November 2019 Update

Alright, I do have a bias.  Generally I don’t pay much attention to Jim Cramer, but his recent attention grabbing headline did pull me in.  “Owning too many stocks and not enough cash can set you up for failure: Cramer” was the title.  As one who owns 200+ issues, I’m always on the lookout for alternative views.  My expectation was for the sage advice to be essentially “have a war chest and shopping list at the ready”.  But rather it was, “Limiting your holdings can be a great tool for investors who don’t have the time or the drive to do their homework for 20 or 30 different companies”.  The essential message being if you “own more than 10 stocks, you might want to consider paring back”. Say what? This recommendation doesn’t even provide exposure across all sectors. So what to do if like me you have an overabundance?  Sell, he says. “Sometimes, it can be as simple as selling some stocks and getting some cash on hand. Go sit on the sidelines — nothing wrong with that.” Very true if one has a knack for timing the markets. My methods aren’t for everyone either as my emphasis is on consolidation, typically M&A – which results in slightly higher mediocrity for this portion of my portfolio with the aspiration of getting a tape measure homer.  As they say, the devil is in the details. His view was apparently honed as a trader rather as a buy and hold type of investor as he states, “I would analyze every losing trade … I realized that good performance could be linked directly to having fewer positions”. Okey dokey, ‘nuff said ….

Certainly a long and roundabout way of saying the market was basically on an upward tear this month with only a few down days.  Try timing that movement! So the S&P rose a stellar 3.9% – the best since June while my portfolio – including the purchase spree I’ve been on – rose 9.84%.  Excluding the final round of purchases – even with no fresh money being used – the portfolio value rose by 2.43%, a tad below the index, probably due in part to buying at elevated levels.

PORTFOLIO UPDATES

  • increased my PB position and lost LTXB (merger).  I’m now overweight PB as my position doubled which I’ll reduce in the next tax year.
  • New Position – PBCT and lost UBNK (merger)
  • increased my WFC position (replication strategy)
  • New Position – KFC  (replication strategy)
  • New Position – PG (replication strategy)
  • increased my YUMC position basically as a rebellion against the President’s antics.  They derive 100% of their sales, all of their profits, no imports or exports (all domestic), and their entire supply chain is in China.  Yet they are incorporated in Delaware and pay a USD dividend. The major question is currency exchange on their P&L statement and the president’s delisting campaign.
  • increased my TD position (IRA).  I’ll increase it further and sell my taxable account shares after the first of the year.
  • New Position – KNBWY – another statement selection – message being , “Mr. President, play with tariffs all you like but there are Japanese companies other than car manufacturers employing thousands of Americans”.  Besides, I see their sales improving in 2020 with the Olympics being in Japan and it fits my bottler strategy.

DIVIDENDS

My primary focus resides on dividends with the goal being a rising flow on an annual basis.

  • November delivered an increase of 15.51% Y/Y.
  • Dividend increases averaged 10.11% with 68.72% of the portfolio delivering at least one increase (including 5 cuts). This is off last years’ pace and I believe a new personal record for dividend cuts in a single year since about 1980.
  • 2019 Dividends received were 99.63% of 2018 total dividends putting me on target to exceed last year’s total on December 1st. The YTD run rate is 110.76% of 2018, slightly over my 110.0% goal. Point of reference, this is the first time since starting this blog that I didn’t exceed the prior year dividends before the end of October.

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 Growth‘s reporting

Key thing I’m looking at is the ratio between market action and purchase activity. This month was roughly 80/20. I suspect most months will be 95/5 as I rebuild the war chest. Another point of interest was the M&A cash exceeding my dividends. I can assure you this is a rare occurrence. It will be interesting to see what I track going forward.

SPINOFFs

On Oct 4, 2018 MSG filed a confidential Form 10 to spin the sports business which remains in progress.

MERGERS

VLY to acquire ORIT for 1.6 sh VLY to 1 ORIT. This merger will result in a slight dividend cut November forward as the rate will be normalized to VLY’s current rate. In my view, the other positives outweigh this negative.  Should close December 1st.

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 am 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.  

Although XRX is officially off the list with their Fujifilm settlement, Icahn & Co. couldn’t wait for the ink to dry before stirring things up with HPQ.  As of now, I am considering exiting my XRX position.

SUMMARY

Overall, the only complaint being not exceeding last year’s dividend haul until December. The culprits being five dividend cuts and merger timings (a couple of completions were accelerated to avoid a payment). My cash position is close to zero, but with replicating the kids’ portfolio complete, I expect this to rapidly change to rebuild a stash for my next sizable purchases (unless market conditions warrant), expected in tax season.

Here’s hoping your month was successful!

Reporting Style Update

On my “to-do” list was to refine my monthly results presentation to make it more relevant – particularly in light of the significant movements in my portfolio of late.  In search of ideas, I stumbled across the Simple Dividend Growth methodology. While not exactly what I had in mind, it covered probably 80% of which I could mix, match and modify to my hearts’ content.

His presentation covers Weekly actual and Forward Annual views, illustrated below.

XXX is text, $$$ currency

The largest differences are that I report monthly (as opposed to weekly), I convert actuals to percentages and I don’t use forward anything (except announced cuts) preferring to use trailing actuals.

The more subtle differences are twofold, I embrace stock dividends and M&A activity (one of his sell signals is a merger announcement).  So I’ve enhanced this template to serve my purposes as follows:

Actual as of 16 Nov 2019

The left column contains all ticker symbols – essentially a point of reference for portfolio activity.  The right column is the activity – as a percentage of portfolio value. The exception being the Dividends which are percentages of dividend activity.

I’ve segmented my new buys between the source of funds – the default being dividends accrued from prior months.  I don’t show my available cash as I reserve the right to spend it on my tax bill (like last April), take a trip or – in this case – replicate the granddaughter’s portfolio.  I may add a “new cash” line item in the event I hit the lottery or my living expenses decrease, otherwise I expect to continue funding purchases via excess funds generated by the portfolio.

I’m not sure how relevant the separate itemization of increases will be, but I’ll let it run for now.  In this example, BX increased their dividend but it doesn’t register as it amounts to 0.001962% – thereby rounding to 0.00%.  This becomes even more negligible when ORIT’s dividend cut is added. Likewise, the increase from stock dividends and DRIPs may also be too small to be meaningful.

The key point I wanted to visualize was the delta between market fluctuations and dividend growth.  Since my purchases are (generally) self funded by the portfolio, the fields: Increase from New Buys, Less Dividends, Less M&A cash and Incr/Decr from Market Action should equal 100%. 

The selfish reason?  After the four dividend cuts I experienced to start 2019, my assumption was the market was in for a rough year and I went into a little of a retrenchment mode.  My cash position rose and my purchases decreased. Now my dividend run rate is below normal – I might exceed 2018 dividends by month end which would be a month later than usual.  I’m used to coasting into the fourth quarter starting some positioning moves to get a head start for the new year. 

I’m thinking dividends deployed for purchases should be in the 3-5% range.  If I had used this method earlier in the year I probably would have realized faster how far I was lagging behind.

The term M&A Cash may be a little bit of a misnomer as a merger may be the trigger for multiple portfolio transactions which can be illustrated through this example.  The PB/LTXB merger was a cash and stock transaction and I owned both sides – PB in my IRA and LTXB in a taxable account. The cash was received this month.  I will sell PB in the IRA replacing it with TD and finally selling the TD in the taxable account. Excess cash in the IRA was used to create a TD starter position there. However, this daisy chain of events will occur over roughly two months to maximize the dividend payments.  The sales of the (current) overweight PB position and the soon to be overweight TD position will be classified as Positions Reduced.

Others present their results in a manner I found interesting including Dividend Driven and Wallet Squirrel.  Tom at Dividends Diversify had suggested creating an index. This solution is less complex but equally illustrative (I think).  I will probably track (perhaps on the side) the Buys to Dividends ratio as a correlation to market value (think “be greedy when others are fearful”) as this presentation may reflect increased buys when the market drops (or failure to do so).

So I’ll lay it out here for ideas, thoughts and discussion and intend to use it starting with my November review.

Just a Few Dribs and Drabs

To review this week’s market action is to basically yawn for a change.  Earnings season began but was tempered to a degree by economic news that questioned the robustness of the US consumer.  While the economy is still growing, the rate is slowing. My view remains that without a ‘real’ deal – skinny or otherwise – on the table between the US and China, both countries will continue to hobble along.

Meanwhile I did make one purchase this week that was a little unanticipated, but not totally unexpected.  I topped up my Legacy Texas (LTXB) holdings in preparation for the completion of the merger into Prosperity Bank (PB) which has received regulatory approval.  Currently I hold both sides of this merger, LTXB in a taxable account and PB in my IRA. Essentially I wanted to avoid assignment of an odd fractional share that I could do nothing with as the ratio is 0.875:1 (plus $6.28 cash). Assuming shareholder approval October 29th, the expectation is for the deal to close November 1st.  My current thinking is the new PB shares (and cash component) will be assigned to the taxable account. Subsequently, I intend to sell the old PB in my IRA replacing it with TD (to take advantage of the tax treaty).  After the dust settles, I will sell the TD in my taxable account. End result being more shares (slightly) of both PB and TD, no shares of LTXB and some excess cash.

I did hit the halfway point on my endeavor to replicate the grandkid’s trust (now liquidated, save one stock).  After I complete the transactions I’ll post regarding the rhyme and reason, but for now let’s say it’s to preserve all options regarding financial assistance as she begins the college application process. 

The strategy I’ve employed is to gauge the futures market for weakness prior to entering an order for market open as I decided to use M1 finance for the bulk of this replication.  For the most part, this has been a viable approach except of late there have been some wild swings going into the open. I’m unsure as to the why, but perhaps someone has identified the secret sauce regarding presidential tweets?

The effort remains ongoing regarding the directory update – primarily removing dormant entries.  It turns out I wind up spending more time than usual as my attention gets diverted by an interesting presentation or difference of opinion or a concept worthy of further review.  Examples of some of these include:

  • Dividends Diversify – in his review of the book Dividends Still Don’t Lie, the comment, “I did some searching on the internet for free services. But didn’t come up with anything that looked useful … Dividends Still Don’t Lie goes through how the calculations are done.  So it is certainly possible for a do it yourself investor to develop the calculations on their own.” garnered my attention.  Now the strategy discussed may be an anathema to a Buy and Hold type (my concern would be tax implications), the “tool” became the curiosity.  The best I could come up with was the Charles Schwab screener that could only analyze three of the book’s eleven metrics yielding fifteen possibilities for further manual research.
  • Finance Journey – the comments, “As a dividend investor, my full focus is on income than capital gain. Thus, capital gains or losses in my investments do not make any sense to me at least for now.” and “I do not convert dividends received from U.S stocks to Canadian dollar, and I use a 1 to 1 currency rate approach to keep the math simple and avoid fluctuations in my dividend income reports due to changes in the exchange rate.” were the culprits.  I trust the “full focus” does not exclude possible warning signals. For instance, many dividend cuts (income) are preceded by a falling stock price (capital gain (loss)). Likewise, the use of a 1:1 exchange ratio for simplicity sake risks masking the true portfolio performance. Personally, I (like ETFs) translate income from my thirteen foreign holdings to home currency prior to publishing results. Besides, if the full focus is income why distort currency exchange (which is a direct income factor)?
  • Finance Pondering is a relatively new blog from the UK that is in the process of ramping up in a thoughtful manner.  The insightful questions raised in this rollout carry the promise of one day being one of the standouts. Yet there is already one nagging question that I hope will be answered in the future – “Why Trainline?”.  To enlighten my audience, Trainline is a ticket booking company that charges a premium in exchange for convenience in what is basically a mobile app. My issues are, 1) it was a 2019 IPO (albeit one of the better ones), 2) KKR was involved (can you say monetize and exit strategy), 3) I question the nature of Brits to embrace premium services given the uncertainty of Brexit and recent demise of Thomas Cook.  

This weeks’ final thought is a potential black swan.  My concern is the expanding pockets of unrest appearing from Hong Kong to Chile to Spain.  Ignoring Turkey/Syria for now, just something I’m keeping my eyes on …

Trump-Tied Banks

Headline Risk

the possibility that a news story will adversely affect a stock’s price

https://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.

QUESTIONABLEhave 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.

CAUTIONARYhave 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)

COOPERATORbased 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

LITIGATORSTrump (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!

My 3Rs – Revamp

Last post in this series I highlighted my views from the rear view mirror.  Going into 2019 will see more changes than normal.  No I’m not selling any positions but changing the emphasis (allocation) on certain issues.  The game plan is for reinvested dividends and fresh money to gradually swing the portfolio into balance with the new targets.

Continue reading

Crazy Free

I decided to pause my 3Rs series to review one particular event of this past week.  No, not the political spectrum (guilty pleas/verdicts in the US and a new PM in Australia) but the bloodbath incurred in the discount broker space following JP Morgan’s announcement of the commencement of a free trade platform.  In the event you missed it, the Tuesday morning market shudder (per Seeking Alpha) was:

Online brokers slump in premarket trading after JPMorgan (NYSE:JPM) says it’s introducing a mobile investing app bundled with free or discounted trades.

TD Ameritrade (NASDAQ:AMTD) slides 6.5%, Charles Schwab (NYSE:SCHW) -4.9%,  E*Trade (NASDAQ:ETFC-4.5%, Interactive Brokers (NASDAQ:IBKR-3.5%.

JPMorgan +0.7% in premarket trading.

Continue reading

Feb 2018 Update

The theme for the month was volatility.  A couple of ETNs cratered as a result of the high volatility causing investors to lose significantly when using these levered products.   “We sincerely apologize for causing significant difficulties to investors,” Nomura said.  Credit Suisse stated “investors who held shares of XIV had bet against at volatility at their own risk.  It worked well for a long time until it didn’t, which is generally what happens in markets”.   Caveat emptor.

During the month, the S&P index dipped into correction territory before rallying to close the month down 3.89%.  My portfolio sympathized with the index closing down 5.53%.  I never hit correction so my peak drop was less but I also failed to recover as quickly.  Probably an area to perform a root cause analysis on at some point.  Following back-to-back monthly losses against the S&P, I’m down 3.44%  to start the year. Continue reading