Warren’s Rant
I have to admire the old bird as he’s never one to mince words. Such as his swipe against Senators Warren and Sanders in particular and Progressive Democrats in general regarding stock buybacks. For the record, I tend to agree with his point – although branding them as either economic illiterate(s) or silver-tongued demagogue(s) may be a little harsh.
My issue is if buybacks are bad and must be penalized, then shareholder dilution via new share creation must be good and rewarded. How many meme stocks fall in this category (AMC, anyone?) The progressive narrative in this regard is a false narrative – but does resonate with the base.
There is a legitimate narrative but it’s not nearly as sexy. Future tax receipts are at risk when buybacks occur. Fewer shares mean fewer transactions which means less opportunity for capital gains taxes. Although I’m not a proponent of the buyback tax, I can see it as an opportunity to maintain the status quo rather than digging us even deeper into debt.
Don’t get me started on a wealth tax on unrealized gains …
GICS Reclassification
The long awaited GICS sector reclassification is at hand, slated to be enacted after market close March 17th. Seven of my companies are impacted with the old and new sectors as follows:
| Sector change eff Mar 23. 2023 | OLD | NEW | |
| CMSQY | Financials | Industrials | |
| V | Information Technology | Financials | |
| MA | Information Technology | Financials | |
| GPN | Industrials | Financials | |
| BR | Information Technology | Industrials | |
| ADP | Information Technology | Industrials | |
| PAYX | Information Technology | Industrials |
The impact to my sector allocation will be:
| OLD | NEW | ||
| Financials | 31.70% | 32.20% | |
| Industrials | 8.10% | 11.60% | |
| Information Technology | 11.60% | 7.50% |
Not a big deal, in a nutshell Transfer Agents and Payroll Processors are new Industrials and Payment Processors become Financials. The big loser is Information Technology. Among DGI enthusiasts, probably the most notable change is Target (TGT-not owned here) moving to Staples from Discretionary. The visual of my world post-reclassification is:
The downward trend I had been seeing over the past couple of years in my overweight Financial sector will be erased overnight.
Those of you that are ETF investors will not be immune from this either, as several will rebalance (and change holdings) automatically.
Portfolio Activity MTD
As mentioned last week, I dropped Lake Shore Bancorp (LSBK) like a hot potato on the 1st. My primary rationale for owning was the demutualization play. My thoughts are any meaningful premium is off the table due to their consent decree with the OCC as a result of failures in their fraud prevention and anti-money laundering controls. Making matters worse, shareowners get to pay for their screwup and system upgrades with a dividend suspension.
So I moved the proceeds from the sale to the IRA to make Prologis (PLD) a full position. Actually, PLD is a little overweight as I have yet to sell the shares in the taxable account. The downside is that I missed the ex-div date – but I’ve already booked the miss for February so I should be ahead by year-end. Any purchases over the next 30 days may be constrained by wash rule considerations triggered by the fractional share sales as part of the M1 transfer.
The 4% 3-month CD from Premier Bank (OH) matured and the proceeds reinvested into another 3-month CD from UMB bank (UMBF) at 4.65%. For the most part, until the debt ceiling is resolved, I’ll probably be juggling between cash equivalents and targeted sales, with an occasional purchase thrown in.
Bank Failures
My potential sales may be muted a bit after the culmination Mr. Markets’ wild week triggered by two bank closures. As half of my possible sale list includes banks (mostly regionals), it may take a while for price recovery in this space.
Neither of the two failed banks resided in my portfolio – not because of business model, but due to valuation. When the dust settles, my assumption is there will be a dual causality to these implosions, 1) the Fed rate hikes and these banks risk management protocols to mitigate via hedging, and 2) Their specialization and concentration in niche markets (Venture Capital and Crypto).
An argument could be made that other banks have similar risk factors, which is true depending on the maturity cycles of their treasury holdings. Smaller banks have fewer options to spread this risk but tend to have stickier low-cost deposits as an offset. My ongoing account transfer (and Direct Deposits – coming up on three months) is Exhibit 1 of the stickiness factor.
I believe the larger headlines will be in the coming days as the full derivative impact becomes known. Some of the uninsured are beginning to dribble out:
- Circle – $9.9B
- Roku (ROKU) – $487M
- BlockFi (bankrupt) – $227M
- Rocket Lab (RKLB) – $38M
Still being determined (hampered by the massive outflows) but could be as high as $150B. Secondary impacts could be payroll, working capital and accounts payable with ripples extending to suppliers and vendors with the geographic epicenter being California. The irony? A vicious cycle is emerging between crypto-centric companies failing and weakening some players in the traditional finance space which in turn nails the crypto-centrics. Next week, I’m watching Signature Bank and Circle in particular as this plays out and wondering which economically illiterate agency dropped the ball on risk management oversight. Perhaps worthy yet another House investigation?
Just wondering, if small carries a higher risk quotient, does Senator Warren’s tune change regarding M&A? Probably not is my guess. Have a good week!
Seeking Returns 