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 …

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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.

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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.

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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

Johnny-come-latelies

Generally I refrain from back-to-back posts with similar topics but decided to make an exception this week as the moving parts have kicked into high gear.  My post last week addressed my uneasiness with cryptocurrency as well as my interest in the underlying blockchain technology.  It appears that my view has some support as two blockchain ETFs debuted on January 17th (BLOK and BLCN) and one January 25th (LEGR).  This should be followed by KOIN next week.  Horizons and Harvest (HBLK) also have ETF applications pending.  Grenadier penned a piece on Seeking Alpha that did some analysis on the first two.  Four of LEGR’s top five holdings are included in either one or both of the originals so it will probably be similar.  David Snowball highlights this sentiment in his piece There’s no idea so dumb that it won’t attract a dozen ETFs stating, “…there are no publicly traded companies that specialize in blockchain; there are mostly companies with a dozen other lines of business that have some sort of efforts going into blockchain.”  This is 100% correct.

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2017 Mid Year Correction

Each year I establish a basic plan to govern my investing activity based on sectors, segments or locales able to deliver a little alpha to my portfolio.  The past couple of years had a focus on the Financial industry with the outcome being rewarded with mergers (small banks) and outsized dividend increases (money center banks).  I also began increasing my Canadian allocation in 2015 from 2.5% of my dividends to the current 8.6%.  Since the election, I was accelerating the increase in my other foreign holdings to the current 13.6% on two theories, 1) gridlock in Congress would persist as the Republican majority would be too narrow to push through sweeping changes, and 2) this inaction would result in a weaker dollar.  It appears I was correct on both counts as the US dollar is now at an eight month low.

With my alpha agendas now too pricey (at least for slam dunk results), a re-prioritization is in order. With the Fed Chairs’ testimony this week indicating that GDP growth of 3% would be difficult, the Trump agenda which projects a higher growth rate is likely in peril – even ignoring the self-inflicted wounds.  Without an improvement in the GDP, deficit hawks will be circling.  It is likely the last half of the year will present some opportunities, but my view these will be predicated on external events.  My eyes will remain open to the USD exchange rate – on strength I may buy foreign issues.

My portfolio allocation between holdings labeled Anchor, Core and Satellite have been imbalanced for a year or two primarily due to merger activity and the acceleration of adding foreign issues.  Now that the major mergers have completed, the last this past January, and other alternatives are slim, I figure it’s time to get back to basics.

My going forward strategy can be summarized as follows:

  1. Non-US equities when secured at a favorable exchange rate
    a)I have 2 Japanese, 2 Swiss, 1 UK and 1 Swedish company on my watch list in the event an attractive price presents itself
  2. Assess corporate actions (spins, splits, mergers) for opportunities
    a) Generally I’m agnostic to splits except when the result would be a weird fractional.  I can easily manage tenths or hundredths of shares.  Smaller sizes are troublesome so I avoid when possible.
    b) Spins (and mergers) are assessed to prevent (if possible) weird fractionals.  For instance, I added to my MET position earlier this month as their spin will be at a ratio of 11:1 which would have otherwise delivered a weird fractional.
  3. Assess portfolio for average down and other opportunities
    a) An example of this was last months’ purchase of KSU.  To this end, I recently updated my Dividends (Div Dates) Google sheet to flag when the current price is lower than my cost basis.
    b) An example of “Other Opportunities” would be BCBP which is resident in my Penalty Box due to dilution.  The dilution (secondary) might be explained (now) with their announced acquisition of the troubled IA Bancorp.  If the regulators provide their seal of approval, it may be time to remove BCBP from Penalty status and perhaps add to this 3.5% yielder.
  4. Add to holdings that are below target weighting
    a) This is where I expect most of my second half activity to reside.

Of my 26 stocks labeled Anchor, Core or Satellite; 5 can be considered at their target weight (within .5% of the target) and 4 I consider to be overweight.  The remaining 17 will receive most of my attention.  As most of these rarely go on sale, I’ll likely ignore price and place a higher priority on yield and events – at least until I’ve exceeded last years’ total dividends.

The following table highlights this portion of my portfolio:

JAN/APR/JUL/OCT

COMPANY TYPE PORT DIV%
Kimberley-Clark/KMB A-(6%) 4.01%
First of Long Island/FLIC C-(3%) 0.85%
Sysco/SYY C-(3%) 1.81%
Bank of the Ozarks/OZRK C-(3%) 0.67%
PepsiCo/PEP S-(1.5%) 1.51%
First Midwest/FMBI S-(1.5%) 0.3%
Comcast/CMCSA S-(1.5%) 8.32%
Toronto-Dominion/TD S-(1.5%) 1.58%
NOTE: Not all payment schedules coincide completely

FEB/MAY/AUG/NOV

COMPANY TYPE PORT DIV%
Clorox/CLX A-(6%) 3.68%
PNC Financial Services/PNC C-(3%) 0.30%
Legacy Texas Financial/LTXB C-(3%) 1.48%
Starbucks/SBUX C-(3%) 1.07%
Blackstone/BX S-(1.5%) 2.58%
Apple/AAPL S-(1.5%) 1.26%
Lakeland Bancorp/LBAI S-(1.5%) 1.04%
Webster Financial/WBS S-(1.5%) 0.82%
NOTE: Not all payment schedules coincide completely

MAR/JUN/SEP/DEC

COMPANY TYPE PORT DIV%
WEC Energy/WEC A-(6%) 5.61%
3M/MMM C-(3%) 0.76%
Home Depot/HD C-(3%) 7.32%
Blackrock/BLK C-(3%) .22%
ADP/ADP C-(3%) 1.60%
Southside Bancshares/SBSI S-(1.5%) 0.96%
Chevron/CVX S-(1.5%) 9.52%
Norfolk Southern/NSC S-(1.5%) 1.99%
Flushing Financial Corp/FFIC S-(1.5%) 0.99%
Wesbanco/WSBC S-(1.5%) 1.14%
NOTE: Not all payment schedules coincide completely

I will provide the caveat that this plan is subject to not only the whims of  the market but of my own as well.  In addition, this plan may be changed if/when a better idea comes along.