Musings – June 22 version

Monday morning delivered the news of a merger announcement between two of my banks. It’s not often I get to play both sides of a deal, so I have to enjoy this one. PB was a hold in my portfolio representing about 1.7% where LTXB was a buy having risen to 1.8% on its’ way to a 3% maximum. My confidence was so bullish that LTXB was my one entrant in Roadmap 2 Retire‘s 2019 Contest. My confidence was inspired by Kevin Hanigan’s (LTXB President & CEO) response on the Q2 2018 Earnings call (July 18, 2018) response in the Q&A on the M&A topic, “We are trying to position the franchise to be the prettiest girl at the dance, whether we’re a buyer or a seller. And I think we’ll soon be a whole lot prettier, if not the prettiest girl at the dance.

Pretty they became as PB is paying 0.528 shares and $6.28 cash for each LTXB share. I plan to vote in favor of the transaction (on both sides), pocket the cash and sell the new shares – retaining the old. Moral to the story – you never know the gem you’ll find embedded in earnings calls.


My initial take with Facebook’s Libra Cryptocurrency is that it’s intriguing, plausible but comes with contradictions. Now – similar to the Mueller report – I’m still digesting the details, but the first two to jump out at me were:

  • Envisioned both as a Stablecoin (tied to a basket of fiat currencies) and a viable alternative to the unbanked masses, is to a degree, an oxymoron as I doubt the majority of the unbanked are versed in currency exchange fluctuations which could have either a positive or negative impact to their wealth.
  • The white paper addresses a goal of social goodness through ethical actors, yet a cursory review of the Founding Members reveals the following:
    • PayU (part of Naspers which had a controversial move from South Africa to the Netherlands – socially responsible?)
    • One founder is Thrive Capital – a VC firm run by Joshua Kushner (Jared’s brother), which would be a potential question mark worthy of further investigation

My interest lies more in the unnamed banks which will be holding all these low cost deposits, and I’m sure there will be more to follow …


The final point this week is on tariffs. Unless a country is self-sufficient, trade is not a zero sum game. There will be surpluses here and deficits there, the goal being all is basically even when viewed on a multilateral basis. My thinking is that the president has been one-upped in the trade war he started. If a measure of greatness is the wealth of a country, perhaps the campaign slogan should be “Making America Irrelevant Again“. China’s reaction (in the long game) to the tit-for-tat brinkmanship has been to reduce tariffs on other country’s goods when retaliating against US tariffs. Good luck getting these markets back …

The Green New Deal

Momentum has been gaining over the past several years over Environmental, Social and Governance (ESG) investing considerations.  Initially reserved for ‘sin’ stocks (tobacco, alcohol and gambling), this movement has evolved to encompass a wide array of ethically questionable, albeit legal, activities including guns and ammunition, farming practices and corporate benefits to name a few.  Notably with the release of the release of the United Nations’ Global Warming of 1.5°C report on October 8, 2018, a renewed emphasis has been heard from some parts of the community, particularly as related to environmental issues.

I first touched on the issue of moral investing last June in concert with the border issues and Paul Tudor Jones’ initiation of the JUST ETF.  Other than a cursory acknowledgement, only one purchase (and no divestments) were performed with ESG in mind. The sole activity being the purchase of Amalgamated Bank (AMAL).  Further deconstruction questioned whether the JUST approach was only a ‘Greenwash’.

Over on the other side of the pond, there has been more angst and soul-searching, my guess as to the cause – a greater formalization of constructive movement towards some of the goals, such as Germany’s coal phase out.  To this end, one of the better posts explaining investing issues and alternatives surrounding ESG is Mindy’s as she performs her due diligence. With the dizzying array of options available, especially when ala carte choices are included, no wonder her “… brain tends to fog over when thinking about investments.

Then again, there’s always the well-reasoned do-nothing approach proposed by Ditch the Cave.  His reasoning follows a similar vein to that of Pitchfork Economics in that the basis of ownership is an event providing no direct benefit to the corporation.  While this is true, I would further add that any ownership stake that most of us could amass would be so minuscule as to be less than a rounding error on the corporate books.

Another school of thought – and more the focus of this piece – comes from DIY Investor (UK) who is currently repositioning his portfolio, in theory, to one less damaging to the climate.  At the very least, it provides comfort that his efforts are doing a small part in contributing to the betterment of society. I have minimal or no debate with his conclusions as we’re dealing with probabilities rather than certainties.  My quibble is with a portion of his analysis – primarily due to the emotional level of the debate on these issues. In my opinion, to present a case inclusive of incorrect – or incomplete – data provides an opportunity for detractors to seize upon and raise questions concerning the legitimacy of the remaining thesis.

Perhaps I was mistaken for a ‘detractor’ when we engaged last week as my comment of:

I applaud your research and investing convictions.  However some conclusions you arrive at may be somewhat flawed.

1) The ‘Green New Deal’ has climate change as only one element. It is too broad an endeavor to gain much traction. A better play would’ve been to select one or two of the contained issues to focus on.

2) The PG&E bankruptcy filing had ‘probable’ equipment malfunction as a cause of the deadly forest fire. Climate change was not listed as a factor, although I would suspect it was a contributor. The article referenced was an editorial (opinion) – not necessarily a factual piece.

3) To take asset managers to task is misguided, I believe. Their growth is largely due to the rise in passive investing (ETFs). Although they are listed as ‘registered owners’ it is on behalf of ‘beneficial owners’, i.e., the vast majority of individual investors with ETFs in their portfolio

The response provided was:

Thanks for your observations Charlie. I may be misguided but I would err on the side of caution with fossil fuel investments. You may have read about the decision by the worlds largest sovereign wealth fund to divest out of 134 of its oil exploration holdings.  The writing is clearly on the wall for everyone to see (or ignore).

So let’s break apart my objections.

  1. The Green New Deal can best be described as aspirational at best and is highly unlikely to be passed in any manner close to its’ current form. The essence of the resolution is to re-engage in the Paris Accord, ensure existing laws (particularly Labor and EPA) are strengthened or adhered to, strengthen laws pertaining to collective bargaining and improve the economy with a focus on infrastructure.  The one piece with any short term chance of passing is infrastructure as it melds with Trump’s economic priorities. Regardless, it remains too lacking in focus to be a viable basis for investment decisions.
  2. The PG&E filing was based on California law that holds a company liable for claims even when fault is not proven (one of the reasons I rarely invest in California).  It appears the direct cause was ‘equipment malfunction’ predicating the filing. His claim that the filing was due to global warming may be partially true but is based on an op-ed (opinion) piece in the LA Times.
  3. His quest against asset managers is akin to tilting at windmills for two reasons.  The majority of ETFs are rules based and merely a reflection of the base rule or index.  If the index is MSCI managed the determination would need to be made by MSCI – not the asset manager.  If the index was based on the S&P 500, the questionable company would need to be removed from the S&P before it would be reflected in the underlying index.  A more jermain reason is that asset managers based in the US (like Blackrock, Vanguard, Fidelity, et.al.) are required to adhere to a higher, government mandated, standard as related to shareholder engagement activities (activism).  To do otherwise would jeopardize their business model.

If engagement were to be considered, who would be the target?  Would it be a broad-brush approach or be laser focused? I mentioned MSCI earlier.  Would they get a pass as they create and manage indexes addressing both investing styles?  Or would their inclusion of questionable companies in some indexes place a target squarely on their backs?  I alluded to this type of inequity in my final sentence to DIY, “The quandary I encounter in my research are undefined secondary impacts. One example being solar. A by-product of manufacturing is silicon tetra-chloride. Therefore, is solar really green?”  The answer is a resounding yes, but, maybe ….

To make the implication that I’m a non-believer reinforces my contention that DIY Investor (UK) has a tendency to mold a conclusion based on opinions rather than facts.  The reality is that I have been looking at this type of strategy since at least 2015. One doesn’t have to look any further than the comment stream of one of Roadmap2Retire’s oldies but goodies on the renewable topic.  Today, the investing landscape in this space remains as muddled as ever and additional elements, perhaps brought into the spotlight by the Green New Deal, are being included. My concern is that this broadness will be result in its failure.  Call me a pragmatist, but current iterations include everything but the kitchen sink. You may also call me overly cautious, but not a naysayer.

The one investment on my watchlist that appears to meet much of the criteria is Brookfield Renewable Partners (BEP) with my core issues being valuation, debt and the K-1.  Therefore, on my watchlist it remains.

The one certainty continues to be each and every investor has their own core sets of values and beliefs – meaning that arriving at a consensus approach is unlikely at this time. I do have to applaud the energy and research being applied by newer investors coupled with their desire to invest in a manner matching their ideals.  For that is what will ultimately result in the world being a better place.

With that, I’ll get down off my soapbox and let you all have your turn 🙂

Portfolio Breakdown by Geography

I’m always intrigued by how investors position themselves in providing a measure of protection against market downturns.  Most common is sector diversification where the theory is a downturn in one area of the economy is offset by outperformance – or at least stability – in other areas.  DivHut recently posted his quarterly sector review which – as he indicated – is reasonably aligned with his risk tolerance and goals.  The weakness in this approach is his low exposure to Technology or in my case an overexposure to Financials.  So long as potential weaknesses are identified, this approach does allow a portfolio to be tilted towards sectors which the investor believes will outperform the broader market.

Another approach was presented by Roadmap2Retire last March where the attempt was made to isolate the geographic revenue diversification of the companies he owned.  A daunting effort to be sure, but I’m not sure the data he obtained was complete.  As an example, he reports BCE’s revenue as 100% Canadian.  That is likely as reported in filings.  Not reported is their 37.5% stake in Maple Leaf Sports which owns the Maple Leafs (NHL) and Raptors (NBA).  The NBA pays revenue sharing in US dollars (not Canadian).  Basically any minority stake, investments or joint ventures with other companies are likely to be excluded from any of the companies he owns.  The question becomes – is this revenue identifiable and negligible?

The approach I take is – first sector and secondly the country where the company is headquartered.  Dividends paid are recorded post exchange to US currency which does result in some fluctuation based on the relative strength (or weakness) of the dollar.  The following table illustrates the non-US source for roughly 15% of my dividends.

8.98% Canada
0.53% United Kingdom
0.04% Bahamas
2.44% Australia
0.13% Ireland
0.32% Mexico
0.00% China*
1.29% Hong Kong
0.20% Chile
0.26% Luxembourg
1.47% Singapore

* no dividend paid at this time

The UK dividends are set to increase once a merger involving one of my US companies is complete.  I may be forced to slow foreign purchases as recent political events have resulted in the US dollar weakening and the Yen and Swiss Franc strengthening.  If so, I’m sure I can find a few US companies to put my money into!

 

 

Rolling Unabridged Update #1

Last month I introduced the Rolling Unabridged Monthly Portfolio (RUMP).  The primary reason was to attempt to identify Herd Mentality tendencies within the DGI community.  My first assumption is that there may be a 6 to 9 month lag from identification to purchase.  My database now carries an eight month lag which I expect to reduce a little further over the next month or two.

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The One Metric

Investment Hunting just started a Blogger Interview series with an interesting interview with Roadmap2Retire a few days ago (June 21). One question in particular caught my attention, If you could only use one metric to evaluate a stock, which one would you choose? Sabeel’s answer was spot on in my book (I don’t think there is one metric that can be used to evaluate stock. If everything could be boiled down to one single number, investing would be easy. The reality is that investing in a company is a multifaceted aspect and there a hundreds of things to consider – both from a qualitative and quantitative standpoint.), but led me to ponder the proverbial what if: If there were only one which would it be?

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Hiding In Plain Sight

“cant see the forest for the trees”

Simply that you have focused on the many details and have failed to see the overall view, impression or key point.  Urban Dictionary

I find it interesting when multiple unrelated occurrences converge and coalesce into a singular thought.  Case in point:

  • Investment Hunting did a financial quiz with one of the questions being “I’ve never bought a stock on OTC Markets?” Wallet Squirrel’s response (presumably tongue-in-cheek) was, “No, no idea (what) that is. “Octopus Tentacle Club”?”
  • DivHut presented his June 2016 stock considerations with a response by Tawcan being, ” … I continue to like V, SBUX, National Bank (not sure if they’re listed in US market) …”

It dawned on me that there was a lack of understanding regarding the OTC (over the counter) market.  Without getting into the nuances (grey, pink, etc.), let me just that a significant benefit to US investors is unprecedented access to foreign markets – notably Canada, but also Australia, Singapore and more.  In this post, I’ll focus on Canada.

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The -opoly World

Early Retiree Reality (ERR) recently published a thought provoking article titled My Duopoly and Oligopoly Shopping List on Seeking Alpha.  The premise is essentially that duopolies and oligopolies provide wider moats which results in greater profitability.  I would encourage you to read it.  This idea is similar to one I’ve been working on with my Speculative Pillars series on Cord cutting, Transaction Processing and to a lesser degree Regional Banks.  Although neatly packaged, I failed to make the leap into the –opoly world.

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