Various Updates and Thoughts

Transition Status

I decided to take last week off as there was essentially nothing new to mull over – at least stuff that others aren’t already considering.  Besides – I had my hands full keeping abreast of forced reshuffling of the portfolio.  All full shares arrived as expected via ACATS.  Most – if not all – of the cash and accrued dividends has been arriving in cryptic form, with multiple transactions grouped together.  Partial example:

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Coronavirus – Pt 3

Another week has elapsed with the coronavirus headlines still front and center.  Politically in the US little has changed with the President doing his utmost to slant the narrative, including leaving an infected cruise liner offshore stating, “I like the numbers being where they are,” … (appearing) to be explicitly acknowledging his political concerns about the outbreak: “I don’t need to have the numbers double because of one ship that wasn’t our fault.”

On the state of the markets, as anticipated there was volatility this past week – despite an emergency Fed rate cut – and the DOW eked out a slight gain.  The one piece of good news at the end of the week was the announcement on test kits for the virus. Many details have yet to be released but will initially benefit two companies – Labcorp (LH) and Quest Diagnostics (DGX).  I suspect it will be provided on a minimal cost-plus basis due to the optics and several insurers already stating existing policies will cover said tests.

 It’s becoming increasingly clear that pundits (probably including yours truly) have disparate ideas as to what’s next.   What is known is travel is being disrupted – Amtrak, airlines and ships. Conventions, including the iconic SXSW, have been cancelled or postponed with a direct economic impact already exceeding $1B – with more to come.  Many companies are issuing earnings warnings, enacting travel restrictions and enabling work from home regimens. Schools in some areas – including the US – are temporarily closing.  Each of these comes with a yet to be identified economic cost, both direct and indirect.  As the US is primarily a service economy, much of this output will not be recovered in future quarter GDP numbers.

Playing on this theme, Jim Cramer began touting his “stay-at-home economy index”.  While (hopefully) being a thought stimulus for his followers, the most blatant issue I have is how well these companies can profit from this paradigm shift.  For example, will new subscribers flock to Netflix? Will companies continue their unfettered advertising on Facebook? How many buildings does Prologis have vacant to accommodate Amazon?  Does Amazon have spare robots up their sleeve to ramp up? This ‘index’ might have legs if the virus is more than a one or two quarter blip.  

Besides the test kits, my inclination is to look at the perceived necessities – the stuff flying off the shelves – even though demand may be based in fear rather than reality – and determine if the stock price reflects a value proposition.  These would include (public companies only):

  • N95 Face Masks (CDC approved
    • Honeywell (HON)
    • 3M (MMM)
    • Kimberly-Clark (KMB)
    • Alpha Pro Tech (APT)
  • Disinfectant Products (EPA approved)
    • Ecolab Inc (ECL)
    • Stepan Company (SCL)
    • Lonza Group AG (LZAGY – caution – possible spinoff)
    • Clorox (CLX)
    • Reckitt Benckiser (RBGLY)

In store for the week ahead will probably be a battle for the headlines between Coronavirus and oil.  No deal in Vienna is good news for US consumers other than the Texans dependent on the oil industry. Prudence dictates I review my oil patch banks’ relative exposure in a declining price environment.
Long: DGX, NVDA, AAPL, PLD, PEP, MKC, MMM, KMB, CLX

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!

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!

Dec 2018 Update and Year End Review

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.

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Where’s Santa?

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!

Ho-Ho-Ho …

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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