Show Me The Money!

politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other.”

Oscar Ameringer 1870-1943

With apologies to the cast of Jerry Maguire, this post is not about sports – unless politics  is now the national pastime.  This post is only peripherally related to the forthcoming election by virtue of the cash.  Period.  Today is not about Purple, Red or Blue – but Green.

Last week I mentioned that any sales of my banks were on hold pending a study which I have now completed.  The common denominator in any US election is fundraising.  The Federal Election Commission lays out the rules of the game, one of which is that cash must be held in one (or more) domestic financial institutions.  For a multitude of reasons (mostly tax related), most campaign advisors recommend placement in a non-interest bearing account.  (Exceptions are rampant – particularly among PACs, but we’ll assume otherwise for simplicity’s sake).

In the current environment, low or no-cost money is key to profitability.  Once critical mass is attained, the spread between cost of funds and the amount earned can be significant.  Three ready sources (that I’m aware of) exist – HSA/FSA accounts (covered previously), state and local tax accounts (still looking for a data source) and political money.

The main problems with political money are additional reporting requirements and stickiness.  A media buy can pull thousands (or millions) of dollars from an account in short order – which could be problematic for many smaller banks.  That said, I kind of had to wonder if the PE ratio noted by Lanny of Peoples United (PBCT) is attributable in part to the fact it was of two used by the Bernie Sanders campaign.  Or perhaps it is an offset to one of my banks’ heavy leverage to the oil patch (BOKF).

Political money is quite often invested in brokered CDs (ensuring FDIC insurance), Treasuries and other low risk and therefore low-yielding investments.  One such bank, Amalgamated (AMAL) reported (March 2020) $774.8m in political deposits (campaigns, PACs, and state and national party committees) with a net interest margin of 3.46%.  All that is required is a decent algorithm to ensure liquidity as the candidates spend their money.

As I was identifying which banks to retain in a post-Motif world, figured it might be enlightening to identify if there was a Republican alternative to the Democratic Amalgamated?  The amount of blatant hypocrisy embedded in the money?  Preconceived notions that were pierced?

I identified 842 campaign accounts reported to the FEC.  116 candidates had no report on file – pretty evenly split between parties.  One of the reasons is explained in this article.  115 of the accounts were held at non-public institutions (private banks, mutual societies or Credit Unions).  For the purpose of this analysis, both categories were ignored with one exception.  66 institutions had the account of only one candidate which were also ignored (except for the self-reporting piece) as they were generally banks in the state or district of the candidate.

The first exception was the answer to Question #1  – a Republican alternative to AMAL.  The answer is an unqualified yes, although Chain Bridge Bank is a closely held (not publicly traded) corporation.  It probably played the spread a little better than AMAL by investing in Treasuries last year, locking in then higher rates.  I identified 42 Republican accounts  held at Chain Bridge versus 88 Democratic at AMAL.  Some Republican accounts of note (at Chain Bridge) include: John Cornyn (TX), Tom Cotton (AR), Lindsey Graham (SC), Joshua Hawley (MO), Rand Paul (KY), the Republican National Committee and one Donald J. Trump.  Notable Democratic accounts at AMAL include: Richard Durbin (IL), Kamala Harris (CA), John Lewis (GA), AOC (NY), Bernie Sanders (VT), Elizabeth Warren (MA), the Democratic National Committee and Joe Biden.

As far as hypocrisy goes, in politics it’s second nature and there’s little difference with the money.  While Democrats seem to thrive keeping Wells Fargo’s feet to the fire after multiple misdeeds over the years, apparently they aren’t severe enough to warrant fellow House Financial Services Committee members David Scott (GA) and Madeleine Dean (PA) to move their accounts or other notable Dems such as Timothy Kaine (VA) or Ted Lieu (CA) either.   Republican’s aren’t immune from hypocrisy either.  Consider the President’s America First campaign.  Apparently Brian Bavin (TX), Richard Shelby (AL) – both BBVA, Glenn Grothman (WI – BMO), Devin Nunes (CA – MUFG) , Ken Calvert (CA – RY) and John Cornyn (TX – UBS) all consider repatriating profits to other countries (Spain, Canada, Japan and Switzerland) the path to making America Great Again.  Moving along …

Let’s talk of my biases – things I had presumed accurate with little basis for the assumption.  Things like Zions Bancorp (ZION) based in Utah would have a conservative political bent.  In fact, 75% of their political accounts are Democratic.  Or the International Bank of Commerce (IBOC) with their CEO an ardent Trump supporter headquartered in a border town with both their political accounts being Democratic.  Or First Republic (FRC) that had some interesting – if not questionable – dealings with Trump associates entrusted by two Democrats. So much for preconceived notions …

The top ten publicly traded banks holding political campaign money are (# of accounts):

Bank of America Corp BAC 115
Amalgamated Bank AMAL 89
Wells Fargo & Co WFC 87
Truist Financial Corp TFC 81
PNC Financial Services Group Inc PNC 23
Citigroup Inc C 19
JPMorgan Chase & Co. JPM 17
Eagle Bancorp, Inc. EGBN 14
Cadence Bancorp CADE 13
Capital One Financial Corp. COF 13

If I were to wager a guess, Amalgamated and Chain Bridge have the number of accounts to move the needle a little where the others either don’t have the critical mass or their sheer size dwarfs any impact to earnings.

I currently own AMAL, BAC, BANF, BMO, BOKF, C, CBSH, CFR, CHCO, CMA, FFIC, FHN, FMBH, HOMB, HTH, IBOC, JPM, KEY, ONB, PB, PBCT, PNC, RY, TD, UMBF, USB, VLY and WFC all with varying degrees of campaign funds.

Various Updates and Thoughts

Transition Status

I decided to take last week off as there was essentially nothing new to mull over – at least stuff that others aren’t already considering.  Besides – I had my hands full keeping abreast of forced reshuffling of the portfolio.  All full shares arrived as expected via ACATS.  Most – if not all – of the cash and accrued dividends has been arriving in cryptic form, with multiple transactions grouped together.  Partial example:

Continue reading

April 2020 Update

The market staged a little recovery this month seemingly shaking off – or at least minimizing – any effects of the ongoing Covid-19 devastation, due in part to the partial ramp up of the economy in some states.  My state is one where a ‘phased’ approach is underway and there is uncertainty as to whether the peak has been attained (thereby ignoring the federal template).  While the economic malaise is running rampant through the states, it is doubly acute in the oil patch where state budgets (Texas) are dependent on a 4.6% tax on extraction (in a declining price environment) addition to an otherwise robust economy.  It will be an interesting social experiment as to how quick the average consumer will embrace the new reality (capacity limits in restaurants, for one), the ability for these businesses to turn a profit anew and if this throttling can move the needle on the economy (GDP, unemployment) without a corresponding spike in cases and/or mortality.   For one, I’m willing (and able) to wait at least two weeks and reassess at that time.

Due to the broker reshuffling caused by Motif shutting down, I can only provide a close estimate for the month.  Currently about $2,000 (cash, dividends, sells, buys) is in the ether migrating amongst accounts.  A full accounting is probably a week or two out.

Portfolio Value:  An estimated increase of 10.8% versus the 11.26% gain of the S&P.  For the year I’m up 2.06%.  All full share positions have been received by my primary broker with.

Dividends:  As previously acknowledged, my dividend increase run rate was not sustainable.  This came to bear in April with a 7.49% year-on-year actual increase.  I don’t think I lost any dividends with the timing of the transfer, but I may take a slight temporary hit as I await the cash to redeploy it.  Also some of the cycles will change as I exit some issues.

The pace of dividend cuts/suspensions continues to increase while any increases tend to be muted by 2019 standards.  Net increase for the portfolio stands at 5.75%, meaning my 10% dividend growth rate goal is in jeopardy.

Strategy Shift: In probably an overabundance of caution, I’ve decided to exit REITs that have a retail focus.  If the crisis is prolonged, rents, vacancy rates, property values and ability to refinance could come under pressure.  The ones retained are the four industrial and specialties in my portfolio.

I borrowed this illustration from one of my companies (BOKF) and modified it for my portfolio to begin to gauge potential impacts.  Currently PEP and KO’s biggest impact would reside in their fountain drinks (restaurants and venues).  I have yet to calculate a total …
Covid-19 Impact Areas

Entertainment & Recreation
Gambling Industries EPR
All Other CMCSA, DIS, T, AMC, PEP, KO, MSG, BATRA
Retail
Convenience Stores & Gas Stations CASY, VLO, CVX, RDS.B
Restaurants CBRL, YUM, YUMC, SBUX, MCD
Specialty OUT
All Other Retail KIM, SRC, WRE, VER
Hotels MTCPY
Churches & Religious Organizations CMPGY
Colleges & Universities SYY
Airlines LUV, SWRAY
Identified Businesses most impacted by Covid-19 mitigation efforts approximately xx.xx % of portfolio

I’m using this template strictly as a guide.  The retail facing REITs are all sold (with the exception of Kimco), Southwest Airlines has been reduced, the others on this list are cautious holds.  I continue the review of my portfolio with an eye on secondary impacts – like who really considered any impact to banks because church services weren’t being held?  I probably need to expand my thought process to include further knock-off effects.

Later in May I’ll update my posted portfolio – once the confirmations (and money) arrive.  What will be clearer is the shift to larger but fewer holdings.  While the portfolio remains sizable, I will retain  some speculative stocks and a few where I remain undecided.  By and large, banks with no dividend growth or ones where M&A prospects have dimmed will be pruned.  In June I expect to exit ETFs as well.  For the near term (12-24 months) I’m willing to accept a lower dividend yield if I gain quality – and limited Covid-19 exposure – in return.

Here’s hoping your month turned the corner!

Down, But Not Out

Another week, another round of mixed messages.  Sifting through earnings reports, Covid-19 spread, economic data and the resultant dividend suspensions and cuts is enough to make your head spin.  This week nailed me with two additional dividend cuts, both of which will be cut loose in short order.  Neither was much of a surprise and one would’ve been gone already save for a hold on one of my accounts which is being transferred to a different broker. (The hold should be lifted next week).

What has been a surprise is the number of companies pulling forward guidance.  It kind of reminds me of the days when analysts earned their keep with – well – thoughtful analysis.  Looks like we’ll find out which are the better ones that can prove their mettle in times like these.

Even more of a surprise was the interview CNBC did with Grant Sabatier (Millennial Money) where he claims that, “the concept of retiring early (FIRE) has already started to lose steam among younger generations. And the impact of the COVID-19 pandemic on the global economy and markets could be enough to eliminate the movement altogether.”  rings a little hollow.  I would surmise there will be greater emphasis on reserves and a heightened awareness of security but the dream of early retirement has endured through multiple generations.  I may be overly sensitive, but it struck me as , “Hey, I got mine and there’s none left for you.”

Let me assure you, there’s always an opportunity awaiting.  You may have to look a little harder or dig a little deeper – but it’s there.  It may also be camouflaged and lying in wait.  These are times when support and thoughtful reflection serves best.  Personal example:  I’m now on the cusp of exceeding last year’s dividend cuts – which was a personal record over roughly 38 years.  The average dividend raise (including cuts) stands at 6.59% and it will probably go lower which puts my goal of 10% year on year increase in jeopardy.  6.59% betters the inflation rate so I’m ahead there.  My current paid run rate on dividends is 19.95% over last year which was previously expected to taper based on some front running I did in the first quarter.  At least I’m operating with a head start.  Lastly, my portfolio balance has lost less value than the overall market which is little consolation, but at least a positive.  Look for what is working.

One of the Diplomats penned a piece published on Seeking Alpha reviewing 3M as a hedge against the pandemic.  In fact, one of their ways to boost income via side hustles.  Overall a good piece with a likely good conclusion – but for the wrong reasons.  The pandemic is a boon to only for their healthcare segment (roughly 20% of sales) their other segments (office, aerospace, automotive) are also in a ditch because of it.  Retooling their lines isn’t easy due to some sterile environment requirements.  Due to their status as an international conglomerate, I believe they will thrive only on the other side of this.  Survivability – either through an essential product line or fortress balance sheet are key.

I would be remiss if I failed to address the (probably) unwanted advertising inflicted by our President on at least two companies.

And I then I see the disinfectant, where it knocks it out in one minute, and is there a way you can do something like that by injection inside, or almost a cleaning. Because you see it gets in the lungs, and it does a tremendous number on the lungs. So it’d be interesting to check that.

While roundly rejected by the manufacturers:

“As a global leader in health and hygiene products, we must be clear that under no circumstance should our disinfectant products be administered into the human body (through injection, ingestion or any other route),” Reckitt Benckiser

“Bleach and other disinfectants are not suitable for consumption or injection under any circumstances. People should always read the label for proper usage instructions.” Clorox

This has to be classified as an item in the “It would be funny if not true” category.  But it did spur the creative genius in some corners (not to be confused with stable geniuses).  Just remember, due diligence should be performed in investing as well as ‘products’

Some memes making the social media rounds:

Another Freebie Down

Initially, this week’s installment was intended to place a spotlight on the ongoing stream of dividend cuts and suspensions facing DGI aficionados – particularly with earnings season ramping up.  Headlines such as, “For investors banking on dividends, the ‘pain has just begun” are making an appearance with some empirical evidence pointing to 10-16% overall reductions for 2020.  Between Simply Safe Dividends’ running tally and the onslaught of Seeking Alpha notices, it’s become increasingly difficult to deny the brevity of the situation.  In fact, I was handed another this week.

I was beginning to perform some analysis  to identify commonalities other than the two biggies – the Oil War and Covid-19.  With my background, I like to dig in the weeds a little to determine the path forward, whether double-down, stay the course or to sell.  I chose the first on AMC (wrong – now sold), the second on CBRL (jury’s out) and probably the third on CVA.  

What I am finding is the understandable (oil exposure, retail closures), the secondary exposure (companies dependent on retail), the idiots (use of leverage resulting in margin calls) and the coattail riders.  I put Covanta in this category as I think they are using the current environment to their advantage – unless some of their municipal customers are experiencing cash flow issues with Covid-19.

Through the ages, many in the DGI camp have laid bare their rules in dealing with dividend cuts or even lack of growth.  My preference has always been to address these on a case-by-case basis as generally, any loss is already reflected in the price providing time to perform additional confirmation.  Nowadays, my view is any decision must reflect a corporation’s ongoing viability – which is all the more difficult when there is no consensus on what the ‘new normal’ really is.

While an atomistic view, one can also take an holistic approach as Mr Free at 33 is doing.  While I’m sure he has attained a level of freedom and solace, I prefer an attempt at damage mitigation.  Perhaps if a section of my portfolio wasn’t allocated to a higher degree of speculation I could have greater agreement with his sentiment.  And this just may just come to pass as well – as the following hit my inbox:

Fri, Apr 17

Dear Investor,

Since 2012, we’ve worked to give everyday investors access to cutting edge investment products.  First, I want to thank you for all your support in taking Motif to where it is today. We’ve come a long way since we started this journey together and there is a lot for us to be proud of. 

At this time, we’ve made the decision to cease operations and transfer your account to Folio Investing.  We’ve selected Folio to give you access to leading investment tools in a similar experience to what you’ve enjoyed at Motif.

Your account transfer will start after market close on Wednesday, May 20, 2020, and your new Folio Investing account will be ready for you to use on Thursday, May 21, 2020.  Unless you choose to opt-out, there is no action required on your part …

Needless to say, I’ll be in the opt-out category.   Motif holds (held?) most of my speculative ideas. Some panned out, others did not, but it was my playground area.  My Canadian stocks were incubated in Motif until I got them structured as I wanted and migrated them to my primary broker earlier this year.  I had started unloading some of the ideas destined for probable failure (thanks to the pandemic) already. It appears I will need to be a little more aggressive as my timeline is now compressed.  Not a major surprise as the advent of free took its toll. The ones I keep will be moved primarily to Schwab with a handful possibly to M1 (depending on their answer to two questions on Monday). 

My primary point being – all strategies will be tested at some point in time.  My banking strategy – after a six year run – has been torpedoed by low interest rates.  My Experiential strategy has been blown away by Social Distancing. Oil transport by the Oil War, Discretionary spending by the job (and protection) uncertainty, M&A by the uncertain future.  I for one, remain willing to sell when circumstances have changed and the path forward is fog bound. Surprisingly, all of my spec plays are in positive territory ranging from a low of 0.1% gain to a high of 2,103.15%.  Until clarity reappears, I will remain a selective buyer – particularly of my three portfolio anchors (WEC, KMB and CLX) which are all up for the year.

In a year such as this, hunkering down with the tried and true is the primary game plan for yours truly.

Portfolio War Footing

the condition or status of a(n) … organization when operating …or as if a state of war existed.

https://www.dictionary.com/browse/war-footing

This week we’ll delve into the dark side as 2020 is rapidly evolving into a nightmare for investors.  While stabilizing a little this week, I believe the market can easily take another leg down. Just let the headlines sink in a little … questions on the length and breadth of the pandemic and the efficiency of the mobilization of the government’s economic response.  Meanwhile the numbers roll in – record unemployment and GDP contraction. Pundits are debating whether this is a recession or even a depression – you never are quite sure until you’re in the middle of it. The icing on the cake? Earnings season is upon us with some nasty surprises likely in store.  So what’s an investor to do? First and foremost … maintain your sense of humor in order to keep your perspective intact. Here’s one for the Hormel investors:

Many DGI folks are in the selection phase – identifying the potentially weak links.  The ones that could be in the position of cutting, suspending or even only maintaining (not growing) their dividends.  This is where it gets tricky as geography, industry, diversification and geopolitics need to be incorporated into relative financial strength of a company with the estimated disruption time frame on earnings as the divisor.  Best of luck with that model. Particularly when there is little consensus on when the US will fully reopen for business. Not mentioned publicly is the liability factor. Will the government indemnify consumer-facing companies from lawsuits arising from contagion?

The EU banking regulator now “urges all banks to refrain from dividends distribution or share buybacks which result in a capital distribution outside the banking system, in order to maintain its robust capitalisation” through at least October.  Australian and New Zealand banks are also scaling back and there are calls in some quarters for US banks to do likewise.  I take this as a signal that regardless of the daily message being delivered, there is some feeling this won’t be enough – and it may last a little longer than some would hope.   

Florida tourism appears to be closed at least until June 1st with Universal’s announcement.  Schools remain closed with remote learning in full swing and graduations postponed. We’re looking at even odds that the granddaughter’s first college semester will be distance learning as well.  Four small businesses on my walking route have been shuttered, so there is tangible evidence that change is afoot.

My approach to investing and life has always been to prepare for the worst but hope for the best.  With the prospect of a depression looming ever larger, my realization is that my portfolio is not on war footing.  In fact, I remain unsure exactly what war footing would look like given the circumstances of today.  The one certainty at this moment is the government has successfully recruited several private sector companies to marshall the distribution of the first wave of the largess.  Ones from my portfolio include, Blackrock (BLK), State Street Bank (STT), Paypal (PYPL), Intuit (INTU), JP Morgan (JPM) and Bank of America (BAC). Little doubt these will generate new business with the initial volley.

If the economic hit worsens or broadens, there is but one historical reference to use as a guide.  Granted the causation differs, but we’re only looking at outcomes. During the Great Depression, the baseline differs as we were a creditor rather than debtor nation and a more industrialized rather than service economy.  The human factors (I think) would be similar in nature to enable a broad brush comparison.  

The major difference between the eras is that then, movies and events provided an escape from reality – today, this outlet is non-existent with social distancing  and AMC Theatres (AMC) may now require a bailout to stave off bankruptcy. Venue operators and concessionaires loom large in this equation as well, although diversification may limit some of the impact – or worsen it.  Companies in my portfolio waving caution flags in this regard include, Disney (DIS), Comcast (CMCSA), Compass Group (CMPGY) and ABM (ABM). Non-portfolio public companies include Aramark (ARMK) and Sodexo (SDXAY).

A 2008 analysis by Dave Chase (which was geared more towards the role advertising played) did present some useful findings:

% DECLINE IN CONSUMER SPENDING BY PRODUCT TYPE

PerishableSemi-DurableDurableServices
19302%9%23%5%
19314%15%4%
19326%13%24%8%
19332%9%-1%1%
Data from Dave Chase

Perishable – meat, vegetables, dairy products, prescription drugs

Semi-Durable – clothing, furniture, preserved foods

Durable – automobiles, home appliances, electronics,, firearms, toys

Services – haircuts, doctors, car repair

While past performance may not be indicative of future results, if human nature and the self-preservation instinct remains intact there should be some correlation. My investments don’t quite match these categories and the task at hand is to perform more research – especially where secondary effects may be present, one example (of many) being Southwest Airlines (LUV) capacity cuts impact on ABM Industries (ABM).

This line of thinking will probably be prevalent this year.  But I’d be more than happy to chuck it in the trash if, as the President promised on February 28th, “It’s going to disappear. One day, it’s like a miracle, it will disappear.”  And may that day be soon.

March 2020 Update

Certainly a month for the record books with the dual blows of the Russia/Saudi oil war and Covid-19 wreaking havoc on portfolios.  Coupled with a bear market unlike any other leaves many licking their wounds and pondering their strategies. At this juncture, proven methods like dollar cost averaging, credit evaluation and retained earnings analyses are more valuable than ever before as the discussion moves towards longevity of the crisis and corporate survivability.

For the month, the S&P index dropped 14.3% while my portfolio dropped 13.51%.  While I typically don’t report cash positions, I will say my first quarter reallocation plan (almost completed) has increased my cash position to 7% rather than the typical 0-1% I carry.  If this cash is included, the net portfolio drop was 6.57%. In these days, cash is king for the moment and at least I have some dry powder to redeploy. For the year (ex-cash) I’m beating the index by 2.53%.

Continuing with the Monthly Recap in its newest iteration, I’m still finding pieces that require some elaboration in order to rationalize it.

The net purchase expense threshold is not a pure indicator of my cash position.  The Incr/Decr from the market — 98.95% of the portfolio volatility was due to the market.  Dividend Raises more than offset my one cut. My full position sales were NWL (receipt of a SEC subpoena), EPR (exposure to AMC and Social Distancing constraints) and MAIN (a BDC with exposure to small business lending).

Dividends:

  • March delivered an increase of 30.91% Y/Y with most of the increase attributable to the migration of the majority of my Canadian holdings into my IRA with timing resulting in some double payments (both taxable and IRA).
  • Dividend increases averaged 8.06% with 25.82% of the portfolio delivering at least one increase (including 1 cut and 1 suspension). This is off last years’ pace and a direct by-product of the global pandemic.
  • 2020 Dividends received were 30.34% of 2019 total dividends. The YTD run rate is 106.5% of 2019, slightly under my 110.0% goal. 

As an aside, Justin Law notes “53 companies declared higher dividends in the past month (March), with an average increase of 7.16%”.  While my YTD 8.06% is in the ballpark, I am cautious of going forward potential cuts or suspensions.  For instance, Coca-Cola Amatil maintained their prior dividend noting the dual headwinds of the Australian wildfires and now Coronavirus.  This I consider a positive although I take a shave on the exchange rate.

Spinoffs:

On Oct 4, 2018 MSG filed a confidential Form 10 to spin the sports business which will become effective on April 17th.  Madison Square Garden Sports Corp will begin trading under the symbol MSGS and the new company, Madison Square Garden Entertainment Corp. will trade under the symbol MSGE.  Each existing MSG share will receive 1 share of MSGE and subsequently convert to MSGS.

Mergers:

Spirit MTA REIT (SMTA) voted on Sept. 4th, 2019 to approve the liquidation of the REIT. I am awaiting the final settlement payout and as of December 31, this issue was delisted. I fully expect a profitable outcome for one of my most speculative positions.

Splits and Stock Dividends

Although splits are technically agnostic, I consider them a positive with reverse splits a negative.  TU had a 2:1 split.

Tax Season

Yesterday marked my end to tax season with my returns turned into the Post Office for delivery.  During my investment “career” I’ve thrived under tax schemes where I paid as much as a 37% effective rate while realizing over the years that minimizing the tax hit has a direct correlation to wealth creation.  What I dislike more than anything is change as my strategies generally can’t turn on a dime. I experienced this during the Reagan years and again in the Trump years. My effective tax rate has generally been between 12-17% (after loopholes, deductions and credits) with one audit resulting in a tax refund.  My prior Trump Tax plan bluster was due more to the forced change to my strategies than to the outcome – although I think it was shortsighted to increase the debt in flush times. The Trump Tax plan, I’m proud to report, after a year of restructuring has rewarded me with a new record low tax rate of 1.67% proving it pays to incorporate tax strategy into ones’ investing strategy.

Summary

With the health of you and your loved ones paramount – stay safe.  My reading pleasure during my home time includes the economic history surrounding 1918.  Here’s one interesting tidbit along those lines.