the possibility that a news story will adversely affect a stock’s pricehttps://www.investopedia.com/terms/h/headline-risk.asp
As my readers are aware, for a variety of reasons I’ve had an affinity for the banking sector following the financial crisis. Outside the rants of a few of the current presidential contenders highlighting abuses against the ‘normal people’, this sector has been relatively subdued albeit with a major storm cloud brewing on the horizon. This formation hit my radar with the August 19th, 2018 article in the American Banker. Since then, I’ve been tracking the progress of this storm to either identify a manner to profit from the event, to see if it dissipates or if it evolves into a black swan.
This week, the storm finally arrived although I have yet to batten down the hatches. My sense of urgency to publish my findings only increased when I ran across a piece by one of our own, All About Interest, in determining a possible investment in Citizens Financial Group (CFG). My response was: Tending to err with an abundance of caution, I would dig much deeper on CFG. Their former parent had financial issues (hence the spinoff) and most recently has been the associated with Manafort loans (speculation is they are ‘Lender B’ in the Mueller report). Another bank with Manafort ties (BANC) last week cut their dividend by 53.8% – although this could be unrelated and pure coincidence. Basically pointing out a basic flaw in pure DGI screening methodology – Headline Risk.
- CFG has had a troubled history probably due to its’ former parent, Royal Bank of Scotland (RBS) (IPO’d in 2014, fully divested in 2015)
- CFG was apparently “Lender B” in the Mueller Report with questionable loans to Manafort (perhaps a coincidence, they issued $300m in stock as Series D preferred in January)
- Another bank involved in Manafort loans, BANC, announced a dividend cut of 53.8% effective July (I can’t say if there is a correlation)
- An indictment against another Manafort lender, Federal Savings Bank (pvt) CEO Stephen Calk, was unsealed after I posted my comment (alleging his personal actions to bypass standard loan processes resulted in a $16m loss to the institution)
Certainly enough thunder to keep me away from an investment in any of these. My count indicates the Trump 8 identified by the American Banker has more than doubled and now stands at 15 – some of which I’m invested in. I’ve basically categorized them into Questionable, Cooperator, Cautionary, Litigant in addition to the three Culpables addressed previously. This is not to imply any wrongdoing – only one of the barometers I use to assess relative safety and mitigate Headline Risk.
QUESTIONABLE – have issues that are unsettling to my investment philosophy
- Sterling National Bank (SNL) – provided financing for Cohen’s taxi-medallion business
- Signature Bank (SBNY) – allegedly lent money to real estate developers, (including Kushner’s family) that used improper tactics to push out low rent tenants. Ivanka served on the board between 2011 and 2013.
CAUTIONARY – have potential exposure but appear to be on the right track
- First Republic Bank (FRC) – filed a Suspicious Activity Report (SAR) on flow through money related to the Stormy Daniels payment and a Columbus Nova payment (Russian Billionaire company)
- Royal Bank of Canada (RY) – McDougal and Daniels payments were allegedly made through a City National account (now RY). It appears the SARS report was filed late probably found by RY through a merger related audit. They are also cooperating on Congressional subpoenas, although a deadline was missed. (own RY)
COOPERATOR – based on the Bank Secrecy Act, which allows Congress access to financial information to search for money laundering (all owned except MS)
- Toronto-Dominion (TD) – provided documents
- Wells Fargo (WFC) – provided documents
- Citigroup (C) – missed subpoena deadline
- Morgan Stanley (MS) – missed subpoena deadline
- JPMorgan Chase (JPM) – missed subpoena deadline
- Bank of America (BAC) – missed subpoena deadline
LITIGATORS – Trump (Pres., family, companies, foundation) suing to block release of information (lost the first round this past week) (none owned)
- Deutsche Bank (DB) – Lawsuit under appeal by Trump
- Capital One (COF) – Lawsuit under appeal by Trump
I can kind of understand the appeals related to his personal financials except where inter-related with SARS filings. In hindsight, this is perhaps a textbook case for use of a blind trust – which as we all know was not done.
In this group, TD has about 1.48% of my portfolio and RY about 0.58%. The others I own are about 0.25% each – therefore my exposure to possible downside risk is minimal. Of the ones not owned, the only one I would currently consider is FRC on weakness. The common thread being compliance to current laws.
Do you account for Headline Risk? Hope you all have a wonderful holiday weekend!