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!

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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!

 

Razzle Dazzle

Give ’em the old flim flam flummox

Fool and fracture ’em

How can they hear the truth above the roar?

Richard Gere performing Razzle Dazzle in the movie Chicago, 2001

One of the many stanzas from the song with which could apply to the theme of this holiday special edition. I decided to present this weeks’ activity as a special post since the number of transactions is greater in three days than my normal 4-5 per month. Also included are three sales which I will elaborate on in some detail.

Roadmap 2 Retire presented another cautionary view reinforcing my approach. While I’m beginning to feel a little like Chicken Little, there are conundrums aplenty from which to choose when attempting to make sense of the economy. Perhaps the best illustration is the fact that Wisconsin farmers are going bankrupt in record numbers. This is a good part of Trump’s base in which their downturn has been accelerated by his policies. And the theory of ‘trickle down’ hasn’t made it to these rural enclaves yet he still carries a 42% approval rating there. It seems that every positive in the economy (low unemployment, low inflation, lower taxes (in theory) carries an equal negative (slowing GDP growth, low wage growth, increasing deficits).

Give ’em the old three ring circus

Stun and stagger ’em

When you’re in trouble, go into your dance

Since I’m no fortune teller I can’t provide any timing, but I dare say this juggling act will come to an end. Hopefully it’ll be a prettier end than any of his four bankruptcies. Like R2R, I’m perusing my portfolio and trimming a little of the speculation. Although I’ve been musing on this for awhile, it was time to begin the execution. Following are the first moves of mine in the pivot from macro to micro.

SELLS

  • Owens & Minor (OMI)
    • Following not one but two dividend cuts. I probably had a bit more patience with this one as it was an IRA holding, but enough already. Sold July 1st – net loss 74.2%.
  • Uniti Group (UNIT)
    • This one has been in the cross-hairs of the Windstream bankruptcy. As a result, they cut their dividend to preserve cash and satisfy their lenders. One lesson I previously learned (Orchids Paper (TIS), anyone?) is to bail when lenders force a dividend cut. Sold July 2nd, net loss 59.2%.
      • After market close, UNIT announced the issuance of 8.68m common shares in conjunction with a preferred redemption. UNIT closed down July 3rd 2% from my sale price.
  • Lamar Advertising (LAMR)
    • This one I groused about all year with the shenanigans they were playing with their 2017/2018 year end pay date. At tax time, I confirmed the forms sent to me and the corporate IRS filing were out of sync. Not being an accountant, I can’t say there’s any illegality – but this is one that has questions – therefore it was booted off the team on July 2nd with a gain of 46.6%.

The proceeds from the LAMR and UNIT sales were used to rebalance a portion of the portfolio across thirteen stocks. I have a pending limit order in place to deploy the OMI proceeds into RY.

With any luck this run will continue, however the pessimist within says it would be unlikely (check back around earnings season …)

Preliminary 1H Results

My apologies, but first half results will have a one week delay due to some dividends not crediting on Friday. These are primarily Canadian held in my taxable account – I’m thinking it’s a tax processing issue as the Canadian stocks in my IRA credited as normal. I do know the S&P beat me for the month but I’m slightly ahead for the year. Beyond that … there’s always next week.

This week, the President attended the G20 and had the anticipated meeting with Xi Jinping. The preliminary reporting by Eunice Yoon, CNBC’s Beijing correspondent was: (June 29, 2019 tweet)

  • By my tally, so far China gets:
    • -no new tariffs
    • -access to US tech for Huawei
    • -better visa treatments for Chinese students
    • -truce on tradewar (resumption of talks)
  • US gets:
    • -bigger purchases for farmers

My initial take was that China came out ahead due to the fact that their pork production has issues with a swine flu epidemic – meaning I think they used a weakness to their advantage. They probably had limited options. The Daily Beast concurs (although a little more stridently). But the futures market appears to be rallying – perhaps because it wasn’t worse? As Monday dawns here I’ll be looking at this a little closer.

Meanwhile, I’ll (finally) be making some moves in July, selling three issues – primarily dividend cut related. Since one of my core holdings is being acquired, a restructure of my top 36 is also in order. So my expectation is more than normal activity is on tap with a slight decrease in the number of my holdings (not the value) as well.

With it being a holiday shortened trading week in the US, I hope you enjoy and have a safe 4th!

Musings – June 22 version

Monday morning delivered the news of a merger announcement between two of my banks. It’s not often I get to play both sides of a deal, so I have to enjoy this one. PB was a hold in my portfolio representing about 1.7% where LTXB was a buy having risen to 1.8% on its’ way to a 3% maximum. My confidence was so bullish that LTXB was my one entrant in Roadmap 2 Retire‘s 2019 Contest. My confidence was inspired by Kevin Hanigan’s (LTXB President & CEO) response on the Q2 2018 Earnings call (July 18, 2018) response in the Q&A on the M&A topic, “We are trying to position the franchise to be the prettiest girl at the dance, whether we’re a buyer or a seller. And I think we’ll soon be a whole lot prettier, if not the prettiest girl at the dance.

Pretty they became as PB is paying 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. Moral to the story – you never know the gem you’ll find embedded in earnings calls.


My initial take with Facebook’s Libra Cryptocurrency is that it’s intriguing, plausible but comes with contradictions. Now – similar to the Mueller report – I’m still digesting the details, but the first two to jump out at me were:

  • Envisioned both as a Stablecoin (tied to a basket of fiat currencies) and a viable alternative to the unbanked masses, is to a degree, an oxymoron as I doubt the majority of the unbanked are versed in currency exchange fluctuations which could have either a positive or negative impact to their wealth.
  • The white paper addresses a goal of social goodness through ethical actors, yet a cursory review of the Founding Members reveals the following:
    • PayU (part of Naspers which had a controversial move from South Africa to the Netherlands – socially responsible?)
    • One founder is Thrive Capital – a VC firm run by Joshua Kushner (Jared’s brother), which would be a potential question mark worthy of further investigation

My interest lies more in the unnamed banks which will be holding all these low cost deposits, and I’m sure there will be more to follow …


The final point this week is on tariffs. Unless a country is self-sufficient, trade is not a zero sum game. There will be surpluses here and deficits there, the goal being all is basically even when viewed on a multilateral basis. My thinking is that the president has been one-upped in the trade war he started. If a measure of greatness is the wealth of a country, perhaps the campaign slogan should be “Making America Irrelevant Again“. China’s reaction (in the long game) to the tit-for-tat brinkmanship has been to reduce tariffs on other country’s goods when retaliating against US tariffs. Good luck getting these markets back …

My Updated Crypto View

Occasionally I use this space for further elaboration on topics that recently garnered my attention. I spent the better part of this past week on one such beast thanks to Caleb over at Buy, Hold Long. He recently added a You Tube channel to his site and the topic on crypto diversification got my attention (as well as a few views). I can’t say my opinion was changed (it wasn’t) as a review of my original thesis reflects (by chance) I pegged the top of the crypto market (almost). His approach though had me reflecting on the similarities to DGI strategies.

The BHL analysis essentially takes the top 100 currencies by market cap to determine the most profitable investing approach. One of the two Crypto ETFs awaiting SEC approval uses a similar methodology, albeit with the top ten. Some of the questions I posed to BHL are indeed reflected in the Bitwise ETF Trust‘s S-1. For instance, an inflation adjusted formula is used and trade suspensions and hard forks are addressed. Private keys and cold storage (security) have been anticipated and rebalances are monthly. The biggest difference between BHL’s Top Ten and Bitwise is that BHL is equal weight and Bitwise is more market cap (with some constraints) weighted. Additionally, Bitwise will carry a 2-3% fee.

There are some intricacies needing to be fleshed out notably in the KYC and FASB/IFRS space which may result in crypto purists losing faith primarily due to the potential loss of any remaining anonymity. Yet some (like me) may come around thanks to the ease of negotiating multiple wallets, exchanges, and yes, diversity. Until then, I’ll keep my head in the sand waiting for the day US investors have a legitimate crypto ETF alternative.

My final concern with the BHL study (date bias) can not be proven in my cursory review, as my question also reflected date bias. I can state the broader model outperformed as it did in BHL’s although with lower gains. Second was the Top Ten. I do think BHL may be onto something and encourage you to take a look at his efforts!

Mexican Standoff

A confrontation in which no strategy exists that allows any party to achieve victory. As a result, all participants need to maintain the strategic tension, which remains unresolved until some outside event makes it possible to resolve it.

https://en.wikipedia.org/wiki/Mexican_standoff

On May 30th, the Trump administration announced stepped tariffs on Mexican imports under cover of the International Emergency Economic Powers Act. Once again it appears to have been a bargaining ploy using the American consumer and farmers as pawns in a game of Chicken as these were “indefinitely suspended” on June 7th – perhaps realizing the signature USMTA was now at risk by this action or the push back by the business community or the fact that Republican Senators realized they did indeed have a backbone (albeit, small).

While I’ve never been a huge fan of ETFs as my view is that an investor is consigning themselves to the average, my preference being to develop a thesis and buy individual companies in support of the idea – with the expectation being the return will be outside the norm (hopefully in a positive manner). That said, I realize ETFs can – and do – serve a purpose and as such I have five in my portfolio, one being iShares MSCI Mexico Capped ETF (EWW). This issue peaked at $44.54 on May 30th before bottoming at $42.64 on June 3rd which is precisely where my order to add executed. Yes, it was luck calling a bottom but it was also a validation of the Headline Risk concept.

One of the first analyses published was that of a short-seller, BOOX research. He does present a decent argument on all counts, save one. This was followed by Liumin Chen’s analysis which missed the same issue. To be fair, I’m now operating in hindsight – post Trump’s reversal, but I did spend most of last weekend forming my conclusion which was the negative tariff impact to EWW was overblown due to one factor. One where you can’t just look at the forest without reviewing the respective trees.

One uncertainty I have with BOOX is his view of a pending peso devaluation as that would likely torpedo any trade agreement and give rise to currency manipulator status. More important is the view that the Consumer Staples exposure is a negative. While it is true that this sector comprises 30.5% of the ETF, only one of the top ten (Walmart de Mexico) has significant Mexican domestic consumer exposure where US imports (tariffs) could be in play. The other two Staples either don’t interact with the US (Fomento Economico Mexicano) or has significant US operations in their own right (Grupo Bimbo with 22,000 US employees). My take is tariffs would slow – but not cripple – the Mexican economy.

Indeed there could be a silver lining for Mexican multinationals that do not import US products. Some brands at the forefront are Tracfone (America Movil), Groupo Mexico (Southern Copper) and the aforementioned Bimbo (Thomas, Entenmann’s, Mrs. Baird’s). Basically these entities could be repatriating US gained profits in inflated USD to Mexico as artificially depressed MXN. A possible spread play that is typically the province of banks and insurers – and an untended consequence that probably escaped the purview of the experts running this show. The icing on the cake? Cemex with 11 plants and 50 quarries in the US. What’s a good border wall without cement and concrete from a Mexican owned company paid for by US taxpayers?

So this is a contrarian play which – so far – is in the money. I believe the real pain would have been felt in the auto and produce industries which do have significant numbers of US workers. Hopefully this is a fire drill that won’t be reenacted any time soon.