speaker Change: That tells me that with fiscal policy the way it is that's stimulative.
Speaker Change: Pumping money into the economy, and if you look at that surge and two as a proxy for deficit spending excessive deficit spending that would tell you that inflation is probably not coming down anytime soon in growth is going to stay fairly high which might lead you to believe that longer term rates should be higher.
Speaker Change: But the market still thinks the opposite the market's still thinks they're going to be easy to just a question on how much so.
Speaker Change: No. We don't know we'll have to watch like everybody else, but the point is to go for now if nothing really changes meaningfully books should be pretty stable and the dividend is pretty well covered so that's not a bad outcome for us at all yes, I think thats the environment where volatility.
Robert E. Cauley: We'll have to watch like everybody else, but the point is, you know, for now, if nothing really changes meaningfully, the book should be pretty stable, and the dividend is, you know, pretty well covered. So that's not a bad outcome for us at all. Yeah, I think that's the environment where volatility comes off both in a rally as well as just sort of staying here and being range-bound. Obviously, the last six months have been extremely volatile, and so I think as the market processes what exactly is going to happen, when the Fed's going to be involved, we have a lot of hedges on the front end of the curve.
Speaker Change: Comes off.
Speaker Change: Both into a rally as well as just sort of staying here and being range bound.
Speaker Change: Certainly the last six months have been extremely volatile and so I think as to market processes, what exactly is going to happen. When the fed is going to be involved with a lot of hedges on the front end of.
Speaker Change: The curve.
Robert E. Cauley: In December, we took strides to lock in as many of these anticipated rate cuts as we could. We sort of traded Eurodollar or SOFR futures for a very long time, but we started locking in some of those cuts, and so I think we're in a good position. Again, it's going to be...
Speaker Change: In December we took strides to lock in as many of these anticipated rate cuts as we clearly started and traded euro dollar so for futures for a very long time, but we started locking into some of those cuts and so so.
Speaker Change: So I think we're in a good position again, it's going to be.
Robert E. Cauley: It's not going to be fun to be a levered mortgage investor if... more hikes start getting priced in. And the market has been trading very, mortgages have been trading very long over the course of the last few weeks. And so we'll see big green days whenever we rally and days that are redder than expected, just based purely on rate moves, on days when we have big sell-offs and the thought of easing or the prospect of even tightening starts getting around mortgage basis really slips in that environment.
Speaker Change: It's not going to be fun to be a levered mortgage investor.
Speaker Change: <unk>.
Speaker Change: More hikes start getting priced in.
Speaker Change: The market has been trading.
Variable mortgages have been trading very long over the course of the lab.
Last few weeks and so we'll see big Green days whenever we rally in.
Speaker Change: Days that are better than expected just based on purely on on rate moves.
Speaker Change: On days, when we have big sell off in the thought of.
Of easing or the prospect of even tightening starts getting batted around.
Speaker Change: Mortgage basis really slips in that environment. So that will continue to be the case, but if were just modeling around here.
Robert E. Cauley: So that'll continue to be the case. But if we're just muddling around here and the tightening cycle is almost over, we don't have to pause or pivot right into an immediate easing cycle to benefit from this environment. Just one of a little bit of stability is also an attractive environment.
And the tightening cycle is almost over we don't have to.
Speaker Change: Pause.
Speaker Change: Our pivot right into intermediate easing cycle to benefit from this environment, just one of a little bit of stability is also an attractive environment for us.
Christopher Whitbread Patrick Nolan: Great. Thank you for the word. See you guys later. Thanks, Chris.
Speaker Change: Great. Thank you for the word so you guys. Thanks, Chris.
Speaker Change: Yes.
Operator: Once again, ladies and gentlemen, if you have a question, it is star number one. There are no further questions at this time. I'll turn the call over to Mr. Cauley for closing remarks.
Speaker Change: Once again, ladies and gentlemen, if you have a question it is star one.
Speaker Change: There are no further questions at this time I'll turn the call to Mr. Cohen for closing remarks.
Robert E. Cauley: Thank you, operator. Thank you, everybody. As always, to the extent that other questions come up or you don't listen to the call live, only the replay, and you have a question, feel free to call us at the office. The number is 772-231-1400.
Cohen: Thank you operator, thank everybody as always to the extent other questions come up or you don't listen to the call live only the replay and you have a question feel free to call us at the office. The number of 77 to $2 311400, otherwise we look forward to speaking to you at the end of the second quarter. Thank you.
Operator: Otherwise, we look forward to speaking to you at the end of the second quarter. Thank you. This concludes today's conference call. Thank you for joining us. Thank you for watching!
Speaker Change: This concludes today's conference call. Thank you for joining you may now disconnect.
Operator: This concludes today's conference call. Thank you for joining us. You may now disconnect.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: [music].