Via Mark J. Grant, author of Out of the Box,
“The substance of the eminent Socialist gentleman’s speech is that making a profit is a sin, but it is my belief that the real sin is taking a loss.”
-Winston Churchill
Losses come in two general forms; mistakes and market reactions. While the media concentrates on the equity markets and dividends and puts and calls and all manner of things related to stocks one of the real winners of this year has been the bond markets. The compression has been extraordinary and whatever index you choose will bear this out. Compression as caused by the flooding of the world with money by the central banks is the real cause of this and as we enter the end of the year some thought should be given to your positions. The “dangling participle” here is the obvious; what to do with the money if profits are taken. I can hear some grandmother in the Bronx’s retort; “Such a problem?”
“We give advice, but we cannot give the wisdom to profit by it.”
-Francois de la Rochefoucauld
The latest Greek crisis has been resolved for the moment in the way that it always gets resolved which is to give them more money and pile on more debt. The numbers were falsified once again, the rhetoric was another mass of purposeful confusion, the “ifs, buts, thats and the others” were plentiful and Europe made one more mockery of itself but what else is new. The Spanish banks are to be helped economically, 60% of the workforces will be laid off for these troubled institutions, the Spanish economy will worsen, unemployment will rise to 28-30% and all of the EU and IMF projections will look like the fantasies that they are some months out but another round of money is tossed against the wall and more debt added to the stockpile. The game remains the same. Yields are held down in Europe by the brandishing sword of Mr. Draghi as he will “Save the World” and the recession in Europe continues unabated.
“These earthly godfathers of Heaven's lights, that give a name to every fixed star, have no more profit of their shining nights than those that walk and know not what they are.”
-William Shakespeare
In America we face our fiscal cliff or perhaps our bungee jump and while no resolution is in sight the one thing that we can hang our hats on is that we will face higher taxes. These may be the ones currently proposed or they may be totally new ones as defined by some sort of compromise. Given this 99% possibility it may be wise and in my opinion it is wise to take some profits now before the end of the year. I would start with bonds that are trading within a hairsbreadth of Treasuries or even through them and redeploy further out the curve in bonds that have some reasonable chance of continued compression. I think the compression will continue as the policy of the Fed and the ECB does not change for some period of time and the flows of money keep forcing the compression. I would look at Municipals versus taxables, I especially like the space in Munis where the credits are “BBB” which is a kind of dead space for many investors in Munis and it can be exploited as the gap here will lessen as people/institutions realize that the yield differentiation between “BBB” corporates and “BBB” Munis is far too wide. I am not talking here about vacant land and the like and you must do the credit homework but decent revenue bonds and G.O.’s in this space are a good bet now in my opinion. You can find many credits now where the absolute yield, forget the tax implications, are vastly better than similar corporate names. Here also, in the case of a reversal, municipalities can raise taxes while corporations could have difficulty making profits.
Finally I suggest taking some profits now because of two common sense principles. The first is that rates are as low as we have seen them in our lifetimes and the markets have a funny way of reversing when you least expect it. The second is that compression has been so great, so magnified by the actions of the central banks, that any slight hint of a change in policy could throw the proverbial wrench into the mechanism. What the markets hand out they can take away and usually in a heartbeat so that sound countenance must be placed upon the advantage that we have been given. It could be taxes, or an unexpected event or politics or the accumulation of debt that changes things but the wise, in my opinion, will take some advantage of our good fortune to date!
“Fortune, that with malicious joy
Does man her slave oppress,
Proud of her office to destroy,
Is seldom pleased to bless.”
-John Dryden