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We are continuing to bring you the Wall Street Journal's number one ranked stock pickers -- all this week were sharing their top money making plays for this year in different sect.
-- today's masters stock picker is down for time.
-- research analysts last year by the way its top stock pick Redwood Trust had a 76%.
While he rated it a -- and -- let's start with Redwood Trust because you still believe that -- you don't think in fact today it would there were with the rest of the market there was a big -- -- I think it ended the -- down about 3%.
Is this -- -- you would go in and buy some more.
Most definitely redwood remains our top pick and is in fact the only buy rated stock we have in the real estate sector as of today.
And we think -- ribbon placed on two important themes that are going on the residential mortgage space the first is a pullback from the -- season the agency mortgage business.
-- and we think that that's gonna take place over the next five years or so and the second is the implementation of Basel III.
Both of these.
Changes in the mortgage market are in essence a tectonic shift.
That should help to -- private capital into the market and Redwood Trust is the tip of that spear.
The second reason we are still bullish on the name is is really the type of -- that they own.
If you think about a typical mortgage there's two pieces of risk and return.
Those two pieces tend to be -- adversely correlated with one another.
That is credit risk and interest rate risk and an economy that is improving in you tend to receive a credit risk outperformed interest rate risk.
And Redwood Trust portfolio is is broadly speaking predominantly -- credit risk portfolio.
How -- a perfect segue to what happened today with fed chief Ben Bernanke used -- what the ten year -- -- it started to move higher.
We do apparently at at least for the moment and then maybe when he starts to ease up on what the easing has been -- tapering -- easing.
We might see some interest rate risk how will that affect the real estate industry but it would still -- to certain names.
Well I I would say Redwood Trust right now is in fact -- only buy -- name.
We think thirteen is the year that mortgage REIT investors particularly.
Should get their -- -- -- order the mortgage REIT industry if you look at the largest players there annaly -- -- C of the two largest by market cap.
We think that there is found some risk that's going to come to fruition -- 2014 or.
And then we'll -- talking -- family is a very short regular stock because it's got an unbelievably high dividend rate.
Absolutely okay so you're saying people might see more risks there and they should -- -- a little bit down.
Well see it what we've been telling investors -- is in essence we've come to hold on that entire space and it's really based on.
A very simple premise.
The mortgage rates by far by far and away our valued on a price to book multiple which which means very simply that the assets that they -- The fair market value of those assets whether it moves up or down we'll have a direct correlation to the share price.
Well and Daniel Martin and Daniel are we missing the elephant in the room which is the Federal Reserve board I mean that -- -- bottom line is when the Fed begins to pull back.
On its purchases of mortgage securities.
Then you have a situation in which you know there's going to be less demand for some that usually means the price drops right.
That's the root cause of of our concern today the Federal Reserve is purchasing about 85 billion of mortgage backed securities per month.
Which -- which equates to fifty to 80% of all production in that space.
You take away the purchaser of fifty to 80% of whatever product we're talking about and the fair market values of those products are gonna go down.
The other aspect to keep in mind is the fundamental side which is simply.
As rates rise the fair market values of bonds fall in value so you have the technical aspect of the Fed pulling out.
And the fundamental aspect of higher rates on the horizon.
I chipped Daniel wonderful to see it in a congratulation -- -- -- real estate stock at a hearing and did you ever try to -- -- destruction.
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