In the coming need to do homework, it is often good to read books about finance because they offer a summary and a perspective that you will not likely receive by reading the newspapers and blog posts. Recently picked up a book called King of Capital by David Carey and John Morris published by Crown Business, NY, 2012.

In the book, the authors go through many deals some made money. lots of money 6 times the investment and some lost money and when investing one of the objectives is not to lose money, however it happens does often. It is important to examine which companies investment lose money and learn from them however it is almost impossible not to have losers in your portfolio. The hope of the new year is to limit the losses and have more winners.

In the book, private equity investors examine multiple companies and eventually pick some, sometimes it is because the company is medium sized and under the right strategies could grow through acquisitions to new markets. A wonderful example is Gerresheimer AG, a German packaging company. The company was owned by a conglomerate by the name of Viag AG which did not spend a lot of time on it. Blackstone repositioned the company into the health care area where there were fewer competition but very loyal customers. The jars which drugs come in, partly because in the health care area, price is not the biggest concern – safety is. If safety is the biggest concern and the company can ensure it surpasses health regulations, customers stay loyal. The company made acquisitions of health care companies and over a few years, Blackstone was able to bring the enhanced company public. It was a success but it outlines the possibilities that can happen.

On the other side of the coin are the many failures which Blackstone invest in, having done their research and due diligence but something changed afterwards. The economy moved downwards so projections were not reached; the expected change in consumers did not change until later or something needed to happen first. For example, when the internet came eventually people moved from telephone companies to internet companies, but not right away. There was an expectation that change would happen, can happen, but win is always tricky answer. In the meantime, companies were loaded up on debt, debt payments could not be paid, companies are restructured debt becomes equity and original investors have lower holdings or almost no holdings. Sometimes even when projecting for higher debt payments, you do not know when the economy moves against your investment.

Linking to dividend paying companies, often these companies even though at low interest rates debt can be used in favor of the company, they tend not to go to much into debt. There is a balance and managing debt is something investors need to worry about. Does the company have the correct debt? does it have balloon payments in the future? how does the company benefit from the debt? Often times a company will go a stray if debt is not strictly controlled, but if debt is not used the leverage buyout companies will examine a company and project if they increased the debt money could be paid to shareholders. Only when you examine the transaction looking backwards do you see when debt is good and not good. Investors always need to do their homework.

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

In the coming need to do homework, it is often good to read books about finance because they offer a summary and a perspective that you will not likely receive by reading the newspapers and blog posts. Recently picked up a book called King of Capital by David Carey and John Morris published by Crown Business, NY, 2012.

The book is about private equity and Blackstone run by Steve Schwarzman. On Wall Street there are multiple private equity firms including KKR and a host of other firms managing billions of dollars. They are what is known as alternative investments, when a private equity firm buys a company, attempts to make it profitable and hopefully in a few years issue an IPO which allows the private equity firm to sell its holdings over the next couple of years. The advantage is making 3 or 4 or more times the amount of money that was spent to buy the company. This happens because there are cycles in the economy and there are ideas for expansion and growth that were not being used before the buyout. When KKK did the first couple of deals they made a lot of money, and in Wall Street if someone makes a lot of money with seemingly little risk, there will be a multiple of players who wish to do the same thing. The difference is some will be able to raise funds. The first years it was hard to raise funds because only a few players were active in the alternative investment area, however once wonderful returns are made, more holders of large funds made the transition to own alternative investments. In the world of capital the new players were the pension funds and the wonderful thing about pension funds is they always have new money to invest, while at the same time worried about their pension obligations.

In the book, the authors discuss various deals that Blackstone has made over the years, and while some were wonderfully profitable for the firm, there were others that failed and over the years Blackstone had to change how they make their decision to invest. One method they adopted the pitch has to be done to a wide variety of people and someone has to play devil’s advocate to ensure the one in the hundred possibilities that could happen is given consideration in the decision. It does not mean all decisions will be profitable, many will not and that is the important take away. Even with the brightest minds in the room, for a company to turnaround and make consistent profits it is not a sure thing. Many times the firm loses money because the economy is not static, it is dynamic and what works in one area of the economy does not work in another.

Linking to dividend paying stocks, when you buy these companies you are buying them because of their abilities to generate profits over the years. Sometimes they could generate more than normal, but they have consistently generated profits and can pay dividends. There is something wonderful about that and it is not as easy as it might seem to be. The company’s history is filled with failures, but there are successes and they produce consistent profits.

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

We all know more and more machines are using computer chips and that makes the machines better for the operations they do. However, we often forget because computer chips are more and more common when there is a supply shortage, individuals will suffer.

In an article by Peter Goodman of the New York Times News Service, there is a case of a person who has sleep apnea which means he frequently stops breathing while sleeping. He uses a CPAP or continuous positive airway pressure machine which can pump air into his body while sleeping and the patient receives a good night sleep. One of the components of the CPAP is a computer chip and every once in a while, the machine needs new computer chips.

Computer chips are in short supply, refer to the auto companies, the chips are in short supply to machines. The President of the ResMed, Michael Farrell, for his clients is on a mission to receive more chips. Mr. Farrell has spent his time trying to find out where the supply system is down and trying to gain more chips for his company. The issue is his company is a small user of the chips and the big companies such as auto companies and cellular communications companies are large users. Who gets the chips. In Mr. Farrell’s case, he has come to understand it is not that chip makers can ramp up production because it takes 2 years of lead time and billions of dollars. In addition, in North America, Europe medical devices manufacturers are governed by strict safety standards that limit their flexibility in adapting to trouble.

Mr. Farrell dived into supply system problems and as he worked backwards, he discovered 5 levels up the Taiwanese manufacturer of silicon wafers had no inventory. That meant the company that combines the wafers and circuitry could not produce more components and the company that takes combines the output into clusters could not make more of them. The maker of the circuit board could not buy clusters to send to ResMed factories to go into machines.

Linking to dividend paying stocks, all companies have supply systems and when they work on time and controlling inventory costs, they work wonderfully. When they do not work, people ask why not do more in house? however the answer is not always a straight forward as one may think it is, unless a company has billions of dollars to do what they need to do. In your investments, how does the supply system work best and when it is down?

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

Happy New Year

As the calendar has turned in is a good idea to look to those who are optimistic for the future. There are considerable challenges in the airline industry, in the author’s part of the country – the warm weather of the south is desirable. However with the pandemic, do you fly south or stay home, as companies continue with hybrid models – it is possible to work from southern climates.

In an article by Tim Hepher, Jamie Freed and Eric M Johnson of Reuters, some of the airlines are looking to buy more energy efficient planes for their fleets. When the severity of the spread of the Delta and Omicron and the next one lessens, it is expected more people will want to fly or travel to other parts of the country and the world. When the holiday public moving then business travel will tend to pick up and we will approach something that was considered normal before the pandemic.

Singapore Airlines, Air France – KLM, and Qantas are purchasing energy efficient planes for the second half of the decade or 2025.

Airbus and Boeing are sold out of the benchmark medium haul models until 2025.

Two large airline purchases are Air Lease Corp and Indigo Partners (which owns a number of airlines) ordered 300 jets at the Dubai Airshow. In the airline industry one of the variable costs is fuel, the more fuel efficient a plane is, the less fuel the plane uses and costs can be lowered all over things being equal or near equal.

Linking to dividend paying stocks, as investors you are looking to the future expecting the company to be profitable to pay dividends for you to invest or spend. Being optimistic for the future is a good thing, ensure you have metrics to see if the glass is half empty but start the new year optimistic.

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

We all know that the world of autos is changing from gasoline engines to electric engines, we know that something the tipping point happens but what happens to the gasoline engine vehicles and since most of us drive gasoline vehicles what should we drive? Those are big questions because the price of the electric vehicles is not less or equal to the gasoline engine vehicles, it is more, yet many people would like to buy electric. If you invest in an auto company – GM, Ford, Chrysler or BMW, Mercedes, Toyota, Honda, or Tesla what does those companies do.

In an article by Tim Kelly of Reuters, Toyota Motor Corp, which is the world’s largest car maker is committing $90.4 billion to electrify its automobiles by 2030. If all goes well, Toyota will have total sales of 1/3 of its lineup in electric.

Toyota Chief Executive Akio Toyoda said his company was planning a multipronged carbon reduction strategy that includes hybrid cars and hydrogen-powered vehicles. He said we want to give people a choice and we will wait until we understand where the market is going.

Toyota is building a $1.29 billion battery plant in North Carolina to open in 2025.

It is important to note electric vehicles have fewer parts than gasoline vehicles which means as the world shifts and people start buying electric, supply systems have to shift and jobs in the auto sector will go down. In Japan. there are 5.5 million auto jobs that will go down significantly.

Linking to dividend paying stocks, in some industries what we want and what we buy can be different. We may want an electric car, but the sticker price says we buy a gasoline car or truck. Vehicle makers have to meet demand of what we actually buy, not what we want, it is an interesting industry to be in when the public and government want something but the public is not quite buying yet. Auto companies will need to having this balancing act between want and need, actual sales and desired sales, profits and doing their part on climate change, what will the the correct approach?

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

Governments are important and often they are important because of the direction they wish to lead the public. In reality, most of the public has limited access to credit and if the government gives an incentive, the public will eventually adopt it. There will be early adopters who see the value in the incentive and believe in the outcome. There will be others who will do the incentive because they see it as the right thing to do and late adopters because the price has dropped or they see others doing the incentive and join in because it seems a normal thing to do. The above happens in new product launches it is generally the way the public functions.

In an article by Kathleen Ronayne of the Associated Press, if you think about California, particularly southern California you will see many parts near Los Angeles are a desert or semi-desert conditions. For the past 26 years, California has a program to put solar panels on their homes. It is widely successful with over 1.3 million homes having solar panels and new subdivisions must be built with solar panels on the homes. The current incentives are if you have solar panels on your home in California, whatever power you do not use you sell back to the power companies which can result in a discount on your bill. The term is net energy metering and the incentives lower the amount of time to pay for the panels. At present the time is between 3 and 4 years. The power companies want to increase the time to between 10 and 15 years.

The issue for the power companies is the current program allows for customers to sell back into the power grid for more than it is worth. Utility power companies need to maintain power distribution across the state and while the incentives have been necessary for the public to adopt solar panels, the cost of the rest of the system is not being paid evenly. The utility companies are proposing the incentive to either be lower or a fixed rate for every customer, then everyone pays their fair share.

Linking to dividend paying stocks, there are government incentives for all types of businesses, most of them rarely are changed, when times are in downside the incentives become larger, but rarely do they go down. Ideally making a long term decision based on incentives is the not the correct process but everyone and companies do it. Cutting incentives by the government is very difficult because decisions have been made using the incentives. When it comes to your investments ask the company which incentives they are using and how much do they depend on them?

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

In mid December a very large tornado that was 200 miles long touch ground on a number of places leaving damaged buildings and lives in the process. Deanne Criswell the head of FEMA has called the tornado the new normal because of climate change. We all understand the destruction tornadoes cause and if you need to see a movie Twister staring Helen Hunt is a good indication of the beauty and destruction of a tornado. The issue is at one point there was a season for tornadoes and people knew and now the tornadoes can come anytime of the year.

In an article by Richa Naidu of Reuters, Amazon has distribution plants around the US and the world and they move goods and services. If you look at map of St. Louis, the Mississippi divides the city if you live on the west, you are in Missouri. If you live east of the river you are in Illinois. One of the suburbs of St. Louis is Edwardsville, Illinois and Amazon has a 500,000 square foot facility and there is a 1.3 million square foot in Republic, Missouri which is near Springfield. The company will continue to operate efficiently. The plant in Edwardsville had its roof ripped off and the concrete walls to collapse. Amazon responded correctly worried about the people first. Then supports when the people are safe and then rebuild.

Linking to dividend paying stocks, climate change is going to affect every company in your investment because the water, the wind, the soil, the micro climate is changing until such time it stabilizes. Most of us are attached to a piece of land, either we bought, grew up near the land and have memories of it. Climate change means people will have to leave and companies have to make decisions to relocate to areas where there is greater stability. There maybe calls to rebuild, but is that always the correct decision. Fortunately with large companies that can make profits, there are going to be alternatives and other choices in order to continue to function. As an investor you like that, as an individual you will likely be conflicted, which is okay.

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

One of the hallmarks of former Donald Trump’s presidency was the use of social media and perhaps through this people felt more in contact with him. Unfortunately the former President dived into conspiracy theories rather than the government operations and eventually Twitter, Facebook and all other social media companies had to ban him. However the former President still has a following and when there is a loyal following someone will want to monetize it.

In an article by Noor Zainab and Greg Roumelitois of Reuters, a social media company called Digital World Acquisition Corp was agreed to merge with Trump Media & Technology Group (TMTG). On the face of it, that is a good thing and people rushed to buy shares pushing the share price up and for a while the valuation of the company went from $875 million to $4 billion as the stock went close to $100 a share, the stock trades around $50 a share.

Senator Elizabeth Warren asked the SEC to investigate TMTG proposed merger with Digital World over potential violations of securities laws.

Digital World has made some lofty projections of the average revenue per user to $13.50 in 2026 with over 81 million subscribers. It should be noted, the beta testing for the app is expected to be launched in the first quarter of 2022.

Linking to dividend paying stocks, in the case above there is a plenty of hope and many companies on the stock exchanges trade on hope for a better day. The plans they have for the future will come true, and if you believe in the founders just maybe, the plans will come and they will gain transaction with the public and all the pieces will fall into place. It tends to be a long journey and other competitors will come into place, but hope is part of the stock exchange. For those who want less hope and more results, examining profitable companies that pay dividends is likely a more profitable way to invest. For the above, there are some who bought at near the top, the stock trades at half the price and the person has to hope for the best. If they bought a profitable stock that can pay a dividend, while they hope for the best the dividends roll in to give more options.

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

Every year we as a society embrace more and more technology in our everyday lives, 99% of the time we want and need the technology. This Christmas weekend many will receive or have bought electronic devices. If you own Apple stock that should be a good thing, if you own Nvidia that should be a good thing, and the list goes on. One of the biggest players in the use of the internet is Amazon. On the ground Amazon uses the internet to ensure the packages are delivered to the correct place; over the internet, Amazon’s cloud services or AWS is the dominant player in the space. One of the newer companies looking to join the cloud is the NASDAQ and they have chosen AWS.

In an article by Eva Matthews of Reuters, in the middle of December Amazon’s cloud services AWS was temporarily down. The effect was streaming services such as Netflix, Disney+, Amazon’s own e-commerce websites and brokerage company Robinhood was down. For Netflix 26% of its traffic was down.

Amazon’s Ring, mobile banking app Chime, vacuum cleaner iRobot all were down because they use AWS.

Fortunately for thousands of people, the AWS system was not down for very long, but if you were using it at the time, as a customer you would feel frustrated.

Linking to dividend paying stocks, more and more of us use the internet all the time and when it works which is very often the service feels almost instantaneous and we expect the service all the time. When the service goes down, our expectations about the time and frustrations go up because of our normal expectations of use of service. Even though the time maybe short, what are your expecting? In our investing, if we buy and stock goes up, well we think it is normal, but in reality all stocks go up and down and most go down. Often times only the best stocks go up over a long period of time, an interesting aspect is to look at the top 20 companies rated by Forbes in 1990, 2000, 2010 and 2020. Notice the change.

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