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!

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Stock Buybacks?

As we round the corner coming into the final week of this month, the markets are showing a robustness that is probably more of a relief with abating trade tensions as the broader market was more a mixed bag with earnings reports. Case in point being my ongoing saga with Owens & Minor which announced their second dividend cut. At least they aren’t facing a SEC investigation à la Kraft Heinz. The common denominator in these two cases appear to be – at least in part – a laser focus on trimming costs with too much emphasis on the salary component.

Which leads to this week’s topic prompted by a private message which read in part: “… (I listen to) Pitchfork Economics with Nick Hanauer … (which) talked about stock buybacks and shareholder value maximization… I was hoping you could listen to it and let me know if everything they talk about holds up, or if there are pieces of the puzzle missing that might have been left out to steer a narrative. I don’t know what I don’t know and I don’t like thinking I might be getting misled.

First half the battle is acknowledging a gap in understanding. Most of us only begin to realize this too late in life choosing to muddle through as best we can. Second, keep in mind the quote, “99 percent of all statistics only tell 49 percent of the story.” Ron DeLegge II

For my uninitiated readers, this podcast is targeted to the rising generational groups such as Millennials, Gen-Z etc. with a slight Socialistic slant. The New Green Deal (which I’m currently researching) resides in this category as well – (but with a twist). Anyway, there are three schools of thought to stock buybacks; they are good, they are evil or they’re neither. The podcast presents them as generally bad, the current administration treats them as good (no choice here as they were spurred on as a by-product of the tax plan). My personal view is under current law – particularly when the Supreme Court of the United States has granted to corporations the notion of “corporate personhood” – they are generally neither. I’m more of a guy that tries to eke out a profit regardless of the rules, knowing they will likely change at a future date and adjustments will be required.

Major Issues with the Podcast

  • 11:44 – “Secondary offerings aren’t all that important”
    • Depends on the type – if the secondary creates more shares to fund a new production line for instance, why would there be a penalty for a return to the original share count?
  • 18:30 – 90% of corporate profits are returned to the richest people via dividends and stock buybacks.
    • Wells Fargo is 62% owned by institutions and the number is about 15% for Walmart. Generally this reflects ETFs and mutual funds which are largely owned by individuals.
  • 16:00 – shareowners are not investors.
    21:07 – … buying stock is speculating not investing .
    23:01 –  … if you think shareholders are investors … that contributes to the growing economic inequality
    • Only in the narrowest of definitions (buying an initial issuance or direct from a company’s secondary) is this true. Even as “traders” an economic interest with ownership rights is gained with the price (implied value) the speculation.
  • 26:49 – chartered corporations existed to better society and for a limited time.
    • These types of corporate structures were modified (initially in NC-1795) to circumvent perceived constitutional limitations on enforcement of multi-state investments (canals, railroads). They maintained a societal purpose including eminent domain rights (conversely, eminent domain is a New Green Deal issue as well).
  • 33:32    – Wells Fargo … laid off employees while (enriching owners through buybacks).
    • The layoffs were due primarily to exiting business lines in an effort to refocus on core operations reducing (in theory) the ongoing capability for malfeasance.  Also to reduce overlapping operations (footprint acquired through acquisitions). It was not related to buybacks. In fact, Warren Buffett, the largest shareholder is precluded from owning greater than 10%.  He is required to sell when buybacks are performed resulting in no short term enrichment.

The one point I hadn’t really considered in this debate was their point at 40:08 of a possible prohibition of buybacks if employees are receiving public assistance. I would add underfunded pensions and Sen. Marco Rubio’s (R-FL) position of taxing buybacks like dividends to the mix of potential areas to improve. One area requiring caution is the treatment of large private companies versus public ones. Examples that initially come to mind are Hobby Lobby, Cargill, Chick-fil-A and Koch Industries. None of the Democratic challengers has yet presented (in my opinion) a viable solution to improve the status quo without discriminating against any current stakeholder thereby cheapening their argument regarding equality.

So, while appreciating the question, my response is probably clear a mud as this issue is a tangled web with no clear right or wrong answer. Only that your instincts are correct in attempting to discern all the arguments to formulate your own opinion. My guess is this rebuttal does not fully address all the issues either – but my 2¢!

Any thoughts, opinions or other considerations that you have?

Black Swan?

A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict. Black swan events are typically random and unexpected.
Investopedia

With the market jittery of late, my sense is it’s waiting for another shoe to drop.  If only we knew when and why.  With a decelerating economy looming, greater uncertainty present and anticipated struggles with earnings comps it doesn’t stretch the imagination much to envision additional – or greater – turmoil.

The question becomes: what is the catalyst?  For purposes of this post we can ignore politics.  Having survived the past two years gives us that luxury.  The usual suspects; oil, interest rates or political upheaval are in check.  The economy, if not robust, is no slouch.  If I concur with pundits that postulate we can bounce along at these levels for awhile then I still must make the attempt to identify a black swan.  For this posts’ purpose some economic thing.  One example being 1997’s Asian Contagion.  In the absence of such a trigger I suspect Michael Pento’s analysis is a little dire, but with minimal tailwinds I could make a case for stagnation.

In my spare time  I’ve been performing a cursory analysis on the ETFs I added this year.  Only from the aspect of understanding each company and ending with a determination as to whether I would choose to own the component outright.  The process is a little laborious but results in more detailed knowledge on my part.  Australia and Mexico were a breeze.  Europe is last.  Japan was painful with the keiretsu overlaying business relationships (formal and informal) coupled with subsidiary relationships and interlocking ownership structures.  While my research remains incomplete, I may have found a lurking black swan.

With much of the analytical commentary in the US centered on corporate debt in a rising rate environment, in this vein, how about a growing Japanese banking scandal that, by comparison, makes the Wells Fargo scandal pale in comparison.  In essence, in April Japan’s Suruga Bank (a roughly $3.5B regional bank) came under investigation for fraudulent lending practices, falsified documentation and a laundry list of assorted unscrupulous business dealings.  In September, an independent investigation revealed at least 795 cases of fraud.  Garnering my attention was a fear that some “analysts have warned (this) could generate risks for the entire Japanese banking sector“.  All this has come to a head with the filing of a lawsuit against the founding family this week.

One could speculate this issue is confined to this bank – and the answer could well be yes.  However one of the issues with the Japanese corporate system is the propensity to delay remedial action – basically a holdover from the glory days of the keiretsu.  The Suruga scandal has the potential to spread into Shinzo Abe’s government and the BOJ.  Not as direct participants but as a negative reflection of their policies.

My eyes will remain on this as we enter the new year as if Japan stumbles the ramifications on interest rates in the US could be interesting as an inflow of currency to one of the world’s remaining ‘safe-havens’ could result in some artificial – and likely temporary – swings in yield curve.

Have a Happy New Year!

 

 

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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Moral Investing

Making the headlines this past week was the atrocious scene along our border.  Being an event driven investor, I had to at least take a look at the situation to – at a minimum – determine my exposure and whether strategy adjustments are  necessary.

I’m not a prude by any stretch of the imagination but (outside of ETFs) have never invested in tobacco stocks.  I have minimal exposure to wine and spirits.  While I’m not casting aspersions on those that do, I figure there are more than enough alternatives that better fit my preferences.

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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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‘Tis The Season

It’s getting to be that time of the year and since I don’t think the grandkid reads this thing, I figured I’d share one of the presents she’ll be getting.  Just to review, each year since she came to live with us she has received shares in a company as a gift. This gift has been purchased in a company DRIP, established as a Custodial Account of which I’m the custodian. Generally, the company is one in which she can relate, i.e., Trix was her favorite cereal as a kid hence the General Mills stock.

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