2020 Crystal Ball

A gentle reminder was provided by the market last week as to its unsettled nature.  Essentially, headline risk is at the forefront tossing the market based on the sentiment of the day – oft times lubricated (or diverted) by a Presidential tweet. Granted, this is little changed from the past but we do have an increasing clarity to use as a guide.

What is unchanged is that US valuations remain elevated.  Sure, there were some stumbles during the recent earnings season and some cautionary guidance presented.  Barring a black swan event it does appear the next recession (US version) has been punted into the future – at a time post election.   There are – and will continue to be – pockets where value can be had, but I see this opportunity being readily available only to individual stock pickers willing to accept a slightly higher risk factor.

Headlines have also illustrated a measured success that Presidential bashing of the Fed failed to accomplish.  The dollar weakened – a little. On the heels of the results from the UK election, Sterling strengthened. My opinion being this is a relief rally at seeing an end to the Brexit saga as the real work now can now begin in earnest.  These negotiations may get bogged down a little – particularly trade – which could provide a reentry point for Labour and their agenda of nationalization. I see the UK as a viable alternative but with risk associated in telecoms, energy, utilities, rail and mail.  Perhaps a mid-term view is required with an entry point sometime after the first of the year.

Much the same boat for China as the renminbi strengthened against the dollar as the news of a “phase 1” agreement on trade crossed the wires.  What this means probably remains debatable, but if a truce is effective going into the new year it is a likely positive for US equities, tempered by the fact that their currency is a daily peg rather than free-float.  The risk here is twofold – on and off again tariffs and US involvement in their political affairs (Uyghur Human Rights Policy Act and Hong Kong Human Rights and Democracy Act). The bills appear to be more show than substance but could flare tensions. The investment thesis should note the alleged Human Rights abuses along with the minimal sanction levels.  If these pitfalls are successfully navigated, opportunities do exist.

Then there are the fintech darlings, the newest variant being the so-called ‘Challenger Banks” or neobanks.  Though awash with cash from private funding rounds, they all have one glaring defect – they aren’t really banks.  They are apps – generally mobile – with a compelling interface and a few niche benefits targeting the millennial audience.  A couple have started the process to really become banks but most are content to partner with real banks – sweeping funds into accounts that have FDIC insurance.  My research remains incomplete but with three exceptions, the partner banks pay no dividend or are private. I currently own the exceptions, GS, JPM and WSFS but don’t expect the challenger funds to be a significant revenue driver.

Perhaps the largest driver of ‘hot air’ time in the new year will be the election.  The obvious beneficiaries being media companies who are able to capitalize on both sides of an argument.  However fragmentation, targeting and scope make it more difficult to call any winners unless any campaign goes on a deep targeting offensive which would benefit social.  From a messaging position, only health care moves the needle much where companies like UNH, HUM and CVS stand to benefit as the attacks subside.

The commonality between these issues?  None are long term. Yet the nature of capitalism is its’ cyclical nature.  There is always a correction to drain the excesses. The timing and severity are always debatable, but rest assured one will arrive.  My approach to the new year will be to take some marbles off the table by pruning some non-core positions and reassessing some strategic plays. To place this in context, I have three new positions on my watchlist and ten to fifteen under review which if fully implemented would be roughly a 5% churn rate.  My comfort zone is now squarely with Staples and Utilities … items necessary for consumer consumption regardless of the overall economy. Yes, the upside is muted with these companies, but more importantly the downside risk is mitigated. A rising dividend stream exceeding the rate of inflation is the core goal in these times in spite of politics or political persuasion.

And so goes my crystal ball for 2020 …

Apr 2018 Update

The month was relatively crazy with geopolitics driving the highs and domestic lunacy driving the lows.  In between were relatively strong earnings and interest rates inching higher driving the question of the bull market sustainability.  Personally, I’m not overly concerned yet but Marco Rubio‘s “implication that Republicans have found no good answer to the problems Mr Trump described is irrefutable.” may be an omen of things to come.   Meanwhile, I took advantage of some dips and stayed the course.  April saw the S&P rise 0.27% and my portfolio outperformed the index by registering a rise of 0.65%! YTD I still lag the S&P by 0.43%.

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April Showers

Below the shifting landscape that debates the notion as to whether tariffs are a negotiating ploy or the real deal, some pig farmers are now operating at a loss of thousands of dollars per week (futures markets have priced in tariffs) and soybean growers are considering whether to reduce their plantings to avoid the same fate.  Meanwhile the impact on our NAFTA partners is also being considered across the borders.  Canada can increase their soybean and pork sales to China but the net impact will still be negative to them considering the magnitude of trade volumes.  Mexico is expanding ties to China in an effort to mitigate the ‘Trump’ effect.  All the while, the administration has to be aware that China holds the ultimate ‘trump’ card in the debt held.  Some bearish views posit US interest rates could rise to 14% if China ceases their bond purchases.

With these headlines staring at us, it would be excusable to have missed some of the underlying news – one being in healthcare.  Two of my companies made the news this past week with possible or rumored deals; Shire (SHPG) and Humana (HUM).  Takeda’s interest in Shire has all the appearances of industry consolidation, Wal-Mart and Humana’s discussions are more along the lines of being one of the last gorillas.

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Mar 2018 Update

A few days late since Easter got in the way with the markets being closed March 30th and dividends not being posted in a timely manner.  FX transactions were also delayed impacting my final accounting for the month and quarter.  This month the DOWs first quarterly loss since 2015 grabbed the headlines while the news getting my attention was the rising Libor particularly with its potential impact on adjustable rate mortgages and business loans.  March saw the S&P drop 2.69% and for the first time this year my portfolio outperformed the index by registering a drop of 0.06%!  YTD I still lag the S&P by 0.81%.

Portfolio Updates:

  • Added to PWOD, WU and ABB
  • Initiated a position in VLVLY

DIVIDENDS

This is where my main focus resides.  Market gyrations are to be expected but my goal is to see a rising flow of dividends on an annual basis.  I’m placing less emphasis on the quarterly numbers as the amount of semi-annual, interim/final and annual cycles have been steadily increasing.

  • March delivered an increase of 39.79% Y/Y fueled by dividend increases and purchases.  In particular, my December buys were almost exclusively March payers.
  • March delivered a 11.44% increase over last quarter (December).
  • Dividend increases averaged 11.25% with 40.3% of the portfolio delivering at least one increase (including 1 cut (GE) and 1 suspension (DST see M&A).
  • 2018 Dividends received were 29.3% of 2017 total dividends putting us on pace to exceed last year in early November.

Spinoffs:

Spirit Realty Capital (SRC) – Mar 6, Form 10 was filed publicly with spin completion targeted for 1H 2018.

Mergers:

Jan 13 – DST announced it was merging with SS&C for $84 cash per share.  As part of the merger agreement, the dividend has been suspended – the merger received shareholder approval on March 28th.   I expect the deal to complete in April or May.

Jan 31 – XRX announced a merger with Fujifilm for stock and $9.80 in cash.

A few others are rumored to be in play including Humana and Shire.

Summary

With my March call being spot on (… it appears we’re getting a preview of March Madness in the form of a Trump induced possible trade war.) the Paychex jobs data (small business) released this morning is keeping me in a cautious mood.  Yes it is only a one month view showing fewer jobs – but small businesses are supposed to be the economic driver in Trump World.  Perhaps it’s an aberration – but one to keep an eye on.  Overall a good month in spite of tariff uncertainty.

Hope all of you had a good month as well.

Dec 2017 Update and Year End Review

The upward trend continued this month with catalysts being the tax plan and holiday sales.  My guess remains that the first half of 2018 will be good for corporations (i.e., dividends and buybacks) with a shift in focus later with deficits and mid-term elections playing a leading role.  I remain convinced the yearlong weakness in the US Dollar will continue and expect to allocate more cash into foreign equities during the first half 2018.  I will review this plan as my personal tax implications become clearer.  For the month,   the S&P index increased by .98% while my portfolio increased by 3.29% largely fueled by Financials (again).  For the year the S&P increased by a stellar 16.26% while I came in at +20.58%! The S&P return with all dividends reinvested adds about 2.41% which my hybrid approach still beat.

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Baseball and Screeners

This is one of the times that another blogger’s post has triggered my (loosely defined) creative juices.  The post in question was Lanny’s (Dividend Diplomats)  Waste Management analysis.  Now I have no disagreement with his conclusion, in fact you could compare the DD Screener to delivering a fastball right down the middle.  The only alternatives to a strike are whether the pitch is high or in the dirt.

Personally, I like a little more strategy – the brush back before throwing a curve that nicks the corner.  Questions like EPA regulations or NIMBY impact on landfills.  Or the number of municipal contracts that are competitive versus monopolistic.  Issues obscured by a strict reading of batting and earned run averages.

The jewel in his analysis was:

I was driving around my neighborhood and was surrounded by a few waste disposal service trucks …

Aha!  A twist on the old kitchen cupboard investing strategy.  You know the drill … identify the companies behind the products you use.  I’m not sure of the absolute merits of this strategy, but there is comfort in investing in companies whose products and/or brands are familiar.  And it is one I use (to a degree) as well.  My assumption being, why not have my spending subsidized by companies I do business with through dividends?

I think I stated earlier I thrive in the obscurities, case in point being that last week I required a new prescription.  My meds generally delivered by mail from Humana (HUM).  One-off situations are handled by a local pharmacy.  In this case I chose Tom Thumb grocery as they accepted Humana insurance and I could wait at the Starbucks (SBUX) nearby.  I noticed on my paperwork that Argus Health was used for claim processing.  Argus is owned by one of my companies, DST.

There we have it.  Humana paid Tom Thumb which paid a processing fee to DST while I paid Starbucks while waiting.  Of which HUM, DST and SBUX all will provide a rebate (dividend) to me.  Although a topic I’ve mused on before, it is also one I feel never gets old.  One can always posit that this level of detail is irrelevant and perhaps it is.  But I feel it provides a broader snapshot of the business when inter-relationships are recognized.

 

Shifting Sentiments

Generally I put together a watch list quarterly based first on overall portfolio goals.  As an example, the first quarter typically is used to readjust weightings where they’ve gone a little awry – particularly in my anchor and core positions.  This next quarter has historically been goosing returns as its’ priority.  Meaning, adding to out of favor positions (depending on the reason) which carry the highest current yield.  You could say it’s a personalized Dogs Of The Dow approach.  As always, market valuations have the final vote on my actions.

In preparing the list for next quarter, I’m finding more compelling reasons to avoid sectors as opposed to buying:

  • Example 1 – The first legislative test facing the Trump team is today’s vote on health care.  Even putting campaign rhetoric aside which placed a spotlight on the likes of CVS, the actual bill aims directly at Medicaid and indirectly at Medicare recipients.  Assuming the bill passes in its current form (unlikely), estimates are roughly 20 million people will become uninsured.  The indirect impact to health care REITs could blindside some investors.  Using CCP for one, some providers to which they lease could face reimbursement issues.   Simultaneously, the DOJ is pursuing a case alleging Medicare fraud against AET, CI, CNC and HUM.  Then there’s fraud in diagnostics resulting in one bankruptcy.  I think I’ll let the dust settle in this segment before treading any deeper.
  • Example 2 – My expansion into Hong Kong encountered some headwinds.  Swire announced a dividend which was effectively a cut (still figuring the magnitude, but about 38%) primarily on the heels of their 45% ownership stake in Cathay Pacific (CPCAY).  At least the poor fuel hedge (that my analysis missed) expires next year.  And, no, my efforts to increase my diversification outside the US are still intact.  If only the Yen would weaken …

Perhaps a correction is on the horizon as UBS suggests. perhaps not.  But the one certainty is there is plenty of uncertainty – especially with earnings season set to begin again.  I guess I need to finish my taxes to see what the budget for purchases looks like.