February 2019 Update

Given the Coronavirus impact on the market, my monthly review will be abbreviated with a planned return to normalcy next month.  That said, the portfolio was essentially flat with the S&P, both down – -9.18% for the index and -9.43% for me. The difference is an increased cash position which if I included would put me down 8.78%.  Dividends rose 26.71% year on year but this is misleading as I timed the moves (actually buy/sell transactions) of my Canadian stocks to my IRA post ex-dividend date as best I could to duplicate several of the dividends.  

Positions sold: TD Ameritrade (pending merger), Nutrien (a little leery of China’s ability to buy ag products per trade deal) and Invesco’s Timber ETF (is a slowdown looming?).

Positions Added: Vonage (a free one, so I’ll probably hold for a year) and Coca-Cola Japan (hoping the Olympics aren’t cancelled).


Now that we have a correction, what next?   First and foremost, ensure your investing plan accommodates this type of black swan event.  Next listen to multiple news sources to separate the hype from the reality. For instance, the World Health Organization upgraded the risk of spread on Friday.  Also on Friday, a somewhat flippant Mick Mulvaney said, “what I might do today [to] calm the markets is tell people turn their televisions off for 24 hours”. The President held a Saturday press conference where he “called for calm … and tried to reassure the nation that the threat was under control”.  Are you reassured?

I take my cues from warnings and conference calls.  On Friday I was presented with my first dividend cut of 2020 – AMC Theatres.  This is one I won’t sell on the cut for three reasons.

  1. I had suspected this when I bought my most recent tranche and I bought enough to pretty much offset the cut
  2. They are on the front lines of any potential virus impact
  3. They are doing it the ‘Warren Buffett’ way

The December drop (when I last bought), I did check the debt maturities first.  In their call they stated, “when there is real uncertainty in the world, we’re going to be conservative and keeping cash in our pockets to make sure that — what I think might be somewhat irrational fears the market has had over the past few days don’t turn out to be rational fears.”  In addition to the dividend cut, management is taking a pay cut replaced with out of the money options.  Their priorities have become deleveraging first and rewarding owners via buybacks – which are paid out of retained earnings.  

Frankly, I would not be surprised if others follow in AMC’s footsteps.  Many foreign companies currently pay dividends at rates fixed to an earnings range.  Should these times persist, perhaps earnings take a hit. How many US companies have retained earnings sufficient to weather more than a few quarters and still fund working capital, capital expenditures, acquisitions, research and development, marketing or debt reduction?  If not, do they have the financial strength to sustain accumulated deficits? (Consider the energy sector in this regard).

Another interesting tidbit from the call was the comment, “we do not have business interruption insurance for the coronavirus”.  It turns out that many insurance companies exclude viruses in a post-SARS world.  Those that did not modify their policies or underwriting may have an impact in today’s world. This aspect was not analyzed for purposes of this post.

If the President is correct in asserting the threat (is) under control, we probably don’t need to be concerned with the financial stability of other public facing companies, such as restaurants, travel and leisure or retail.  But that position, while projecting strength, belies the fact that supply chains are being stretched, production lines are at reduced capacity and the consumer’s capacity to spend is turning cautious.

While the WHO is urging calm, perhaps as a counter to Jim Cramer’s posturing, respected analysts, such as Mohamed El-Erian are weighing in on potential rate cuts being unable to stabilize the markets, arguing a medical solution is the only weapon.  I suspect he’s correct and perhaps a solution is available sooner rather than later.

I don’t pretend to know which way the will markets react – only that increased volatility is probably here for a while.  What I do is gather information and attempt to find flaws or weaknesses in possible outcomes to determine scenarios that might be profitable. Do your own due diligence, but my guess is medical solutions are priced into the stock price already.

Long: VG, AMC, CCOJY

December Purchases

Despite the ongoing record setting pace of the market this month, two purchases of note were made. There are in addition to the DRIP and FRIP purchases which are generally reported in bulk at month end.

This one is allocated to the granddaughter’s future holdings, continuing the tradition of a stock for Christmas. The only rationale given for these purchases is that it is meaningful for her – forget PE ratios, valuation, etc. In this case, she and her friends spend a good part of their off-campus lunches at McDonald’s (MCD) – end of story. I had considered Toyo Suisan Kaisha Ltd (TSUKY) the maker of ramen noodles but decided that one might be a better choice for her first year of college.

——————–

An outstanding limit order executed more than doubling my holding. That said, assuming the dividend remains intact it will account for maybe 1% of my forward dividends. I suspect capex spending has peaked and their attention can turn to the balance sheet. So – I essentially reduced my cost basis although I remain underwater on this one.

Two things I be keeping an eye on as 2020 begins – 1) their expansion (via JV) in Saudi Arabia, and 2) their version (and traction) on streaming.


Unless there is a major retraction over the next day or two, this will close the curtain on my 2019 activity. Here’s hoping your 2020 is great!

Just a Few Dribs and Drabs

To review this week’s market action is to basically yawn for a change.  Earnings season began but was tempered to a degree by economic news that questioned the robustness of the US consumer.  While the economy is still growing, the rate is slowing. My view remains that without a ‘real’ deal – skinny or otherwise – on the table between the US and China, both countries will continue to hobble along.

Meanwhile I did make one purchase this week that was a little unanticipated, but not totally unexpected.  I topped up my Legacy Texas (LTXB) holdings in preparation for the completion of the merger into Prosperity Bank (PB) which has received regulatory approval.  Currently I hold both sides of this merger, LTXB in a taxable account and PB in my IRA. Essentially I wanted to avoid assignment of an odd fractional share that I could do nothing with as the ratio is 0.875:1 (plus $6.28 cash). Assuming shareholder approval October 29th, the expectation is for the deal to close November 1st.  My current thinking is the new PB shares (and cash component) will be assigned to the taxable account. Subsequently, I intend to sell the old PB in my IRA replacing it with TD (to take advantage of the tax treaty).  After the dust settles, I will sell the TD in my taxable account. End result being more shares (slightly) of both PB and TD, no shares of LTXB and some excess cash.

I did hit the halfway point on my endeavor to replicate the grandkid’s trust (now liquidated, save one stock).  After I complete the transactions I’ll post regarding the rhyme and reason, but for now let’s say it’s to preserve all options regarding financial assistance as she begins the college application process. 

The strategy I’ve employed is to gauge the futures market for weakness prior to entering an order for market open as I decided to use M1 finance for the bulk of this replication.  For the most part, this has been a viable approach except of late there have been some wild swings going into the open. I’m unsure as to the why, but perhaps someone has identified the secret sauce regarding presidential tweets?

The effort remains ongoing regarding the directory update – primarily removing dormant entries.  It turns out I wind up spending more time than usual as my attention gets diverted by an interesting presentation or difference of opinion or a concept worthy of further review.  Examples of some of these include:

  • Dividends Diversify – in his review of the book Dividends Still Don’t Lie, the comment, “I did some searching on the internet for free services. But didn’t come up with anything that looked useful … Dividends Still Don’t Lie goes through how the calculations are done.  So it is certainly possible for a do it yourself investor to develop the calculations on their own.” garnered my attention.  Now the strategy discussed may be an anathema to a Buy and Hold type (my concern would be tax implications), the “tool” became the curiosity.  The best I could come up with was the Charles Schwab screener that could only analyze three of the book’s eleven metrics yielding fifteen possibilities for further manual research.
  • Finance Journey – the comments, “As a dividend investor, my full focus is on income than capital gain. Thus, capital gains or losses in my investments do not make any sense to me at least for now.” and “I do not convert dividends received from U.S stocks to Canadian dollar, and I use a 1 to 1 currency rate approach to keep the math simple and avoid fluctuations in my dividend income reports due to changes in the exchange rate.” were the culprits.  I trust the “full focus” does not exclude possible warning signals. For instance, many dividend cuts (income) are preceded by a falling stock price (capital gain (loss)). Likewise, the use of a 1:1 exchange ratio for simplicity sake risks masking the true portfolio performance. Personally, I (like ETFs) translate income from my thirteen foreign holdings to home currency prior to publishing results. Besides, if the full focus is income why distort currency exchange (which is a direct income factor)?
  • Finance Pondering is a relatively new blog from the UK that is in the process of ramping up in a thoughtful manner.  The insightful questions raised in this rollout carry the promise of one day being one of the standouts. Yet there is already one nagging question that I hope will be answered in the future – “Why Trainline?”.  To enlighten my audience, Trainline is a ticket booking company that charges a premium in exchange for convenience in what is basically a mobile app. My issues are, 1) it was a 2019 IPO (albeit one of the better ones), 2) KKR was involved (can you say monetize and exit strategy), 3) I question the nature of Brits to embrace premium services given the uncertainty of Brexit and recent demise of Thomas Cook.  

This weeks’ final thought is a potential black swan.  My concern is the expanding pockets of unrest appearing from Hong Kong to Chile to Spain.  Ignoring Turkey/Syria for now, just something I’m keeping my eyes on …

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!

Summer Vacation

I didn’t have to wait too long for turmoil to reemerge.  Apparently the President is unaware of the concept of a vacation as the barrage of libelous, racist, bullying, slanderous and lying tweets continued unabated.  It makes me wonder at times if Jack Dorsey has any regrets of the monster he has enabled. Although it is easy to digress into the madness, I must remain centered, mindful that this is a blog with an investing focus.  Therefore we need to backtrack a little to set the stage for Friday’s meltdown.

Ignoring the slightly left bent of this article, this week’s drama was highlighted by Fed browbeating and a tantrum as a result of a measured Chinese response to additional tariffs imposed by Trump.  Possible additional measures – not mentioned in the article – include of all things a devaluation of the US dollar. Since the Fed is asserting a measure of independence, it appears the only recourse to further Trump’s agenda is through the Treasury Department.  This all culminated on Friday which coincidentally was the eve of the G7 summit. Going into the weekend, the Dow dropped 623 points. My guess is the drop was a little greater than it should have been as positions were probably closed going into the weekend with an aura of uncertainty in the air.

The talking heads really went to town on all of this with the “probability” of a recession increasing in many analysts’ eyes.  Remembering that a recession is defined as two consecutive quarters of negative GDP growth, I don’t see this in the cards as yet.  However, if the consumer bears the brunt of any downturn, it will surely feel like one. 

With this in mind – and also as most of my available cash for the month was previously allocated – I had minimal opportunity to play Friday’s slide.  I had previously set $100 aside as the minimum price for admission to the Webull platform that Tom at Dividends Diversify had reviewed. Basically, on a new platform, I dip my toes in at the minimum level, play around and test the waters before jumping in.  I took it as a sign that my final approval and funding was completed on Wednesday.

The one complaint I have with Webull (so far) is their desktop version is in beta and currently has limited functionality – forcing most activity to a smart phone.  This is probably only an issue for those of us with disabilities. Outside that, it performed in line with Tom’s review.

The enrollment offer had two free stocks which I promptly claimed.  The ones assigned were MFG and ERIC.  Interesting that both are ADRs which could be off-putting to some given the foreign taxes, fees and exchange rates – but they are dividend payers, MFG semi-annually and ERIC annually.  They both have intriguing storylines in that MFG could benefit from ongoing US/Japan trade talks and ERIC could see some benefit with the US blacklisting of Huawei. Neither of these were on my radar but I’ll hold these for now and with the market value being $11.03 getting an unrealized 11% gain for one weeks use of my money.  If only that were to continue … 

My Friday rampage continued by initiating two new positions, both with stories of their own.  CSCO, another 5G opportunity, reported lackluster results and Genpact which was a GE spinoff. GE remains their largest client which may strengthen further if recent allegations against GE prove to be true.  I’ll probably add one more position to the Webull account then pause while I figure out the ins and outs of the app. If you are interested in their promotion, this referral link can be used.

Rampage in this context is a misnomer, but I couldn’t resist.  I guess the real question is whether Trump decides to be civil with our allies at the G7 with a reset towards a united effort against China or if he decides to continue with a self-serving path where an increase in market volatility will result.  Keep your seat belts fastened!

July 2019 Update

The market continued to defy gravity this month as the only external turmoil was leveled at the Fed with encouragement to cut rates in excess of a quarter point. At month end, the Fed chose their own path and the market tailed off from the highs recently attained. Earnings season has been generally good to mixed with ongoing concern regarding Trump’s Tariff strategy the main issue. This month the S&P gained 1.3% while my portfolio gained 1.8%. For the year, I remain ahead of the benchmark by 1.0%.

PORTFOLIO UPDATES

  • finally sold out my OMI position (prior dividend cut) and used the proceeds to increase my RY position
  • Sold my UNIT (dividend cut/debt covenant issue) and LAMR (reporting discrepancies (my opinion)) positions using the proceeds to increase positions in ABM, ARD, BLL, CHCO, KOF, CCEP, CTBI, AKO.B, HOMB, IRM, NWFL, OCFC, OUT, PLD, QCOM, SRC, SMTA, BATRA and VALU as a rebalance
  • increased my CHD position
  • increased my JNJ position

DIVIDENDS

My primary focus resides on dividends with the goal being a rising flow on an annual basis. This month marks the removal of the quarterly comparison as this has proved to be steadily meaningless.

  • July delivered an increase of 4.64% Y/Y. This is off my typical run-rate due to two foreign pay cycles hitting in August this year, rather than the July of last year.
  • Dividend increases averaged 10.13% with 57.27% 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 64.31% of 2018 total dividends putting me on target to exceed last years’ total in late October. The YTD run rate is 107.66% of 2018, slightly under my 110.0% goal – but still recoverable.

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.

PBCT to aquire UBNK for .875 sh PBCT to 1 UBNK. I plan to hold this one as I wouldn’t be surprised if PBCT gets taken out at come point.

The last three continue to validate my strategy of bank consolidations from a few years ago. The only flaw (so far) was the holding period required – but dividends were received while waiting.

SUMMARY

Overall, no complaints. It appears the pending mergers might provide premium to improve my performance over the index, but I don’t want to get too far ahead of myself yet. I still see a little consolidation in my holdings through the last half by migrating to a slightly risk off stance, offset slightly by companies with compelling stories. My cash position does remain slightly above mean.

Here’s hoping your month was successful!

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.