Show Me The Money!

politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other.”

Oscar Ameringer 1870-1943

With apologies to the cast of Jerry Maguire, this post is not about sports – unless politics  is now the national pastime.  This post is only peripherally related to the forthcoming election by virtue of the cash.  Period.  Today is not about Purple, Red or Blue – but Green.

Last week I mentioned that any sales of my banks were on hold pending a study which I have now completed.  The common denominator in any US election is fundraising.  The Federal Election Commission lays out the rules of the game, one of which is that cash must be held in one (or more) domestic financial institutions.  For a multitude of reasons (mostly tax related), most campaign advisors recommend placement in a non-interest bearing account.  (Exceptions are rampant – particularly among PACs, but we’ll assume otherwise for simplicity’s sake).

In the current environment, low or no-cost money is key to profitability.  Once critical mass is attained, the spread between cost of funds and the amount earned can be significant.  Three ready sources (that I’m aware of) exist – HSA/FSA accounts (covered previously), state and local tax accounts (still looking for a data source) and political money.

The main problems with political money are additional reporting requirements and stickiness.  A media buy can pull thousands (or millions) of dollars from an account in short order – which could be problematic for many smaller banks.  That said, I kind of had to wonder if the PE ratio noted by Lanny of Peoples United (PBCT) is attributable in part to the fact it was of two used by the Bernie Sanders campaign.  Or perhaps it is an offset to one of my banks’ heavy leverage to the oil patch (BOKF).

Political money is quite often invested in brokered CDs (ensuring FDIC insurance), Treasuries and other low risk and therefore low-yielding investments.  One such bank, Amalgamated (AMAL) reported (March 2020) $774.8m in political deposits (campaigns, PACs, and state and national party committees) with a net interest margin of 3.46%.  All that is required is a decent algorithm to ensure liquidity as the candidates spend their money.

As I was identifying which banks to retain in a post-Motif world, figured it might be enlightening to identify if there was a Republican alternative to the Democratic Amalgamated?  The amount of blatant hypocrisy embedded in the money?  Preconceived notions that were pierced?

I identified 842 campaign accounts reported to the FEC.  116 candidates had no report on file – pretty evenly split between parties.  One of the reasons is explained in this article.  115 of the accounts were held at non-public institutions (private banks, mutual societies or Credit Unions).  For the purpose of this analysis, both categories were ignored with one exception.  66 institutions had the account of only one candidate which were also ignored (except for the self-reporting piece) as they were generally banks in the state or district of the candidate.

The first exception was the answer to Question #1  – a Republican alternative to AMAL.  The answer is an unqualified yes, although Chain Bridge Bank is a closely held (not publicly traded) corporation.  It probably played the spread a little better than AMAL by investing in Treasuries last year, locking in then higher rates.  I identified 42 Republican accounts  held at Chain Bridge versus 88 Democratic at AMAL.  Some Republican accounts of note (at Chain Bridge) include: John Cornyn (TX), Tom Cotton (AR), Lindsey Graham (SC), Joshua Hawley (MO), Rand Paul (KY), the Republican National Committee and one Donald J. Trump.  Notable Democratic accounts at AMAL include: Richard Durbin (IL), Kamala Harris (CA), John Lewis (GA), AOC (NY), Bernie Sanders (VT), Elizabeth Warren (MA), the Democratic National Committee and Joe Biden.

As far as hypocrisy goes, in politics it’s second nature and there’s little difference with the money.  While Democrats seem to thrive keeping Wells Fargo’s feet to the fire after multiple misdeeds over the years, apparently they aren’t severe enough to warrant fellow House Financial Services Committee members David Scott (GA) and Madeleine Dean (PA) to move their accounts or other notable Dems such as Timothy Kaine (VA) or Ted Lieu (CA) either.   Republican’s aren’t immune from hypocrisy either.  Consider the President’s America First campaign.  Apparently Brian Bavin (TX), Richard Shelby (AL) – both BBVA, Glenn Grothman (WI – BMO), Devin Nunes (CA – MUFG) , Ken Calvert (CA – RY) and John Cornyn (TX – UBS) all consider repatriating profits to other countries (Spain, Canada, Japan and Switzerland) the path to making America Great Again.  Moving along …

Let’s talk of my biases – things I had presumed accurate with little basis for the assumption.  Things like Zions Bancorp (ZION) based in Utah would have a conservative political bent.  In fact, 75% of their political accounts are Democratic.  Or the International Bank of Commerce (IBOC) with their CEO an ardent Trump supporter headquartered in a border town with both their political accounts being Democratic.  Or First Republic (FRC) that had some interesting – if not questionable – dealings with Trump associates entrusted by two Democrats. So much for preconceived notions …

The top ten publicly traded banks holding political campaign money are (# of accounts):

Bank of America Corp BAC 115
Amalgamated Bank AMAL 89
Wells Fargo & Co WFC 87
Truist Financial Corp TFC 81
PNC Financial Services Group Inc PNC 23
Citigroup Inc C 19
JPMorgan Chase & Co. JPM 17
Eagle Bancorp, Inc. EGBN 14
Cadence Bancorp CADE 13
Capital One Financial Corp. COF 13

If I were to wager a guess, Amalgamated and Chain Bridge have the number of accounts to move the needle a little where the others either don’t have the critical mass or their sheer size dwarfs any impact to earnings.

I currently own AMAL, BAC, BANF, BMO, BOKF, C, CBSH, CFR, CHCO, CMA, FFIC, FHN, FMBH, HOMB, HTH, IBOC, JPM, KEY, ONB, PB, PBCT, PNC, RY, TD, UMBF, USB, VLY and WFC all with varying degrees of campaign funds.

Portfolio War Footing

the condition or status of a(n) … organization when operating …or as if a state of war existed.

https://www.dictionary.com/browse/war-footing

This week we’ll delve into the dark side as 2020 is rapidly evolving into a nightmare for investors.  While stabilizing a little this week, I believe the market can easily take another leg down. Just let the headlines sink in a little … questions on the length and breadth of the pandemic and the efficiency of the mobilization of the government’s economic response.  Meanwhile the numbers roll in – record unemployment and GDP contraction. Pundits are debating whether this is a recession or even a depression – you never are quite sure until you’re in the middle of it. The icing on the cake? Earnings season is upon us with some nasty surprises likely in store.  So what’s an investor to do? First and foremost … maintain your sense of humor in order to keep your perspective intact. Here’s one for the Hormel investors:

Many DGI folks are in the selection phase – identifying the potentially weak links.  The ones that could be in the position of cutting, suspending or even only maintaining (not growing) their dividends.  This is where it gets tricky as geography, industry, diversification and geopolitics need to be incorporated into relative financial strength of a company with the estimated disruption time frame on earnings as the divisor.  Best of luck with that model. Particularly when there is little consensus on when the US will fully reopen for business. Not mentioned publicly is the liability factor. Will the government indemnify consumer-facing companies from lawsuits arising from contagion?

The EU banking regulator now “urges all banks to refrain from dividends distribution or share buybacks which result in a capital distribution outside the banking system, in order to maintain its robust capitalisation” through at least October.  Australian and New Zealand banks are also scaling back and there are calls in some quarters for US banks to do likewise.  I take this as a signal that regardless of the daily message being delivered, there is some feeling this won’t be enough – and it may last a little longer than some would hope.   

Florida tourism appears to be closed at least until June 1st with Universal’s announcement.  Schools remain closed with remote learning in full swing and graduations postponed. We’re looking at even odds that the granddaughter’s first college semester will be distance learning as well.  Four small businesses on my walking route have been shuttered, so there is tangible evidence that change is afoot.

My approach to investing and life has always been to prepare for the worst but hope for the best.  With the prospect of a depression looming ever larger, my realization is that my portfolio is not on war footing.  In fact, I remain unsure exactly what war footing would look like given the circumstances of today.  The one certainty at this moment is the government has successfully recruited several private sector companies to marshall the distribution of the first wave of the largess.  Ones from my portfolio include, Blackrock (BLK), State Street Bank (STT), Paypal (PYPL), Intuit (INTU), JP Morgan (JPM) and Bank of America (BAC). Little doubt these will generate new business with the initial volley.

If the economic hit worsens or broadens, there is but one historical reference to use as a guide.  Granted the causation differs, but we’re only looking at outcomes. During the Great Depression, the baseline differs as we were a creditor rather than debtor nation and a more industrialized rather than service economy.  The human factors (I think) would be similar in nature to enable a broad brush comparison.  

The major difference between the eras is that then, movies and events provided an escape from reality – today, this outlet is non-existent with social distancing  and AMC Theatres (AMC) may now require a bailout to stave off bankruptcy. Venue operators and concessionaires loom large in this equation as well, although diversification may limit some of the impact – or worsen it.  Companies in my portfolio waving caution flags in this regard include, Disney (DIS), Comcast (CMCSA), Compass Group (CMPGY) and ABM (ABM). Non-portfolio public companies include Aramark (ARMK) and Sodexo (SDXAY).

A 2008 analysis by Dave Chase (which was geared more towards the role advertising played) did present some useful findings:

% DECLINE IN CONSUMER SPENDING BY PRODUCT TYPE

PerishableSemi-DurableDurableServices
19302%9%23%5%
19314%15%4%
19326%13%24%8%
19332%9%-1%1%
Data from Dave Chase

Perishable – meat, vegetables, dairy products, prescription drugs

Semi-Durable – clothing, furniture, preserved foods

Durable – automobiles, home appliances, electronics,, firearms, toys

Services – haircuts, doctors, car repair

While past performance may not be indicative of future results, if human nature and the self-preservation instinct remains intact there should be some correlation. My investments don’t quite match these categories and the task at hand is to perform more research – especially where secondary effects may be present, one example (of many) being Southwest Airlines (LUV) capacity cuts impact on ABM Industries (ABM).

This line of thinking will probably be prevalent this year.  But I’d be more than happy to chuck it in the trash if, as the President promised on February 28th, “It’s going to disappear. One day, it’s like a miracle, it will disappear.”  And may that day be soon.

January 2020 Update

What a way to start the new year.  Beginning with the reshuffling of my portfolio and continuing right into earnings season and the inevitable debate over the Coronavirus impact on the economy … all I can say is yep it’s a lot to digest – and it’s only January.  With the gyrations in the market, all but two of my low-ball limit orders executed, probably the most controversial being MTR Corporation – the Hong Kong high speed rail line recently at the forefront of the protests. Anyway, I added two Canadian companies (Fortis and TMX Group – (Toronto stock exchange)) and starting the long rumored whittling of some of the non-core holdings (XRX and MSGN).  Most of the other action was moving Canadian companies from my taxable accounts to the IRA – some of which were done as a rebalance to minimize fees (hence the slight additions to the other holdings). Also selling part of the PB stock (which went overweight due to a merger) to fund these movements. As I indicated last week, this is the first of a multi-month transition. Obviously my timing was decent (this time, anyway) as the S&P lost 0.16% for the month while my portfolio gained 1.81%.

PORTFOLIO UPDATES

DIVIDENDS

My primary focus resides on dividends with the goal being a rising flow on an annual basis.

  • January delivered an increase of 22.73% Y/Y primarily the result of last years’ dividend cuts rolling off.
  • Dividend increases averaged 11.48% with 8.5% of the portfolio delivering an increase.
  • 2020 Dividends received were 1.86% of 2019 total dividends putting me on target to exceed last year’s total in November. The YTD run rate is under my 110.0% goal but I anticipate this will normalize as my portfolio movement becomes clearer and the current year begins to distinguish itself from the last. 

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.

AT A GLANCE

Inspired by Simple Dividend Growths reporting

The relationship between market action and purchase activity was roughly 95/5.  As I’m generally playing with ‘house money’ (proceeds from sales, M&A activity and dividends), I doubt there will be a significant variance until I fund my 2019 IRA contribution.  The Net Purchase Expense being less than 1 or 2% illustrates the ‘house money’ concept. Timing did play a part as I sold early in the month (before the drop) and most of the purchases were in the latter part of the month. 

SPINOFFs

On Oct 4, 2018 MSG filed a confidential Form 10 to spin the sports business which remains in progress.

MERGERS

Spirit MTA REIT (SMTA) voted on Sept. 4th to approve the sale of most assets to HPT for cash. A second vote was held to liquidate the REIT. The first payment was received and awaiting final settlement payout. Fully expecting a profitable outcome for one of my most speculative positions.

SCHW to acquire AMTD for 1.0837 sh SCHW to 1 AMTD.  My only surprise with AMTD being taken out was the suitor – I had expected TD.  Regardless, I have three concerns over this deal, 1) profit margin compression with the onset of $0 fee trades, 2) possible liquidation of a partial TD stake to reduce their ownership share from 13.4% to 9.9% (the same issue Buffet regularly faces) and 3) 10 year phase-out of AMTD/TD cash sweep account relationship.  The third one means TD has a low cost (albeit, decreasing) source of deposits for the foreseeable future. After the first of the year, I’ll probably cash in AMTD and increase TD a little further.  

SUMMARY

Overall, the only complaint is the sluggish start to the year. Minus the drag from last years’ dividend cuts I figure this will be short lived.  On my goals, progress was made as follows:

  • Scenario 1 – TD is now confirmed
  • Scenario 2 – Half complete, awaiting timing issues for the sell part
  • Scenario 3 – Determination of maximum contribution amount complete
  • Scenario 4 – 2020 RMD amounts identified

Here’s hoping your month was successful!

Trump-Tied Banks

Headline Risk

the possibility that a news story will adversely affect a stock’s price

https://www.investopedia.com/terms/h/headline-risk.asp

As my readers are aware, for a variety of reasons I’ve had an affinity for the banking sector following the financial crisis. Outside the rants of a few of the current presidential contenders highlighting abuses against the ‘normal people’, this sector has been relatively subdued albeit with a major storm cloud brewing on the horizon. This formation hit my radar with the August 19th, 2018 article in the American Banker. Since then, I’ve been tracking the progress of this storm to either identify a manner to profit from the event, to see if it dissipates or if it evolves into a black swan.

This week, the storm finally arrived although I have yet to batten down the hatches. My sense of urgency to publish my findings only increased when I ran across a piece by one of our own, All About Interest, in determining a possible investment in Citizens Financial Group (CFG). My response was: Tending to err with an abundance of caution, I would dig much deeper on CFG. Their former parent had financial issues (hence the spinoff) and most recently has been the associated with Manafort loans (speculation is they are ‘Lender B’ in the Mueller report). Another bank with Manafort ties (BANC) last week cut their dividend by 53.8% – although this could be unrelated and pure coincidence. Basically pointing out a basic flaw in pure DGI screening methodology – Headline Risk.

  • CFG has had a troubled history probably due to its’ former parent, Royal Bank of Scotland (RBS) (IPO’d in 2014, fully divested in 2015)
  • CFG was apparently “Lender B” in the Mueller Report with questionable loans to Manafort (perhaps a coincidence, they issued $300m in stock as Series D preferred in January)
  • Another bank involved in Manafort loans, BANC, announced a dividend cut of 53.8% effective July (I can’t say if there is a correlation)
  • An indictment against another Manafort lender, Federal Savings Bank (pvt) CEO Stephen Calk, was unsealed after I posted my comment (alleging his personal actions to bypass standard loan processes resulted in a $16m loss to the institution)

Certainly enough thunder to keep me away from an investment in any of these. My count indicates the Trump 8 identified by the American Banker has more than doubled and now stands at 15 – some of which I’m invested in. I’ve basically categorized them into Questionable, Cooperator, Cautionary, Litigant in addition to the three Culpables addressed previously. This is not to imply any wrongdoing – only one of the barometers I use to assess relative safety and mitigate Headline Risk.

QUESTIONABLEhave issues that are unsettling to my investment philosophy

  • Sterling National Bank (SNL) – provided financing for Cohen’s taxi-medallion business
  • Signature Bank (SBNY) – allegedly lent money to real estate developers, (including Kushner’s family) that used improper tactics to push out low rent tenants. Ivanka served on the board between 2011 and 2013.

CAUTIONARYhave potential exposure but appear to be on the right track

  • First Republic Bank (FRC) – filed a Suspicious Activity Report (SAR) on flow through money related to the Stormy Daniels payment and a Columbus Nova payment (Russian Billionaire company)
  • Royal Bank of Canada (RY) – McDougal and Daniels payments were allegedly made through a City National account (now RY). It appears the SARS report was filed late probably found by RY through a merger related audit. They are also cooperating on Congressional subpoenas, although a deadline was missed. (own RY)

COOPERATORbased on the Bank Secrecy Act, which allows Congress access to financial information to search for money laundering (all owned except MS)

  • Toronto-Dominion (TD) – provided documents
  • Wells Fargo (WFC) – provided documents
  • Citigroup (C) – missed subpoena deadline
  • Morgan Stanley (MS) – missed subpoena deadline
  • JPMorgan Chase (JPM) – missed subpoena deadline
  • Bank of America (BAC) – missed subpoena deadline

LITIGATORSTrump (Pres., family, companies, foundation) suing to block release of information (lost the first round this past week) (none owned)

  • Deutsche Bank (DB) – Lawsuit under appeal by Trump
  • Capital One (COF) – Lawsuit under appeal by Trump

I can kind of understand the appeals related to his personal financials except where inter-related with SARS filings. In hindsight, this is perhaps a textbook case for use of a blind trust – which as we all know was not done.

In this group, TD has about 1.48% of my portfolio and RY about 0.58%. The others I own are about 0.25% each – therefore my exposure to possible downside risk is minimal. Of the ones not owned, the only one I would currently consider is FRC on weakness. The common thread being compliance to current laws.

Do you account for Headline Risk? Hope you all have a wonderful holiday weekend!

Crazy Free

I decided to pause my 3Rs series to review one particular event of this past week.  No, not the political spectrum (guilty pleas/verdicts in the US and a new PM in Australia) but the bloodbath incurred in the discount broker space following JP Morgan’s announcement of the commencement of a free trade platform.  In the event you missed it, the Tuesday morning market shudder (per Seeking Alpha) was:

Online brokers slump in premarket trading after JPMorgan (NYSE:JPM) says it’s introducing a mobile investing app bundled with free or discounted trades.

TD Ameritrade (NASDAQ:AMTD) slides 6.5%, Charles Schwab (NYSE:SCHW) -4.9%,  E*Trade (NASDAQ:ETFC-4.5%, Interactive Brokers (NASDAQ:IBKR-3.5%.

JPMorgan +0.7% in premarket trading.

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Moral Investing

Making the headlines this past week was the atrocious scene along our border.  Being an event driven investor, I had to at least take a look at the situation to – at a minimum – determine my exposure and whether strategy adjustments are  necessary.

I’m not a prude by any stretch of the imagination but (outside of ETFs) have never invested in tobacco stocks.  I have minimal exposure to wine and spirits.  While I’m not casting aspersions on those that do, I figure there are more than enough alternatives that better fit my preferences.

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Proxy Time!

It’s the time of year when winter is but a memory (for most of us), taxes have been filed and proxies are filling our mailboxes.  As I review the filings and determine how to cast my votes, I’m struck with one of these off-the-wall thoughts that hit me every now and again.  I wondered how much was earned – and the margins derived – via the annual proxy season. I didn’t delve into the number of trees sacrificed though I’ll wager it’s fewer than before electronic transmissions.

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