Nope, we aren’t at the bar, and it is not closing time. Where we are is the last few hours of the year. Father Time is shutting 2018 down as one door closes and another opens, while the “Great Game” continues, unabated. New beginnings are in order, and I hope you feel some level of excitement as new opportunities come your way.

There are three basic things that you can do with money. The broad categories are gambling, speculating and investing. I want nothing to do with gambling. Inside of this group you find casinos, some derivative products and Bitcoin. At least the first two are regulated by some governmental commission. Bitcoin is the worst of the three because it is regulated by no one and the pimp rooms abound for the easy marks. Fortunately, I am not of the “easy” variety.

Speculating is fine. You buy a stock at 5 and hope it goes to 10 and a tremendous amount of people spend time on this endeavor. Success or failure is governed by the choice of the company and also, which we have all been reminded of lately, by the vagaries of the overall markets, which are subject to not just economic, but political events. This form of “money on the table” are “appreciation plays.” For a number of years, they generally worked. Now, not so much, as the volatility in the markets is panicking both people and institutions alike and overriding rational thinking as Fear, once again, rears its ugly head.

Besides investing in equities, we are also having difficulty in bonds. High yield bonds are down -2.64% in December. This has been the worst month since September 2011. The asset class has lost -2.59% so far this year. This is the biggest loss since 2015 when High Yield bonds fell -4.47%, according to the Bloomberg Barclays High Yield Total Return Index. Funds that invest in high-yield debt have seen massive outflows. Investors have pulled $11 billion from these funds over the past six weeks, according to Lipper.

Investment Grade bonds have not performed well either. The Bloomberg Barclays US Corporate Total Return Value Unhedged USD is down -2.75% for the year, according to Bloomberg data and the average “yield-to-worst” is now 4.24%. The issues here are a combination of rising yields and widening spreads which have had a very negative impact on liquidity as bid/ask spreads have also widened significantly.

There is a segment of the markets that continues to interest me. They are closed-end funds with double digit returns that pay monthly. Here you get “compound interest,” which adds about 1.10%, in my calculations, to the yield, as money rolls in every month. This only works if you re-invest the money each month but, unlike some stock re-investment plan which mandates the money go back into the very same company, it also gives you the opportunity to invest in whatever fund looks the most attractive at the moment. The monthly payments, besides compounding the interest, allows for diversification and/or lowering your average cost which is an advantage, I believe, given our current market conditions.

The closed-end funds have also been hit, along with everything else, but plays for yield, when they are in double digits, and the 10 year Treasury is yielding 2.72%, is an alternative that I find attractive. I think it is especially interesting for retirees, pension funds or any other institutions with monthly liabilities. You do have to watch the dividends and pay close attention to the history of the sponsor but then investing always requires that you know what you are doing. The other thing that I like about closed-end funds is that some are based on Real Estate, some on energy, some on diversified bond portfolios, some on metals et al and so you have a broad choice of what looks attractive at any given point in time.

Dear past, thanks for all the lessons. Dear future, I am ready.

– Ms. Lalique, The Sage

The 2019 “Great Game” Fear Factors:

  • The Democrats trying to impeach President Trump.
  • The Fed keeps on raising interest rates and the American economy grinds to a halt.
  • A “Hard Brexit.”
  • “Brexit” leading to an implosion in the British and European banks.
  • The “Game of Thrones” tariff war between the United States and China escalates.
  • Italy going head-to-head with the European Union.
  • The Italian banks imploding as a result of the face-off, impacting all of the European banks.

I particularly wish to make note of our central bank. The Supreme Court is independent, as provided by the Constitution, with the Justices appointed for life. The Fed is independent, as provided by the Federal Reserve Act of Congress of 1913, with Fed Governors having 14 year terms. Neither institution is off-shore. Both are part of the American government. Independence does not mean some sort of singularity. Both are accountable to the American government and to the American people.

Some Fed Governors keep calling for a return to “Normalcy.” After our financial crisis of 2008/2009 there has been no “Normalcy,” so it is not a condition to which you can return. The world’s central banks created a “free cash flow,” money from nothing but a few computer strokes, which is the size of the entire American economy. America’s central bank is pulling the rug out from underneath the economy with each interest rate raise and each decline in their balance sheet. They are moving too fast and have made a severe error in judgment, in my estimation.

I do hope that Chairman Powell meets with President Trump and, as a matter of growing the economy, not political considerations, that the Fed corrects its mistake. I think the Fed has made a grievous error in judgment and I hope that they change their ways! The American economy, and the markets, will all be far better off if they do.

Grant’s Rules:

Rules 1-10: “Preservation of Capital”

Rule 11: “Make Money”

Rule 12: “When a company is under Federal investigation for Fraud-Sell!”

Rule 13: “When a company gets an “Ongoing Concern Letter” from its auditors-Sell!”

Now I welcome in the New Year.

It will be full of things that have never been.

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