Summer Vacation

I didn’t have to wait too long for turmoil to reemerge.  Apparently the President is unaware of the concept of a vacation as the barrage of libelous, racist, bullying, slanderous and lying tweets continued unabated.  It makes me wonder at times if Jack Dorsey has any regrets of the monster he has enabled. Although it is easy to digress into the madness, I must remain centered, mindful that this is a blog with an investing focus.  Therefore we need to backtrack a little to set the stage for Friday’s meltdown.

Ignoring the slightly left bent of this article, this week’s drama was highlighted by Fed browbeating and a tantrum as a result of a measured Chinese response to additional tariffs imposed by Trump.  Possible additional measures – not mentioned in the article – include of all things a devaluation of the US dollar. Since the Fed is asserting a measure of independence, it appears the only recourse to further Trump’s agenda is through the Treasury Department.  This all culminated on Friday which coincidentally was the eve of the G7 summit. Going into the weekend, the Dow dropped 623 points. My guess is the drop was a little greater than it should have been as positions were probably closed going into the weekend with an aura of uncertainty in the air.

The talking heads really went to town on all of this with the “probability” of a recession increasing in many analysts’ eyes.  Remembering that a recession is defined as two consecutive quarters of negative GDP growth, I don’t see this in the cards as yet.  However, if the consumer bears the brunt of any downturn, it will surely feel like one. 

With this in mind – and also as most of my available cash for the month was previously allocated – I had minimal opportunity to play Friday’s slide.  I had previously set $100 aside as the minimum price for admission to the Webull platform that Tom at Dividends Diversify had reviewed. Basically, on a new platform, I dip my toes in at the minimum level, play around and test the waters before jumping in.  I took it as a sign that my final approval and funding was completed on Wednesday.

The one complaint I have with Webull (so far) is their desktop version is in beta and currently has limited functionality – forcing most activity to a smart phone.  This is probably only an issue for those of us with disabilities. Outside that, it performed in line with Tom’s review.

The enrollment offer had two free stocks which I promptly claimed.  The ones assigned were MFG and ERIC.  Interesting that both are ADRs which could be off-putting to some given the foreign taxes, fees and exchange rates – but they are dividend payers, MFG semi-annually and ERIC annually.  They both have intriguing storylines in that MFG could benefit from ongoing US/Japan trade talks and ERIC could see some benefit with the US blacklisting of Huawei. Neither of these were on my radar but I’ll hold these for now and with the market value being $11.03 getting an unrealized 11% gain for one weeks use of my money.  If only that were to continue … 

My Friday rampage continued by initiating two new positions, both with stories of their own.  CSCO, another 5G opportunity, reported lackluster results and Genpact which was a GE spinoff. GE remains their largest client which may strengthen further if recent allegations against GE prove to be true.  I’ll probably add one more position to the Webull account then pause while I figure out the ins and outs of the app. If you are interested in their promotion, this referral link can be used.

Rampage in this context is a misnomer, but I couldn’t resist.  I guess the real question is whether Trump decides to be civil with our allies at the G7 with a reset towards a united effort against China or if he decides to continue with a self-serving path where an increase in market volatility will result.  Keep your seat belts fastened!

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More of the Same …

Basically I took last week off.  While I pride myself in posting weekly, there was little new to reflect on in the business world.  Some earnings were good and when they weren’t the trade war was the culprit. The Fed cut rates but the White House wanted more, ostensibly because Europe’s were lower relatively.  So now Trump’s self-proclaimed “greatest economy in the history of our country” wants to compete with others in a race to the bottom? There are plenty of signals indicating troubles ahead, yet for every one I find problematic another exists with a contrarian view.  Then when all else fails to divert attention away from the clouds forming on the economic horizon, the President amps up his racist banter to ensure the focus is on antics over reality.

So I took a week off from posting to revitalize.  To clear my head of the endless back and forth. To dig a little deeper into my research on some of the oddities that appear regardless of the political view that one ascribes to.  One example being the workplace raids in Mississippi rounding up undocumented individuals. Once I got past the fact that all these plants were not publicly traded my business interest waned as there is minimal direct impact to investors such as ourselves.  The question that continues to be asked by left of center media is, “Which employers will be charged?”. The answer is probably NONE. The reasons are twofold, 1) HR functions (in at least 6 of the seven) were outsourced to a third party, and 2) the Government’s E-Verify system was used.  Plausible deniability is the buzzword of the day unless documented attempts to circumvent the process occurred. The real question should be, “What is Homeland Security doing to improve the verification system?”

The one item that left me scratching my head was if the impact of the underlying consequences was identified – or even considered.  With low unemployment, these are the types of jobs that are typically shunned by most legal workers. Higher wages may make the difference which would result in higher consumer prices.  The second consideration is according to the Mississippi Poultry Association, the feed used for the birds is a mix of corn and soybean. The state may be licking their wounds as well since their Development Authority contributed $1.5 million in federal community development money to improve a building that Pearl River Foods leases from Leake County. The county also provided $170,000 for infrastructure improvements.  As I see it, a campaign promise kept may impact the CPI, reduce soybean demand even further (following the loss of the Chinese market) and embarrass a Trump-allied governor by highlighting poor oversight of “corporate welfare”. But my dividend stream should be unimpeded.

However, as the dog days of summer are upon us, this is the time I like to reflect on the portfolio progress thus far and identify any adjustments necessary as we move towards year end.  This continues to be difficult as during this presidency the only certainty has been volatility usually caused by tweet or inconsistent positions. During times of uncertainty, my fallback view traditionally has been transportation.  But for every analysis like Wolf Street reflecting on the production backlog decreasing, there are other – not so dire measures – such as port utilization. I will say one of holdings (Volvo) has reflected some weakness in North America. Perhaps some of the answer lies in tariff front running and taxes or perhaps this time has no historical parallel. So I continue to be cautious while playing some of the dips – all the while remaining on the strategy that has not let me down over the years.

I may decide to take another week off unless the market gets even crazier!

July 2019 Update

The market continued to defy gravity this month as the only external turmoil was leveled at the Fed with encouragement to cut rates in excess of a quarter point. At month end, the Fed chose their own path and the market tailed off from the highs recently attained. Earnings season has been generally good to mixed with ongoing concern regarding Trump’s Tariff strategy the main issue. This month the S&P gained 1.3% while my portfolio gained 1.8%. For the year, I remain ahead of the benchmark by 1.0%.

PORTFOLIO UPDATES

• finally sold out my OMI position (prior dividend cut) and used the proceeds to increase my RY position
• Sold my UNIT (dividend cut/debt covenant issue) and LAMR (reporting discrepancies (my opinion)) positions using the proceeds to increase positions in ABM, ARD, BLL, CHCO, KOF, CCEP, CTBI, AKO.B, HOMB, IRM, NWFL, OCFC, OUT, PLD, QCOM, SRC, SMTA, BATRA and VALU as a rebalance
• increased my CHD position
• increased my JNJ position

DIVIDENDS

My primary focus resides on dividends with the goal being a rising flow on an annual basis. This month marks the removal of the quarterly comparison as this has proved to be steadily meaningless.

• July delivered an increase of 4.64% Y/Y. This is off my typical run-rate due to two foreign pay cycles hitting in August this year, rather than the July of last year.
• Dividend increases averaged 10.13% with 57.27% of the portfolio delivering at least one increase (including 4 cuts (two being OMI)). This is off last years’ pace and I believe a new personal record for dividend cuts in a single year since about 1980.
• 2019 Dividends received were 64.31% of 2018 total dividends putting me on target to exceed last years’ total in late October. The YTD run rate is 107.66% of 2018, slightly under my 110.0% goal – but still recoverable.

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

On Oct 4, 2018 MSG filed a confidential Form 10 to spin the sports business which remains in progress.

MERGERS

XRX merger with Fujifilm cancelled (still being litigated). Pending settlement expected in September.

TSS to merge into GPN (all stock, .8101 sh GPN for each TSS sh) estimated to complete in October – Upon the announcement, I was prepared to sell my TSS position to book almost a triple in just over 4 years as GPN currently pays only a penny per share dividend per quarter. However, page 14 of their slideshow states: Dividend – maintain TSYS’ dividend yield. This would appear to indicate an increase in GPN’s dividend, so for now I’ll hold.

PB to acquire LTXB for 0.528 shares and $6.28 cash for each LTXB share. I plan to vote in favor of the transaction (on both sides), pocket the cash and sell the new shares – retaining the old and perhaps use some of the cash to purchase additional PB shares post-merger.

VLY to acquire ORIT for 1.6 sh VLY to 1 ORIT. This merger will result in a slight dividend cut November forward as the rate will be normalized to VLY’s current rate. In my view, the other positives outweigh this negative.

PBCT to aquire UBNK for .875 sh PBCT to 1 UBNK. I plan to hold this one as I wouldn’t be surprised if PBCT gets taken out at come point.

The last three continue to validate my strategy of bank consolidations from a few years ago. The only flaw (so far) was the holding period required – but dividends were received while waiting.

SUMMARY

Overall, no complaints. It appears the pending mergers might provide premium to improve my performance over the index, but I don’t want to get too far ahead of myself yet. I still see a little consolidation in my holdings through the last half by migrating to a slightly risk off stance, offset slightly by companies with compelling stories. My cash position does remain slightly above mean.

Here’s hoping your month was successful!

Investing in CBD

Subsequent to the passage of the Agricultural Improvement Act of 2018, signed into law December 21st, there has been a significant amount of speculation as to the rise of the market for CBD oils, edibles, supplements and derivatives. Migrating across the country are calls to create a system – or infrastructure – if you will, to enable this budding (pun intended) industry to grow and thrive. This bill clarified two gaps in prior legislation related to industrial hemp, namely removing hemp from the definition of marijuana and and creates an exception to the THC in hemp – essentially declassifying it as a Schedule I narcotic, as long as it has no more than 0.3 percent. Then the state has to enact processes – subject to USDA approval – before being legal. The most onerous of which is mandatory testing of the THC threshold.

In a role reversal of sorts, the new reality is that CBD is legal at a federal level with a hodge-podge of regulations at the state level with a degree of federal oversight. For the time being, one can assume differing laws depending on the state. This is also subject to change regularly. For purposes of this discussion, we’ll assume Texas is moderate – neither at the bleeding edge nor trailing the pack – as HB1325 was signed into law last month and retailers are already making an appearance – pending registration. Many – including myself – are attempting to identify ways to profit from these endeavors with no clear answers. DivHut (via a guest post) tackled this question and laid out a great foundation before withering away at the end. I do have to concur there may well be room to run in this space, the key being in what way – which we’ll explore a little further.

Retail is the obvious starting point with CVS and Walgreen are dipping their toes in the water while Amazon is marketing CBD-less hemp oil. The bad news, if any, is that any sales made by these giants would be negligible to earnings. This isn’t to ignore the mom-and-pop shops or franchise operations appearing, only that as a passive investor the options currently limited.

Manufacturing is the second area for research but winds up being the most convoluted depending on your interest, e.g., topical, edible, oil, prescription drug, THC or CBD, et.al. My approach is to categorize into two segments: Consumer and Cultivation. The consumer side being a product supplier to a retailer or consumer direct. Cultivation is a little trickier in that the Texas bill legalizes hemp farming and the sale and possession of hemp-derived CBD oil containing less than .3% of THC. Meanwhile growing hemp is not yet legal until the USDA provides guidelines and approves state applications. This could be considered a quagmire of sorts, but of a temporary nature.

Extraction and Testing is the final area to watch as this is where the heavy investment will take place. One piece of the Texas Law is, ” the laboratory must be accredited under ISO/IEC 17025 or other comparable standard. License holders may not use their own laboratories for state testing unless the license holder has no ownership in the laboratory or less than a ten (10) percent ownership interest if the laboratory is a publicly traded company.” Consider that most – if not all – of the law enforcement labs require upgrades to differentiate between now legal and still illegal products. Xabis, an independent lab, has forged a deal with Westleaf that includes equity based compensation.

So who currently has my eye?

• Retail – Elixinol Global (ELLXF). Assuming this Aussie company can navigate through the FDA regs unscathed.
• Manufacturing – Canopy Growth (CGC) – pursuing a license to process hemp in New York state
• Testing – Eurofins Scientific (ERFSF)

All of which are highly speculative – so tread lightly and do your due diligence. Is this a space you too are looking at (additional suggestions are always welcome)!

Update 4 Aug 2019: On Aug 1 I initiated a position in Innovative Industrial Properties Inc. (IIPR), a REIT in the medical space.

Randomness For July

Typically I gain inspiration from the news or other bloggers – or a combination thereof. When a thought – or concept – materializes my research kicks in to validate (or invalidate) the idea. Unlike others, my approach doesn’t follow a given model nor does it lend itself to a generic screening process. This isn’t to imply I ignore PE ratios, Dividend Growth Rates, Dividend Coverage, et.al., because I don’t. It’s just that outside the core 36 holdings I want to see a story, a compelling reason or something that makes me scratch my head and think.

Hidden in plain sight this week were a few that fit this category, so without further introduction, I present these for your consideration.

Bottling/Snacks Skirmish?

Pepsi announced the acquisition of South Africa’s Pioneer Food Group. I believe this intensifies the battle between the two giants and provides Pepsi a leg up in the snack segment, adds some bottling and expands their distribution capabilities. Conversely, Coke has pretty much divested their bottlers with the exception of Africa. So the question becomes, “What’s up with Africa?” and which one holds the answer to this riddle. Category: scratching my head

Watch List Addition

A friend of mine sent me a link to the Australian version of 60 minutes with an interesting (but non-standard) treatment for stroke victims. There are many more questions than answers with this treatment, most notably sustainability, yet the initial findings hold some promise. Ever the sucker for a speculative play in the realm of strokes (remember my Nexeon investment – (currently tardy in their filings)), perhaps a small investment may bear fruit. The drug in question is Etanercept and the company is Amgen. Bonus points for AMGN paying a dividend. Category: Good Story

Political Thought

We’ll delve into the political arena a little as the Democrats have initiated an opening salvo illustrating to the world they might be able to walk and chew gum simultaneously. This effort is in the form of a Senate bill provocatively titled, “Stop Wall Street Looting Act of 2019“. This bill aims to stem some of the more egregious acts of private equity firms when they take companies private. Assuming this gets through the proverbial roadblock in Mitch McConnell and the unrelenting lobbyists, I have a one minor concern (outside the name) that should be addressed in order for bipartisan support to be obtained. Section 309 is applicable to workers and places a higher priority on pension funding, which is well and good. The issue I have is in the charge to bankruptcy judges to consider job retention in a liquidation (sale) event. If I thought I could profit via productivity gains (technology) at the expense of labor, I would have no incentive to prevent full on bankruptcy – waiting to buy the pieces after the fact. Category: Compelling Reason (probable GOP inaction to avoid debate)

With these thoughts, I hope the week ahead is good for you!

Things Making Me Go Hmm

Loose reference to a segment on The Arsenio Hall Show, 1989-1994

A handful of areas caught my attention this past week, some of which captured my whimsical thinking so much that it occurred to me that our president may actually have a game plan. Before I roll that scenario, let me start with the Boeing saga.

The Max Issue

As it will be awhile before the dust settles and the corner is turned, shareholders are likely in for choppy ride. My guess is the Jim Cramer Chipotle advice is applicable to this situation, “It takes 18 months from the last incident to get the American people to forget“. As Boeing previously had a solid reputation (outside supplier negotiations), there’s little doubt, given time, they’ll recover. The nagging question in my mind is, “What about their subs?”, the three largest being Spirit AeroSystems (SPR – ~50%), Triumph Group (TGI – 31%) and Hexcel (HXL – 25%) with several others dependent on Boeing for about 10% of their sales.

While some have pulled guidance, looking at Spirit shows a ‘sweetheart’ arrangement with a guaranteed production take threshold. Even so, Wichita, Kansas is feeling a little pain as SPR has cut hours by 20% and eliminated most contractors. The possible hmm counterpoint: Trump’s recent efforts to prod the Fed to reduce rates to weaken the USD.

Ongoing Farm Woes

A couple of weeks ago I touched on the plight of Wisconsin dairy farmers. This week, farming issues – specifically lending – crossed the wires. A Reuters study concluded farm lending declined 17.5% by the thirty largest banks between December 2015 and March 2019. Perhaps they’ve identified a bubble or perhaps diversifying risk. While keeping an eye on developments, my portfolio of community banks isn’t overly concerned as most of their loans are USDA carrying a 95% government guarantee. I think the current largest downside would be depressed merger premiums in this space. The possible hmm counterpoint: The federal debt limit may be reached sooner than anticipated, perhaps in part, due to increased credits to farmers to counteract tariff retribution?

Game Plan?

Low interest rates essentially delays the day of reckoning for out of control federal deficits. A weaker USD benefits exporters to the detriment of importers, but has the potential to reduce the trade deficit. These two issues, coupled with the fairly robust economy have the ability to provide a tailwind to the incumbent’s reelection prospects. The possible hmm counterpoints: Possible implementation of a surcharge based on the USD strength in the Petrodollar world, additional tariff retaliation.

Just some random thoughts to start your week!

June 2019 Update

The market went on a tear this month hitting new records. With several companies attempting to tamp down expectations for the second half, my belief is the inflow of money is due to the lack of relatively safe investment options available as long as the trade truce holds. With earnings season on the horizon, it will be interesting if we see a continuation in July. This month the S&P gained 6.45% (almost erasing last month’s loss) while my portfolio gained a meager 5.56%. For the year, I’m still ahead of the benchmark by 0.45%. You can call it neck-to-neck.

PORTFOLIO UPDATES

• increased my CL position
• increased my DGX position
• increased my EBSB position
• increased my GNTY position
• increased my HTH position
• increased my MSCI position
• increased my JNJ position
• increased my ETF positions (VGK, JPMV, EWA, EWW, CUT)

DIVIDENDS

My primary focus resides on dividends with the goal being a rising flow 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.

• June delivered an increase of 15.42% Y/Y.
• June delivered a 1.78% decrease over last quarter (Mar) due primarily to timing issues (a Japanese dividend arrives in July).
• Dividend increases averaged 9.31% with 50.22% of the portfolio delivering at least one increase (including 4 cuts (two being OMI)). This is off last years’ pace and I believe a new personal record for dividend cuts in a single year since about 1980.
• 2019 Dividends received were 55.35% of 2018 total dividends putting me on target to exceed last years’ total in late October. The YTD run rate is 107.27% of 2018, slightly under my 110.0% goal.

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

On Oct 4, 2018 MSG filed a confidential Form 10 to spin the sports business which remains in progress.

MERGERS

XRX merger with Fujifilm cancelled (still being litigated). Pending settlement expected in September.

TSS to merge into GPN (all stock, .8101 sh GPN for each TSS sh) estimated to complete in October – Upon the announcement, I was prepared to sell my TSS position to book almost a triple in just over 4 years as GPN currently pays only a penny per share dividend per quarter. However, page 14 of their slideshow states: Dividend – maintain TSYS’ dividend yield. This would appear to indicate an increase in GPN’s dividend, so for now I’ll hold.

PB to acquire LTXB for 0.528 shares and $6.28 cash for each LTXB share. I plan to vote in favor of the transaction (on both sides), pocket the cash and sell the new shares – retaining the old and perhaps use some of the cash to purchase additional PB shares post-merger.

VLY to acquire ORIT for 1.6 sh VLY to 1 ORIT. This merger will result in a slight dividend cut November forward as the rate will be normalized to VLY’s current rate. In my view, the other positives outweigh this negative.

SUMMARY

Overall, no complaints. The performance isn’t stellar but being ahead – even a little – in this market is no mean feat. Looking forward into the second half sees a little consolidation by migrating to a slightly risk off stance.

Here’s hoping your month/quarter was successful!