Coronavirus – Pt 3

Another week has elapsed with the coronavirus headlines still front and center.  Politically in the US little has changed with the President doing his utmost to slant the narrative, including leaving an infected cruise liner offshore stating, “I like the numbers being where they are,” … (appearing) to be explicitly acknowledging his political concerns about the outbreak: “I don’t need to have the numbers double because of one ship that wasn’t our fault.”

On the state of the markets, as anticipated there was volatility this past week – despite an emergency Fed rate cut – and the DOW eked out a slight gain.  The one piece of good news at the end of the week was the announcement on test kits for the virus. Many details have yet to be released but will initially benefit two companies – Labcorp (LH) and Quest Diagnostics (DGX).  I suspect it will be provided on a minimal cost-plus basis due to the optics and several insurers already stating existing policies will cover said tests.

 It’s becoming increasingly clear that pundits (probably including yours truly) have disparate ideas as to what’s next.   What is known is travel is being disrupted – Amtrak, airlines and ships. Conventions, including the iconic SXSW, have been cancelled or postponed with a direct economic impact already exceeding $1B – with more to come.  Many companies are issuing earnings warnings, enacting travel restrictions and enabling work from home regimens. Schools in some areas – including the US – are temporarily closing.  Each of these comes with a yet to be identified economic cost, both direct and indirect.  As the US is primarily a service economy, much of this output will not be recovered in future quarter GDP numbers.

Playing on this theme, Jim Cramer began touting his “stay-at-home economy index”.  While (hopefully) being a thought stimulus for his followers, the most blatant issue I have is how well these companies can profit from this paradigm shift.  For example, will new subscribers flock to Netflix? Will companies continue their unfettered advertising on Facebook? How many buildings does Prologis have vacant to accommodate Amazon?  Does Amazon have spare robots up their sleeve to ramp up? This ‘index’ might have legs if the virus is more than a one or two quarter blip.  

Besides the test kits, my inclination is to look at the perceived necessities – the stuff flying off the shelves – even though demand may be based in fear rather than reality – and determine if the stock price reflects a value proposition.  These would include (public companies only):

  • N95 Face Masks (CDC approved
    • Honeywell (HON)
    • 3M (MMM)
    • Kimberly-Clark (KMB)
    • Alpha Pro Tech (APT)
  • Disinfectant Products (EPA approved)
    • Ecolab Inc (ECL)
    • Stepan Company (SCL)
    • Lonza Group AG (LZAGY – caution – possible spinoff)
    • Clorox (CLX)
    • Reckitt Benckiser (RBGLY)

In store for the week ahead will probably be a battle for the headlines between Coronavirus and oil.  No deal in Vienna is good news for US consumers other than the Texans dependent on the oil industry. Prudence dictates I review my oil patch banks’ relative exposure in a declining price environment.
Long: DGX, NVDA, AAPL, PLD, PEP, MKC, MMM, KMB, CLX

The Ongoing Virus Saga

In the markets this week, concerns over Coronavirus continued to be front and center. Not surprisingly caution (finally) took hold amid varying views on the longevity and severity of the impact, including reports of cases in South Korea and Iran.  In a counter programming attempt, the White House, through Larry Kudlow, indicated it was “not an American story” subsequent to the Saint Louis Fed comments stating there is a “high probability” that the outbreak will be a temporary shock.  While it’s become commonplace for the government to talk from both sides of its mouth, the issues I find in the actual data indicate caution is warranted.  

While the slowing manufacturing output is likely a result of supplier delays with the virus, more concerning to me is that for the first time in the Trump presidency the key economic driver of the US economy – the services sector – fell into contraction territory, albeit fractionally.  For good measure, don’t ignore the corporate warnings due to the virus led by the likes of Apple. One contrarian surprise being Caterpillar – although this could be strictly relief that the perceived end of the trade war is nigh.

Complicating any analysis is oil pricing and whether any strength is the result of production cuts, increased demand or refinery maintenance – or some combination.  There remains an ongoing debate among traders as to whether the market is tilting bullish or bearish. So no raging indicators one way or the other are visible.

Reinforcing my concerns are two measures being implemented by China.  The first subsidized loans to key companies that are helping prevent and fight the epidemic.  These rates are as low as 1.32% of which foreign companies, such as 3M are eligible. The second could be the shock that does make this an American story.  China has issued more than 1,600 force majeure certificates to shield companies from legal damages arising from the coronavirus outbreak. The riddle then potentially becomes, “When is a contract not a contract …?”  Keep in mind that next week’s economic data is mostly pre-virus.

In the midst of tax season the initial results look promising.  As many remember, I groused last year (quite a bit) over Trump’s tax cuts actually being an increase.  We decided to accelerate taxable RMDs in 2018 to lower our 2019 tax bracket. To ensure my calculations were correct, I did not modify any withholding rates.  The strategy worked as a refund for 2019 is forthcoming. I’m still a few weeks away from reporting my final tax percentage rate but do know it’s lower year on year.  And yes – unlike candidate Bloomberg I can and do use Turbo Tax, a product of Intuit which is one of my portfolio companies. I did have to smile from the priceless, national advertising they received.

Another element of my consolidation strategy is taking form.  I have decided to eliminate ETFs from the equation. Although there are things to like about them, the downside (for me) is fluctuating payout rates with regression to the mean, partly a result of changes to the underlying components.  Basically, I see minimal upside potential while conceding there is associated risk mitigation I’m giving up. The upside (hopefully) is a slightly higher return in pure equities. I expect to be fully divested by mid-year distributions.

Here’s hoping February is shaping up as a good month for us all!

My Lazy*** Goals

Actual book cover, JoeKarbo.com

In my younger days, I was fascinated with the notion of becoming wealthy with a minimal amount of effort.  To that end I scraped and saved enough pennies to become the proud owner of a copy of the late Joe Karbo’s best seller, The Lazy Man’s Way to Riches.  Imagine my disappointment when I realized that significant effort was still required, albeit in a different manner.  If the book were updated today, I would think it would gloss over the time and coding required to attain website SEO success and focus on the rewards – while ignoring the fact that only a few will reach that level.

My quest for the laziest way to make money was not in vain as I stumbled onto dividend oriented investing forty years ago.  Essentially one can spend as much – or little – time and effort as they want in this regard. One person can use a set-it and forget-it strategy while another can be actively involved.  Or in my case, I’ve used both. While I recovered from my strokes, my portfolio was on auto-pilot accumulating dividends awaiting my return. For over a year – and it didn’t miss a beat. 

The complaint I’ve most often heard is that it takes too long to see results and this endeavor does require patience to get the snowball rolling – probably five to seven years.  But once it gains momentum it is a force to be reckoned with.

This is a meandering way to get to this weeks’ point. I’m really not that much into goals at this stage, but since I’m basically a let the portfolio do its own thing type of guy, there are times when adjustments just have to be made and framing them as goals could be beneficial.  For this year, perhaps you can refer to me as an active manager. The broader theme was my desire to reduce the number of holdings and so far I’ve dropped two (XRX and MSGN) but added two (FTS and TMXXF). Currently, this is a wash. On my monthly reports – with the exception of the new and sold positions – all of the activity nets out with an increase in the value of the stocks retained – which will probably be the case throughout the year.  

Scenario #1

Goal – consolidate all Canadian stocks across multiple accounts into the IRA

Rationale – the tax treaty between the countries allows most holdings to be exempt from the 15% Canadian tax withholding

Funding Source – the sale of PB from my IRA (leaving a slightly larger position in a taxable account)

Actions Required – 

  1. Ensure all have no Canadian taxed dividends
    1. RY, PWCDF are confirms
    2. BCE, CM, BNS, CP, CNI, TRP, TD, BMO, ENB, TMXXF, MFC, SLF, HRNNF, TU, RCI, FTS are pending confirmation
  2. If any are taxed, file appeals
  3. If appeal denied, review for possible sale
  4. If confirmed, add to TRP, TD, BMO, MFC, HRNNF positions
  5. Close out remaining taxable Canadian positions including NTR and AMTD (US)

Over the years I’ve received conflicting answers on the taxability issue.  With free trades I can get the real answer with the next dividend payment. I have 20 current Canadian positions plus AMTD (American, but I grouped it with the Canadians due to TD’s ownership stake).  NTR and AMTD (merger) will be closed positions – probably in April. End result will be more room for foreign dividends to stay under the Form 1116 filing cap.

———

Scenario #2

Goal – Migrate a few issues from Motif to Webull

Rationale – Webull has a promotion too good to pass

Funding Source – petty cash to be replenished by the sale of the same issues in Motif (timed to avoid wash rule issues – if applicable)

My issue with Motif is that they are late to the party on free trades, so I’m beginning to take some money off their table.  Although not fond of Webull (they are in the same camp as Schwab with paying stock dividends as cash-in-lieu rather than fractionals), getting three free stocks is a return equivalent to an immediate 5% (or more).  As my moniker implies, I seek returns where I find them.

——–

Scenario #3

Goal – Add cash to spousal IRA

Rationale – Reduce tax liability

Funding Source – emergency cash to be replenished by the anticipated tax refund

For the first time in years, we have some earned income which enables us to contribute.  This will be done into the spousal one which is not subject to RMDs (yet).

Scenario #4

——

Goal – Address RMDs without liquidating stock

Rationale – Keep the snowball alive

Funding Source – accrued surplus dividends

Our planning for this event was done a few years ago when we reduced the holdings in two IRAs.  One contains all SBUX (cost basis of $6) and the other all AAPL. 2019’s RMDs were addressed by surplus accrued dividends.  In 2020 we may have to journal transfer a few shares of each to the joint account which happens to already have these issues in place.  RMD slam dunk – except for the wife who’d like the cash – hence the alternate funding source.

——

So there are this lazy man’s goals for 2020 and it sure looks like more work than I’ve seen in awhile.  In my spare time I can see how my diverse and weird ideas panned out (or not) to determine the further portfolio reductions so I can return to being a future lazy man! As always, comments, thoughts and criticisms are always welcome.

Who Loves a Surprise?

This week has been flowing a river of surprises and I’m not talking about the nasty ones, like dividend cuts – of which I’ve had my fair share already this year. Rather I’m talking about the good surprises, the ones that put a smile on your face and lift your spirits. The ones that validate theories and reward accordingly. In this holiday shortened week, I have three to share.

Qualcomm/Apple Peace Treaty

On the eve of their dirty laundry being aired in court, the battle ended. Worldwide. Mark Hibben covers essentially all of the thought process I had when I topped off my holdings a little last July. My current thinking is that Intel was having some difficulty engineering a design that avoided patent violations and emanating minimal heat. When asked my position on this, I allowed it is a win for all three parties – QCOM in the short tern, AAPL in the mid to long term and Intel long term. My rationale? The length of the agreement is double Moore’s law providing Intel and/or Apple the runway to leapfrog 5G and focus on 6G – securing some initial patents for themselves. (Long QCOM, AAPL)

Blackstone Converts (finally …)

The long rumored conversion of Blackrock from a partnership to C-Corp will be effective July 1st. This was greeted enthusiastically by the markets, and I applaud as well. This is a positive result of Trump’s tax plan but my reasons are more the personal impact. In my portfolio I hold Blackstone in an IRA resulting in the annoyance of a K-1 as well as the possibility of Unrelated Business Taxable Income (UBTI). Going forward I’ll have the opportunity to add to this holding without looking over my shoulder at tax consequences. (Long BX)

AB Volvo (Wow!)

The one least expected actually occurred two weeks ago but I had to spend a little time digging into their numbers a little to figure out the why. The announcement from Volvo was a dividend increase to SEK 5.00 (17.65%) plus a SEK 5.00 special dividend. As they pay annually, this will hit my account this month. As the news reports in the states depicts Europe on the brink of a recession, I just had to plow through their report.

Looking at the numbers, I see a little weakness in the bus line, likely due to uncertainty around the revised NAFTA. Their otherwise record results included increases in construction, trucks and heavy equipment. Currency was a positive impact as well. As a multinational, they appear poised for continued strength in light of the Trump team’s escalating war of sanctions with the EU. Deere and Caterpillar were named last week as possible retaliatory targets. (Long VLVLY)


All in all a nice and surprising week. Here’s hoping these April showers result in a torrent of May flowers!

Johnny-come-latelies

Generally I refrain from back-to-back posts with similar topics but decided to make an exception this week as the moving parts have kicked into high gear.  My post last week addressed my uneasiness with cryptocurrency as well as my interest in the underlying blockchain technology.  It appears that my view has some support as two blockchain ETFs debuted on January 17th (BLOK and BLCN) and one January 25th (LEGR).  This should be followed by KOIN next week.  Horizons and Harvest (HBLK) also have ETF applications pending.  Grenadier penned a piece on Seeking Alpha that did some analysis on the first two.  Four of LEGR’s top five holdings are included in either one or both of the originals so it will probably be similar.  David Snowball highlights this sentiment in his piece There’s no idea so dumb that it won’t attract a dozen ETFs stating, “…there are no publicly traded companies that specialize in blockchain; there are mostly companies with a dozen other lines of business that have some sort of efforts going into blockchain.”  This is 100% correct.

Continue reading

November 2017 Update

The upward trend continued this month fueled by the progress on the tax plan.  If finalized, my guess is that the first half of 2018 will be good for corporations (i.e., dividends) with reality setting in later in the year that the average consumer received a raw deal and has less disposable income than advertised.  That is unless trickle down really works.  The wild card being the government (or lack thereof) as a second felony plea was accepted with individuals tied to the campaign or administration.  The S&P index increased by 2.81% while my portfolio increased by 3.22% largely fueled by Financials.  For the year I’m still ahead of the index by 3.12%.

Headlines impacting my portfolio (bold are owned):

  • 11/1 – OMI buys HYH‘s Surgical and Infection Prevention (S&IP) business
  • 11/2 – SBUX sells Tazo line to UL
  • 11/6 – AVGO bids to acquire QCOM at $60 cash & $10 stock per share
  • 11/6 – BCE acquiring ARFCF
  • 11/9 – AAPL acquires InVisage Technologies
  • 11/13 – GE cuts dividend by 50%
  • 11/13 – AMT buys Idea/VOD Cellular towers in India
  • 11/13 – VER selling Cole Capital to CIM Group
  • 11/14 – Baupost Group initiates 3,565,361 sh position (abt 6.25%) in AMC
  • 11/14 – MSG to sell WNBA team (Liberty)
  • 11/15 – SQ launches ability to buy and sell Bitcoin
  • 11/16 – PYPL sells $5.8B loan package to SYF
  • 11/16 – IRM buys China assets from SFG.CO
  • 11/20 – MSG acquires Obscura Digital
  • 11/27 – PNC acquires The Trout Group, LLC
  • 11/28 – BLK to acquire C‘s Mexican asset management business

Portfolio Updates:

  • increased position in existing DRE holding

Dividends:

  • November delivered an increase of 18.3% Y/Y with the about 60% of the increase being attributable dividend increases and the remainder purchases.
  • November delivered a 1.0% decrease over last quarter (August) due to two payouts being moved to December.
  • Declared dividend increases averaged 11.9% with 71.75% of the portfolio delivering at least one increase (including 2 cuts (XRX and YUM) and and 1 suspension (TIS)).  Note: GE’s announced cut is counted as 2018.
  • YTD dividends received were 109.86% of total 2016 dividends which exceeded last years’ total on October 25th.

Spinoffs:

Spirit Realty Capital (SRC) – Nov 21, Form 10 was filed confidentially with spin completion targeted for 1H 2018.

Mergers:

AGU/POT (Nutrien) remains pending with the US being the only approval pending.

Summary

My 2018 strategy is forming with the focus turning towards Consumer Staples and Utilities (existing holdings).  I expect to incorporate a side strategy on lower yielding but faster growing companies which I’ll publish in the next week or two.   Of course I will continue to also pursue opportunities as they arise.

And how was your month?

October 2017 Update

This month was pretty solid with the market continuing its upward grind.  Earnings season was in focus with good reports outweighing the bad.  Most of the attribution to the hurricanes was legitimate but a few did raise my eyebrows.  The US dollar turned in a second rising month.  The S&P index increased by 2.22% while my portfolio lagged (again) by only increasing 2.03%.  The two culprits were international currency weakness and a drop in value in my October (speculative) purchase.  For the year I’m still ahead of the index by 2.7%.

Headlines impacting my portfolio (bold are owned):

  • 10/3 – IRM acquires Bonded Services Holdings from Wicks Group, LLC
  • 10/4 – IBM acquires Vivant Digital (pvt)
  • 10/5 – YUMC initiates quarterly dividend scheme
  • 10/5 – IRM buys CS datacenters in London and Singapore
  • 10/6 – K acquires Chicago Bar Company LLC (RXBAR)
  • 10/11 – BHB sells insurance business
  • 10/11 – FHN acquires Professional Mortgage Co.
  • 10/16 – SJI buys NJ/MD assets from SO
  • 10/17 – SYY acquires HFM Foodservice
  • 10/18 – India approval for POT/AGU merger received. awaiting  US and China.
  • 10/18 – DGX to acquire Cleveland Heart Lab
  • 10/19 – JNJ acquires Surgical Process Institute
  • 10/25 – AAPL acquires PowerbyProxi
  • 10/30 – DGX aquires some California Laboratory Associates assets
  • 10/30 – TU to acquire Xavient Information Systems

Portfolio Updates:

  • initiated position in NXNN

Dividends:

  • October delivered an increase of 24.59% Y/Y with the about half of the increase being attributable dividend increases and the other half purchases.
  • October delivered an increase of 8.53% over last quarter (July).
  • Declared dividend increases averaged 10.91% with 70.62% of the portfolio delivering at least one increase (including 2 cuts and 1 suspension).
  • YTD dividends received were 103.83% of total 2016 dividends which exceeded last years’ total on October 25th.

Spinoffs:

Spirit Realty Capital (SRC) has been announced.

Mergers:

AGU/POT (Nutrien) remains pending.

Summary

With the primary goal of exceeding last year’s dividends completed, my focus turns to developing a strategy for 2018.  Meanwhile adding NXNN (speculative) in October and DRE for November’s primary purchase.  DRE as they go ex-div next week and a special dividend is likely in December as a result of the sale of their Medical buildings to HTA this past May.