I decided that this week’s post would be the financial highlights and thought processes that I generally go through in a typical week.
Monday
Delivered in the mail was the Proxy Statement for Yum China’s (YUMC) proposed Primary stock listing on the Hong Kong Exchange (HKXCY). While they currently have a secondary listing in Hong Kong (9987), this will raise it to primary while retaining their current New York (ICE) listing. Similar to how dual listed Canadian stocks operate between the Toronto (TMXXF) and New York exchanges.
The kicker here is that this is a preemptive move in the event the audit compliance negotiations between China and the US go sideways. If the SEC decides to delist them Yum China’s stock will remain tradable, albeit in Hong Kong only.
My vote is aye for optionality, but it remains on my sale list due to lack of dividend increases. Either way is a net 0 for my portfolio as any listing and volume fees lost by ICE should be made up by HKXCY.
Tuesday
The issue of the day was locating my missing dividend for Computershare (CMSQY-Australia), which was supposed to have been paid September 12th. The only logical reason is perhaps the mourning period for Queen Elizabeth who passed on September 8th. Shell’s (SHEL-UK) dividend was also missing but the 19th was a UK bank holiday for the funeral. Conversely, Manulife’s (MFC-Canada) dividend was received on time on the 19th. Anyway, Schwab is in pursuit.
Wednesday
First blog post of the week to make an impression was Dividends In Hand’s comment of “(my) dividend income gets taxed quite aggressively” due to income and his province’s marginal tax rate. I assume he’s optimized the portfolio for minimal taxation – which I did late in the investing game, only looking at that aspect in earnest with the onset of the Trump years in the White House. His answer – in a test portfolio – is to focus on Total Return over Income, theoretically delaying a portion of the Tax man’s day of reckoning.
The only issue I have with his initial three selections is the concentration in the technology/fintech space. Otherwise, it appears to be a similar approach to my inflation scoring which has its’ emphasis on dividend growth versus current yield.
But of course, all bets could be off for the moment as the market appears to have priced itself on the wrong side of Jerome Powell’s mettle to continue the inflation fight.
Thursday
Personal observation from the Fed rate hike: The value of the spread on margin loans is decreasing. Less margin generally equals less excess funds sloshing through the economy. Yes, I realize this is a First World problem – but still an indicator that the Fed’s fight is having an impact – albeit minimal thus far.
Yet digesting the Fed comments brings some ominous potential outcomes to the forefront which Powell quantifies as “continued slow growth, a modest increase in unemployment and clear evidence that inflation is moving back down to their 2 percent target”. Reading between the lines – be prepared for a roughly Fed Funds rate of 5% over the next year! Nowhere near 1980’s 20%, but sure to be a shock to many portfolios.
Friday
Given the doom and gloom sentiment, Friday’s eye-opener was Psycho Analyst’s piece, in which he posits pausing stock purchases and loading up on Treasuries. The part that enlightened me – which I subsequently confirmed – was “Bond funds don’t work the way many investors think they do.” In a nutshell, with Funds or ETFs (of which I was contemplating), in most cases the yield is indicative of a lack of capital preservation. The way to ensure the full return of invested capital is by direct investment in bonds (albeit, less an inflation premium).
So where does all this leave us? First, it’s a reinforcement we’re on the right track with some adjustments warranted.
To my surprise, Aug 2021/Aug 2022 the portfolio is only down 2.64%, while the S&P is down 12.55% and CPI is running 8.3%. Then there’s the dividend stream running 18.1% ahead on a Y/Y basis. I can’t say we’re behind the eight ball though my concern, as always, is keeping ahead of it. Think sustainable run rates in the face of recession.
As I complete my strategic moves, I’ll continue adding a little to my underweight positions. I think it’s a little too early to slide into treasuries, but short term (3 month) CDs look like a decent place to park cash, as the portfolio’s (risk on) Yield On Cost is about 3.59% and FDIC insured 3 month CDs (risk off) are 3.35%. Combined with adding to my inflation beaters, these also appear to be a viable interim solution.
I’m a little leery adding to my foreign holdings at this moment as overseas markets appear to lack direction, due in part to the USD strength. Unless I choose to gamble a little. We should get a little clarity as we enter 2023 and if we see inflation peaking the time to introduce treasuries arrive. Meanwhile, the CD move should introduce some temporary capital preservation into the mix.
Next week is month and quarter end – Happy Investing!
Seeking Returns 