2020 Crystal Ball

A gentle reminder was provided by the market last week as to its unsettled nature.  Essentially, headline risk is at the forefront tossing the market based on the sentiment of the day – oft times lubricated (or diverted) by a Presidential tweet. Granted, this is little changed from the past but we do have an increasing clarity to use as a guide.

What is unchanged is that US valuations remain elevated.  Sure, there were some stumbles during the recent earnings season and some cautionary guidance presented.  Barring a black swan event it does appear the next recession (US version) has been punted into the future – at a time post election.   There are – and will continue to be – pockets where value can be had, but I see this opportunity being readily available only to individual stock pickers willing to accept a slightly higher risk factor.

Headlines have also illustrated a measured success that Presidential bashing of the Fed failed to accomplish.  The dollar weakened – a little. On the heels of the results from the UK election, Sterling strengthened. My opinion being this is a relief rally at seeing an end to the Brexit saga as the real work now can now begin in earnest.  These negotiations may get bogged down a little – particularly trade – which could provide a reentry point for Labour and their agenda of nationalization. I see the UK as a viable alternative but with risk associated in telecoms, energy, utilities, rail and mail.  Perhaps a mid-term view is required with an entry point sometime after the first of the year.

Much the same boat for China as the renminbi strengthened against the dollar as the news of a “phase 1” agreement on trade crossed the wires.  What this means probably remains debatable, but if a truce is effective going into the new year it is a likely positive for US equities, tempered by the fact that their currency is a daily peg rather than free-float.  The risk here is twofold – on and off again tariffs and US involvement in their political affairs (Uyghur Human Rights Policy Act and Hong Kong Human Rights and Democracy Act). The bills appear to be more show than substance but could flare tensions. The investment thesis should note the alleged Human Rights abuses along with the minimal sanction levels.  If these pitfalls are successfully navigated, opportunities do exist.

Then there are the fintech darlings, the newest variant being the so-called ‘Challenger Banks” or neobanks.  Though awash with cash from private funding rounds, they all have one glaring defect – they aren’t really banks.  They are apps – generally mobile – with a compelling interface and a few niche benefits targeting the millennial audience.  A couple have started the process to really become banks but most are content to partner with real banks – sweeping funds into accounts that have FDIC insurance.  My research remains incomplete but with three exceptions, the partner banks pay no dividend or are private. I currently own the exceptions, GS, JPM and WSFS but don’t expect the challenger funds to be a significant revenue driver.

Perhaps the largest driver of ‘hot air’ time in the new year will be the election.  The obvious beneficiaries being media companies who are able to capitalize on both sides of an argument.  However fragmentation, targeting and scope make it more difficult to call any winners unless any campaign goes on a deep targeting offensive which would benefit social.  From a messaging position, only health care moves the needle much where companies like UNH, HUM and CVS stand to benefit as the attacks subside.

The commonality between these issues?  None are long term. Yet the nature of capitalism is its’ cyclical nature.  There is always a correction to drain the excesses. The timing and severity are always debatable, but rest assured one will arrive.  My approach to the new year will be to take some marbles off the table by pruning some non-core positions and reassessing some strategic plays. To place this in context, I have three new positions on my watchlist and ten to fifteen under review which if fully implemented would be roughly a 5% churn rate.  My comfort zone is now squarely with Staples and Utilities … items necessary for consumer consumption regardless of the overall economy. Yes, the upside is muted with these companies, but more importantly the downside risk is mitigated. A rising dividend stream exceeding the rate of inflation is the core goal in these times in spite of politics or political persuasion.

And so goes my crystal ball for 2020 …

The COPPA Impact?

The Children’s Online Privacy Protection Act of 1998 (COPPA) is a United States federal law, located at 15 U.S.C. §§ 6501–6506.

Wikipedia

The inspiration for this week came from a Facebook post:

COPPA is ruining everything. My youtube channel i watch for family friendly videos, has quit. My YouTube channel I rely on for toy unboxing and reviews, to buy gifts for my grandchildren, quit. My youtube channel that I rely on for gaming reviews, quit. The channels I subscribe to for Kids videos for my grandchildren, quit. People who don’t understand technology, have no business making the laws that govern, technology. So, now there will be no more child friendly videos on YouTube, so now if a child loads YouTube, their only option is adult content… WTG, congress, just when I thought you couldn’t be any more ignorant, you’ve proved me wrong… Idiots!!! ~END OF RANT

Point taken, but – knowing me – I now had to figure out the why.  Why has a law that’s been on the books for some nineteen years suddenly causing angst for the masses?  I mean, this was never an issue under prior administrations (Clinton, Bush II or Obama). So what gives?  Well in September, YouTube was fined $170 million by the FTC because they “illegally collected personal information from children without their parents’ consent”.  As part of the settlement, YouTube agreed to implement a system of checks and balances which puts much of the onus (and liability) on content creators.  Felix ‘PewDiePie’ Kjellbergd, a top ranked YouTuber puts it this way, “content creators can be sued for violating COPPA regulations. “What? Why? That makes no sense… control your children please” he said, clearly disappointed with the fact he can be punished for children viewing his content, and for his content being automatically flagged as child-friendly even if they aren’t.

So my response was, “It’s probably more appropriate blaming the FTC, not Congress. COPPA has been the law for almost 20 years. In 2019, the FTC decided to step up the enforcement actions, resulting in your turmoil.”   This particular thread continued the rant blaming Congress or even Satan.

To be clear, the FTC consists of five members, three Republican and two Democratic – all appointed by President Trump and confirmed by the Senate in April 2018.  These are the Chair, Joe Simons (R), Christine Wilson (R), Noah Phillips (R), Rohit Chopra (D) and Rebecca Slaughter (D).  The FTC approved this action on a party line 3-2 vote.  The nays were not altruistic – they only wanted stiffer penalties.  As an aside, I don’t see ‘Satan’ being confirmed – unless as a euphemism for one (or both) of the parties.

The reality is that COPPA was effective April 21, 2000 almost five years prior to YouTube’s launch (February 14, 2005).  Other than by regulation (rulemaking), I was unable to find any amendment or act to address or update the law given the technological advances over the past two decades.  The most recent effort to update COPPA is S.748 introduced by Sen. Markey (D-MA) and co-sponsored by Sen. Hawley (R-MO). This bill remains in committee and unless amended, does not address this particular issue.  A classic tale of technology outpacing intelligent oversight.

As the FTC is notoriously underfunded, one has to wonder if part of the motivation is collection of the fines.  Regardless, to sew this up in a manner befitting a financial blog, this is not the first fine levied and probably won’t be the last.  Companies targeted include, Devumi, LLC (falsifying social media influencer clout – involving LinkedIn, YouTube and Twitter), iBackPack of Texas, LLC (fraudulent acts involving Kickstarter and Indigogo), TicTok (COPPA violation) and more.  Separately, EPIC (non-profit research center) conducts investigations and agitates for reform (includes the likes of Amazon, VTech, Mattel and others).  The same logic is applicable to gaming and vLogs.

Bottom line – the differentiation between child targeting and child attractive is littered with many shades of gray.  Possible examples being channels reviewing custodial accounts for minors or budgeting for children. Be prepared to lose advertising revenue if flagged as child appropriate or perhaps face consequences if classified improperly.  Maybe the best course of action is to follow YouTube’s advice, “Consult a lawyer”.

From an investor’s point of view, the financial impacts are likely negligible – particularly if the ongoing risks are offloaded to the creators.  The biggest downside I see are user discontent (evidenced by the Facebook post above) and headline risk if a content creator is fined by the FTC.

Any thoughts?

Earnings Season and more …

Earnings season is in full force with its peak next week.  I’m always a little amused by the commentary as the bulk is based against analyst estimates.  My preference is to view the results against prior actuals. Estimates can be fudged or modified more easily than actuals.  One reason Factset was a recent addition to my portfolio was for their analytics in this regard. Their recent report noted that the Y/Y revenue growth is about 2.8% which if held would, “mark the lowest revenue growth rate for the index since Q3 2016 (2.7%)”.  Which would indicate many companies are relying on cost cutting – and perhaps efficiencies – to boost their profits – which without corresponding capex may not be sustainable. This being one of many indicators I keep my eye on. I do agree with Stalflare’s view, “I am not sure about (a) recession to be honest … but I am pretty sure that the downturn has already started.”

The Blog Directory is still undergoing its review for dead or inactive blogs.  As I will be rotating some of my prime blogs – ones I consider my ‘regular reads’, I figured a grocery list of needs, wants and desires was in order, so following are my criteria.

  • Regular (at least monthly) posts
  • Content in addition to status reports
  • Minimal/Irregular guest posts (I want to read the author’s views, not an interlopers’)
  • Minimal advertising (I know the rage is about ‘monetizing blogs’ but the sheer volume of some detracts and is annoying).
  • Thought provoking (I don’t have to agree with the message, only that it spurs analysis)
  • Has posts that invite comments and interaction along with thoughtful discourse

Just some of the things I look for when elevating to (or demoting from) the dozen highlighted on my Blogroll (not to be confused with the couple hundred in the directory).  Once the review is complete, I’ll do a post on my decisions. Blog posts that engaged me this week include:

My Journey to MillionsReviewing my Dividend Investment Account for Sell Opportunities

Pollies DividendWhat is my Yield on Cost (YOC)? – 2019

I’m still contemplating the first, while my comment on the second awaits moderation.

For the first time in awhile, I was a little flummoxed on how to report a payment.  My broker obviously was as well as there was a two day delay on the credit to the account.  Spirit MTA REIT (SMTA) is undergoing a voluntary liquidation in two (perhaps more) phases. The regular quarterly dividend payment wound up being an $8.00 per share initial liquidation return.  My broker ultimately classified it as an ‘Account Credit’. Now I don’t have that level of sophistication in the tools I use, so this payment went into the dividend bucket. The shares will be cancelled, delisted and transferred to a liquidating trust.  I will classify the further payment(s) as sale proceeds. My dividend calendar will retain SMTA solely as a memory jogger. I am now slightly positive on this investment (gamble?) with the profits coming with the subsequent payments.

With my granddaughter’s portfolio replication in full swing (her final stock (PG) was sold post ex-div last week), I’ve recreated about two thirds within one of my brokers.  Although feeling a little like a market timer in this exercise (which I find a little stressful), it will illustrate one of the issues I have with other DGI reports – namely isolating pure portfolio performance versus additional capital.  For example, Stockles says, “Naturally, before the compounding effect has really done its thing, most of the increase is due to increased portfolio value (i.o. additions to portfolio in terms of investments).”  In my view (which could be too literal) his claim of a year to year return of 19.53% could be distorted by cash additions.  In my case, I’m purchasing thousands of dollars of new stock holdings from cash that was previously reported on my monthly reports.  So, should accumulated, non-reinvested dividends or previously reported cash received in M&A activity be treated differently than “new cash” is the quandary I’m dealing with.  Perhaps just footnote the daylights out of it …

So goes my thought processes for the week. Any ideas on the reporting?

Some Overdue Cleaning

This week, I began the annual review of my blogroll and noticed something perplexing.  Some Australian sites have gone dark. Frankie’s is offline and Australian Dividend Investor’s final post cryptically reads:, “As the old saying goes, all good things are eventually brought to end by the firms risk and compliance division.”  Just scratching my head a little and wondering if the hammer was dropped by the authorities down under as I know they can be a little more restrictive there …


Meanwhile, I’ll look to shake up the Top Sites a little to at least replace the broken links.
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As part of this review, I ran across a great analysis by Mr Free at 33 illustrating the differences between total return and appreciation through capital gains in one case.  The one hole in the analysis (in my opinion) was the potential role of tax strategies – which was promptly brushed aside by Jason. Curious as to why, I found the answer in another comment thread where he states, “Writing about bureaucracy and stuff like that (including taxes) isn’t very interesting for me, so I just don’t.”.  So yes the current tax law is structured advantageously to his benefit – however if this changes – or he grows his portfolio enough to exceed current thresholds – tax strategies could play a role in improving overall performance.
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A second anomaly in his work becomes evident when his statement, “The stock that can produce the most possible dividend income on the smallest possible investment is, for me, the best stock of all.appears in his post.  In his case this is certainly a plausible theory.  Yet in a prior post, he defines his top holdings in terms of portfolio value rather than dividend income.  It could be claimed this is a minor point, however allow me to illustrate some differences based on the top holdings in my portfolio.

Obviously I have a mix of the AT&T and Visa scenarios as well.  The point being, 70% of my top ten are the same on each side of the ledger, it’s the 30% that is interesting – particularly Disney.  Legacy Texas could be an aberration due to a pending merger (scheduled to complete November 1st (pending shareholder approval)).

And yes, I do have a slight imbalance that I’ve been trying to correct for awhile now.

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Finally, the data in the Dividend CAGR column was extracted from a cool tool that Dividend Dozer created.  It’s one of those things that kind of grows on you particularly when you can identify additional ways to use it.  I would encourage you to look at his Dashboard!

I guess that’s all musings I have for this week, so onward and upward as we see how the market digests the landmark – kinda sorta – trade deal in three phases …

Weekly Musing (Sep2019)

For the umteenth time during this presidential reign, I have to say, “What a week!”.  What surprised me was the markets took the probable presidential impeachment in stride, only faltering when Trump decided to fuel trade tensions with China (again) – and this being just prior to the next round of talks.  The topic this time being capital restrictions – neither of which would likely be very successful. For instance, rescinding the waiver allowing Alibaba (BABA) or Tencent (TCEHY) to trade on US exchanges would not change their ways but force them to move their listings to London or Hong Kong.  Noble but not realistic.  Then there’s the issue of the impact on Hong Kong listings … My potential impacts include Yum China (YUMC) and Swire Pacific (SWRAY) which I’ll have to investigate further if this idea gains traction.

I am not alone!  BAML decided to upgrade CHD to Buy citing “strength in their largest business (laundry) and seeing the company’s brand-building efforts paying dividends.”  The one quibble I have with this assessment is the attribution of recent weakness to “value rotation” rather than placing the blame squarely on a short seller (Spruce Point).  Shares were up for the week but still down 5.5% from their September 5th close. This puts last week’s buy squarely in the green. Gotta love it when you are on your game.

Last week’s lament was regarding the lack of novel concepts emanating from the Delivering Alpha conference.  Fast forward a week and one appeared out of nowhere – well actually on the CNBC set. David Zaslav, Discovery’s (DISCA) CEO was interviewed on the launch of a new concept dubbed the Peloton model, aka,  The Food Network Kitchen. Like Peloton (PTON), this offering provides multi-level customer engagement; Subscription, Interactive and Transactional. This type of engagement – if successfully executed – has the potential to attract, retain and increase sales – all while the customer is eagerly forking over their cash.  I chose not to participate in PTON as the dual class and pricing was a turnoff. DISCA pays no dividend so I’m not invested there either. But the concept, if not the companies, is intriguing. 

Thumbing through other news, I ran across an interview with Robert Herjavec regarding his view on interest rates in which he opines, “If I can borrow at 2% or 3% and grow by 10% or 20%, I’m going to take that all day long.”  Well, yes, I would too – and then Eureka!  (yes, I can be dense at times), a rationale behind Trump’s persistent jawboning of the Fed.  I’ve never believed the President’s motives were pure, as people on fixed incomes are disproportionately impacted by low rates.  If a successful businessman such as Herjavec can leverage off of low rates, a leveraged real estate guy – such as the President – should easily profit (or reduce losses) via refinance.  Particularly when other ways to increase business are being scrutinized and licensing deals are drying up.

There are my thoughts for this week.  With both month and quarter end arriving Monday, I’ll be heads down.  I don’t know how it happened but fully 15% of my dividends arrive on two days … the last day of the quarter and the first day of the subsequent quarter.  Next week will be the Monthly/Quarterly recap.

Have a great week!

Old Fashioned Horse Race

the horses rounded the bend and started down the home stretch. “Look! Look! See his stride now!”

Black Mack by Neil Dawson in The Canadian Magazine, Vol. 29, Oct. 1907

In a followup to my last post, I decided to increase my position in Church & Dwight (CHD) this week which I posited was a possibility with the current weakness.  I’m assuming that a floor has been reached following Spruce Point’s short campaign and some insider selling reported. Quarterly filings also revealed some increases in long positions by entities much larger than Spruce Point.  With the price decline now at roughly 10%, I thought it prudent to begin accumulating some more. Its’ position in my portfolio was about 0.2% – and now about 0.22%, there’s still plenty of room to add until my 1% limit is met. This is one I’ll be keeping an eye on prior to there next ex-dividend date.  

The Dow Jones Industrial Average rose for eight straight days, I believe largely on the heels of positive-sounding trade news – particularly on President Trump’s acknowledgement that he would at least consider an interim trade deal.  This may be short-lived if his base considers this a retreat from the all-or-nothing position that was held stating the tariffs will force China to conform with established standards. Perhaps the message to the base would be, “See how easy trade wars are to win when the goal posts are moved.

With the yield curve steepening, some pressure was off of financials contributing to my portfolio attaining a new record high as well, eclipsing the prior high set in July.  Let’s see if this can continue through month-end as there are some issues like the Fed meeting and the attack on Saudi oil to consider.

This is the time of year that I begin the fine tuning of the portfolio strategy as there are limited possibilities remaining to impact dividend results as the final quarter of the year looms on the horizon.  Considering that ten of my companies have no more ammunition available until next year, the pickings will become increasingly slim until we turn our focus to the new year. Plus there’s a delicate balancing act to perform with the cash allocation as October has historically been a volatile month.  Keeping a little dry powder in place could also be a viable strategy. Just some random ideas that are framing my thought process a little.

So to come full circle, we’re rounding the bend and coming down the home stretch. Being a nose ahead of the index is something I’m not accustomed to as generally I’m several lengths ahead. Which is why my final assessment this year (about two weeks away) will be crucial. Here’s hoping your week is fruitful!

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!