In mid July, Russia decided to put pressure on global countries that back Ukraine, by not allowing ships to leave the Ukraine filled with wheat. In Europe, the Ukraine is the breadbasket of Europe and Asia and for the last 6 months, Russia has allowed grain shipments from the Ukraine to go to Africa and Europe. Russian decided to stop and has fired rockets and drones with rockets at grain handling structures in the Ukraine.

In a related story, In an article by Rajendra Jadhav, Mayank Bhardwaj and Shivam Patel of Reuters, India which in a normal year accounts for 40% of the world rice exports, has ordered a halt in the export of rice. Rice grows in water and last month the monsoon rains caused heavy damage to many areas of India.

The non-basmati white and broken rice account for 10 million of the 22 million tonnes India exported last year. Parboiled rice has not included in the ban.

Rice is the staple for nearly 3 billion people and 90% of the water-intensive crop is grown in Asia. The top buyers of rice from India are: Thailand, Vietnam, Benin, Senegal, Ivory Coast, Bangladesh and Nepal.

Linking to dividend paying stocks, food security is a number one concern for billions of people on the planet and when climate changes, there will be effects. No one knows if the weather affects are permanent or when and if they will change however the fact is there was change and it takes time to adjust to the new normal. If the companies you invest in is trying to do something to stop further changes, perhaps the world will see it and continue to use the products and services the company offers or will people see how Russia made a bad situation worse?

There are more questions than answers, till the next time – to raising questions.

When you want to know how the economy is doing, one easy method is examine how the banks are doing. The banks make most of their money taking in deposits at one rate and lending the money at a higher rate. If people pay their bills on time, the bank will make money. Deposits will include both government money and employees money, while lending their money is primarily mortgages but does include personal loans, loans to go on holidays and credit card fees. The larger banks will have an investment bank division that makes profits on trading and issuance of stocks and bonds. If the stock market is doing well, there will be a desire to buy shares of companies not making money but they could be soon because of their potential growth.

In an article from Reuters, in mid July, the US banks reported on the 2nd quarter and generally it was a good quarter.

Bank of America, Bank of New York Mellon which are 2 of the nation’s largest lenders earn money from charging clients higher interest rates as the Federal Reserve raised borrowing rates. Bank of America made net interest income (NII) rose 14% to $14.2 billion. BofA expects full year NII to up 8% or about $37 billion.

BNY Mellon had a 33% increase to $1.1 billion. PNC was up 15% to $3.51 billion.

State Street which caters to institutional players of mutual fund companies, hedge funds, etc and could not pass on higher rates showed a decline of 12-18% of NII.

Morgan Stanley which has a very large wealth management division, said NII of $2.2 billion was virtually flat.

All the banks noted there were headwinds in the economy – possible pullback in consumer spending, slower loan growth, increased deposit costs. The banks are hoping investment banking which was $15.7 billion, which is the lowest since 2012, in the quarter increases.

Linking to dividend paying stocks, it would seem from the banks’ performance that people have been adjusting to the higher interest rates from the Fed and that is a good thing. The Federal Reserve increases interest rates to slow down the economy to fight inflation. If people are adjusting and that means loan losses are stable or falling which means more profits to the banks.

There are more questions than answers, till the next time – to raising questions.

In every industry there are leaders and large players who seemingly could be leaders but every once in a while something goes wrong. The company has to write down assets, make less money and then rebound for a few years when it seems they make a different mistake but the results are same. In the banking industry, the large player is Citibank and looking at the history of company from being an investor you wonder why? In a book called Borrowed Time by James Freeman and Vern McKinley published by HarperCollins, NY, 2018, the authors help answer the question why?

When Walter Wriston retired, the new President was John Reed. Prior to Mr. Reed, much of banking was paper based, Mr. Reed believed in technology and Citibank was the research and development shop for the industry. Mr. Reed worked on all areas of operations including speed of credit card purchases, expanded the ATMs and made them user friendly, which many Citibank consumers believed was a very good thing. When Mr. Reed was appointed President, he had not worked in the credit department and made loans. He had not thought about what happens when companies and countries do not pay back loans. For the first 6 years as Chairman, he spent half of his time of those issues with little progress made.

In 1990, the biggest creditor to the banks was former President Trump with Trump International Hotel in Atlantic City and Trump Shuttle. Both went bankrupt and Citibank and other banks were owed $2 billion in bank dept and $1 billion in bond debt. Citibank took assets including the Plaza Hotel in Manhattan.

In 1991, Prince Alwaleed bin Talal Bin Abdulaziz al Saud bought a $500 million preferred stock and 4.9% stake in the common stock.

In 1998, Citibank merger with Travelers Insurance to form Citigroup. The merger would serve over 100 million customers worldwide with Citibank for consumers and businesses, Travellers for insurance and mutual finds, and Salomon Smith Barney for investment banking and securities.

Sandy Weill became Chairman and although his reputation is a swashbuckling empire builder, he actuallly is someone who is disciplined in not taking on too much risk during the boom times and controlling expenses in both cycles. The discipline allow him to buy distressed companies and reorganize them. For decades when Wall Street was down, Mr. Weill was looking for bargains and had the ability to buy. When Mr. Weill left Citigroup the total shareholder equity was 8% of total assets. By 2007 it was below 6%

By 2008, Washington had come up with the $700 billion Trouble Asset Relief Program (TARP) and Citibank took $25 billion. The quarterly report announced a $4.4 billion write-down in securities and banking segment; the quarterly loss was $2.8 billion.

Citigroup’s Global Transaction Services unit which manages cash, facilitates trade and executes payments for large organizations worldwide experienced a $14 billion decline in available funds or 5%. The next day significant fund withdrawls came from the US and Europe. Confidence was going down and money was being moved. On November 23, Treasury bought $20 billion preferreds at 8% dividend. By January 31, 2009 Citigroup had used $517.3 billion of the governments money.

Why? Fed Chair Ben Bernanke said the system could not have handled the sudden collapse of a $2 trillion institution that provided much of the world’s financial plumbing.

Those on the other side point out Citibank holds about 5% of US bank deposits.

When the book was written there was a change of CEO from Vikram Pandit to Michael Corbat, a long time Citi veteran who is by most accounts a competent executive who understands the business. He seems more interested in operating a solid firm than in pursuing a grand vision or rapid growth.

Although it is important to remember, the history of Citi is every 20 years they manage to lose money.

Linking to dividend paying stocks, as a dividend investor you love solid operating firms that can implement new ideas, just not starting them. Innovation and technology are wonderful, they can change processes and industries, and with the change the solid dependable become much risker and money is lost. It is a balancing act between growth and slower organic growth, there are advantages and disadvantages to both, as an investor you must make a good judgement.

There are more questions than answers, till the next time – to raising questions.

In every industry there are leaders and large players who seemingly could be leaders but every once in a while something goes wrong. The company has to write down assets, make less money and then rebound for a few years when it seems they make a different mistake but the results are same. In the banking industry, the large player is Citibank and looking at the history of company from being an investor you wonder why? In a book called Borrowed Time by James Freeman and Vern McKinley published by HarperCollins, NY, 2018, the authors help answer the question why?

In banking for credit there are the 3 C’s: character, capacity and collateral. When considering whether to extent credit. a banker must know whether the potential borrower has the integrity and the financial wherewithal to repay a loan, but also understand which assets of the borrower can be seized and sold by the bank if the loan is not repaid.

Although all banks can give out loans to all industries, the reality is banks tend to specialize. Citibank had a client named Aristole Onassis and he became a large player in the business of shipping. Onassis was in the business of building oil tankers, Texaco needed the oil moved and MetLife arranged the long-term loans. Citibank became the world’s leading bank in financing shipping. Citibank merged with First National Bank of NY and its clients including railroads made Citibank the bank of the railroad industry. In 1969 the railroad clients included Penn Central.

Penn Central was a merger of 2 railroads that were losing money- Pennsylvania and New York Central. Part of the reason Penn was losing money was competition that the government paid for the opening of the St. Lawrence Seaway and the Interstate highways or trucking companies.

When Penn Central declared bankruptcy, the federal government offered loan guarantees. The government was thinking about the commercial paper market. Companies issue commercial paper rather than loans for 60 or 90 days. The market was $40 billion in 1970 with Penn Central having $84 million outstanding. The question for the authors of the book was the government guarantee needed?

An area of growth, Citibank went into were international lending. Citibank’s branches around the world meant it enjoyed an established customer base, knowledge of local conditions, and experienced staff. The branches specialized in foreign exchange trading, dollar based services for foreign customers in NY. By 1969, Citibank had over 200 branches around the world. By 1973, foreign deposits exceed domestic deposits.

In terms of managing the risks, after a study in 1974, the bank lacked a system for assessing the unique risks for lending in each foreign country. The President of the bank Walter Wriston believed loans to countries were guaranteed by taxpayers of the country and were essentially risk free.

Many countries around the world depend on the price of a commodity for the economic viability for example oil. When oil is discovered, loans are made and hopefully the price of the oil remains to cover the cost of drilling, pipelines, refining and using the product. However, in 1980, oil peaked in price and fell for the next 5 years. Loans to governments would have to be written off. Citibank as leader in the field needed to have government bailouts and extend the loans or technically, they would have been insolvent.

Linking to dividend paying stocks, every leading company has an array of clients, but they tend to be clustered in a few categories because the company can serve the customers better. As long as the customers are above board and make money, the specialization is a good thing. When economic cycles turn, how well do the customers perform? How are the customers ensuring bills get paid? When you do your homework, you want to determine how your investments will do on both sides of the economic cycle.

There are more questions than answers, till the next time – to raising questions.

In every industry there are leaders and large players who seemingly could be leaders but every once in a while something goes wrong. The company has to write down assets, make less money and then rebound for a few years when it seems they make a different mistake but the results are same. In the banking industry, the large player is Citibank and looking at the history of company from being an investor you wonder why? In a book called Borrowed Time by James Freeman and Vern McKinley published by HarperCollins, NY, 2018, the authors help answer the question why?

When people invest, invariably because we are all bias, we look at the institutions we pay bills to for it turns many of them are very good dividend stocks to own. For example you pay an electric bill, your utility company has been paying dividends for years; you own a cellphone and which company pays a dividend – the teleco and the list goes on. Eventually you will look at the bank for most banks are profitable companies. You may deal with a large bank and a more regional bank for a number of reasons.i

If you own a regional bank, one of the possibilities of owning a regional bank is it maybe taken over by a larger bank eager to gain market share in the region. However according to an article by Tatiana Bautzer and Saeed Azhar of Reuters, the likelihood of a takeover of a bank is next year or 2024. The reason the bank regulators have introduced new capital requirements.

After 2008 when all banks around the world received bailouts both directly and indirectly from the governments, new standards were agreed to by the Basel Committee on Banking Supervision. Global regulators agreed to give banks a transition period to meet the new standards and the set the beginning of 2025 as the target for full implementation.

Federal Reserve Vice Chair Michael Barr, noted the federal reserve will be increasing the capital requirements because of the banking crisis which happened earlier this year. Although bank analysts do not believe the largest banks have anywhere near the stresses of loan and deposit relationships. For example one of the banks which failed loaned their money out at low interest rates for 10 years and needed to pay deposits at higher rates than the loans they gave. The mismatch was not good.

If banks have to be sold, they will be as deals with banks in either receivership or under stress rose to $23.2 billion in the 1st quarter, but deals with banks that are non-stressed was the lowest seen over the first year and half, the number was $3.9 billion.

Once the new capital requirements come out, it will be easier for regional banks to merge and for them less expensive as larger institutions have an easier time of meeting the capital requirements.

Linking to dividend paying stocks, whatever bank you deal with you hope it has a long history and even longer future. We pick a bank for many reasons including convivence to our home or work, but the reality is the internal operations of the bank depends on meeting and surpassing banking regulations which change over the years. Unless you work for a bank, you may not know or understand what the regulations allow the bank not to do, but if the bank Tallows you to meet your regular banking needs, you do not need to. Regulations in every industry help determine a level of profitability and governments try to balance – profitability and security for the consumer on a regular basis.

There are more questions than answers, till the next time – to raising questions.

If you were advising the President of China, you would have a difficult time because for much of the time the President has been in power or raising to power, China was in double digit growth numbers and the numbers could be trusted. The growth of China made it the 2nd largest economy in the world, infrastructure projects were being built in and around China for the Belt and Road program. The news was good news, but times have changed.

In an article by Zen Soo of the Associated Press, China’s growth is down, missing official forecasts, and youth unemployment is up. There is a weak property sector which for many years contributed 25% of the GDP as well as the largest property developer in China, Evergrande posted a loss of $81 billion for the past 2 years including debts of $300 billion.

The ruling party in China expects 5% growth and the department of National Bureau of Statistics says the government will adjust policies to stabilize growth.

Harry Murphy Cruise of Moody’s Analytics noted the Chinese economy is going from bad to worse.

The weak economy means more government spending, cuts in interest rates and trying to free up credit to more businesses.

Exports have declined 12.4% from the same period in 2022.

Retail sales rose 3.1% from the same period in 2022.

Industrial output have increased 4.4% in June compared to 2022.

Linking to dividend paying stocks, China was once the go to country for almost everything but COVID lockdowns and companies moving operations to India and Southeast Asis means the Chinese economy will not grow at double digit rates anymore. Chinese leaders have greater capacity to encourage growth than many countries around the world, but things have changed and they are not going back to where they were.

There are more questions than answers, till the next time – to raising questions.

In every industry there are different ways to achieve the same goals. Some people will try to pick a stock that will tend to go up. Sometimes the easier method is to buy the owner of the exchange because if the exchange is making money, then it is rewarding a company.

The owner of the NYSE is Intercontinental Exchange Inc (ICE) and if you think about the stock market, millions of shares are traded daily for thousands or millions of reasons, but given the exchange of stock there is a fee involved somewhere. The exchange will capture that fee and given a minimum volume the exchange will make money. As long as the minimum is reached, the rest is gravy and every year with lower computing costs the cost is less. The owner of the exchange (ICE) deals in large data sets and that can be translated to other companies. ICE examined the market and decided the largest mortgage software company or Black Knight was a good fit and purchased it. ICE bought Black Knight for $11.7 billion. ICE had bought mortgage automation company Ellie Mae from private equity firm Thoma Bravo for $11 billion in 2020.

With all large purchases, the regulators often have a view and they have been giving their input in an effort that too many monopolies exist. The regulator in this case is the US Federal Trade Court or FTC encouraged ICE to sell off parts of Black Knight including Optimal Blue and Empower – a software which helps banks generate loan documents to Constellation Software Inc.

Linking to dividend paying stocks, ideally you want to buy a company that whatever the economic cycle the company makes money. Often times you will focus on a particular stock or industry sub group, but buying the owner of the exchange will accomplish the same goals. The processing of information for a fee ensures as long as their is economic activity fees will be generated. If fees are generated, profits can be generated and risk level remains low.

There are more questions than answers, till the next time – to raising questions.