Handling The Truth

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by: Mark J. Grant

I'll answer the question. You want answers?

I think I'm entitled to them.

You want answers?

I want the truth!

You can't handle the truth!

-Jack Nicholson, A Few Good Men

Europe

You want the truth?

We are one election, one Italian banking crisis, one follow the Brexit leader, by the Netherlands or by France, or the ending of Quantitative Easing by the ECB, from the demise of the European Union. We are balancing dangerously on the precipice of falling into the abyss of their collapse. It is my view that if the ECB stops their QE program that you are going to see a blood bath in Europe's sovereign debt, and I have no call for European sovereign credits at the moment. None! That is my opinion.

Truth?

The European politicians and the bureaucrats in Brussels don't provide a shred of it. Whether it is France or Italy or Greece or the European Central Bank, there are fantasy numbers, and falsified methodologies, that reach the conclusion, desired by the Masters of the Empire. The conclusion is arrived at first, and then the scheme is concocted to fit the crime.

I shall achieve in time -

To let the punishment fit the crime…

-The Mikado, Gilbert and Sullivan

Well, my friends, the punishment may be coming and it may be just around the bend. I, too, can look at the European banks, their P/E multiples and their book to equity prices and I can see value. I can look at some of the European industrial companies and find value there too. However, events in Europe may far overshadow fundamental analysis and, for me, the risk/reward ratio is now heavily tilted to the risk and that is my version of the truth. So, I will abstain. Thank you.

Man will occasionally stumble over the truth, but most of the time he will pick himself up and continue on.

-Winston Churchill

America

Hi Ho, Hi Ho, it's off to work Trump goes. The equity markets don't care about my politics, your politics, or the "purveyors of poppycock" on the network news shows. The DJIA is up 12.5% since Mr. Trump's election, according to Bloomberg data. If this continued it would be a 37.5% annualized return for the year. Not happening, however, in my view.

I am now a fan of switching some capital to the Grant's "Cash Flow Investing" strategy. One-half of the money in carefully chosen investment grade corporate bonds, yielding around 4.00% now, and paying a better after-tax return than most equivalent municipal bonds, and one-half of the money in carefully chosen closed-end bond funds. I like six closed-end bonds funds, at present, with an average yield of 10.59%, according to the Bloomberg indicated yield. As with all equities, there are risks associated with investing in closed-end funds.

All of the closed-end bond funds, which have no maturities and trade as equities, pay monthly which, using the compound interest calculation suggested by Vanguard Research, equates to a yield of 11.69%. So, 11.69% + 4.00% equals 15.69% or 7.85% when considered together. This is 5.84% more than the 5 year Treasury or 5.37% more than the 10 year Treasury, according to data provided by CNBC.

The interesting part of my game plan is that you get this return on the day you invest the money. No guessing, no hoping for appreciation, no wishful thinking. Yes, the closed-end bond funds can lower their pay-out, this happens, but the rational response can be quite positive, as a result. Since you get money every month, you can buy more of the fund at generally a lower price which usually means a higher yield. As a matter of procedure, if the fund appreciates more than 10%, or so, then I sell it and find another one to buy. This is a conservative cash flow play, a yield play, that commences the moment you put your money down on the table. I want to make money on the money!

We are investing here, not speculating, in my opinion.

Now I am not suggesting that the appreciation in equities is going to stop, not at all, as Mr. Trump cuts regulations and taxes. I started calling for higher equity prices on CNBC on November 8, as many of you know. However, being the conservative investor that I am, I am reining in my aspirations some now and adding my Plan B to the mix. No sense in giving back what has been gained.

Grant's Rules 1-10, "Preservation of Capital," always defines my thinking!