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This had been a general rule in Cramerica, although certain stocks like Annaly [NLY
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] that exhibited above-par borrowing practices were exempt. But not anymore.
Cramer thought Annaly was safe because it only invested in bonds issued by Fannie Mae [FNM
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] that have the implicit backing of the government. This seemed like just about the safest investment strategy for a mortgage company outside Treasurys. But as Annaly’s stock got systematically destroyed this week, Cramer learned an important – and painful – lesson: Even the best borrowers are still vulnerable in this market.
So what happened to Annaly, the company that was supposed to have gotten subprime right? According to Cramer, investors got spooked that the bonds issued by Fannie – those ones that are supposed to be guaranteed by the Feds – might not actually be so bulletproof. The worry now is that they could default like regular mortgage-backed bonds. The company has assured investors not to worry, but since it owns so much of the Fannie paper, which keeps getting marked down almost daily, it’s hard not to.
Annaly has another problem anyway. It borrows from brokers, and brokers are simply out of money or have cold feet about lending what little they do have left. So even though Annaly, run by Mike Farrell, the most conservative and brilliant guy in the business, as far as Cramer is concerned, hasn’t made the mistakes of many of its mortgage brethren, it doesn’t really matter. The only way it can fix its borrowing problem is to raise capital by issuing more stock and that will dilute existing shares, which is exactly why investors and short-sellers have obliterated the stock.
Annaly was a tough lesson, but it proves that when things are this bad, there are no exceptions to the rules. If a company has to borrow money to make money, the stock is off limits, Cramer said. “It might not make you money, but my Game Plan could save you a bundle.”
Jim's charitable trust owns Annaly.
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