Why War with Syria Would Benefit Annaly Capital and Real Estate

It sounds wacky I know, but bear with me, because war with Syria really would serve Annaly Capital (NYSE: NLY) shareholders and the entire real estate market in my estimation, and for a very tangible reason. If the U.S. were to eventually take military action against Syria, it would drive a “flight to quality,” and despite U.S. involvement, that means increased buying of U.S. treasury securities. Increased demand for U.S. debt would drive up the price of that debt and lower the cost of debt for the U.S. When U.S. treasury yields fall, longer term interest rates decline including mortgage rates. Just as higher mortgage rates have hurt the real estate market and NLY shares, lower mortgage rates serves the housing market and Annaly.

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Annaly Capital (NYSE: NLY) shares have been especially impacted by rising mortgage rates since speculation began about Fed tapering in early May. The situation was only exacerbated when the Fed Chairman actually suggested tapering would likely start this year. This week, the Fed backed down from its prior warnings and held off the tapering of its asset purchases. That supported Annaly Capital, American Capital Agency (Nasdaq: AGNC) and the rest of the real estate sector. Still, the threat of near-term tapering remains, and that was priced back into long interest rates and mortgage rates yesterday a bit, and served to sink Annaly shares again.

Now, you might think a U.S. war or strike against Syria would drive capital out of the U.S., but the opposite is actually more likely. Given the distance between the U.S. and Syria, and the immense difference in military might between the two nations, any injury to the U.S. would be unlikely in such a conflict. Obviously, if something significant did occur on U.S. soil, the argument would not hold and interest rates would not decline, but instead increase. Despite the threats often made against the United States when it threatens nations in the Middle East and North Africa, history has shown a lack of follow through against the blitz of power the U.S. has displayed. More often, serious threat is directed toward Israel, Europe and western allies in the Middle East. So on a relative basis, the United States has tended to be the destination in flights to quality. In the future, someday, that may change, but today it remains likely.

You might ask how sustainable a change in interest rate trends might be in such a scenario. While a military strike might only last a few days, the concern and worry about the region would last longer. Also, the U.S. Federal Reserve would be expected to favor accommodation in such a time, which further serves lower interest rates. And the dependence of the entire globe on Middle Eastern oil, and the importance of the U.S. strategic oil reserve and new status of the U.S. as a net exporter of energy, only solidifies the U.S. status as destination in flights to quality.

As interest rates have increased, investors and pundits have expressed concern about the structure of mREIT asset portfolios and their exposure to rising interest rates. Annaly shares are down in price by 22% since May 1st, even after adjusting for dividends. The SPDR S&P 500 (NYSE: SPY) is up by 8.2% over the same span.

Security	05/01 – 09/16
Annaly Capital (NLY)	-22%
SPDR S&P 500 (SPY)	+8.2%
iShares US Real Estate (NYSE: IYR)	-10.4%
SPDR S&P Homebuilders (NYSE: XHB)	+0.2%
American Capital Agency (AGNC)	-26%

The entire group of real estate relative stocks sensitive to changes in interest rates has underperformed the broader market since May, but the mortgage REITs, including Annaly’s peer American Capital Agency (AGNC), have done the worst. Thus, they should also outperform if rates were to change direction and turn lower. While none of us would like to see war or conflict of any sort, it is interesting to note and perhaps prepare for the possibility that some stocks might benefit from the effects of a flight to quality. Among those, I find real estate relatives and especially Annaly Capital (NLY) of special interest for capital resting on the sidelines.

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