Agency mREITs lived through interesting times last week. We cannot change the past, but we can plan for the future. mREITs potentially have a core role in a high-yield portfolio building strategy. Here are my reflections and strategies for the upcoming week.
Truly, we need to work together for optimal results. Clearly we are in uncharted waters on a few fundamental issues.
Advice: Run Away from "Experts"
If anyone claims to know all the answers, my advice is to "run" immediately from such enlightened individuals. The U.S. debt has never been on the cusp of a Moody's or Standard and Poor's downgrade. A few caveats if I may:
- This is not a political article. I personally, for what it is worth, am 100% purely apolitical. My views, long ago, changed knowing the system is broken. A properly working political system does not permit a $14.5-trillion dollar debt level.
- I am a U.S. citizen. I am not a Republican, Independent, Radical, Democrat, or Teapartier. This is an investing article. I do not like to be pigeon-holed based upon personal beliefs. May Darwin or God bless your views - if you so desire. I respect all views. I do, however, recognize the political dialogue is personal to most individuals. Let's try and escape that framework for purposes of this article.
- I am focused purely on capital preservation and making money. I try to express my ideas so they are actionable, relevant, and self-deprating. I can guarantee you I judge my performance more harshy than any collective group of readers. Accountability and results matter. Period.
- I do not hold punches and views. It's nothing personal. It is about financial results. If this offends you, I sincerely apologize. Fluff does not agree with me. I admittedly lack political sensitivity coping skills to suffice mankind.
Cut to the Chase
We shall review SEC June 30th, 2011 data. Although this is looking in the rear view mirror, we shall remains steadfast in recognizing there are looming August 2nd debt-ceiling perils (click to enlarge image):
American Capital Agency Corp. (AGNC)
AGNC continues to amaze me. Although I feel "mREIT-naked" as I own zero agency mREIT positions, AGNC is my number one choice to buy when the opportunity arises. The second quarter resulted in leverage reduced to 7.5x-second quarter from 7.6x-first quarter.
The book-value-per-share (BVPS) increased by 3.0% from first quarter (BVPS = $25.96) to second quarter (BVPS = $26.76).
Hatteras Financial Corp (HTS)
HTS continues to fly under the radar and produce stand-out results. HTS ended the second quarter with a book value of $26.72. External management is accomplished, experienced, and results-driven. To expect anything further would be ridiculous. This company produces results quarter-in and quarter-out.
Annaly Capital Management, Inc. (NLY)
The book-value-per-share (BVPS) is $15.76 per the 03.31.2011 data. Although NLY had a $2-billion secondary offering, the secondary data is not known at present time. Remember that Chimera Investment Corporation (CIM) is likely to pull down NLY BVPS by a few cents per share. On the hand, you have the hands-down best mREIT management team, via NLY, in your corner.
Present Day Actions to Take
- If a debt-ceiling is not agreed upon, stay on the sidelines. Not much more needs to be said in my viewpoint.
- If a U.S. debt default officially occurs, then all bets are off. Watch an episode of Seinfeld or feel-good-television. Times are just about to become a little rougher for all of us. The sun, however, will arise the next day.
- If a short-term rally occurs, stay on the sidelines. Wait 3-4 days for agency mREIT action to stabilize. There has been enough panic selling. Get a firm footing to the mREIT, GSE, T-Bill, MBS markets before taking action. We are not out to become the next heroes of the world. Act with confidence and conviction.
- If Moody's or Standard Poor's issues a U.S. debt downgrade, relax and turn off the news. The media operates under the principle "if it bleeds, it leads". Find out the facts, determine the bearings, and react with caution and comfort. Let's sincerely work together to prosper and make lemonade out of lemons.
- 5. If given the opportunity, buy puts on agency mREIT positions. Sell weak mREIT holdings. Open a short-ARR positon on ARR-strength.
Agency mREITs are one segment of the economy. Do not fall in love with a sector or a stock. They possess no such reciprocal love for you! If it doesn't pass the common sense test, do not enter into new agency mREIT positions. The goal is to make portfolio money, not prove you can do the opposite of what makes common sense.
Recognize that newsletter writers, internet writers, and "experts" write to sell newsletters or "page views". I write to make money. Period.
I know experts who know 10x my mREIT knowledge. I can admit so and not feel less as a human. They feel superior. So be it. Let's beat them in the long run.
The "proclaimed experts" are so confident in their beliefs, that I am embarrassed to say that they are acting irrationality. No names will be mentioned out of respect. Experts appear on Bloomberg and CNBC to appear as experts.
You can take all of the experts and put them into one room, and zero have ever worked on a levered mREIT bond fund during a U.S. debt downgrade. Ignore the noise. Be practical. Think independently and with the end goal in result.
If it means you own MCP or short S&P 500 futures, we can make it through. Have confidence in your common sense. There is always a Plan B, and way to achieve our common goals. Capital preservation is not simple or performed overnight.