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!

Last Week in the Rear View

IMF growth forecasts for 2020 were released this week and were inclusive of the “momentous” and “remarkable” Phase 1 trade deal between the US and China.  It would appear the critics of the deal win the first round as China’s growth forecast for 2020 was revised higher by 0.2 percentage points to 6%, while that of the U.S. was marked down by 0.1 percentage points to 2.0%.  While I’m sure the diehard Trump supporters will discard this report as another in a long line of “deep state conspiracies”, one opinion worth reading is how China is retooling – whereas where are we? My thinking is the trade deal is at best a Pyrrhic victory for the US – tempered by a possible coronavirus black swan.

In a similar vein, is a recession in store for the trucking industry?  That is perhaps the implication of the 2H 2019 data. Trucking, shipping and freight are indicators I tend to keep an eye on and one possibility is recession – which I discount.  In my view, this slowdown is a return to normalization – coming off the sugar highs of the tax plan of 2017 followed by the tariff front loading of 2018. Others to watch in this space include CAT, CMI and NAV.  There are, however, opposing views, such as Larry Kudlow’s, “You’ve gone from 1.5% to 2% growth. We had it going at almost 4%, then the Fed tightened.” Oh yes, the infamous Fed tightening defense. Well sir, unless your boss can pull another rabbit from his hat, I doubt the ‘blame anyone else game’  has much longer to run.  There does come a point when your policies have to stand on their own merits.

In my inbox this image arrived.

Now, I own CLX, CL, PG, GIS, K, KHC, KO and PEP.  If you’re counting, that’s 8 of the 14 company owners of the 26 listed brands.  In an exchange telling of the times in which we live:

Me: So just because they sold themselves to a larger corporation now makes a product like Burt’s Bees less natural? Or am I missing your point?

Resp: They do tend to alter the original ingredients

Me: Well, I guess since there is no acknowledged standard, natural would be in the eye of the beholder.

Point is the definition of “Sold Out”.  My assumption being a merger or acquisition.  Obviously someone else saw this as a breaking of the “natural” covenant – of which there are no standards.  I cannot prove or disprove the “tend(ing) to alter ingredients” allegation. Another example of society’s ongoing inability to communicate.

The final act for the week was the Steve and Greta show.  In Davos, Mnuchin questioned her economic credentials in regards to climate change.  While he may have been technically correct, his flaws were to attack a school girl on an issue where the US has ceded any moral high ground.  He lost the round “bigly” on optics alone.

My opinion is that even if climate change could be denied, the planet and our environment would be better served by implementing many of the Paris Accord action items.  Greta’s zeal is both her charm and achilles heel. To blast the Paris accord as not being enough may well be correct, but at least it is a beginning.  My preference for the moment is to incentivize constant incremental improvement in the vein of Deming’s Law and to bring the ESG conversation to the forefront.  However, to ignore the realities of economics in this quest is begging for the Law of Unintended Consequences to bite you.  One example being a retooling of worldwide supply chains if plastic containers were outlawed.  Doable, yes – but at what cost and in what time frame. Another example is even more ghastly – Healthcare and Pharmaceuticals.  These two consume roughly 4% of petrochemical production although part of this could be attributed to packaging. Impacted products would currently include Aspirin, Heart valves, Hearing aids, Artificial limbs, Antihistamines, Rubbing alcohol, Cortisone, Anesthetics and more.  Two possible consequences emerge, 1) even greater increases in health care costs, and/or 2) Bringing back Sarah Palin’s (2009) death panel debate except the options today could be a heart valve for someones’ life today versus a possible future life. Oh, the conundrums we face.

As we swing into the final week of January, it’s time to break out the month end reports. For my part, my activity was abnormally high due in part to some initiatives previously discussed. Hoping your week is great!

Earnings Season (again)

Once again, earnings season is upon us and the one aspect that rubs me the wrong way is the inevitable comparison of expectations to actuals. This, for the most part, is a grade on how well an analyst anticipated the twists and turns of a particular quarter to provide a gradable prediction. Fortune telling at its finest! For its’ part, Zacks Investment Research has created a business out of the compilation and distribution of this data. But to what end?

Let’s review one example of this season, DGI darling Caterpillar (CAT). The release by Zacks was:

Deere & Company (DEFree Report) reported second-quarter fiscal 2019 (ended Apr 28, 2019) adjusted earnings of $3.52 per share, missing the Zacks Consensus Estimate of $3.58 by a margin of 2%. However, the reported figure recorded an improvement of 12% from the prior-year quarter’s adjusted earnings per share of $3.14.


Ongoing concerns over the impact of the escalating trade war between the United States and China on U.S. exports of key commodities, weakening agricultural market and delayed planting season in much of North America are resulted in farmer’s getting cautious about their equipment purchases. Deere has this trimmed fiscal 2019 guidance. The company’s shares fell 5% in pre-market trading.

https://www.zacks.com/stock/news/415679/deere-de-q2-earnings-lag-estimates-trims-fy19-guidance?art_rec=earnings-earnings-earnings_analysis-ID04-txt-415679

The key here is the Consensus Estimate. Subsequent events are that CAT is one of the companies in the cross hairs of the escalating trade spat. Contrast this with the headlines from the company’s earnings call:

Caterpillar ups dividend by 20%, raises guidance
May 2, 2019 7:48 AM ET
Caterpillar (NYSE:CAT) has authorized an increase to its quarterly cash dividend of 20% to $1.03 per share of common stock, payable August 20, 2019, to shareholders of record at the close of business on July 22, 2019.


“Caterpillar expects to increase the dividend in each of the following four years by at least a high single-digit percentage. With its remaining free cash flow, the company intends to repurchase shares on a more consistent basis, with the goal of at least offsetting dilution in market downturns,” according to a press release.


Later today, Caterpillar’s executive leadership team will describe its plans to grow services. It intends to double Machine, Energy & Transportation services sales to about $28B by 2026, from a 2016 baseline of about $14B.


Updated outlook for 2019: EPS of $12.06-$13.06 (vs. previous guidance of $11.75-$12.75). Other 2019 assumptions include: Restructuring costs of about $100M-$200M and capex of $1.3B-$1.5B.


CAT +0.8% premarket

https://seekingalpha.com/news/3457913-caterpillar-ups-dividend-20-percent-raises-guidance

Personally, I’ve never owned CAT primarily due the the volatility of their underlying customer base, i.e., agriculture and construction being in traditional feast or famine business cycles. But if I were an owner, unless there’s any indication of trouble brewing, I would probably place my faith in management over the talking heads. Otherwise, how can one rationalize their investment decision.

It’s not only Zacks. Larry Swedroe wrote an article in 2013 on this issue as well, proving the old adage, “the more things change, the more they stay the same”.

I guess the real question is in regard to the average investor and their ability to perform adequate due diligence as opposed to blindly following the ravings of the charlatan du jour. If the will – or ability – is lacking, an ETF is probably a better alternative to the whims of most ‘professionals’.

Thoughts and comments 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!

Dividend Increases & a Buy

Page 1

Each week I catch up on blogs, comment on a handful and generally learn a thing or two.  On occasion I take issue with a post (or a portion thereof) – and provide a (hopefully) meaningful comment.  The most recent being Lanny’s post which included, the lines:

I don’t know about you, but the dividend increases keep coming in hot, right off of the Tax Cuts, Jobs Act!  and Let’s just say tax reform has continued to be nice, as it relates to dividend increases.

The rationale for my comment being – assuming all of his US company increases were a result of the tax plan, this would be a 12.45% increase.  Not shabby by any means but a far cry from his reported total of 20.13%.  The difference being his foreign holdings which weren’t beneficiaries of a tax cut but of strength in ore prices and China shipments.  My quibble is not the numbers – only the presentation of the tax bill being a panacea for businesses.  It may well be, however the rules are still being written and the jury is still out.

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Insider Dealing?

The news cycle appears to be churning ever faster.  Whether as a reaction to events, an attempt to manage the narrative or obscure the message is a debate that will occur for some time with the real answer becoming apparent in the hindsight of history.  Not to minimize the Charlottesville tragedy or the headline grabbing Bannon ouster, but these stories are playing out in several flavors depending on the source.  As one who attempts to discern the impact of issues on my investments, two (possible) financial headlines crossed my desk amid the other events that intrigued me.

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Some Cracks Begin To Form?

Naysayers of this market (of which I include myself to a degree) have been voicing a concern regarding market valuations.  When reviewing my February results I noticed the average size of  dividend increases was lagging last years’ pace (12.3% in 2016 vs. 7.96% YTD 2017).  One could say it’s too early to make an assessment and that could be true.  But it could also be said that companies are being cautious due to uncertainty in regulations, taxes, inflation and economic growth.  If this were a one-off issue, that would be one thing.  On the other hand I’m starting to see some parallels to times when bubbles existed.

Exhibit #1 – SNAP

When was the last time an IPO was launched successfully with an increased price, profitability uncertain, a twelve month lockup for outside investors and founder retention of roughly 88% of the voting rights?  If so inclined, the safest play is through Comcast (CMCSA)’s roughly 5% ownership of Class A shares.  Can we say dot-com revisited?

Exhibit 2 – Target

Target (TGT – #19) whiffed on earnings and guidance last week.  On one of Lanny’s posts, my comment How many were blindsided by TGT’s report yesterday, how many updated their forward estimates and how many incorporated the fact (illustrated by mgmt) that a turn around was (minimally) two years out and would incur additional costs in store conversions and IT expense?  raised the question Did you, by any chance, seize the opportunity, by the way, at TGT? Or waiting for some dust to settle?. 

The short answer is no and not likely near term.  All retailers are struggling against Amazon (AMZN).  I have exposure to Wal-mart (WMT) through a trust I manage.  WMT is about a year ahead of TGT via their Jet acquisition but still significantly lag AMZN.  The good news is TGT now recognizes a problem.  My question surrounds their execution (and time required).  Yet several bloggers bought this dip.  They may be correct but this one currently carries more risk than reward in my book.

Exhibit 3 – Caterpillar

It’s always disconcerting to have Federal agents raiding corporate offices.  To have it broadcast live on television raises the stakes.  Caterpillar (CAT – #32) experienced this treatment last week.  Not overly surprising as CAT has been embroiled in a dispute with the IRS regarding alleged shifting of profits offshore to a Swiss subsidiary.  What I found interesting was that FDIC regulators participated … which perhaps raises a new question of money laundering?

Exhibit 4 – Costco

Sliding back to the retail space, we have another DGI darling illustrating how customer loyalty should be rewarded.  Costco (COST- #156) reported Y/Y revenue growth due only to new stores and membership fees.  Their response?  Let’s boost revenue growth by raising membership fees further!  Talk about a counter-intuitive response.

These are but a few reasons I believe this market warrants an abundance of caution.

Long: CMCSA, WMT (trust).  Ranking based on DGI popularity list.