When There’s Lemons …

This week’s missive will get back to some of the basic block and tackling we face at times as investors.  Not to downplay the market madness, it seems everyone and their brother now has a view on the pandemic. Certainly not immune to the downdraft, in hindsight my decision to sell my taxable Canadian stocks on February 28th makes me look like a genius.  The reality is essentially sheer dumb luck. It did, however, provide the cash to nibble on subsequent down days.

The Canadian IRA Taxability Answer

I did receive my first dividend from TMX Group a couple of weeks ago and to my chagrin saw Canadian tax withheld even though it’s in my IRA.  Obviously one of the outliers I previously referenced. While my appeal failed, my broker did confirm two of my companies reside in this category, the other being Hydro One.   I did gain some insight which I figured I’d share.  

  1. To be processed as compliant with the tax treaty, companies have to use the DTC – which comes with a cost.  Most Canadian companies trading in the US absorb this fee as a cost of doing business.
  2. Canada has their own version of the DTC – CDS which is owned by none other than the TMX group, which uses (at least for US based stockholders) Citi for disbursement without treaty compliance review.
  3. Brokers have no recourse but to withhold Canadian taxes in IRAs for CDS processed dividends.  Meaning there is no tax benefit for US citizens holding non-DTC processed securities.

These two will be sold from the IRA when the markets recover a little.  Meanwhile both are also held in my taxable account where I can claim a tax deduction when taxes are filed.

De-risking Process

With the heightened level of uncertainty, more than a few bloggers have shared their approach towards increased safety.  Dividend Diplomats ran a piece on Debt to Equity Ratios and Chuck Carnavale reviewed a Debt to Capital analysis. While both metrics are fundamentally sound – and I’ll likely add to existing holdings that are on these lists – both share a flaw that is highlighted by the current black swan event.  Companies in unprecedented numbers are drawing down their credit lines or issuing new paper, both of which have an impact on the ratios. I mean, is Disney any less of an investment with $6B additional debt offset by $6B cash? Other than a slight increase in carrying expense, I would argue no but they do have other issues with the magnitude currently unknown.  My take is this is where the ratings agencies theoretically should be earning their keep.

My process is to essentially begin the process of reducing the speculative portion of the portfolio.  Eliminating my one BDC (MAIN – smaller business exposure), Entertainment Properties (high social distance exposure), Newell (a recipient of an SEC subpoena).  This is one time a dividend cut or suspension doesn’t necessarily mean a sell if the purpose is cash preservation. I did reduce – but not fully sell – Cracker Barrel on their delay and suspension.

Additionally, I keep abreast of the news to identify potential opportunities.  You’ve heard the mantra, Don’t Fight The Fed?  How about profiting from the economic stimulus they’re embarking on?  Blackrock is a (partial) proxy for this angle. I say partial as I doubt the fees will generate a meaningful profit to them.

In Parting

As no one knows when and how this will end and I doubt I have the time on my side to play the long game, the better part of valor is to strengthen the hand I have.  Someone younger can carry more risk but caution is warranted in my opinion. Either way, try to make some lemonade from these lemons.

Volatility Returns!

With the wild ride in the markets this week, I perused some of the community’s blogs to gauge the reaction.  While not meeting scientific norms regarding sample size, I was surprised by the lack of reference to the pullback in 66% of them – including ones with posts as recent as yesterday.  Perhaps it’s a lack of funds to take advantage or the deer in the headlights syndrome.  One blog, Fully Franked Finance, had a timely piece a few days prior which stated the importance of a ‘shopping list’ – as many others also encourage.  I too, engage in a strategy which emulates  the ‘shopping list’ strategy.  So, what were my moves so far this month?

Continue reading

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.

Continue reading

Sluice Box: My 2018 Strategy

In a recent conversation with a friend of mine, the topic of cryptocurrency arose as he has started accepting Bitcoin in his business.  Though more enamored over the possibilities of wealth through hoarding and/or trading, he began to look under the hood to figure out why I had a greater fondness for Blockchain over any cryptocurrency.  His insight surprised me: “You’re like the sluice box salesman in the California Gold Rush.”

I choose to think of myself as a shortstop hitting singles rather than a home run hitter going for the fence, but his analogy was apt.  I prefer to get a slice of many transactions as opposed to getting the big one.  I play the percentages.   He was able to visualize I place a greater value on the tools (mining), transport (exchanges) and utility (ancillary applications) rather than the commodity itself.  Meaning, I’d rather sell the Levi’s than look for (and mine) the gold vein.

It appears the revisions to the tax plan being discussed will be slightly less draconian than previously announced resulting in a little lead time for portfolio adjustments.  My guess (pure speculation) is the first half of 2018 will be relatively good but a little choppy.  The last half I suspect we’ll be seeing a weaker dollar, a little uptick in inflation and minimal tangible results from the administration’s policies.  Anyway, an emphasis on appreciation over dividends in a rising tax environment may result in tax deferral possibilities.  This belief is the basis for next years’ strategy as subsequently outlined.

  1. Continuation of the primary portfolio strategy in regards to moving closer to the defined target allocations.  One example of this was my first December purchase, KMB which is an Anchor holding of mine.
  2. With the tax bill still in an uncertain status, load the maximum allowable contribution to the IRA.  These funds have been allocated and will be moved by month end.  A small Canadian holding in my taxable account has been identified as my new IRA purchase which will probably be made in January (pre ex-div).  A by-product of this will be a temporary overweight status in this issue.  Since I don’t like redundant holdings across accounts, my smaller taxable holding will be sold post ex-div.  This should shield more income from taxation (under current tax).
  3. Implemented (December 14th) my side strategy for 2018 titled Sluice Box which is a reference to the Gold Rush days.  This represents about 1% of the portfolio and was created (and bought) in my Motif account (shameless plug).  The emphasis is on Bitcoin, Blockchain, Growth and my first Swiss stocks with a couple of beaten down issues thrown in.

My 2018 strategy research began in earnest when I encountered Fortune magazines’ November 1st article, In Search Of ‘Vital’ Companies.  Of the fifty companies listed, my selection process drilled into the dividend payers – albeit at low yields.  Then on November 7th, Investor Place published The 10 Best Growth Stocks You Can Buy Now I chose to ignore The Dividend Guy’s August 23rd launch of Dividend Growth Rocks as I tend to shy away from paid sites particularly when operated by one person with multiple pseudonyms.  Besides, only one of his selections (Nordson – NDSN) was either not owned already or replicated in the other analyses.

Once the data was combined, I removed issues already owned and ones I had no inclination to buy.  Basically I had to be convinced of the opportunity and that the price (subjective argument) remained reasonable.

The following table presents my 2018 picks and the primary reason.  All but one are dividend payers and I front-loaded my purchase to 2017 to ensure receipt of CME’s special dividend (ex-div Dec 28).

SLUICE BOX (Motif: 2018 Growth)
Yield
NVIDIA Corporation (1,2) NVDA 7.30% 0.32% Bitcoin chipset
CME Group Inc CME 7.30% 1.76% Bitcoin Futures
Cboe Global Markets Inc CBOE 6.70% 0.86% Bitcoin Futures
Intercontinental Ex. (1) ICE 6.80% 1.14% Coinbase investor
Nasdaq Inc NDAQ 6.70% 1.96% Blockchain
Microsoft Corp. (2) MSFT 6.80% 1.98% Blockchain (Azure, Ethereum)
JPMorgan Chase & Co. (2) JPM 6.80% 2.68% Blockchain (hyper ledger)
Veritex Holdings Inc VBTX 5.90% 0.00% emerging growth co. (JOBS Act)
Ottawa Bancorp, Inc. OTTW 6.10% 1.10% 2-step conversion (growth)
Newell Brands Inc NWL 6.50% 3.02% Brands
Energizer Holdings Inc ENR 6.50% 2.44% Brands
Cognizant Technology (1) CTSH 6.50% 0.84% Future 50
Intuit Inc. (1) INTU 6.70% 1.00% Future 50
Novartis AG (ADR) NVS 6.70% 3.21% possible Alcon spin
ABB Ltd (ADR) ABB 6.70% 2.91% purchased a GE segment

Notes:

  1. Future 50 (also currently own: MA, V)
  2. Investor Place 10 (also currently own: V, SQ)
  3. Other Bitcoin/Blockchain indirect investments include: GS, IBM, WU, AMTD

At the very least it will be interesting to observe the Crypto phenomenon in more of a supporting role.  I also need to acknowledge Dividend Diplomats whose research on NWL was enlightening.

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.

Continue reading