Gamblin’ Man

Lord, I was born a gamblin’ man

David Pratter (parody of Allman Brothers Ramblin’ Man)

I’m not sure what it is about October that causes some vicious swings in the market but this year remained true to form.   When viewed through the prism of percentages the two day drop was merely a blip,  for newer investors I’m sure it was gut wrenching all the same.  While the President was quick to cast blame on the Fed,  this is the same man  that was quick to criticize the Fed for keeping rates artificially low.  Others cast the net a little wider to include trade tensions with China.  Kind of like saying , “Look at the man in the mirror first!”  We don’t have to look any further than PPG’s pre-announcement to identify the culprits: Accelerating raw materials and transportation costs, slowing China demand, weakening auto paint demand and a stronger US dollar.  I wouldn’t be surprised if additional surprises are in store as more companies announce.

What does surprise me a little is the fact that costs like PPG is incurring has not yet worked into the CPI or PPI numbers yet.    One pundit mentioned inventories were being drained so the full increase will be felt in the future – unless a China agreement is on the short-term horizon.  Perhaps …

I was able to capitalize on the rout a little on Thursday by adding to seven positions – notably the foreign ETFs along with BOKF and CL.  Unless markets go haywire again, I have only one more purchase on tap for this month.

To come full circle to the title of this post, our friend Jim Cramer is in the process of releasing his selections for 2019.  He’s doing this in the format of Power Rankings which is a unique approach but one I wouldn’t touch with a ten foot pole.  The reason: there is already an embedded mindset of investing being a form of gambling.  Cramer says, “we’re rolling out power rankings for each sector of the stock market, just like how gamblers use power rankings to gauge the strength of football teams”.  Hmm … but I will keep an eye on these selections.  Mysteriously they stopped after three sectors were released, perhaps related to the market selloff?  All I can say is during week 1, 11 of his 15 selections were under water … so what was advertised as a one week rollout is now on hold?  Perhaps market conditions weren’t conducive for his track record?  Any way, more to come on this front I’m sure 🙂

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Bank Strategy – 2017/2018 Review

During the 2007/2008 financial crisis, bank stocks were one place many investors fled from – like herds of lemmings.  I can’t say this was unreasonable as these companies sustained blow after blow – some deserved and some not.  When a company such as Lehman collapses,  mortgage  GSEs are federalized and mortgage lending comes to a grinding halt one has to consider the Chicken Little scenario – is the sky really falling?  From this systemic failure emerged a new dawn on the heels of legislation, notably Dodd-Frank.  Though far from perfect, this bill in 2010 established a floor from which the system could be rebuilt.

To paraphrase Warren Buffett, my view was this fear and dysfunction presented an opportunity.  With the dust beginning to settle, in early 2013 I dipped my toes back into Financials.  With the exception of Prosperity Bank (PB), which I classified as a Core position at that time along with a few others, these holdings – peaking at about 32% of the total portfolio in aggregate – didn’t exceed the 1% threshold individually.  Financials currently hold 29.9% and are trending down.  Truth be told, this group did provide the octane enabling my portfolio to consistently exceed the benchmark.

The Dividend Diplomats employ a similar small bank strategy but our approaches differ.  Whereas their baseline is the dividend screen process, I rely more on size and geography.  This is due primarily to embedded distortions in a TARP (and post-TARP) world as well as historical factors regarding bank failures.  For example, Lanny’s Isabella Bank purchase wouldn’t make it onto my list as I consider Michigan banks inherently risky due to the number of failures within the state during the last crisis.  You could posit a macro versus micro view in our perspectives.

Since I began this strategy I’ve periodically reported my results with my 2015 and 2016 reviews.  I was remiss earlier this year as the pace of significant mergers decreased in the post-Trump world.  This activity is now accelerating due to two factors, I think.  The first being the Dodd-Frank modifications enacted in May making it less onerous for banks of a certain size to combine.  The second being rising interest rates.  This one is less obvious as rising rates should be a boon to banks.  However, the spread between long and short rates is compressing (perhaps inverting soon?) which is where much of the profit is derived.  So the results, please?

Bank Strategy
YEAR	TTL	FULL PREM	REVERSE	%	NOTES
2014	6	1	2	21.9%	41 positions
2015	16	3	0	38.7%	49 positions
2016	8	2	0	13.8%	58 positions
2017	16	1	0	25.8%	62 positions
2018	15	5	1	19.23%	78 positions

Note: through 7 Oct 2018

Of interest is that the majority of 2017 was mostly a year of consolidation with smaller banks (usually thinly traded or private) being acquired by one of my holdings.  2018 is interesting in that a number of mergers have a cash component which adds to the complexity of determining the ‘real’ valuation resulting in some initial pricing or recommendation assessments by firms on Wall Street.  I bought into two of these before the assessment changed in my favor (resulting in an unanticipated unrealized gain).

Now that this sector is pretty much fairly valued unless some compelling opportunity presents itself I’ll hope for some of the remaining 73 to be acquired and place my cash elsewhere. 🙂

September 2018 Update

It was a tale of two markets this month with highs being set on the 20th before pulling back through month end.  It’s a riddle of sorts when consumer sentiment is off the charts and the ultimate consumer stock (BBBY) plunges on terrible sales.  How about the Fed raising rates again but bank stocks fall?  Then Mexico appears to tap the brakes on a possible bilateral trade deal in favor of retaining a trilateral including Canada with the Trump threat being tariffs on Canadian cars.  Yes, a conundrum indeed. I was off the sidelines during the first half of the month but going silent during options expiration and the sector changes later in the month.  September saw a rise in the S&P of 0.43% while my portfolio lagged by registering a decrease of 0.42%.  YTD I’m ahead of the S&P by 0.21%.  The biggest factor being my cash position – which is normally minimal.  I only report stock positions – but if cash were reported the results would have been a wash.

Portfolio Updates:

• added to KMB prior to ex-div
• added to GBNK (hedge on IBTX merger)
• sold IBTX (locking in a 46% gain – I’ll get these back post merger)
• sold one CHD position (completed last month’s repositioning)
• sold one JNJ position (completed last month’s repositioning)
• added to CMA (minor rebalance)
• added to EPR (minor rebalance)
• added to CBSH (minor rebalance)
• added to FFIN (minor rebalance)
• added to MAIN (minor rebalance)
• added to MKC (minor rebalance)
• added to PYPL (minor rebalance)
• added to PNC (minor rebalance)
• added to PRI (minor rebalance)
• added to SHPG (minor rebalance)
• added to TSS (minor rebalance)
• added to UNH (minor rebalance)
• added to VLO (minor rebalance)
• added to V (minor rebalance)

DIVIDENDS

My main focus resides on dividends.  Market gyrations are to be expected but my goal is to see a rising flow of dividends on an annual basis.  I’m placing less emphasis on the quarterly numbers as the number of semi-annual, interim/final and annual cycles have been steadily increasing in my portfolio.

• September delivered an increase of 13.54% Y/Y, the impacts being dividend increases and a sizable special dividend (AMC).
• September delivered a 15.65% increase over last quarter (Jun).
• Dividend increases averaged 14.96% with 71.03% of the portfolio delivering at least one increase (including 1 cut (GE).
  
• 2018 Dividends received were 92.71% of 2017 total dividends putting us on pace to exceed last year next month.

Note: I updated my Goals page to provide a visual of these numbers.  Based on Mr All Things Money’s instruction set with a conversion to percentages.  My code only updates when the monthly Y/Y number is exceeded.  Otherwise, the prior year actual is used.

Spinoffs:

GE‘s rail unit to spin then merge with WEB

GE to spin 80% of the health business

NVS proposed spin of Alcon scheduled for shareholder approval Feb 2019

Mergers:

XRX merger with Fujifilm cancelled (now being litigated).

SHPG to merge into TKPYY

GBNK to merge into IBTX (shareholders approved)

COBZ to merge into BOKF (expected completion 1 Oct 2018)

GNBC to merge into VBTX (semi-reverse)

Summary

My repositioning is almost complete so next month I can begin to front load into 2019.   Dividends this month hit a new record.

Hope all of you had a good month as well.

Some Random Meanderings

Now that I’ve presented my 2019 game plan and my positioning moves planned for the last quarter, the time is ripe to see the strategies embraced by others.   First off the blocks was Credit Suisse with a projection of an 11% upside with some volatility.  I can’t disagree with the answer but question the methodology.  Their belief is the rise will mainly be on the backs of investors willing to pay up for quality (margin expansion).  My belief is that it will be riding the back of productivity increases as a result of the tax plan.  At least we both recognize that the Y/Y EPS growth rate is generally not sustainable.

My 3Rs – Revitalize

In the first two posts of this series, I highlighted my thought process in basically the recent past and present.  Today will attempt to bring the investment landscape of the future into focus.  I will be the first to admit that I have a jaded view of the present – i.e., not being aligned with the economic views espoused by the current administration.  The upcoming midterms have the ability to shuffle the deck even further.  The assumption set I used (which easily could be argued with) is:

• The current administration will continue to be embattled by prior missteps – primarily in vetting – (resulting continuing indictments and guilty pleas)
• This could be further hampered by loss of one – or both – chambers of Congress
• I (currently) anticipate no major activity regarding impeachment, 25th amendment or resignation

Basically a recipe for gridlock – which will put the brakes on some of Trump’s more polarizing policies.  Without a Democratic landslide, I don’t see a major rollback but also don’t see further continuation on a partisan path.  Therefore my view is a continuation of trade tensions (notably Canada and China), rising deficits and interest rates resulting in a slowdown in the US economy.  While the economy is currently growing, the metrics I am watching are debt levels (student loan and state government), the inability of rising wages to keep pace with inflation and savings rate.  Though the concerns are endless, a greater domestic focus tends to mitigate much of the risk but bring me to one conclusion: Regular Americans’ disposable income may be in shorter supply next year.

With this theory outlined, it’s time to fit the remaining pieces into my puzzle of a portfolio which allows for roughly 1/3rd allocation to conservative speculation.  Frankly, my outlook is a bet that the US economy has been front-loaded into the midterm elections.  The downside if incorrect is that I’ve added some slower growth positions.  If correct I’ve generated a little alpha.

Tariff Myself

In the spirit of the times, I completed the move of my Johnson & Johnson (JNJ) and Church & Dwight (CHD) positions to M1 Finance.  I plan to add Colgate (CL) as a new position in the near future.  With M1 being a no-fee broker, my intention is to add new funds whenever I purchase toothpaste, mouthwash or deodorant throughout 2019 with the aim for these companies to attain about 2%, 3% and 1% of the portfolio respectively.

Corporate Actions

I intend to ride the M&A wave in addition to selected spinoffs.  I rarely participate in IPOs but do make an exception from time to time.  I continue to add to my banks that have completed two-step conversions.  This month has seen activity in this area as follows:

• added to GBNK and sold IBTX locking in a total gain of 46.4% (16.3% annual return).  Assuming their merger with GBNK completes I’ll be assigned more shares of IBTX than I previously had.
• added to SHPG as they received another approval in their merger.
• Initiated a post-IPO position (from the 30 day over-allotment period) in Amalgamated Bank (AMAL).  This due to their intention to initiate a dividend next quarter.

Averaging Down

Yes, there are times when I’m underwater on some investments, most of these being holdings of less than 1%.  It would be a fair assessment that something was amiss in my initial analysis as several of these are foreign caught in the cross hairs of the strong US dollar.  One reason I tend to scale in to investments is to take advantage of opportunities to average down when my  original premise remains intact.  These tend to be intermittent purchases.

There, in three parts, is my strategy going into 2019.  As my dividend goals for 2018 are close to being met, I am now starting the realignment process so I’ll be hitting the new year with a running start.

I’d love to hear your thoughts the processes you use!

 

My 3Rs – Revamp

Last post in this series I highlighted my views from the rear view mirror.  Going into 2019 will see more changes than normal.  No I’m not selling any positions but changing the emphasis (allocation) on certain issues.  The game plan is for reinvested dividends and fresh money to gradually swing the portfolio into balance with the new targets.

August 2018 Update

The markets took comfort by rising on a possible trade deal with Mexico with hopes of Canada being a slam dunk being dashed (until possibly next month) by the president’s own words (albeit off-record) that shot the negotiations down.  Kind of have to wonder about the art of that deal :).  Anyway, earnings were generally good with only a few surprises although several companies guided lower on tariff concerns and the inability to maintain the run rate that was accelerated by the tax plan.  I did come off the sidelines a little this month with mostly repositioning moves on the few dips.  August saw a rise in the S&P of 3.03% while my portfolio lagged a little by registering an increase of 3.02%.  YTD I’m ahead of the S&P by 1.06%.

Portfolio Updates:

• Initiated GNBC (hedge on VBTX merger)
  
• added to LUV on weakness
• added to CHD (repositioning move – now overweight through the dividend)
• Initiated MSCI on weakness (capturing their 52.63% dividend increase)
  
• added to JNJ (repositioning move – now overweight through the dividend)
• added to COBZ (merger approved by regulators)

DIVIDENDS

My main focus resides on dividends.  Market gyrations are to be expected but my goal is to see a rising flow of dividends on an annual basis.  I’m placing less emphasis on the quarterly numbers as the number of semi-annual, interim/final and annual cycles have been steadily increasing in my portfolio.

• August delivered an increase of 53.11% Y/Y, the impacts being a Sep dividend paid in Aug (10%), last month’s rebalance (5%), dividend increases (5%), interim/final cycle (5%), purchases (1%) and the remainder being dividend reinvestment.
• August delivered a 17.93% increase over last quarter (May) due to an interim/final cycle.
• Dividend increases averaged 14.83% with 69.16% of the portfolio delivering at least one increase (including 1 cut (GE).
  
• 2018 Dividends received were 77.59% of 2017 total dividends putting us on pace to exceed last year in early November.

Note: I updated my Goals page to provide a visual of these numbers.  Based on Mr All Things Money’s instruction set with a conversion to percentages.  My code only updates when the monthly Y/Y number is exceeded.  Otherwise, the prior year actual is used.

Spinoffs:

GE‘s rail unit to spin then merge with WEB

GE to spin 80% of the health business

NVS proposed spin of Alcon scheduled for shareholder approval Feb 2019

Mergers:

XRX merger with Fujifilm cancelled (now being litigated).

SHPG to merge into TKPYY

GBNK to merge into IBTX

COBZ to merge into BOKF

GNBC to merge into VBTX (semi-reverse)

Summary

The Y/Y dividend result is a great illustration of the power of reinvestment – particularly in light of the fact that “fresh” money investment is minimal.  Next week will be the continuation of the 3Rs series which will highlight some of the moves I’m making going into 2019.  You might guess at a couple of them based on my portfolio additions.

Hope all of you had a good month as well.