OUT OF THE BOX: EUROPE-THE CAN KICKING CONTINUES

Europe-The Can Kicking Continues

You would think that Britain could reach a decision. You would think that the European Union could reach a decision. Obviously, both incorrect assumptions. It reminds me of Greece, and then Italy, just keep kicking the can along. 

The end-date was March 29 and then extended until April 12. Now the EU has extended the Brexit deadline to October 31 and fueled controversy over UK participation in next month's European elections. So now, with the clock ticking again, the Prime Minister wants Parliament to finally agree on the UK's withdrawal from the EU preferably before May 23, to avoid the UK taking part in elections for the European Parliament. Her plan is first to try to get a cross-party agreement with the opposition Labour Party. If that fails, there could be a series of votes in Parliament on alternatives to her deal, such as holding a second referendum. However, agreement has so far proved elusive, so it's entirely possible the UK will be back where it started, when the can kicking commenced.

Britain's politicians are now broadly divided into three camps, those enthusiastic "Brexiteers," on the right of the Conservative Party, who want to leave the EU sooner rather than later, even if that means doing so without any kind of deal. Then there are those who see Brexit as a question of damage limitation and who would prefer the UK to stay close to the EU after departure. Finally, there are those who now see Brexit as such a disaster they want it reversed altogether, either by another referendum, or if necessary, by Parliament simply calling a halt to the whole process itself.

As to the questions concerning the British and European bank relationships/obligations and the bond governance of bonds governed under British law, all in limbo. The can kicking effects everything and so none of us have any idea except that the questions remain along with the “Risk.” The Europeans have created, and now elongated, the “No Man’s Land” and I still think European investments should be avoided. 

Back in the United States, compression is still underway and this is a positive for market sentiment as well as for many portfolios. In the last three months the Bloomberg U.S. Government Index is up 1.80%, while the U.S. Corporate Index is up 4.76% and the U.S. High Yield Index is up 4.74%. America continues to represent a “Safe Haven” with all of the uncertainties in both Europe and China and our markets are benefiting, as a result. 

“Safety is as simple as ABC---Always Be Careful.”

       -Ms. Lalique, the Sage

This is another way of describing Grant’s Rules, “Preservation of Capital” and I have tried to discuss it with Lalique before. She has her own view on this, however. She could care less about the Capital and it always turns into a discussion about dog treats. Her view is that I should never run out of dog treats and I follow her Sage wisdom, of course. 

Virtually all of “Out of the Box” is directed at warning you where not to go, where to avoid, and where to stay out of because pending circumstances. I identify “Risk” and I don’t handicap it because so much of it is political and those folks just play by a different set of rules than we do. It is the “identification” that is important, and then a rational plan of what to do about it.

Today I would also like to point out a few areas that I like and think may positively affect your portfolios. After Grant’s first 10 Rules, “Preservation of Capital,” comes Rule 11 which is “Make Money” and I am addressing the eleventh Rule here.

My first thought is interest rates. I think by year-end they may be lower than where they are at present because of the Fed’s change of attitude. You may place the reason for it where you like but they have most assuredly changed course and I see even more accommodation by year-end, especially if the European situation worsens.

The next positive I see is in 5G connected bonds and equities. You can look at the tower companies, the cell phone makers, the chip companies and the revenues and profits are all likely to rise as 5G rolls out. The wireless telecom companies have all started their programs and 5G is in 9 cities now. I would consider adding some of these credits to your holdings.

The next area I like are closed-end funds. It takes a lot of homework, and they are complicated, but it is possible to attain some double digit yields in this space when the 10 year Treasury is fluctuating around 2.50%. You can also get monthly payments, which adds to the yield, with compound interest. There is also diversity here as some are in the MLP/Pipeline sector while others are in Real Estate, bonds, gold, equities, et al. If you want some yield, besides playing for appreciation, I think you may want to consider these funds. The primary risk here is that some fund could cut their dividend but what else is new with any security that pays dividends?

“Sometimes it is what you don’t like. Sometimes it is what you do like. Between the two is a borderline. It is named Success.”

                -Ms. Crystal, the Sage

            Mark J. Grant

            Chief Global Strategist, Fixed Income

           Managing Director

           B. Riley FBR Inc.

            [email protected]

            U.S. 954-468-2366