he fourth quarter swoon continued in earnest this month resulting in an annual loss for the markets. While the final trading day closed higher (DJIA up 265, NASDAQ up 51 and the S&P up 21) it was nowhere near close enough to avoid the worst December since 1931. Though surprised by the resiliency of the US dollar, last year’s intent to migrate further into foreign equities was largely preempted by tariff uncertainty. My other 2018 concern of rising federal deficits stifling the economy did not manifest itself as yet – though I remain skeptical of administration claims that growth can outpace the deficit. For the month, the S&P index dropped by 9.18% while my portfolio dropped by ‘only’ 8.44%. For the year the S&P posted an unusual loss of 6.65% while my overall loss was 3.57%. In an otherwise ugly ending to the year, my primary goal of exceeding the S&P’s return was attained marking the 33rd year (of 38) that I’ve been able to make this claim.
What a start to the final month of the year. At least there is a little something for everyone. First the CME tripped the first wave of circuit breakers in the futures market. Then the chartists found the S&P closed the week in a death cross. Then there’s news of a possible yield curve inversion. Lest we not forget, the most recent China issue which may or may not even be legal. While the Huawei issue is unfolding, Lighthizer continues to stir the pot by saying he considers March 1 “a hard deadline” otherwise the delayed tariffs will be imposed. Hmm … kind of like bringing a gun to a knife fight – or – perhaps the administration really believes that “free and fair trade” is an outgrowth of convoluted negotiations.
If week one is any indication, the traditional “Santa Claus Rally” will be delivering a lump of coal this year. Being the eternal optimist, I’ll argue Christmas isn’t here yet so I had to take advantage of the sell-off to do a little buying:
- First, I added to my ETF group. I accomplished two things with this:
- As the majority of these are foreign, they are underwater. Therefore, an ‘average down’ scenario.
- These all pay December dividends (one quarterly, three semi-annual and one annual) all yet undeclared. All are now captured.
- Second I executed a rebalance on a small portion of the portfolio. I chose a ‘rebalance’ as the fees were lower than the alternatives. End result being:
- Sale of BOKF. I had this issue in two accounts due to a merger, now it’s only in one, with the proceeds and accumulated dividends:
- Added to ADP, MMM, KIM, FAF as these are underweight target holdings
- Added to AVNS as they may have received a good price for the division sold to OMI
- Added to LARK and CASS – missing the ex-date for the stock dividends
- Added to BR, CNDT, CDK, FHN, JHG, KSU, PJT, WU, XRX – capturing WU’s December dividend
I still have another rebalance queued pending completion of a merger (might be into the new year) and then we return to normal operations.
I also will be selling my OMI – perhaps later in the month to see if Santa really exists!
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.
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.
Each year I establish a basic plan to govern my investing activity based on sectors, segments or locales able to deliver a little alpha to my portfolio. The past couple of years had a focus on the Financial industry with the outcome being rewarded with mergers (small banks) and outsized dividend increases (money center banks). I also began increasing my Canadian allocation in 2015 from 2.5% of my dividends to the current 8.6%. Since the election, I was accelerating the increase in my other foreign holdings to the current 13.6% on two theories, 1) gridlock in Congress would persist as the Republican majority would be too narrow to push through sweeping changes, and 2) this inaction would result in a weaker dollar. It appears I was correct on both counts as the US dollar is now at an eight month low.
With my alpha agendas now too pricey (at least for slam dunk results), a re-prioritization is in order. With the Fed Chairs’ testimony this week indicating that GDP growth of 3% would be difficult, the Trump agenda which projects a higher growth rate is likely in peril – even ignoring the self-inflicted wounds. Without an improvement in the GDP, deficit hawks will be circling. It is likely the last half of the year will present some opportunities, but my view these will be predicated on external events. My eyes will remain open to the USD exchange rate – on strength I may buy foreign issues.
My portfolio allocation between holdings labeled Anchor, Core and Satellite have been imbalanced for a year or two primarily due to merger activity and the acceleration of adding foreign issues. Now that the major mergers have completed, the last this past January, and other alternatives are slim, I figure it’s time to get back to basics.
My going forward strategy can be summarized as follows:
- Non-US equities when secured at a favorable exchange rate
a)I have 2 Japanese, 2 Swiss, 1 UK and 1 Swedish company on my watch list in the event an attractive price presents itself
- Assess corporate actions (spins, splits, mergers) for opportunities
a) Generally I’m agnostic to splits except when the result would be a weird fractional. I can easily manage tenths or hundredths of shares. Smaller sizes are troublesome so I avoid when possible.
b) Spins (and mergers) are assessed to prevent (if possible) weird fractionals. For instance, I added to my MET position earlier this month as their spin will be at a ratio of 11:1 which would have otherwise delivered a weird fractional.
- Assess portfolio for average down and other opportunities
a) An example of this was last months’ purchase of KSU. To this end, I recently updated my Dividends (Div Dates) Google sheet to flag when the current price is lower than my cost basis.
b) An example of “Other Opportunities” would be BCBP which is resident in my Penalty Box due to dilution. The dilution (secondary) might be explained (now) with their announced acquisition of the troubled IA Bancorp. If the regulators provide their seal of approval, it may be time to remove BCBP from Penalty status and perhaps add to this 3.5% yielder.
- Add to holdings that are below target weighting
a) This is where I expect most of my second half activity to reside.
Of my 26 stocks labeled Anchor, Core or Satellite; 5 can be considered at their target weight (within .5% of the target) and 4 I consider to be overweight. The remaining 17 will receive most of my attention. As most of these rarely go on sale, I’ll likely ignore price and place a higher priority on yield and events – at least until I’ve exceeded last years’ total dividends.
The following table highlights this portion of my portfolio:
|First of Long Island/FLIC||C-(3%)||0.85%|
|Bank of the Ozarks/OZRK||C-(3%)||0.67%|
|NOTE: Not all payment schedules coincide completely|
|PNC Financial Services/PNC||C-(3%)||0.30%|
|Legacy Texas Financial/LTXB||C-(3%)||1.48%|
|NOTE: Not all payment schedules coincide completely|
|Flushing Financial Corp/FFIC||S-(1.5%)||0.99%|
|NOTE: Not all payment schedules coincide completely|
I will provide the caveat that this plan is subject to not only the whims of the market but of my own as well. In addition, this plan may be changed if/when a better idea comes along.
March brought us the longest DOW losing streak in five and a half years on the heels of the first legislative defeat of the Trump administration. The talking heads then moved their focus to the “end of the earnings recession”. Frankly, I think as long as the US dollar remains strong, earnings will continue to suffer – except for domestically focused companies. As a leading indicator to this thesis, I would point to the slowing growth in dividend increases as a proxy. Regardless, the S&P closed the month down .04% while my portfolio rebounded ending the month up 3.3%. At the end of the first quarter, I lead the S&P by 1.35%.
Headlines impacting my portfolio:
- 3/1 – SQ buys OrderAhead (pvt)
- 3/6 – FMBI acquires Premier Asset Mgmt, LLC
- 3/9 – BR acquires Message Automation, Ltd.
- 3/13 – BUSE acquiring MDLM
- 3/16 – MMM acquiring Scott Safety from JCI
- 3/16 – Fed lowers barriers for <$100B bank mergers
- 3/20 – UL reviewing sale of spreads line
- 3/23 – BLK buys 5% stake in NTDOY
- 3/27 – BLL sells paint can line to BWAY Holding
- 3/27 – DST buys remaining UK JVs from STT
- 3/27 – SGBK to merge with HOMB
- 3/28 – KO and KOF close on AdeS line purchase from UL
- 3/29 – MA acquires NuData Security
- 3/30 – CM increases offer for PVTB
- Added to BCE
- Added to SQ
- Added to KO
- Added to TD
- Initiated position in AKO.B
- March delivered an increase of 9.15% over March 2016. 2.24% of this increase is attributable to purchases with the remaining 97.76% a result of dividend increases. The Y/Y comparison is a little distorted as four companies shifted pay dates and one special dividend did not reoccur.
- March had an increase of 6.44% over the prior quarter. This was primarily due to a pay date shift as a result of a merger.
- Declared dividend increases averaged 7.75% with 36.42% of my portfolio delivering at least one raise (1 cut – YUM).
- YTD Dividends received were 27.1% of total 2016 dividends. If the current run rate is maintained would exceed 2016 around October 15th – particularly with most of my semi-annual or interim/final cycles paying during the next quarter.
The MET spin (Brighthouse Financial – BHF) remains pending.
Agrium/POT, JNS/HGG.L and SGBK.HOMB remain pending
Following the most divisive and cantankerous election I’ve ever seen, I – along with many others – were likely longing for a return to normalcy. A day where markets are driven by earnings, GDP, or other useful metrics rather than tweets and soundbites. A time when logic dictates norms rather than bluster and berating. The ability to take a deep collective breath followed by attempting to figure out how our respective investing strategies need to be tweaked to profit from the new regime. I’m not referring to the recounts as I suspect they will result in no significant change with Clinton winning a majority of votes cast but Trump winning the Electoral College – and therefore the election. What I’m referencing is the ability to cipher a meaningful direction that the President-Elect (PE) is going to take the economy.
Three diverse events occurred this week that gave me pause. On the surface these are likely one-off issues but looked at in total generate more questions than they answer.