The Green New Deal

Momentum has been gaining over the past several years over Environmental, Social and Governance (ESG) investing considerations.  Initially reserved for ‘sin’ stocks (tobacco, alcohol and gambling), this movement has evolved to encompass a wide array of ethically questionable, albeit legal, activities including guns and ammunition, farming practices and corporate benefits to name a few.  Notably with the release of the release of the United Nations’ Global Warming of 1.5°C report on October 8, 2018, a renewed emphasis has been heard from some parts of the community, particularly as related to environmental issues.

I first touched on the issue of moral investing last June in concert with the border issues and Paul Tudor Jones’ initiation of the JUST ETF.  Other than a cursory acknowledgement, only one purchase (and no divestments) were performed with ESG in mind. The sole activity being the purchase of Amalgamated Bank (AMAL).  Further deconstruction questioned whether the JUST approach was only a ‘Greenwash’.

Over on the other side of the pond, there has been more angst and soul-searching, my guess as to the cause – a greater formalization of constructive movement towards some of the goals, such as Germany’s coal phase out.  To this end, one of the better posts explaining investing issues and alternatives surrounding ESG is Mindy’s as she performs her due diligence. With the dizzying array of options available, especially when ala carte choices are included, no wonder her “… brain tends to fog over when thinking about investments.

Then again, there’s always the well-reasoned do-nothing approach proposed by Ditch the Cave.  His reasoning follows a similar vein to that of Pitchfork Economics in that the basis of ownership is an event providing no direct benefit to the corporation.  While this is true, I would further add that any ownership stake that most of us could amass would be so minuscule as to be less than a rounding error on the corporate books.

Another school of thought – and more the focus of this piece – comes from DIY Investor (UK) who is currently repositioning his portfolio, in theory, to one less damaging to the climate.  At the very least, it provides comfort that his efforts are doing a small part in contributing to the betterment of society. I have minimal or no debate with his conclusions as we’re dealing with probabilities rather than certainties.  My quibble is with a portion of his analysis – primarily due to the emotional level of the debate on these issues. In my opinion, to present a case inclusive of incorrect – or incomplete – data provides an opportunity for detractors to seize upon and raise questions concerning the legitimacy of the remaining thesis.

Perhaps I was mistaken for a ‘detractor’ when we engaged last week as my comment of:

I applaud your research and investing convictions.  However some conclusions you arrive at may be somewhat flawed.

1) The ‘Green New Deal’ has climate change as only one element. It is too broad an endeavor to gain much traction. A better play would’ve been to select one or two of the contained issues to focus on.

2) The PG&E bankruptcy filing had ‘probable’ equipment malfunction as a cause of the deadly forest fire. Climate change was not listed as a factor, although I would suspect it was a contributor. The article referenced was an editorial (opinion) – not necessarily a factual piece.

3) To take asset managers to task is misguided, I believe. Their growth is largely due to the rise in passive investing (ETFs). Although they are listed as ‘registered owners’ it is on behalf of ‘beneficial owners’, i.e., the vast majority of individual investors with ETFs in their portfolio

The response provided was:

Thanks for your observations Charlie. I may be misguided but I would err on the side of caution with fossil fuel investments. You may have read about the decision by the worlds largest sovereign wealth fund to divest out of 134 of its oil exploration holdings.  The writing is clearly on the wall for everyone to see (or ignore).

So let’s break apart my objections.

  1. The Green New Deal can best be described as aspirational at best and is highly unlikely to be passed in any manner close to its’ current form. The essence of the resolution is to re-engage in the Paris Accord, ensure existing laws (particularly Labor and EPA) are strengthened or adhered to, strengthen laws pertaining to collective bargaining and improve the economy with a focus on infrastructure.  The one piece with any short term chance of passing is infrastructure as it melds with Trump’s economic priorities. Regardless, it remains too lacking in focus to be a viable basis for investment decisions.
  2. The PG&E filing was based on California law that holds a company liable for claims even when fault is not proven (one of the reasons I rarely invest in California).  It appears the direct cause was ‘equipment malfunction’ predicating the filing. His claim that the filing was due to global warming may be partially true but is based on an op-ed (opinion) piece in the LA Times.
  3. His quest against asset managers is akin to tilting at windmills for two reasons.  The majority of ETFs are rules based and merely a reflection of the base rule or index.  If the index is MSCI managed the determination would need to be made by MSCI – not the asset manager.  If the index was based on the S&P 500, the questionable company would need to be removed from the S&P before it would be reflected in the underlying index.  A more jermain reason is that asset managers based in the US (like Blackrock, Vanguard, Fidelity, et.al.) are required to adhere to a higher, government mandated, standard as related to shareholder engagement activities (activism).  To do otherwise would jeopardize their business model.

If engagement were to be considered, who would be the target?  Would it be a broad-brush approach or be laser focused? I mentioned MSCI earlier.  Would they get a pass as they create and manage indexes addressing both investing styles?  Or would their inclusion of questionable companies in some indexes place a target squarely on their backs?  I alluded to this type of inequity in my final sentence to DIY, “The quandary I encounter in my research are undefined secondary impacts. One example being solar. A by-product of manufacturing is silicon tetra-chloride. Therefore, is solar really green?”  The answer is a resounding yes, but, maybe ….

To make the implication that I’m a non-believer reinforces my contention that DIY Investor (UK) has a tendency to mold a conclusion based on opinions rather than facts.  The reality is that I have been looking at this type of strategy since at least 2015. One doesn’t have to look any further than the comment stream of one of Roadmap2Retire’s oldies but goodies on the renewable topic.  Today, the investing landscape in this space remains as muddled as ever and additional elements, perhaps brought into the spotlight by the Green New Deal, are being included. My concern is that this broadness will be result in its failure.  Call me a pragmatist, but current iterations include everything but the kitchen sink. You may also call me overly cautious, but not a naysayer.

The one investment on my watchlist that appears to meet much of the criteria is Brookfield Renewable Partners (BEP) with my core issues being valuation, debt and the K-1.  Therefore, on my watchlist it remains.

The one certainty continues to be each and every investor has their own core sets of values and beliefs – meaning that arriving at a consensus approach is unlikely at this time. I do have to applaud the energy and research being applied by newer investors coupled with their desire to invest in a manner matching their ideals.  For that is what will ultimately result in the world being a better place.

With that, I’ll get down off my soapbox and let you all have your turn 🙂

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Buybacks (part 2)

To follow a theme outlined a couple of weeks ago, my going forward intent in my random musings segments is to view some of the issues of the 2020 presidential campaign under discussion.  My investing rationale has always been that to be successful, one has to understand all possible outcomes which means digging through a lot of crap to discern viable opportunities. It would appear at this early stage that much like 2016, 2020 will have plenty of that to wade through.  As an added bonus, I don’t want to disappoint my newest audience demographic by suppressing my irreverence. As always, these are only observations awaiting an investing opportunity that may never present itself.

The Pitchfork Economics series on buybacks continued on February 26th with Sen. Cory Booker (one of the multitude of Democratic presidential contenders) as a guest discussing his new bill, Workers Dividend Act.  Evidence cited to support his cause is twofold.

  1. American Airlines (AAL) wage increase was roundly panned by analysts.   Booker states the analyst opinions were misguided – which is true. To parlay these opinions into supporting rationale against buybacks is equally misguided as these were partially collectively bargained.  (i.e., benefit to unionized employees which is a goal of the bill.)
  2. His use of Walmart (WMT) as the proverbial case of buyback greed ignores some aspects that are detrimental to his position.  Walmart offers its’ employees matching 401K plans, stock ownership plans with a 15% discount and HSAs, of which some – if not all – allow employees to share proportionately in the “wealth” gained through buybacks.  The choice resides with the employee as to participation.

In an attempt to frame rhetoric with reality, I chose my oldest 15 holdings to identify what happened over the past three years.

Company201820172016
Comcast3.05% decline1.83% decline 3.18% decline
WEC Energy 0.09% decline .09% incr. 16.21% incr.
Chevron0.46% incr.1.33% incr.0.11% decline
Kimberly-Cl.1.77% decline 1.6% decline 1.26% decline
Norf. Southrn3.48% decline 1.93% decline 2.76% decline
Clorox1.19% decline 0.11% decline 0.8% decline
Prosperity B.0.51% incr. 0.28% decline 0.53% decline
Sysco0.5% decline5% decline 3.26% decline
Owens & Minor0.0% change 0.16% decline 0.16% decline
Walt Disney1.51% decline 3.72% decline 4.1% decline
Home Depot2.81% decline 3.82% decline 4.68% decline
PepsiCo0.9% decline 0.96% decline 2.22% decline
Kimco Realty0.62% decline 1.03% incr.1.66% incr.
Towne Bank0.13% incr.0.08% incr.1.05% incr.

Data from MacroTrends

In this scenario (excluding increases denoted bold/italic), the buybacks – as a percentage of the stock outstanding – actually decreased during each of Trump’s years as president despite the tax plan (from 2.1%/1.94%/1.45%).  Companies increasing their share count did so generally to use as currency in lieu of debt. In Chevron’s case this was to fund capital expenditures. Most of the others were for acquisitions.  It’s only slightly ironic that a merger cutting jobs and increasing capital concentration (banking sector) would be viewed more favorably due to an expanding share count

This discussion topic has also been picked up by Mr Tako Escapes who elaborates more skillfully than I.  I don’t dispute two points here, 1) Companies tend to have poor judgement in the timing of these transactions (buy high) and 2) the dollar amounts being expended.  But a dose of reality has to exist as well, I mean – realistically how many capex dollars should be spent to further the worldwide glut of steel (as one example)?

At least this exercise has been interesting but to draw any real conclusions requires a larger sample size.  More questions will also arise such as, ‘Are buybacks more prevalent in the overall S&P universe moreso than the DGI slice?’ or ‘Is my portfolio a large enough sample to be reflective of the stats bandied about by the Democratic candidates?’.  As usual in this blog, more questions than answers. I intend to complete this exercise for all of my holdings during the year

Other concepts will likely hit the garbage heap prior to getting much traction including a wealth tax (constitutional issues) and Modern Monetary Policy (hyperinflation).  As an aside, these concerns, per David McWilliams piece entitled Quantitative easing was the father of millennial socialism as presented by Ben Carlson makes for an interesting case. It certainly appears that the 2020 election season is off to a rousing start. Bottom line, I suspect some candidates will use this issue as a cry to rally the base with minimal substance to follow – similar in many ways to “Build the Wall” of yesteryear.  A reflection of what little has been learned over the last two years. In my mind not an investable theory.  

As always, opinions are welcome!

Stock Buybacks?

As we round the corner coming into the final week of this month, the markets are showing a robustness that is probably more of a relief with abating trade tensions as the broader market was more a mixed bag with earnings reports. Case in point being my ongoing saga with Owens & Minor which announced their second dividend cut. At least they aren’t facing a SEC investigation à la Kraft Heinz. The common denominator in these two cases appear to be – at least in part – a laser focus on trimming costs with too much emphasis on the salary component.

Which leads to this week’s topic prompted by a private message which read in part: “… (I listen to) Pitchfork Economics with Nick Hanauer … (which) talked about stock buybacks and shareholder value maximization… I was hoping you could listen to it and let me know if everything they talk about holds up, or if there are pieces of the puzzle missing that might have been left out to steer a narrative. I don’t know what I don’t know and I don’t like thinking I might be getting misled.

First half the battle is acknowledging a gap in understanding. Most of us only begin to realize this too late in life choosing to muddle through as best we can. Second, keep in mind the quote, “99 percent of all statistics only tell 49 percent of the story.” Ron DeLegge II

For my uninitiated readers, this podcast is targeted to the rising generational groups such as Millennials, Gen-Z etc. with a slight Socialistic slant. The New Green Deal (which I’m currently researching) resides in this category as well – (but with a twist). Anyway, there are three schools of thought to stock buybacks; they are good, they are evil or they’re neither. The podcast presents them as generally bad, the current administration treats them as good (no choice here as they were spurred on as a by-product of the tax plan). My personal view is under current law – particularly when the Supreme Court of the United States has granted to corporations the notion of “corporate personhood” – they are generally neither. I’m more of a guy that tries to eke out a profit regardless of the rules, knowing they will likely change at a future date and adjustments will be required.

Major Issues with the Podcast

  • 11:44 – “Secondary offerings aren’t all that important”
    • Depends on the type – if the secondary creates more shares to fund a new production line for instance, why would there be a penalty for a return to the original share count?
  • 18:30 – 90% of corporate profits are returned to the richest people via dividends and stock buybacks.
    • Wells Fargo is 62% owned by institutions and the number is about 15% for Walmart. Generally this reflects ETFs and mutual funds which are largely owned by individuals.
  • 16:00 – shareowners are not investors.
    21:07 – … buying stock is speculating not investing .
    23:01 –  … if you think shareholders are investors … that contributes to the growing economic inequality
    • Only in the narrowest of definitions (buying an initial issuance or direct from a company’s secondary) is this true. Even as “traders” an economic interest with ownership rights is gained with the price (implied value) the speculation.
  • 26:49 – chartered corporations existed to better society and for a limited time.
    • These types of corporate structures were modified (initially in NC-1795) to circumvent perceived constitutional limitations on enforcement of multi-state investments (canals, railroads). They maintained a societal purpose including eminent domain rights (conversely, eminent domain is a New Green Deal issue as well).
  • 33:32    – Wells Fargo … laid off employees while (enriching owners through buybacks).
    • The layoffs were due primarily to exiting business lines in an effort to refocus on core operations reducing (in theory) the ongoing capability for malfeasance.  Also to reduce overlapping operations (footprint acquired through acquisitions). It was not related to buybacks. In fact, Warren Buffett, the largest shareholder is precluded from owning greater than 10%.  He is required to sell when buybacks are performed resulting in no short term enrichment.

The one point I hadn’t really considered in this debate was their point at 40:08 of a possible prohibition of buybacks if employees are receiving public assistance. I would add underfunded pensions and Sen. Marco Rubio’s (R-FL) position of taxing buybacks like dividends to the mix of potential areas to improve. One area requiring caution is the treatment of large private companies versus public ones. Examples that initially come to mind are Hobby Lobby, Cargill, Chick-fil-A and Koch Industries. None of the Democratic challengers has yet presented (in my opinion) a viable solution to improve the status quo without discriminating against any current stakeholder thereby cheapening their argument regarding equality.

So, while appreciating the question, my response is probably clear a mud as this issue is a tangled web with no clear right or wrong answer. Only that your instincts are correct in attempting to discern all the arguments to formulate your own opinion. My guess is this rebuttal does not fully address all the issues either – but my 2¢!

Any thoughts, opinions or other considerations that you have?

Game Therapy

Today takes us off the beaten path with a more personal, rather than investing, theme. As many of you already know, in 2013 I suffered a series of five strokes which overnight turned my world upside down. 2014 was a blur of procedures, tests, medicine calibration and therapies centered on relearning some basic functions such as speaking (I now stutter), walking (with a cane) and basic logic function (depends on the side of the brain). The most difficult issues for me – (my wife’s may differ) – were walking with some right side paralysis, inability to drive and loss of basic math skills. The brain is a weird beast in that I can’t add and subtract but I can perform complex algebra.

Through this journey I’ve uncovered many things that frustrate me, one being walking as a therapy (doctors’ orders) is inherently boring – particularly when cross-country hiking is out of the question. That is until my granddaughter introduced me to Pokémon Go in July of 2016. Since then, I’ve experienced improved dexterity in the fingers on my weak side, an element of improvement in low level strategic thinking and an impetus to get my rear in gear.

The results I’ve had have now been replicated in government funded research studies – one of the reasons I’ve long had Nintendo (NTDOY) on my watch list, included Nexeon MedSystems (NXNN) in my portfolio and am closely monitoring Niantic’s funding rounds. This may be one reason the popularity of Pokémon Go has continued to increase rather than being a flash-in-the-pan. Other games, such as Fortnite, are generally too intense or fast moving for folks like me. I even have difficulty in Las Vegas with the strobe lights on the machines.

For awhile I’ve been struggling with the how and why of sharing this as I’m generally a private person. Then I ran across Captain Zach Brooks story and how his struggles parallel mine – though mine is a walk in the park by comparison. I saw his success as an inspirational guide and figured that perhaps mine could do likewise (in addition to answering the question as to the eclectic nature of some of my holdings). While my daily routine includes my walks (weather permitting), there is also a dose of Pokémon Go as well. And if you play the game and need another friend my trainer code is: 8321 0821 5972

Conspiracy Theory: The Fed

Every now and again a friend of mine asks my view of the world as it relates to conspiracy theories.  For the uninitiated, these are plausible concepts with minimal basis in truth that take on a life of their own through repetition by a willing spokesperson.  A recent example is Info Wars as reported by Rolling Stone.  This platform has been – and continues to be – used by the now indicted and arrested former Trump confidante, Roger Stone.

The theory in question – which has existed for nearly 200 years in some form or fashion – centers on the role played by the Rothschild family in the formation of the Federal Reserve.  While the family’s wealth was at one time vast, nationalizations (France), confiscations (Germany/Austria), charitable donations and dilution between various heirs have reduced the fortune.  One leading view was that the wealth was being used to accumulate land holdings as the precursor to a ‘one world order’.  This one was obviously deflated last week with the sale of their final Austrian property.

As in any good Mythbuster episode, there’s always a secondary revelation and in this case it pertains to Federal Reserve ownership.  The Fed is both a public and private enterprise, the Board of Governors is a government agency while the twelve banks are stock companies.  Their shares are restricted with ownership limited to Fed member banks which currently number about 767 banks.  FRB shares pay a dividend of roughly 6% per annum which for one of my smaller banks Brookline Bancorp (BRKL) would’ve been about $1m last year.  The Fed also pays interest on both required and excess reserves on deposit currently about 2.4%.

Fed membership is not compulsory and many smaller institutions choose not to join, taking advantage of correspondent relationships.  With the advent of the 1976 banking law permitting interstate banking, correspondent banking began to decline and Banker’s Banks arose on fears of competition from their bigger brethren.  Banker’s Banks are structured similarly to the Fed (owned by member banks) but are subject to regulatory oversight.  An interesting tidbit … Congressional hearings in 1923 on lack of participation in the Federal Reserve highlighted a trust issue between large and small, rural and urban – a divide that obviously continues to this day!

So, no the Rothschild family don’t own the Federal Reserve or banking system.  If you own stock in a National bank or State chartered member bank – you own the Fed.

 

Random Thoughts

With the big news being government dysfunction – the partial shutdown in the US, the Brexit power play in the UK, Hong Kong’s volatility and Italy’s lagging growth, earnings reports provided a modest nudge to the markets which was welcomed generally by the Financials.  I’m more interested in the forthcoming multinational reports as a barometer of health.  Thus – as usual in earnings season – my mind tends to wander to obscure – some could posit meaningless – issues to occupy myself.  With a short market week and the only other to-do item is blog housekeeping – here’s my diversionary tactic.

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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!