(Source: Business Wire)Annaly Capital Management, Inc. (NYSE: NLY) released its monthly commentary for September. Annaly expresses its thoughts and opinions on issues and events in the financial markets through its commentary set forth below and through its blog, Annaly Salvos on the Markets and the Economy (Annaly Salvos). This month's commentary features a new section covering our observations in the corporate credit market. Please visit the Resource Center of our website (www.annaly.com), to see the complete commentary with charts and graphs and to visit our blog.

The Economy

It's been one year since the near-collapse of the global financial system. Re-reading our contemporaneous commentary reminds us how far we've come since that eventful month: "[E]ven bears like us who knew that this would all end very badly can't say that we foresaw many of the specifics of the denouement: venerable Bear Stearns and Lehman Brothers out of business; Fannie Mae and Freddie Mac in the government's conservatorship; AIG only alive because it was too big to fail; Bank of America acquire Merrill Lynch; Morgan Stanley and Goldman Sachs repudiate the bulge bracket investment-banking model and become bank holding companies; General Electric need to raise $15 billion in new equity capital; California and Massachusetts ask for federal assistance; Congress pass in record time two landmark pieces of legislation”the Housing and Economic Recovery Act of 2008 and the Emergency Economic Stabilization Act of 2008; deposit insurance caps lifted both here and around the world; massive hedge fund losses; commodity prices plunging the most in 50 years; the Treasury guarantee money market funds; a country near bankruptcy (Iceland); and finance ministers and central bankers around the world pledge to do whatever was necessary to fix the problem. This is a long, terrifying list of events, and almost all of it occurred in the last 30 days."

We've come a long way since then. The efforts of government policy makers have been directed at improving market liquidity and staving off an economic depression. It's safe to say that these efforts have worked, at least for the short term. We're not so sure about the long-term. We believe that the exit strategy from the government support programs could prove to be more destabilizing than the events that brought them on.

For example, we addressed the Cash for Clunkers in our last commentary”a perfect microcosm of government market intervention. One month after its expiration, the program is now available for a post-mortem. Vehicle sales, after popping to an annualized rate of 11.25 million and 14.09 million in July and August, respectively, fell back to 9.20 million in September.

The conclusion? It was a one-off trade of current consumption at the expense of future consumption. While it may provide a bump to third quarter GDP, Cash for Clunkers had virtually zero long-term benefit and will likely hurt future car sales. We would wager that the $8,000 first-time homebuyer credit, set to expire November 30, 2009, will have the same transient effect. The National Association of Realtors estimates that 30% of recent activity has been due to this credit, and they and others are doing some heavy lobbying to have it extended beyond its deadline. See the link on NAR's website titled "Call for Action" which beckons realtors to write their legislators; thus far 142,810 have called on their congressman to extend the credit, because "Otherwise, uncertainty will return and the market might again be frozen”possibly as soon as October." In a similar vein, there is a proposal coming from Capitol Hill that would give employers tax credits for creating new jobs. The credit would reduce the payroll tax paid by companies for new employees for up to two years. Bill Rys of the National Federation of Independent Business told the New York Times why he thought this was a bad idea: "Why would a business hire a new worker? They're hiring because they need to do work. Unless you have work to do, it's still an expense."

Stimulus programs are a match in search of something flammable. But the graph online shows that the government is also just giving money directly to the people. For the first time since measurements began, the government has been a net contributor to disposable personal income. We calculate this as income received from transfer payments (social security, unemployment, etc), less payments into these programs and taxes paid on income. The Government giveth¦.what happens when it taketh away?

The Residential Mortgage Market

Driven by continued slowing in refinancing activity and two fewer business days, aggregate 30-year FNMA conventional prepayment speeds fell by 4 CPR in August (September release) to 14.2 CPR. There was a modest increase in higher coupon credit-impaired 30-year FNMA 6.5s and 7s, which may be a harbinger of faster speeds on super premiums thanks to Housing Affordability Modification Program-related buyouts. Looking ahead, most dealers' expectations are for tamer speeds over the next few months with September speeds flat to 10% higher than August.

There were two major announcements during the month of September that relate to mortgage spreads, both of which occurred on September 23rd. On the morning of September 23rd, Vanguard announced it was changing the index tracked by 12 bond funds to exclude mortgage-backed securities held by the U.S. government.