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!

The Defunct Kid Portfolio

This week saw the completion of the rebuild of my granddaughter’s portfolio.  Basically an effort that spanned six weeks and navigated some tricky waters – earnings season, trade news, Fed meeting … Yep, we had them all.  So, I figured it was only fitting to share the whys and wherefores of this little expedition since it pertains to the market.

Background

Since coming to live with us, the kid has been given an annual present of a stock holding and as such has accumulated a nice – but not quite fully diversified portfolio.  Over the years she has been proud of this and one year participated in a ‘mock’ stock contest at school which was (I believe) sponsored by FinViz taking eighth place in the state.  So it was a sad day for her when she was advised that the majority of college aid programs (Grants, Scholarships, etc.) would be discounted by 25% of her net worth. This includes savings, portfolio …  There goes the incentive for planning ahead. End result being upon graduation, her nest egg would be 0. My wife and I are not her parents – the legal status is guardian – so at least our net worth is not considered. So the game plan evolved to maximizing the available assistance.

Liquidation

The rules are similar between 529 plans and custodial accounts, except when liquidated.  With 529s, there is a penalty and possible tax restatements. With Custodial accounts there is the obligation of the custodian to prove the liquidation benefit was on behalf of the minor.  As these accounts were Custodial, I’m now tracking application fees, ACT/SAT testing fees and much more, so if necessary I can respond to an IRS audit.

My Decision

She’s aware that I chose to replicate her portfolio as a slice of one of my M1 pies.  So I laid the groundwork to ensure no dividends were lost in this migration. Fortunately I’d been holding much of my previously paid dividends in cash just waiting for an opportunity to present itself.  As the checks arrived, I moved an equivalent sum to M1. What I haven’t shared is my intention to gift it back to her upon graduation from college.

The Process

I created a spreadsheet with the sale price and the repurchase price to determine if I made or lost money (outside of fees).  I will say that I don’t have the nerve to try to time the market for a living. On the subject of fees, company plans managed by Computershare, Broadridge and Equiniti downright suck on fees when transferring or cashing out.  To be fair, that’s an aspect that’s not at the forefront of most DGIs who buy and hold for the long term. The fees ranged from a little over $25 (BR, CMSQY) to $0 (SCHW) with EQN.L in between at $15 and change. With today’s free trading schemes, the incentive for using traditional DRIPs will likely wane as I noted in one of my infrequent comments on Seeking Alpha.

Once started, I was blindsided by some events.  WFC named a new CEO, TXN provided weak earnings guidance and KHC had an earnings beat.  For the most part, I was able to better her sale price when I did my purchase as illustrated below.

Cur price as of November 8, 2019

Takeaways

While I didn’t enjoy this exercise, had I realized in 2010 what rules would be in place in2019 I’m not sure I would have done anything differently as the kid gained an appreciation for investing and the power of compounding.  Besides, Administrations come and go, rules and policies are ever changing. The key is adjusting to whatever is most beneficial at a point in time.

Going Forward

I will be hoarding most of my dividends once again until tax time as my wife took a part time job this year.  For the first time in a couple of years I’ll be able to make an IRA contribution. 2020 portfolio reporting will likely be a little strange – at least from my view of normalcy, as I tend to like consistency rather than one-off events.  (I know … first world problems …) My concerns lie more in highlighting dividend growth performance rather than portfolio growth via cash infusions – regardless of whether it’s new cash or self generated by reported dividends. This I’m sure will become clear as we progress into the new year.

As always, thoughts and comments are welcome!

October 2019 Update

On the 1.9% Q3 GDP growth rate, “The Greatest Economy in American History!” as contrasted with the 1.9% Q1 2012 growth rate under the prior administration, “Q1 GDP has just been revised down to 1.9%. The economy is in deep trouble.

As tweeted Oct 30, 2019 and May 31, 2012 by the now president, Donald Trump

With renewed optimism for a China trade deal (again), generally good earnings reports (though there were a few snags) and additional rate cuts in this Great Economy – perhaps to spur growth to the promised sustained 4%+ envisioned with the tax cuts (doubtful) – the markets did achieve new records. In spite of all this noise, the S&P rose 2.0% and my portfolio – sans purchases – rose 2.0%. I did deploy funds that were previously generated by the portfolio, accounted for in my reports , but then stashed in an interest bearing account. When incorporating these funds (repeat – no fresh money was used), the portfolio value rose by 8.65%. So, yes, purchases can have an impact on the portfolio. Imagine the potential results if it was “new money” and I had some years to let it run.

PORTFOLIO UPDATES

  • increased my LTXB position going into the PB merger
  • increased my JNJ position on weakness
  • Performed a partial rebalance resulting in slight increases to AROW, BANF, BKSC, BRKL, CVLY, FMBH, LSBK, NWBI, TMP, UMBF and WFC
  • New Position – GIS
  • New Position – WMT
  • New Position – UNP
  • New Position – RDS.B
  • New Position – HSY
  • New Position – TXN
  • New Position – ATO
  • New Position – T

DIVIDENDS

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

  • October delivered an increase of 7.49% Y/Y.
  • Dividend increases averaged 10.27% with 66.52% of the portfolio delivering at least one increase (including 4 cuts). This is off last years’ pace and I believe a new personal record for dividend cuts in a single year since about 1980.
  • 2019 Dividends received were 93.01% of 2018 total dividends putting me on target to exceed last year’s total in mid-November. The YTD run rate is 108.77% of 2018, slightly under my 110.0% goal – but still recoverable. Point of reference, this the first time since starting this blog that I didn’t exceed the prior year dividends before the end of October.

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.

SPINOFFs

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

MERGERS

XRX merger with Fujifilm cancelled (still being litigated). The expected settlement was disallowed by the judge September 13th.

PB acquired LTXB for 0.528 shares and $6.28 cash for each LTXB share which completed November 1st. I plan to pocket the cash and sell the old shares – retaining the new PB shares.

VLY to acquire ORIT for 1.6 sh VLY to 1 ORIT. This merger will result in a slight dividend cut November forward as the rate will be normalized to VLY’s current rate. In my view, the other positives outweigh this negative.

PBCT acquired UBNK for .875 sh PBCT to 1 UBNK – completed November 1st. I plan to hold this one as I wouldn’t be surprised if PBCT gets taken out at some point.

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 am awaiting final settlement payout. Fully expecting a profitable outcome for one of my most speculative positions.

SUMMARY

Overall, no complaints. The initial quote can also bear reference to the growth rate of my portfolio this month – which is why I presented the results in two ways. Although accurate, I do not care to be viewed as tilting the scales in favor of one narrative over another. My cash position will hover close to zero while replicating the kids’ portfolio but expect the dividend growth to accelerate into the first half of 2020 with this strategy.

Here’s hoping your month was successful!

‘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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6 Degree Investing

Six degrees of separation is the theory that everything is six or fewer steps …
“Invest in what you know (coupled with serious fundamental stock research)” attributed to Peter Lynch
“Own What You Love” Loyal3 slogan
These are common themes used widely among investors. Presuming due diligence has been performed and ones minimum requirements are attained it makes perfect sense. One example is my granddaughter’s portfolio. Each Christmas she receives a stock that she can relate to and one with a company sponsored DRIP. Her first was General Mills as she liked Lucky Charms. When she studied US history it was Washington Gas Light (WGL) as they keep the Capitol lit. Over the years her portfolio has grown to also include Hershey, Walmart, Procter & Gamble, Union Pacific, Disney and Kraft-Heinz. This year’s addition was Texas Instruments since she applied – and was accepted – to a high school sponsored in part by them. It is a moderately diverse portfolio, but more important is the fact that she can identify with it.  Although none are owned through Loyal3, it is a kind of Own What You Love portfolio.

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