Here's My Trading Strategy Mindset for Monday

by: Todd Johnson

My trading strategy on Monday morning will not alter its normal course. The markets are dealing with a U.S. debt downgrade by Standard & Poors. The key issue for me, however, is how the European currency markets play out. The core elements remain constant in my portfolio:

  • Tell myself to not panic and obey myself!
  • Ensure puts and inverse funds are adequately in place for holdings.
  • Keep winners. Sell losers. Live to play another day.
  • Identify a few core stocks to accumulate. Set entry points at opportune prices.
  • Discipline trumps conviction. Take losses if necessary.
  • I shall not utter the word "austerity" as the free press has anointed "austerity" as the word of the decade. It should not be breaking news that countries should have a balanced budget. Germany taught us that a printing press does not equate to new-found money. Revenues must match expenses.
  • If anyone states the U.S. debt did not deserve a S&P downgrade, I shall take a 1-minute timeout to look at our fiscal reality. I have planned 60 minutes to stare at this screen accordingly.

Agency mREITs:
Michael Farrell has stated a U.S. debt downgrade will not impact agency mREITs' GSE positions. My focus is to determine if the mREITs will need to deleverage their GSE positions. Repo funds are flush with cash as money flows in from Europe. Deleveraging could impact the dividend levels at the well known agency mREITs. I will watch this issue with intense interest.

I will closely track the trading prices of iShares Barclays MBS Bond (NYSEARCA:MBB). A few points of note:

  • This ETF's goal is to highly correlate to the investment returns that correspond generally to the price and yield performance of the investment grade agency MBS sector of the United States.
  • MBB is a non-levered MBS bond fund.
  • MBB holds agency-MBS, similar to agency mREITs. This is a non-levered agency mREIT.
  • If there are problems with MBB, there should be obvious spillage over to levered agency mREITs. I don't anticipate MBB will have any such unusual price action.
  • I will attempt to acquire discounted shares of American Capital Agency Corp. (NASDAQ:AGNC). The company owns only agency MBS. The current yield, based upon a $1.40-quarterly dividend, offers a 19.9% annual dividend yield. The company's investor relations, management team, and focus on returns is unrivaled in my opinion. These returns may adjust downward if the markets force AGNC to deleverage.

Inverse Funds:
My portfolio holds individual equity put positions and inverse funds. I need to confirm hedges are in place for any new positions.

Gold Stocks:
I own a number of gold positions:

  • I own physical gold and silver bullion. In the words of popular UBS Art Cashin, "Own enough physical gold to bribe the border guard when exiting the country".
  • I own Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ), which owns the gold juniors as gold trades at $1650-per-ounce. The majors scan these names for new properties to add to their production line. A $14.5-trillion U.S. debt level only promotes the positive outlook, unfortunately, for GDXJ. The ETF's positions have an average market cap of $850-million. This one-stop, gold-bug ETF offers an asset class that should trade in inverse relationship to the U.S. debt issues. This presumes, however, that inflation becomes a central theme.
  • I own Central GoldTrust (NYSEMKT:GTU), which physically owns gold in audited Canadian bank vaults. As of Friday, GTU traded at a 4.4% premium to NAV. Central Gold-Trust primarily invests in unencumbered gold bullion. As of August 5th, the GTU's gold holdings were 604,676 fine ounces of physical gold bullion and 6,156 fine ounces of gold bullion certificates. Central Gold-Trust is based in Ancaster, Canada.

Collectors Universe
There are a number of stocks I would like to increase shares of to my current positions. One name is Collectors Universe Inc. (NASDAQ:CLCT). CLCT has zero debt and pays an annual 8.1% dividend yield. If you want to own a modern U.S. Mint 1-ounce gold or platinum coin, then you will want to have it graded to ensure it is authentic. Collectors Universe's subsidiary PCGS charges a fee for the coin to be graded and authenticated. CLCT is an off-the-radar stock with a unique business model. The business model is recognized by coin collectors as the industry leader. Before you pay $1700 for a MS $1700 1-ounce U.S. Mint gold coin, you will respect the authenticity of PCGS's grading service.

Linn Energy

I want to own additional shares in Linn Energy, LLC (LINE). I shall be on the prowl for discounted shares sold by forced margin holders. This MLP has strong management and a focused business model which is conservative and dynamic in selling and buying new oil and natural gas properties. The producing oil and gas properties in the United States are long-life properties with minimal risk of exploration surprises. As energy prices have dropped in recent days, the price has dropped in favor of investors wanting to build or add to their LINE positions. I have full confidence in this company to operate in shareholder's best interests.

May everyone benefit by any opportunities presented by Mr. Market. Think for yourself and I am confident you will succeed.

Disclosure: I am long AGNC, GDXJ, GTU, CLCT, LINE.