Black Swan?

A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict. Black swan events are typically random and unexpected.
Investopedia

With the market jittery of late, my sense is it’s waiting for another shoe to drop.  If only we knew when and why.  With a decelerating economy looming, greater uncertainty present and anticipated struggles with earnings comps it doesn’t stretch the imagination much to envision additional – or greater – turmoil.

The question becomes: what is the catalyst?  For purposes of this post we can ignore politics.  Having survived the past two years gives us that luxury.  The usual suspects; oil, interest rates or political upheaval are in check.  The economy, if not robust, is no slouch.  If I concur with pundits that postulate we can bounce along at these levels for awhile then I still must make the attempt to identify a black swan.  For this posts’ purpose some economic thing.  One example being 1997’s Asian Contagion.  In the absence of such a trigger I suspect Michael Pento’s analysis is a little dire, but with minimal tailwinds I could make a case for stagnation.

In my spare time  I’ve been performing a cursory analysis on the ETFs I added this year.  Only from the aspect of understanding each company and ending with a determination as to whether I would choose to own the component outright.  The process is a little laborious but results in more detailed knowledge on my part.  Australia and Mexico were a breeze.  Europe is last.  Japan was painful with the keiretsu overlaying business relationships (formal and informal) coupled with subsidiary relationships and interlocking ownership structures.  While my research remains incomplete, I may have found a lurking black swan.

With much of the analytical commentary in the US centered on corporate debt in a rising rate environment, in this vein, how about a growing Japanese banking scandal that, by comparison, makes the Wells Fargo scandal pale in comparison.  In essence, in April Japan’s Suruga Bank (a roughly $3.5B regional bank) came under investigation for fraudulent lending practices, falsified documentation and a laundry list of assorted unscrupulous business dealings.  In September, an independent investigation revealed at least 795 cases of fraud.  Garnering my attention was a fear that some “analysts have warned (this) could generate risks for the entire Japanese banking sector“.  All this has come to a head with the filing of a lawsuit against the founding family this week.

One could speculate this issue is confined to this bank – and the answer could well be yes.  However one of the issues with the Japanese corporate system is the propensity to delay remedial action – basically a holdover from the glory days of the keiretsu.  The Suruga scandal has the potential to spread into Shinzo Abe’s government and the BOJ.  Not as direct participants but as a negative reflection of their policies.

My eyes will remain on this as we enter the new year as if Japan stumbles the ramifications on interest rates in the US could be interesting as an inflow of currency to one of the world’s remaining ‘safe-havens’ could result in some artificial – and likely temporary – swings in yield curve.

Have a Happy New Year!

 

 

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Are Trump-Towns Next?

“let me assert my firm belief that the only thing we have to fear is fear itself”

Franklin D. Roosevelt, March 4, 1933

With all the news coverage this month of the stock market slump there is a rising comparison with historical events.  Notable are the comparisons with 1931 which was when we were in the midst of the Great Depression.  Current events certainly lend themselves to shocking headlines with fearmongers like Jim Cramer piling on the bandwagon with comments like, “It’s not a safe market. It’s a treacherous market. This is the most treacherous market I’ve seen in a many a year.”  While probably true, this narrative is more ‘click-bate’ than substance.  Sad are the masses feeding from Facebook feeds with nary a thought towards deeper analysis.

After all these years historians remain at loggerheads as to the cause of the Great Depression, however to equate current events with history is misguided at best.  The common denominator is only that Hoover, Bush and Trump represent the Republican party.

Sivaram Velauthapillai penned a great thesis in 2009 laying out a case as to the differences between the Great Recession and the Great Depression.  In my view, the key points pertaining to the markets in the Great Depression were:

  • During the Depression there were two 100% market rallies
  • Dollar cost averaging mitigated losses for some investors
  • Currency liquidity was not increased
  • Maintaining the Gold Standard tightened money supply

The first two notes are only points of interest, the third point was not repeated in the Great Recession (TARP) and fourth, Nixon (another Republican) removed us from the Gold Standard in 1971.

Another Great Depression issue was Hoover remaining steadfast in cutting spending to maintain a balanced federal budget which (combined with a tightened money supply) contributed to his current day image as an uncaring soul and a lasting legacy of “Hooverville” shanty towns.

Fast forward to 2018 – while there are a few similarities with past crises these (my opinion) do not yet rise to levels where alarm bells are ringing.  Caution is warranted particularly on the trade and political fronts.  Uncertainty is the bane for business and commerce and this has been presented in abundance.  The market, being a reflection, has responded in kind ignoring some basic fundamentals while emotion – and fear – run amok.  Trump-towns aren’t a blip on my radar – yet.

The S&P has lost 12.45% of its value so far this month.  Even with an overweight in regional banks my portfolio lost 10.87% so far in December.  These are only paper losses and the strength I see are dividend increases announced thus far for 2019 outweigh the few decreases.  Yes, Virginia, there are some positives lurking in the shadows.

Have a Merry Christmas and a Happy Holiday Season!

Selective Updates

Crypto Update

What a difference a year makes.  Last year I penned My Views on CryptoSince hitting its peak of $19,783 last December (17th) the drop has been breathtaking to say the least.  The -84% haircut (through today) makes even GE (-63% this past year) look like a great investment.  Though enthusiasts maintain the theory that a need exists for an alternative to fiat currency, the reality is that other than some emerging and frontier markets the real world has yet to embrace this concept.  The continuing requirement to classify many ICOs as securities may be a contributing factor to the malaise.  Yes, the wild west is being tamed.

I think it may go a little deeper though.  Consider this:

  • the majority of ICOs require Bitcoin to purchase
  • If the US market is limited until SEC compliance is obtained the supply/demand ratio is impacted
  • As the price drops, mining becomes unprofitable
  • With pricing pressure, the speculation component becomes riskier

In a nutshell, my belief is that the ICO aspect is artificially drawing down the cryptocurrency space but remain doubtful that the glory days will return anytime soon.


Yield On Cost Update

In September, I mused on the YOC metric.  A current, real-time example of a valid potential use is probably worthy of discussion.  The view presented by YOC is generally framed by initial yield and dividend growth compounded by the time held.  Over the past two years I’ve had a stagnant YOC for two primary reasons:

  1. Some of my longer term holdings were lost via mergers for cash, and
  2. My current focus on M&A action – which tends to initially be more of a short-term view – for a third of my portfolio.

My portfolio’s average YOC today sits at 3.54%.  When compared against treasuries (with their increasing yields) my view is the risk premium associated with equities, coupled with the tax benefits with treasuries are beginning to converge.  My cross-over point is about a 1% differential and when attained, I’ll reenter the bond market following a 10-15 year absence.  Catfish Wizard recently wrote on his particular strategy.


‘Tis The Season Update

The annual addition to the trust has been completed with the first foreign issue.  With Friday’s market swoon, Royal Dutch Shell (B shares) was added to this portfolio.  The other change during the year was the loss of WGL via merger for cash in July.  This cash was redeployed in August into Atmos Energy (ATO).  Incidentally the acquirer, AltaGas (ALA.TO,ATGFF) was subsequently forced to cut their dividend by 56%).  Kind of like taking the money and running on that one!


There it is – akin to a Greatest Hits release.  In all seriousness though, I think it’s fair to share some of the thoughts that play a role in the direction my actions take me.

Until next week …

A Little Holiday Musing

Following the Thanksgiving feast and visits with family, it’s time to return to more mundane fare like the real world.  The headlines lighting up the news this afternoon leads me to believe we’re in for another rocky ride when the markets reopen.  From the Ukraine at battle stations to the US closing the border in California one has to wonder if this is a precursor for the final month of the total Republican regime until some semblance of sanity returns to Washington in January.  One has to wonder if lobbing tear gas from the US into Mexico is technically an act of war.  Or if the Senate cares to address the apparent multiple treaty violations associated with the border closing.  It’s times like these that I regret (a little) giving up my pursuit of law as a career move to focus on business.  As an aside, it would be an interesting exercise to determine how much success the administration could have enjoyed had they not been so intent on breaking the rules first rather than changing them.


On a somewhat lighter note, It’s time for the annual Christmas shopping countdown.  You know the drill … the ability of retailers to forecast properly and execute impeccably during the season.  It appears the season began a little early with advertising starting around Halloween, but by and large most are putting on a brave face on their prospects.  Anecdotal evidence points more to lackluster with ample parking available locally, while retailers’ response is “an ongoing migration to online shopping”.  Perhaps, but here’s hoping additional “black eyes” don’t dampen the holiday spirit or the recent University of Michigan Consumer Sentiment index doesn’t have legs.


More analysts are coming around to the view I’ve held most of the year that the 2018 boom year was a one-off primarily due to lower taxes.  Forecasts are starting to arrive  and the consensus is for lower GDP growth.  The sad part is that much of this is self-induced.  Tariffs hitting the farm belt and now lower oil prices hitting the oil patch (Trump takes credit – I think it’s more likely a bribe. )  If credit is due its more likely the result of all the waivers he granted regarding Iran sanctions.  Regardless, some wells here in Texas are being capped and cap-ex is dwindling.  Oil in the $40-60 range makes some production unprofitable – and with them jobs, support systems, etc.  Farmers felt the pain earlier and now the pain is shifting.  One investment I was considering I’ve decided is too risky (for me) in this environment (oil patch support services).   Earnings reports also carried a cautionary tone.  I think it is now time  to be in a ‘wait and see’ mode.

Next week – November Results!

For Your Reading Pleasure

Every so often I update my directory omitting inactive or defunct blogs and generally get a feel for what the temperature is in the worlds I frequent less often.  This exercise was all the more telling in the general mood within the community.  One example being Young Dividend‘s monthly recap in which he notes, “Although the portfolio value fell, it is interesting to see that the dividend growth graph of my portfolio continues to climb upwards.“.  In a nutshell that is the reason we choose DGI.  Another analysis on staying the course comes from Time In The Market.  Points I like to keep in mind when the markets are volatile.  My friend Tom over at Dividends Diversify scooped my original thought for the week with his Can You Save Money at a Farmer’s Market piece.  My focus was on the Community Kitchens used by many of these vendors.  That concept will be fleshed out  further and arrive at some future point in time.

All good reads which I encourage you to partake.


Not to beat a dead horse, but I’ll  touch a bit more on Bank OZK which was one of last week’s topics.  Turns out The Dividend Guy featured this stock on his podcast the day before its precipitous drop.  To his credit he published a mea culpa on which the Seeking Alpha version received mixed reviews.  In my view, his laser focus on the dividend growth blinded his peripheral vision.  Not looking a little harder under the hood, so to speak.  Wolf Richter‘s  piece on the potential asset bubble in Commercial Real Estate (CRE) can highlight reasons a broader view is warranted at times.


Since I mentioned Wolf Street, a couple of additional articles grabbing my attention (including the comments) were, Why I think the Ugly October in Stocks Is Just a Preamble with a compelling argument and What Truckers & Railroads Are Saying About the US Economy.

Full disclosure: Long CASS whose data is the basis for his article.

As we come into the final week of the month, though my portfolio is down my dividends are up for the month, quarter and year.  The only suspense being the magnitude of increase!

 

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 🙂

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.

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