Orchid Island Capital Inc (ORC) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Third Quarter 2018 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, October 26, 2018.

At this time, the company would like to remind listeners 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 the 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.

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 Chief -- Chairman and Chief [Financial] Officer, Mr. Robert Cauley. Please go ahead, sir.

Thank you, operator. Welcome, everybody, this morning. I hope everybody's had a chance to either download our slide deck off of our website or is looking at it electronically. We'll begin the slide deck on Page 3, which, obviously, is the table of contents. I'm just kind of go over an outline of what I'd like to say today. And at the end of our slide deck, we'll then open up the call for questions.

As usual, I'm going to start off with a quick synopsis of our financial highlights for the quarter ended September 30, 2018. I'll then go to our market developments that occurred during the quarter to kind of give us a backdrop of what was the environment that we are operating in, then I'll go into our financial results a little more.

But given the developments in the fourth quarter, the extreme volatility we've seen so far in the month of October, I'd like to spend a fair amount of time talking about what's happened in early Q4 and what we've done. I think it's very important. And then I'll come back and talk about the portfolio characteristics, positioning and so forth, and how we see the world going forward.

Now turning to Slide 4. These are the financial highlights for the quarter. We generated a GAAP net loss per share of $0.06. This was composed or comprised of a $0.39 loss per share on net realized and unrealized gains and losses on our MBS and derivative instruments, inclusive of net interest income on interest rate swaps.

Earnings per share was $0.33, excluding these same realized and unrealized gains and losses on MBS and derivatives and interest rate swap income. Book value per share was $7.56 on September 30, a decrease of $0.30 from our value at 6/30 of $7.86. We paid 3 dividends -- 3 monthly dividends totaling $0.25 per share, which generated an economic return of negative $0.05 or negative 0.6% for the quarter, 2.5% annualized.

Turning now to Slide 6, I'll walk through the -- kind of the background as well the market that we are operating in for the quarter before going into our results in a little more detail. On Slide 6, we see a slide that we've been focusing on for quite some time now. It basically shows a continuation of this trend that's been in place, which is a flattening of the curve, but it's a bear flattening. So not only is the yield curve flattening, both the Treasury note -- or note curve but also the dollar swap curve, not only is it flattening, but rates are moving higher. As you can see in the chart, the blue line basically, in both cases, represents the level of rates or swaps at the beginning of the year. The red line was the end of the second quarter, and the green line is the end of the third quarter. So not as dramatic a move in Q3, but the curve continues to move higher and flatter.

Turning to Slide 7. This is a more focused look at rates, mainly the 10-year, both the 10-year Treasury note and 10-year swap, very important for mortgage investors. And as you can see, over the course of the quarter, rates were moving somewhat sideways until August. In late August, in particular, rates started to move higher. This was triggered by a few developments. The first one was probably the developments with respect to a new NAFTA. The Trump administration reached an agreement in principle with Mexico and, by the end of the quarter, with Canada. So the new NAFTA, as it will be known as the USMCA, looks like it's going to make progress and hopefully come to fruition. And this definitely stoked the selloff. We've also had very strong data throughout the quarter. And at the very end of the quarter, on September 26, the Fed meeting, we had a hike. And we would characterize that as a hawkish hike. And I'll have more to say about that later. So as you see, 10-year rates, both swaps and notes, were moving higher in the quarter.

Turning to the next slide is something we've been showing again for some time. This is just another picture of the shape of the curve. In this case, it's the slope between the 5-year note and the 30-year bond. And as we note here, this -- we reached a local flat, if you will, on September 18 of 1 point -- or 18.5 basis points. Since quarter end, that has actually steepened. But it's one thing that's worth noting here: one is this prolonged period of a curve flattening; but two, we're getting pretty close to 0. And that matters because, absent the prospects of an imminent inversion of the curve, we're kind of getting as flat as we can.

Turning now to Slide 8. We talk about some other markets, namely, the vol market. On the left-hand side, what we show here is the normalized volatility on a 1-month option on a 10-year swap and the same thing with a slight different moneyness of plus 50 basis points. And as you can see, over the course of the year, really, volatility has been drifting lower. And we did have a slight uptick later in the quarter. And that's obviously a result of the items I just mentioned in the Fed move.

On the right-hand side of the page, we see this is the mortgage of -- performance of various 30-year fixed-rate mortgages versus a 10-year hedge ratio. We're using JPMorgan's 10-year hedge ratio in each case. And as you can see, the lines at the bottom of the page spanning 3.5s, 4s and 4.5s, especially 4s and 4.5s, have had a rough go of it. So often, coupon has suffered over the course of the year on a hedge-adjusted basis.

The green line represents Fannie 3s, and they appear to have done much better than they have. But keep in mind, at the beginning of the year, Fannie 3s were trading at about a par dollar price. And over the course of the year, as they traded into a discount dollar price, they really just tend to trade to their duration. They really extended about as much as they can. Whereas the other securities, mainly 4s and 4.5s, have certainly not reached that point, and that's probably reflected in their price versus their hedge ratios. This is just meant to be a comment on the general mortgage market, not indicative of the way we hedge the portfolio; just wanted to add that comment.

On Page 10, we take a little deeper dive into the specific coupons. As you can see in the top-left corner, Fannie 4s and 4.5s have had a rough quarter, both underperforming by almost 1 point. Dollar rolls have generally been subdued, although they had showed some life later in the quarter. One thing I do want to point out, though, and is this is very important for the market, and is kind of reflected on the right-hand side, but what we've seen in the TBA deliverable or new issue securities is kind of a meaningful deterioration in the quality of those securities.

The spread between the gross and net WAC, they have become quite large for reasons really not relevant for this call. But needless to say that they -- the convexity of those securities appears to be diminished. Also, these securities tend to have higher FICO scores and loan balances. So all 3 of these characteristics kind of make for poor hedge-adjusted carry. And they've impacted the results of mortgages, generally, and certainly TBAs. As a result, specified pay-ups have actually held in fairly well, at least on a hedge-adjusted basis. I mean, obviously, they're down, given the level of rates, but probably not as much as you may have suspected. And in the cycle early in the month of October, they actually performed quite well.

Slide 11 is just another depiction of where we are with rates. Obviously, funding rates continue to move higher. What we show here on the bottom is the spread between the 1-month OIS swap, which is just a proxy for Fed Funds over the next month, versus 1-month LIBOR. It's meant to be a proxy for funding costs. And you can see there's been some volatility but relatively stable versus the fund-in month LIBOR set.

Slide 12 is a new slide for our deck. And it's kind of an interesting picture, what we show here. In each block, what we're showing in the red line -- and these dates here, by the way, correspond to Fed meetings. So it's basically a 2-year look back, if you will. The first block is September of '16, in other words, right before the election. The second block on the bottom left is March, which is kind of March of '17, after the election. Then we show September '17 and September '18. And in each case, the red line represents the Fed's -- the median of the Fed's dot plot released at those respective meetings. And the blue line is the Fed Funds Futures contracts. So I want to just make a few points because it's kind of relevant for where the discussion will go after these pages.

On the top left, you can see, this, as I said, is right before the election. And remember, in the summer of 2016, we had Brexit. The 10-year Treasury reached an all-time low yield. And at that time, and really, this is reflective of what conditions had been like for several years at that point. The Fed each meeting talked about their growth forecasts. They envisioned the GDP growth hitting 2%, inflation going back to 2%, and as a result, the need to hike. And as you can see here, this shows several hikes approaching 2.5-or-so percent. But the market was completely in disagreement, as reflected in Fed Funds Futures. And the terminal rate there is barely 1%. So obviously, there was a significant disconnect between Fed thinking and the market. And as I said, that had been the case for some time. And for investors such as ourselves, which hedge using instruments impacted by these measures, it meant for a significant hedge underperformance.

That all changed, obviously, in late 2016 when the Trump administration surprised the world and won. And then, all of a sudden, we had a very significant pro-business administration in place. As you can see in the bottom left, all of a sudden, Fed Funds hiking gets a little more robust. But more importantly, the market starts to move closer to the Fed. And I think, as at this point, a terminal funds rate near 2%.

But that was March of '17. The things didn't go so well early in the administration's first year. They tried to repeal the Affordable Care Act. That failed miserably, and basically, people started to fade the Trump optimism that we had seen. And that's reflected in the top right where you can see the market pricing of Fed hikes has eased back again.

But after that, there was a second wave. Then in late 2017, the Tax Cuts and Jobs Act was passed; and in early 2018, the Bipartisan Budget Act, both of which were sources of fiscal stimulus. And the economy started to reflect out those -- the developments were associated with those and got much stronger. And as you see in September of '18, now the Fed Funds on the dot plot side are north of 3%. But importantly, market pricing has moved much higher. Come off of there somewhat recently, but it's interesting to note, over the course of this 2 period, how much the world has changed from a hiking perspective, and maybe we're getting to a point where there are too many hikes priced in.

Turning now to our financial highlights on Slide 14. On the left-hand side, as we have in the past, we show our -- basically the results of the portfolio net interest income and expense, with the interest expense in our various expense items in the middle column there. Just shows you the mark-to-market, which we're trying to separate those out. And we'll get to that in a second on our next chart. But to point out, as you can see, the realized and unrealized gains and losses on MBS is a large number, reflecting the widening of mortgages and the fact that those outperform -- or underperformed our hedges, and the result is a net negative mark there.

Interest income. We did have a slight decrease in interest revenue. However, realized yields for the quarter were up 19 basis points on a slightly lower portfolio with a higher yield. As a result, interest income is down slightly. Economic interest expense, which is kind of a proxy for our hedged funding cost, moved up from 1.97% to 2.20%. In this case, the repo balance was slightly lower, but the significant increase in rates resulted in an increase in interest expense. The net of the 2 is a slight decrease in our net interest margin from 218 basis points to 214.

On the right-hand side, we show the results by our strategy, our pass-through versus structured. As you can see, the pass-through strategy generated a negative 0.68% return. It's obviously much larger than the structured portfolio, which had a positive return. The net of the 2 was essentially 0. So just looking at the performance of the portfolio in that regard, we had a loss of a return.

On Slide 15, this is a slide we've shown many times before. You can see the 3 lines on the top. The blue line is the yield on the portfolio. The red line is our funding costs. As I mentioned, it was higher. It's 2.20%. And the NIM, which is the middle line, the green line, as you can see, is at 2.14%. And what I want to point out here is, we talked about how the curve has been flattening. Obviously, that impacts our spread and it's reflected in these numbers, but it's also noteworthy that, as I mentioned before, the curve is not inverted, but it'd becomes very flat. It seems to be somewhat plateauing, if you will. And our net interest margin appears to be doing the same. In fact, if we go back 5 quarters, the net interest margin was 219 basis points. And at the end of this quarter, it was 214. So it seems that -- barring an inversion, it seems like it's plateauing some.

On Slide 16, we just show the separation of our earnings per share between the blue line, which is the actual reported earnings per share; and the red line, which reflects the earnings per share less those expenses. And as you can see, it's down slightly. It's basically the product of slightly lower leverage in portfolio side and a slight decrease in net interest margin, but the rate of decline appears to have slowed.

Finally, on Slide 17, we just show the allocation of our capital. It basically did not change much. The structured securities portfolio increased relative size modestly. And as I mentioned previously, on the right-hand side, we show kind of the roll forward of the portfolio, if you will. And it's down from a little under $3.7 billion to a little over $3.5 billion.

So that's kind of a quick run-through of the market developments and what's happened in our financial results. Now I'd kind of like to talk about Q4, because I suspect everybody is concerned about that given how much has happened.

So really, just to this kind of quick run-through of what has happened. It all started on or about October 3. That was the date we got some data in the morning. The first thing was the ADP employment report, and the second one is the nonmanufacturing ISM reports. So those numbers were both extremely strong and far above expectations. Those in conjunction with the fact that a week before, the Fed had raised rates, and the Fed chairman seemed to be very hawkish in his comments and outlook on the economy, so the 2 combined to cause a meaningful selloff in rates.

We also were just below key technical levels in the Treasury market. We broke through those with a lot of momentum. Word from The Street was there's a lot of real money involved in it. It wasn't just fast money, and therefore lended credibility to the move. And we moved to significantly higher rates. In fact, in front end of the curve hit multiyear high levels, and the market began to price in more hikes. So that was kind of the first leg and that took place over the course of about a week or so.

And then there was the second leg, which was the equity markets reacting to that. So what was the effect, if you will, of the initial impetus from data on the selloff in rates seemed to cause a corresponding selloff in equities. And then, of course, a kind of flight to quality. Follow-on rates rallied back. And that's, of course, as you know today, we're back to the point now where equities have wiped out most of their year-to-date gains and Treasuries are back in the range that they had previously broken out off. Further, we've had, as we go through earnings season, obviously, given what's gone on in the stock market, no surprise there, the guidance hasn't been great. There's been a lot of talk about the effect of higher rates, the effect of tariffs, especially anybody -- any company that's involved in international trade, and higher input costs, which is meaningful, both energy and other prices that have been moving substantially higher as a result of tariffs.

So where does that leave us? Where do we go from here? Well, it's hard to say, obviously, given all the volatility and the uncertainty in the market. But I think if you'll look carefully, for instance, if you look at inflation, inflation has just now reached 2%. And for the most part, it's been driven by housing. Housing data has been strong. House price appreciation has been strong, owners' equivalent rent. They've really been driving the inflation data. But the recent data showed that, that market is rolling over. On the other hand, some of the other components of inflation have been tamed, but they show signs, as I just mentioned, of accelerating. So we're starting to see, as a result of tariffs and so forth, increases in those prices. So the net of that, it's hard to say, but it's, I suspect, it means we'll probably keep the inflation rate at or near 2% as we move through the next year kind of as housing declines as a driver and other sources become more prevalent. So we'll probably see inflation somewhere in the neighborhood of 2%, plus or minus, over the next year or so.

And what's the significance of that? Well, I think if you see inflation stick around 2%, the economy still is growing, 3.5% GDP growth today. The labor market's very tight. Consumers are very healthy, even with a weaker housing market. I think that keeps the Fed on pace to continue to hike. And in all likelihood, as we approach the end of 2019, Fed Funds will be approaching 3%. Now, does the curve invert? I think it's hard to say, but I think it's probably a little early for that. So in all likelihood, we'll probably see a bear flattening for the balance of the next year or so with Fed Funds moving slower.

So what does that mean for us? And what can we do to address that, if that's what, in fact, we're going to see? With that, I'll turn to Slide 19. So what I would like to do now is talk about our portfolio positioning both at 9/30 and the steps that we've taken since then in response to what's happened and then kind of leave it -- summarize it from there.

Slide 19 shows the portfolio. As you can see, the allocation across hybrid ARMs, which is very, very small, and for the most part, fixed-rate MBS, whether they'd be in structured form, in the case of CMOs, or 15-, 20- and 30-year collateral. And what I'd like to point out is the steps that we took this quarter have been very much focused on -- and it's really a continuation of prior quarters -- trying to remove as much extension risk as we can from the portfolio. So we've bought shorter fixed-rate CMOs. They're front -- generally front sequential, so they don't have much extension risk. And we moved that allocation from 14.7% at the end of the second quarter to 21.6%; 15-year securities, again, with less extension risk than 30 years from essentially 20% at the end of the second quarter to 22.6% at the end of the third. And we've reduced 30-year exposure from just under 55% to a little over 45%. So we've definitely taking meaningful steps to reduce the extension risk of the portfolio and minimized the exposure of the portfolio to movements, especially in the long end.

Since quarter end, and I'll let Hunter talk about this a little more in our outlook, but we have not made meaningful changes to the structure of the portfolio since then. What we have done is on the hedge side. I'll just kind of skip through Slide 20, which just is historical information. There's nothing really new in that.

Slide 21, we show our repo counterparties and our leverage ratio. The leverage came down slightly this quarter, both on a gross and a net basis. And by net basis, I mean, our leverage ratio less TBA shorts. Since the end of the quarter, we've added slightly to the TBA shorts. More on that in a moment, so the net leverage ratio is probably even a little lower than what you see there.

And now Slide 22. This shows all of our various hedge positions. On the top left are eurodollar positions. And you can see the contract notional amount by contract, the weighted average entry rate and then, of course, the effective rate, which would be the rate as of that date and the dollar amount of equities. So you can see all of those contracts are in the money. Bottom left shows our 5-year Treasury note shorts. And on the right side, we show swaptions, TBA hedges and swap agreements in that order, on the right-hand side.

I'd like to point out that as of 9/30, our repo balance was $3.32 billion. So thinking from the perspective of funding, at the time at the end of the quarter, we had swapped in eurodollar positions of about $2.76 billion. In the case of the swaps, the effective rate was 1.7%; and on the eurodollars, 2.4%. Both of those, in each case, the underlying index is 3-month LIBOR. Today, 3-month LIBOR is set at 2.52%. So those hedges are all in the money as reflected in the open equity on this page.

Since quarter end, we have added to those hedges, at least in the case of the eurodollars. If you see the contracts laid out there on the left, in the case of the September and December 2019 contracts and all of the 2020 contracts, we've increased the notional from $1.5 billion to $1.8 billion. As a result, the weighted average entry rate on our 2019 contract has moved from 2.16% to 2.25%; in the case of the 2020 contract, from 2.64% to 2.74%. We've also added a slight TBA hedge where we short 30 years and go long 15 years. Hunter will talk about that more in a moment. That was done in a not duration neutral. It's a net short. And we've also put on some out-of-the-money swaptions that are below the market in the case the market rallied back. And since the time we put those on, the market has. Again, I'll let Hunter talk about that some more.

Just to summarize then where we sit today. As I mentioned, on the asset side, we've taken out as much extension risk as we can. We have not made meaningful changes to the portfolio in the last few weeks. But on the repo side and the funding hedge side, we're at, again, about $3.32 billion repo. And now the eurodollar and swaps are at $3.06 billion, plus these other hedge instruments. So pretty much all of our, what we would call, hedge funding -- or funding hedge proxies that are in here will certainly be in the money if our outlook for the economy is right and -- or if we even stay here, frankly. With respect to our long end exposure, as I mentioned, we had a slight increase in the net TBA short. We continue to own our IO securities, our swaptions with a long tail, in other words, exposure to the long end of the curve and, again, as I mentioned, much less extension risk in the portfolio. So that kind of concludes the wrap.

I will say, I suspect many people are concerned with our -- the net effect of the market move. As I mentioned earlier, our book value at the end of the third quarter was $7.56. We estimate at the current time, as of Wednesday's close, we are at about $7.43. That is an estimate. That is not subject to review or examination by our auditors. And obviously, it's not the end of the quarter. So we won't be reporting another number until year-end. But that is our rough estimate of the book value that we've been able to put together over the last couple of days.

With that, I will turn it over to the operator for questions. And presumably, at that point, Hunter will get a chance to talk a little more about the portfolio changes in more detail. Thank you. Operator?

(Operator Instructions) Our first question or comment comes from the line of Christopher Nolan from Ladenburg Thalmann.

Bob, when you mentioned removing extensioners from the portfolio, if I'm looking at that correctly, should we think about you increasing your capital allocation to IOs more?

Well, it is slightly higher, but I'll let Hunter talk about this. It's more than the securities themselves. That's -- it's both. But what I was referring to was how we changed the composition of the assets in the structure of that pass-through side. And I'll turn it over to Hunter to talk about that.

Sure. Hey, Chris. With respect to the extension risk question, what we've done -- and really, it's a continuation of what we've been working on for a couple of months or a couple of quarters, I should say -- at the end of last year, our allocation to 15 years and front sequentials was practically 0. And now that represents just under half of the portfolio. So the idea is really sort of rooted in improving the convexity of the portfolio, both for a rising rate environment and a declining rate environment. So the focus on removing extension risk is centered around taking away allocation from a 30-year fixed rate bucket into 15s and the front sequentials Bob alluded to. That's the primary focus there.

We've also added -- on the hedge side, we've continued to replenish IOs as they've run off. The capital allocation hasn't changed dramatically, but those IOs that we've added do have more negative duration than some of the assets that are running off. A big component of what we did, and it's something that's been very helpful for us in damage control, I guess, or in this more recent selloff, is earlier in the year, we increased our allocation to pay our swaptions pretty substantially. So we're long, just around $850 million, basically, 1 -- 3-month by 10-year at this point payer swaptions. So that has added a lot of convexity into the selloff as well. We've moved the strikes around from time to time to try to minimize cost and enhance the return profile into the risk scenarios and buckets that we have our eye on.

But I also want to add, the down in rate scenario is something that we're focused on as well. So as we've been adding to 15 years, 30 -- 15 years front sequentials and even, to a lesser extent, 20-year mortgages, we've been shifting our balances into what we feel like are relatively cheap forms of call protection. So buying a lot of 85k Max, 15-year 4s, for example, 20-year 4s. We've shifted out of generic into 85k Max. So we expect the portfolio to have a little bit better convexity profile. On that same note, we've added some receiver swaptions recently as well. So we're certainly mindful of the fact that -- basically, we just don't expect rates to stay put for very long, so we're trying to improve how the portfolio performs on the wings. And those are the actions that we've taken.

So Hunter, if I heard you correctly, based on what you say, we should expect further allocation to the 15-year? (multiple speakers)

I think we're about where we want to be now with respect to the 15-years. I would say that if we have an opportunity to -- something Bob hasn't really touched on yet -- if we have an opportunity to buy stock back this quarter, I would expect that we will be liquidating some 30-years to buy that back. So in that respect, the allocation may increase a little bit.

Final question, and then I'll get back in the queue is what you guys are thinking about leverage? Your leverage is -- has some room to go up. Are you waiting for some sort of opportunistic moment to lever up? Or are you just sort of happy where you are?

I would say probably happy where we are. That kind of -- to me, it's kind of akin to the question of whether you think the curve continues to bear, flatten or inverts. If we start to see signs that the economy's rolling over, I think that's the time when you take the leverage up. The other option that might present itself, and we've seen, obviously, mortgages have had a rough go of it of late. I tend to look at the spread of the current coupon 30-year fixed-rate mortgage to this 10-year, the -- which is an index on Bloomberg. And as of last night, it was about 86 basis points. That's as wide as it's been since the summer of '16 after the Brexit and subsequent rally but still not as wide as it was after the taper tantrum. I suspect if we had a meaningful blowout in mortgages and you got north of 100 on, say, for instance, on an index like that where mortgages just look so cheap, that it might make sense to just figure that's just a great buying opportunity to take the leverage up.

Just to chime in on that. Mortgages certainly look a little bit better than they have, but are still -- I would characterize them as still being sort of on the tight end of the zone. They look good on an absolute basis, sure, if you -- but the fact of the matter is we wouldn't be comfortable taking on unhedged risk here, so that doesn't really do us a lot of good.

Our next question or comment comes from the line of David Walrod from JonesTrading.

A couple of questions. Your prepaids were down this quarter. How much of that do you think is due to seasonality? And how much do you think it's due to the increase in rates?

Both. They both helped. No question, we're entering the seasonal slowdown and we had the uptick in rates. And really, the uptick in rates didn't occur -- or actually, October, which means we're probably going to have a very slow rate environment over the course of the winter. That being said, our portfolio tends to be new, low WALA. And as a result, they're not as subject to the seasonally-ness. So there's 2 factors at work with a new mortgage: it's one, the seasonal; the other one is it's just generally moving up the curve off of 0. But we definitely had and would expect to see slow speeds for both of those reasons going end of the year.

The other thing for us, as you are familiar with, we have this notion of premium loss due to paydown, which, obviously, is affected by speeds. But it's not just affected by speeds. It's affected by the price of a given security. So unlike, say, available-for-sale accounting where you amortize purchase date premium subject to quarterly revisions using the retrospective, but for us, we mark all of our securities to market each quarter and then calculate the premium loss due to paydown based on their price. So as rates have moved higher and the prices of our securities have moved lower, there's less premium to amortize. As a result, our premium loss due to paydown -- I have the numbers in here somewhere, but it dropped pretty precipitously over the course of the quarter, and we probably would expect it to stay low.

I would just add that the -- Dave, I think where we have room to see more -- further slowdown is in the IO, inverse IO portion of the portfolio. The overwhelming majority of the loans in that portfolio are now solidly out of the money. So I would expect going into -- especially into the seasonal part of the year that you referred to, the seasonal slowdown, I would really expect to see a little bit better performance on that side.

Okay. And then, I guess, Bob, can you expand on whatever Hunter was alluding to about the share buyback?

Well, we kind of have an unofficial threshold of 10%. And based on where the stock was trading when I walked in here this morning, we're in a position where we would be looking to buy back shares. The discount is sufficient. I don't know where the stock is trading at the very moment, but I think it was down $0.40-odd when I came in. So that would mean that we would be looking, once we pass out of our window -- blackout window, to look to be buying back some shares.

(Operator Instructions) We have a follow-up question from Mr. Christopher Nolan from Ladenburg Thalmann.

Bob, how much do you think the yield curves are reacting to stuff happening with the EU? I mean, everything over -- economically, it sounds okay in the U.S., generally speaking. But on the EU side, it sounds like the long end of the curve might be reacting to risks from there. I mean...

I think it's possible. There was the ECB meeting yesterday, and they say they're going to end their QE program in the not-too-distant future. I think it's in December. And then they anticipate hiking sometime late next year. The economic data there has been somewhat mixed, but they seem to be not sufficiently weak to cause them to change their plan. But it's -- it definitely impacts the term premium. There's obviously been a huge spread. We watch the spreads, say, for instance between the 10-year Treasury note and the 10-year Bund, but those levels have reached very highs. They're at the high end of the range lately. I'm not so sure today that's as relevant. Today, everybody seems to be more focused on inflation and whether or not we're going to have any. And if therefore, there should be a term premium for that reason. It's -- who knows? The market seems to be -- the most recent data has been tame. The GDP data came out today. Core PCE was, I believe, 1.6%. So it's come off of the 2% level. That's going to be -- even no matter what happens in Europe, it's going to be hard for that term premium to get much higher with the inflation data doing what it is.

But as I mentioned, if you listen to the earnings call, I'm not an equity guy, but I do have CNBC on in the office. And it's -- across many industries, they're talking about pricing pressures. There was the Kansas City Fed ISM number yesterday. And the Bloomberg story I read had a lot of anecdotal reports. There definitely is a lot of talk about rising input prices, not just jet fuel and airlines. It's tariff-related and otherwise. There's definitely increasing pricing pressure in the pipeline. The big question is, do they absorb that or do they pass it through? And nobody knows, but certainly, it's not all going to be absorbed. So it will be starting to get pass-throughs. You're going to see price pressure. But is that enough to really cause a big uptick in the term premium? Hard to say. I think, at this point, most people think the Fed is probably going to have to considerably -- or consider pausing maybe sooner than they thought. So that would not mean that that's going to cause the term premium to go up.

(Operator Instructions) I'm showing no additional -- oh, I'm sorry, we have a question or comment from the line of Roy Nada from NatWest Markets.

I just wanted to elaborate a little bit on that kind of inflation side that you've said is clearly a big impact to all of our businesses. Productivity, it was kind of touched on a few times by some of the Fed members over the last week and obviously, where we are with employment and kind of where we are in the cycle. Do you guys see productivity making a step change from here to kind of counteract kind of pricing pressures? Or do you think we're going to -- it's going to stabilize?

I would expect it to increase, although the CapEx component of GDP wasn't so great. But I think if you back away from the super high-frequency data and look at the year-over-year trend, it's still increasing at a decent rate. I believe, about a month ago, Kevin Hassett, the Chairman of the Economic Council, the administration's council, had a very good presentation showing a clear break in the trend in all of these various measures of CapEx spending that have occurred over the last 2 years. And those have been on a significant long-term downtrend for years for whatever reason, weak economy, excessive regulation, whatever, and that certainly has to affect productivity. So I suspect that it's rebounding. I mean, after all, the Tax Cut Act was aimed at doing that, at least for the first 2 years.

So in spite of whatever has shown up in the data very recently, I think it will continue to occur, if for no other reason, pent-up demand because it was subdued for so long. So yes, I do think productivity will come back, and that will take even more pressure off pricing pressure in terms of driving inflation, so -- and wages possibly. So yes, I think the sustainable growth rate can recover. And all the more reason that you don't necessarily have to worry about this inflation. Inflation is not too, and unfortunately, that means the term premium will stay low.

Yes. The data this morning certainly supported that thesis. GDP was robust again, and inflation was very tame.

(Operator Instructions) I'm showing no additional audio questions in the queue at this time. I would like to turn the conference back over to management for any closing remarks.

Thank you, operator. Thank you all again for your time. To the extent you have any other questions that you didn't get a chance to ask or you listen to the replay and want to ask a question, we're always here to answer your questions. Our number here in the office is (772) 231-1400. We're always willing and able to take your questions. Otherwise, we'll talk to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.