A Moment to Rethink Market Strategies

Today’s shining investments are often tomorrow’s painful losers.

Markets are on edge.

Photographer: Michael Nagle

“Necessity is the mother of invention.” -Plato

Nowhere, in no game, and especially in the great game of markets, does necessity drive invention like on Wall Street. Successful strategies come and go and re-invention is the byword of continuing success. Today’s shining investments are often tomorrow’s painful losers and the trick is to roll out from one strategy and into another strategy before the markets roll you out on a hospital bed gasping for breath.

Let’s roll.

I said early on Nov. 8 that Donald Trump would win the American election and to buy equities. It was a decisive call and a breath taking one, for me, for the first few days after the election. Recently I suggested a new strategy as the 12.2 percent gain in the Dow Jones Industrial Average before yesterday’s plunge was not, in my opinion, going to be a sustainable track for the balance of the year. We had run the course, for the moment, in my estimation.

My “re-invention” was a plan I named “Grant’s Cash Flow Investing.” The concept is fairly simple. I suggested buying five- to 10-year investment grade corporate bonds combined with an equal amount of closed-end bond funds. The idea is to utilize the combined yields to achieve a 7 percent to 8 percent total return and to bank on the cash flows instead of banking on appreciation.

The closed-end bond funds, that I like, all pay dividends monthly and one of the advantages of this plan, in my opinion, is that regardless of market fluctuations, there is money available to be utilized at the beginning of each month. There are risks associated with my idea, such as the fund manager cutting the pay-out or bond yields heading higher. If the yields do go higher, though, then you have cash rolling in every 30 days or so to buy more of the funds at a possible higher yield.

Given yesterday’s shudder in the equity markets it is a concept worth considering. Invention is the mother of necessity, you know.

I am quite concerned about Europe these days and what the antics on the Continent might do to the markets. "Nexit" is now behind us. I did not think it would occur, but the new Dutch coalition may drive the Netherlands far to the right as the new government is formed. The “sigh of relief” in Europe may be a very short breath.

The possibility of "Frexit" is coming soon as France gets ready for their elections. The popular wisdom is that Nationalist Marine Le Pen will get knocked out in the final round. I am not making any bet here as terrorism, or a stumble by independent Emmanuel Macron (republican Francois Fillon already fell on his sword) could upset the cheese cart and send blocks of brie careening in all kinds of directions. Have what opinion you like but the “risk factor” is undeniable, in my estimation, and I am not a proponent of European debt or equities until the dust settles in Normandy.

What I find equally troubling is what is going on with Greece. The popular argument is that the country is so small that it just doesn’t matter. Those with that opinion, in my view, just do not understand the dynamics of Greece.

It is not only that the debt to GDP ratio now, according to the Wall Street Journal, is 181 percent but the total size of the Greek debt. The Center for Research on Globalization pegs the total debt of Greece at 352 billion euros ($379.8 billion). The country may be small but the debt is gigantic and numbers of that sort can fell Empires.

Germany won’t grant debt forgiveness and the IMF, so far, has refused to participate in any new loans. And with the American participation in the IMF now reporting to Donald Trump, I do not expect the IMF to back-up. Push comes to shove in July when Greece’s next interest payment is due and time is running out on this clock.

If push comes to shove, and Greece defaults, then the government may well step-out of the EU or be forced out of the EU and default on all of its debts and havoc will ensue. Brexit is one thing but Grexit, given the size of the debt, is a much larger issue, in my view, even if the country is small. Do not focus on the country but the size of the total debt when drawing your own conclusions.

In America, we are all waiting on the “repeal and replace” of Obamacare vote, which is supposed to take place in Congress tomorrow. Trump said yesterday, according to the Federal Policy Group, that under Congress’ “crazy, arcane” rules, lawmakers cannot address his plans for “massive” tax cuts for individuals and businesses until the health-care legislation is approved. “We want a very big tax cut, but cannot do that until we keep our promise to repeal and replace the disaster known as Obamacare,” the President said. 

This statement, I believe, has made the markets very nervous and it contributed to yesterday’s significant sell-off. It is an open question now whether the “repeal and replace” legislation will get passed. If it does not, I would be watching out below because that is where we will likely be heading. Today may be a very good day to take some money off the table.

Grant’s Rules 1-10, “Preservation of Capital,” are still the Rules and I suggest following them closely.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Contributors to Bloomberg Prophets may have a stake in the areas they write about.

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