Sluice Box: My 2018 Strategy

In a recent conversation with a friend of mine, the topic of cryptocurrency arose as he has started accepting Bitcoin in his business.  Though more enamored over the possibilities of wealth through hoarding and/or trading, he began to look under the hood to figure out why I had a greater fondness for Blockchain over any cryptocurrency.  His insight surprised me: “You’re like the sluice box salesman in the California Gold Rush.”

I choose to think of myself as a shortstop hitting singles rather than a home run hitter going for the fence, but his analogy was apt.  I prefer to get a slice of many transactions as opposed to getting the big one.  I play the percentages.   He was able to visualize I place a greater value on the tools (mining), transport (exchanges) and utility (ancillary applications) rather than the commodity itself.  Meaning, I’d rather sell the Levi’s than look for (and mine) the gold vein.

It appears the revisions to the tax plan being discussed will be slightly less draconian than previously announced resulting in a little lead time for portfolio adjustments.  My guess (pure speculation) is the first half of 2018 will be relatively good but a little choppy.  The last half I suspect we’ll be seeing a weaker dollar, a little uptick in inflation and minimal tangible results from the administration’s policies.  Anyway, an emphasis on appreciation over dividends in a rising tax environment may result in tax deferral possibilities.  This belief is the basis for next years’ strategy as subsequently outlined.

  1. Continuation of the primary portfolio strategy in regards to moving closer to the defined target allocations.  One example of this was my first December purchase, KMB which is an Anchor holding of mine.
  2. With the tax bill still in an uncertain status, load the maximum allowable contribution to the IRA.  These funds have been allocated and will be moved by month end.  A small Canadian holding in my taxable account has been identified as my new IRA purchase which will probably be made in January (pre ex-div).  A by-product of this will be a temporary overweight status in this issue.  Since I don’t like redundant holdings across accounts, my smaller taxable holding will be sold post ex-div.  This should shield more income from taxation (under current tax).
  3. Implemented (December 14th) my side strategy for 2018 titled Sluice Box which is a reference to the Gold Rush days.  This represents about 1% of the portfolio and was created (and bought) in my Motif account (shameless plug).  The emphasis is on Bitcoin, Blockchain, Growth and my first Swiss stocks with a couple of beaten down issues thrown in.

My 2018 strategy research began in earnest when I encountered Fortune magazines’ November 1st article, In Search Of ‘Vital’ Companies.  Of the fifty companies listed, my selection process drilled into the dividend payers – albeit at low yields.  Then on November 7th, Investor Place published The 10 Best Growth Stocks You Can Buy Now I chose to ignore The Dividend Guy’s August 23rd launch of Dividend Growth Rocks as I tend to shy away from paid sites particularly when operated by one person with multiple pseudonyms.  Besides, only one of his selections (Nordson – NDSN) was either not owned already or replicated in the other analyses.

Once the data was combined, I removed issues already owned and ones I had no inclination to buy.  Basically I had to be convinced of the opportunity and that the price (subjective argument) remained reasonable.

The following table presents my 2018 picks and the primary reason.  All but one are dividend payers and I front-loaded my purchase to 2017 to ensure receipt of CME’s special dividend (ex-div Dec 28).

SLUICE BOX (Motif: 2018 Growth)
Yield
NVIDIA Corporation (1,2) NVDA 7.30% 0.32% Bitcoin chipset
CME Group Inc CME 7.30% 1.76% Bitcoin Futures
Cboe Global Markets Inc CBOE 6.70% 0.86% Bitcoin Futures
Intercontinental Ex. (1) ICE 6.80% 1.14% Coinbase investor
Nasdaq Inc NDAQ 6.70% 1.96% Blockchain
Microsoft Corp. (2) MSFT 6.80% 1.98% Blockchain (Azure, Ethereum)
JPMorgan Chase & Co. (2) JPM 6.80% 2.68% Blockchain (hyper ledger)
Veritex Holdings Inc VBTX 5.90% 0.00% emerging growth co. (JOBS Act)
Ottawa Bancorp, Inc. OTTW 6.10% 1.10% 2-step conversion (growth)
Newell Brands Inc NWL 6.50% 3.02% Brands
Energizer Holdings Inc ENR 6.50% 2.44% Brands
Cognizant Technology (1) CTSH 6.50% 0.84% Future 50
Intuit Inc. (1) INTU 6.70% 1.00% Future 50
Novartis AG (ADR) NVS 6.70% 3.21% possible Alcon spin
ABB Ltd (ADR) ABB 6.70% 2.91% purchased a GE segment

Notes:

  1. Future 50 (also currently own: MA, V)
  2. Investor Place 11 (also currently own: V, SQ)
  3. Other Bitcoin/Blockchain indirect investments include: GS, IBM, WU, AMTD

At the very least it will be interesting to observe the Crypto phenomenon in more of a supporting role.  I also need to acknowledge Dividend Diplomats whose research on NWL was enlightening.

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Tax Plans – Part 2

Much has transpired over the past week in regards to tax reform.  With the Alabama Senatorial special election now being too close to call, Congress is kicking into high gear to try to get it passed while the Republicans hold a slim majority in the Senate.  This past week saw the House passing their version with no debate although appearances were that many were unaware of the full impact.  Case in point is the CNBC interview with Diane Black (R-TN) where she had the wrong definition of carried interest (she thought it was applicable to car dealers not hedge funds).

If it passes the Senate in something close to its current form, the result will be a reduction in the number of people qualifying for tax deduction itemization from the current 29% to an estimated 6%.  This is the “gotcha” for many filers including myself.  The proposed increase in the standard deduction is large enough to wipe out itemization yet too small to prevent an overall tax increase.  The only viable course of action (for me) is to front load deductions into the current tax year and hope it is not a retroactive change.  I’ve eliminated one alternative from consideration (establishing a corporation) as it would only be a wash in my current bracket and would choose accelerate my 2018 income up to the 25% tax level while reducing subsequent years to fall below the 0% rate.

This plan also has some potential ‘unintended consequences’ which may impact both Trump’s agenda as well as 2018 (and beyond) investment strategies.  Last week I identified home builders as a potential casualty, this week I’ll present a few more that I’m looking at .

Chained CPI

This will impact retirees first and wage earners later.  Essentially this modifies cost of living increases to a lesser increase than regular CPI.  Social Security and Veterans benefits will have lower increases than before reducing disposable income.  Wage earners will see tax brackets expand more slowly potentially (eventually) putting them in a higher bracket faster than the current structure.  End result is (my opinion) a positive for Staples and Utilities with Discretionary taking it on the chin.

Municipal Bonds

The plan would eliminate – or curtail – issuance of private activity bonds (hospitals, nonprofit colleges and universities, and airports) or Municipal Bonds for stadiums.  These types of bonds are often used for rehabilitating cities – think infrastructure.  If one tool is eliminated what is the chance of Trump’s Public/Private partnerships getting off the ground?  I see this as a negative for some Industrials.

General Electric

In the midst of GE’s dividend cut and restructuring I had to hit the pause button.  Their game plan going forward is to focus on three segments; Aviation, Healthcare and Power.  All fine and well – at least it’s a plan.  The remaining business lines will be sold or spun off – which is why I remain interested (although prior spins haven’t been shareholder friendly).  Now the tax plan injects an additional wildcard.  The Power division is the most troubled.  The Renewable Energy segment may be a spin candidate especially as the tax plan targets the Wind Energy production tax creditRetroactively.  Talk about throwing a monkey wrench into the thought process.


With all the unknowns, I believe my 2018 strategy will be to prioritize growth over yield.  The rationale being to delay taxable events as much as possible.  Next year is certainly on tap to be full of uncertainty and  surprises.

Are you considering alterations to your strategy?

 

My Overseas Guidebook

Over the past few months I’ve visited several blogs when one topic in particular has been addressed. For the past year or two I’ve been expanding my international holdings to my current mix which is highlighted below. Time In The Market got me thinking with his comment.  Although he tends to be more an ETF investor, he was experiencing similar trends as I.  Then there was Bert’s CM purchase.  He was agnostic to the CAD/USD correlation probably because the US and Canadian markets are usually tightly correlated with exchange rates.  Then there was Tawcan, illustrating his top five.  In his post he mentioned his use of ETFs for international diversification.  Finally there was The Dividend Pig musing on portfolio hedging.

My endeavors in overseas investing have delivered an education of some obscure items that hopefully will benefit an investor looking out of country.

Create a Strategy

Before starting, perform your due diligence and run an issue through your screening algorithm.  Then ask the question, “Is my home currency overvalued?”.  In the case of US investors, the simpler question is “Do you believe Trump’s policies will result in a stronger or weaker dollar?” and secondarily, “To what degree?”.  I like to use foreign exchange as a tailwind.  But by investing in dividend stocks in the event I’m wrong the sting is mitigated.

Be Aware of Monthly Deviations

Currency fluctuation will result in either positive or negative moves in both portfolio value and dividend amounts.  As an example January to August 2017 saw the US dollar depreciating against most currencies.  One example is the Euro which has appreciated 8.95% since last October – making US exports cheaper and imports more expensive.  One anomaly with the currencies I track – the relative value has been stable when compared to each other whereas the US dollar has been the outlier.  Also many companies pay annual dividends or interim/final (with variable amounts) dividends.  Some are capped at a percentage of profits.

Be Wary of Tweetstorms

In recent months, fluctuations have occurred as the result of Presidential tweets.  Most recently was the posturing on NAFTA.  This was a buying opportunity for Canadian and Mexican issues.  Conversely, dividends received took a hit.

Understand the Tax Implications

The US engages in tax treaties on a country by country basis which establishes the withholding rate and the application of said rate.  Ones that I’ve found with caveats include Canada (15% unless in an IRA and a part of DRS – then no withholding), Australia 15% (unless reduced via franking), Singapore – verify on a company basis whether dividends are qualified (may impact the decision to place in a taxable or tax-deferred account) and Switzerland (15% if registered, 25% if not – check your broker).  The good news is that at tax time foreign withholding can be credited (with some limits) under current law.

Stay Abreast of Local Events

This can be issues not normally aired in the US such as the Australian deflation discussion (generally groceries) or the Customs workers strike in Chile.  These wildcard issues have the ability to impact the profitability of the investment.

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The lessons I’ve learned have been many and these are but a few.  However, foreign investing can be rewarding as long as there is an awareness.

Overheard in Texas

Though not as juicy as THE conversation between attorneys in DC a few weeks ago, the opportunity to eavesdrop landed in my lap a couple of weeks ago.  Sitting across from me at my local Starbucks were three individuals.  Although not aware at the time, (or I would have paid closer attention sooner), I fast realized one was a locally based money manager, the second an aide of some sort (perhaps a lobbyist) and the third a Republican Congressman (not from my district – but the next one east of here).  They were engaged in a spirited discussion when some topics arose that got my attention (and my phone set to take some notes).

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A Look ‘Down Under’

It’s been about two years since I first invested in Australian issues, choosing to take a slow approach while I obtained some practical experience first hand.  Certainly many of the yields are good, but the economy – much like Canada – is resource based.  Then there’s the whole franking deal.  Plus the foreign exchange conversion – but this has been relatively stable at 75 – 80 cents per USD.  Add to that, until recently the selection was limited to ADRs or using a cost prohibitive foreign desk.

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‘Tis The Season

It’s getting to be that time of the year and since I don’t think the grandkid reads this thing, I figured I’d share one of the presents she’ll be getting.  Just to review, each year since she came to live with us she has received shares in a company as a gift. This gift has been purchased in a company DRIP, established as a Custodial Account of which I’m the custodian. Generally, the company is one in which she can relate, i.e., Trix was her favorite cereal as a kid hence the General Mills stock.

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It’s Not Our Fault

There is a trend occurring that I find troubling to say the least. It is the inability of people in power – essentially those in control of a given situation – to take ownership of a failure. Gone are the days of Harry Truman who popularized the concept of accepting personal responsibility rather than assessing blame with his famous desktop sign stating, The Buck Stops Here. We accept the fact that in politics the notion of assigning fault to a predecessor is commonplace, although not necessarily right. It is what it is. To that end, I feel this is but one reason the majority of citizens have a significant disdain for politicians.

Recently I’ve noticed an increasing number of people in business who appear to subscribe to this political theory.  Forget about asking forgiveness of their customers and outlining remedial actions to remedy the problem. In my book, corporate officers who make the choice to deflect blame rather than accepting responsibility should be replaced as this easily could be a sign of more significant problems simmering beneath the surface.

The first resident of my Wall Of Shame is Reggie Fils-Aimé, president of Nintendo of America. In an interview discussing delays on the Switch, said, “We don’t want to have a consumer disappointed by not being able to get one for the holiday season. But managing that complex supply chain is a challenge.” and “… what I don’t know is what the demand is going to be. And there is a potential that demand is going to outstrip supply.”

Regarding the SNES Classic, he blamed problems “outside our control” at retailers. Looks like they could use a new forecasting methodology, less complex supply chain and greater control over the retail channel? Perhaps even communicate with buyers.  Maybe the answer is much simpler – as in reshuffling maybe the C-Suite?
The second entrant is Rick Smith of Equifax which fessed up to a massive data breach on September 7th. The hack was discovered July 29th (and began in May) and about August 2nd and 3rd, three executives (reportedly in a planned 10b5-1 sale) sold about a combined $1.8m. While the optics don’t look good on this event, it only gets better.

They then blamed a flaw in the open-source software created by the Apache Foundation (STRUTS) without disclosing whether the patches released by Apache since March were properly applied. In a response September 14th, Apache said they weren’t. Also September 14th, CNBC reports that ‘admin’ was used as the database password in Argentina.

The wisdom of using open-source versus proprietary software should be questioned as well as the sheer stupidity exhibited by their administrators.  Then in an attempt to limit liability, their “free” credit monitoring had a provision limiting the legal actions affected consumers could use.  This was subsequently updated with a statement saying, “enrolling in the free credit file monitoring and identity theft protection products that we are offering as part of this cybersecurity incident does not prohibit consumers from taking legal action.” At week’s end, two exeutives “retired” effective immediately.  But not the CEO.

The Fool highlights some other examples but none are nearly as brazen as these two.  I do not own Nintendo (NTDOY) but have them on my watch list.  Perhaps their actions are little more than a misguided marketing ploy to stimulate sales.

I do own a small slice of Equifax (EFX) which is now under water.  As this space is controlled by the tri-opoly of Equifax, Trans Union (TRU) and Experian (EXPGY) there is not significant competition.  In fact, most US mortgages are scored using a merged report of these three bureaus.  So my game plan is to ignore TRU (no dividend), wait to add to my EFX position (so as not to catch a falling knife) and look closely at initiating a position in Experian.  There are rumors that EFX may now be a takeover target as well.

Update 26 Sep 2017 – Rick Smith CEO of EFX has retired effective immediately

So any thoughts on the data breach or other blame games?