At the end of the possibility curve that is a section for the unknown and it is called the Black Swan. Jake Lloyd-Smith writing for Bloomberg News outlined some of the concerns Barclay’s Bank have concerning commodity prices. Last year commodity prices increased and that was a good thing for investors. What could go wrong or why would prices decrease this year? According to a report written by Michael Cohen and Dane Davis many things:

China, Russia, the Middle East and Turkey can easily have an effect.

Venezuela might default on its bank loans

Commodities must move from one country to another which there is always a concern about supply routes

Relationships between countries particularly when President Trump says or tweets something.  (while blaming Ms. Clinton for the situation in the Middle East, asked what he would have done -he said he would have left enough troops to secure the oil fields. Considering we are in the 21st century and that talk – to the victors, the riches are taken is a few centuries old not sure what will come from the White House)

Trade wars between China and the US; the US and Mexico;

Campaign rhetoric from elections coming true.

Linking to dividend paying stocks, somewhere along the lines there will be significant change in the normal economic patterns. Who will change is what we will find out in the future. Some of the events will radiate from the White House for no one is quite certain what the priorities of the new administration are and how the White House sees their role in the world. Ideally, if you own companies that have near monopoly conditions, you can rest easier until the White House begins to sort itself out and predictions on how it will govern come easier.

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

 

Over the Holidays you may have received a book as a gift, it is likely Warren Buffet did. Mr. Buffett is a reader of newspapers, magazines and books for he does his own research, has a prodigious memory and loves reading. In an article written by Brian Milner titled Reading one’s way to Buffett-sized earnings, Mr. Milner notes high net worth people tend to read far more than the average investor. So what books does Mr. Buffett recommend for investing?

Favorite book: Benjamin Graham’s The Intelligent Investor

Mr. Graham preached that investors should think more like owners than traders when evaluating a company and its prospects. make sure the price includes a margin of safety, avoid trying to time the market and never sell when the herd stampedes for the exists. Mr. Buffett says pay attention to Chapters 8 and 20 which has been the bedrock of his investing activities for more than 60 years.

Other books on his list to read and reread
Security Analysis by David Dodd and Benjamin Graham

The Clash of Cultures by Jack Bogle  (he founded Vangard  – the company who specializes in index investing)

The Little Book of Common Sense Investing by Jack Bogle

Common Stocks and Uncommon Profits by Philip Fisher (the father of Ken Fisher who writes in Forbes – the Fisher Report and runs a fund)

Stress Test by Timothy Geithner (former US Treasury secretary)

The Outsider’s 8 Unconventional CEO by William Thorndike

Linking to dividend paying stocks, all these books outline an approach to take to the market that seasoned people have found fruitful. All of the approaches take time and the idea is to buy companies which are undervalued and become fully valued and continue to do their good things for a long time to come. There are always opportunities and whether you do it through indexing or individual stocks, if you narrow the bulk of your investing to companies that make profits and pay a dividend in the long run you will have more wealth.

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

 

In the investment world, people with all types of backgrounds look at stock prices and do their analysis to come up with a decision. With some stocks it is relatively easy for people to agree with the general view, however there are some where there are competing points of view and you are left to make a decision is the glass half full and which way is it tilting. Robert Gill of Lincluden Investment Management recently wrote about a stock called Home Capital which is Canada’s largest non-prime mortgage lender. In December of 2016  30% of the float of shares was short or equally informed people were making decisions the company’s shares were going to go down sooner than later. Mr. Gill believes the shares will go up.

The shorts have good reasons and their reasoning are 1) the Canadian market resembles the US market in 2008 and therefore should do the same thing. 2) the firm had problems with mortgage brokers making stuff up. 3) the company specializes in making loans to people deemed too risky by Canadian banks – entrepreneurs and new citizens.

Mr. Gill asks are those valid concerns: 1) the Canadian market is much smaller than the US market (think California), which makes it more influenced by local drivers. In addition the Canadian employment levels remains solid and low interest rates reflective of the US fed remain. Home Capital has 85% of its mortgages in Ontario and bulk of those in the greater Toronto area. While it is true some brokers gave misleading information, Home Capital did an audit cut its ties with these brokers however the loans have remain solid with a loan loss ratio of 0.3%which is better than Canadian banks of 0.75%. The reason tends to be the short term nature of the mortgages.

Mr. Gill then analyzing the company – over the past 10 years the return on equity (ROE) has been 25%, over the past 5 years 23% and most recent ROE was 18.6%.

The mortgage market in Canada is worth $1.2 trillion which the big 6 banks control 65% to 75% or there is $400 million to fight over and Home Capital has 4.1% market share there is room to grow.

Home Capital pays a dividend that management was increased regularly over the past decade at present the yield is 3.4% and management has bought shares.

The shares trade at 1.2 times price to book and 7.5 times earnings which compares to 2.0 times and 23% respectively for the broader market. If the shorts begin to unload their position the price could go higher.

Linking to dividend paying stocks, for every active stock there are equally smart people deciding to buy and sell. They buy and sell for many reasons and for their reasons they made a good decision. As you look to buy you are always wondering why is the glass half full and why does not the other side see the same thing? Only time will tell what is the correct answer and that is the reason the only perfect answer is the one seen from the past. We do not know the future but can make educated predictions.

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

In North America we were reasonably lucky for the great banking crisis of 2008 was essentially over by 2010 and with the new rules came in the banking system has been stable. The economy has been growing and we are basically with the same institutions as prior to 2008. In Europe, the world is much different, the banking system moves from one crisis to another and the reality is the ultimate solution is the senior government with access to lots of credit. Many private sector banks were largely nationalized but slowly have come to be reprivatized. Writing for Reuters Silvia Aloisi, Paola Arosio and Pamela Barbaglia wrote about How JPMorgan was unable to save Monte dei Paschi.

In Italy, the third largest bank is called Monte die Paschi di Siena. Similar to the largest banks given the slow recovery of the economy and the billions in bad debts, the bank needed greater capitalization. The board decided to try a private sector solution lead by JPMorgan, the advantage for JPMorgan was the lead in the fees in the range of E558 million. The idea was to raise write off the bad debts of $40 billion and raise E5 billion in equity. This was promoted as a private sector arrangement for the general public were skeptical of more government arrangements (although needed it has not worked as well as it expected). The fact that state aid has not changed the economy has allowed the critics to suggest one more round of Euro funding was not going to change much. If a government takes Euro Bank financing, it takes their rules.

With all banking financing, the ultimate decision rest in the President or Prime Minister office, in Italy Prime Minister Matteo Renzi who has a political base of support around Siena was in full backing of JPMorgan and other banks going forth with their solution. For the bank, if this one was successful, more of these types of deals would be coming in the future. JPMorgan called on investors throughout the world, however although government guarantees were not part of the program, the support of the Prime Minister was touted and when he resigned over another issue, fewer people were willing to sign on to buying the debt and equity which lead to the deal falling apart.

Since the deal fell apart, the board went to the European Central Bank (ECB) which has decided the capital shortfall is not E5 billion but E8.8 billion. The government of Italy or ECB has to put money into the bank to save it. More subordinated bondholders will be forced into owning shares of the company or a debt for equity solution. The bank will be saved, but not before the government owns 70% of the bank.

Linking to dividend paying stocks, while banks that need bailouts do not pay dividends, when they come out of restructuring and begin to generate profits can be an excellent investment, at least it was in the US banking world. The US banks were restructured, paid back the US government and helped ensure the US economy can grow.

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

 

For many companies, at some point in the year they are looking for more growth to be bigger in an effort to control market prices to stabilize their incomes. In 2016 Michael De La Merced writing in the New York Times examined the mergers file. In 2016 deals for $3.55 trillion were announced but 1009 takeovers worth $800 billion were pulled which still accounts for some big mergers during the year. In examining the deals that did not go through, most were about trying to achieve growth of their companies which the company could not generate on its own. The problem was both government regulations (some said no due to antitrust or possible market concentration) and others thought the price should be higher. Some of the bigger deals which did not come to pass include:

Pfizer and Allergan – deal was worth $152 billion and part of the reason was to change its corporate tax home to lower the tax bill. The government changed the rules which did not make changing locations for the tax an advantage and eventually Pfizer walked away.

Honeywell and United Technologies  – deal was worth $90 billion and composed of stock and cash. United Technologies stock price decline and there were disagreements who would be the senior people in the new company. The issue of antitrust was raised but by that time the deal was dead.

Energy Transfer Equity and Williams Co. – deal was worth $ 33 billion. The smaller Energy Transfer wanted to create an energy giant, but oil prices fell and the deal seemed expensive thus Energy Transfer wanted to walk away. Williams fought it in court however Energy Transfer won and walked away.

Halliburton and Baker Hughes – deal was worth $35 billion. The idea was to combine the two companies to fight the number one company and along the way cut costs. The government had other ideas as antitrust was raised, when the oil price dropped the deal fell through.

Mondelez International and Hershey – deal was worth $23 billion. The owner of Cadbury and Nabisco wanted to buy Hershey chocolate. Hershey wanted a higher price and there is a problem with the ownership of Hershey. It is owned by a trust for the benefit of orphans and the question is how can that be changed?

Linking to dividend paying stocks, mergers will continue in 2017 and beyond some will be succeed some will not. On the face of it, there maybe less antitrust concerns from the new administration and it will be tested in the not too distance future. If there is less antitrust concerns expected even bigger activity in the mergers field. The other aspects who which company executives get senior posts and fair value will also continue.

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

 

In the year end review, Julie Verhage of Bloomberg News examined where could you have put your money in last year – there are always many choices.

Currencies

Britian’s currency the Pound was the worst performer because of Brexit, the currency was down 17.1%

Bitcoin was up 100%

Russian ruble was up 21.3% but that is linked to oil prices.

World Equity Indexes

Brazil’s Ibovespa stock index was up 63.4% after a new President was installed and hope for economic recovery pushed up the markets.

Nigeria was down 41.1% due to capital controls and oil fluctuations

Commodities

Natural gas was up 60%

Oil was up from$40 to the present $50 or a 45% gain

Wheat and corn were down 13% and 1.6% respectively

Bonds

Venezuelan bonds have increased as payments were pushed back there are still many problems with the economy.

Mozambique were the worst country due to debt crisis and inflation.

In corporate bonds, Sidewinder Drilling were down 80%, however Anton Oilfield Services gained more than 170% on their refinancing.

Linking to dividend paying stocks, there was many opportunities to make money and to lose it, which is the number one reason to invest is not to lose money. If you do not lose money, then you do have to have a great year the following year to make up for the losses. There are risks in every sector, by starting with companies that are profitable, the risk reward goes down on the risk and up on the reward which is a good thing. Next year there will be another year where the world focus on the American economy and what growth rate the economy will do.

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

 

 

 

A few weeks ago was Christmas and one of the great things about Christmas is young people are starting or continuing their dreams. Whatever they are good at they begin to specialize into something that they can be the best in the world at. In terms of hockey, the most important league is the NHL but to get there is very tough. There are usually 20% of the spots on the team which are for superstars who everyone could pick, the other 80% have varying degrees of skill, and depending on circumstances they could be in the NHL. The path for the 80% is the American Hockey League (AHL). While most people dream of playing hockey in the NHL, the AHL has changed itself from a second tier league to one where young players are trained and veterans on their seemingly last legs mentor the younger ones. In the NHL the base salary is around $500,000 plus; in the AHL the base salary is $45,000 which is why people follow their dreams. One can easily look around to salaries in your community and see which ones are more and less and people work them.

Ted Starkey wrote a book called Chasing the Dream – Life in the American Hockey League published by ECW Press, Toronto, 2016. Mr. Starkey takes us through a tour from the perspective of owners, coaches, general managers, players and support staff – broadcasters. From each of the perspective, people are there for different reasons and in sports change is a key. Although many of the teams in the AHL are owned by a team in the NHL (which has changed the locations for them – being close to watch and bring up and down players is a huge advantage) while smaller towns with long history of a team may or may not lose out. For the support staff, learning and loving the game must go hand in hand; for the players they are waiting and learning for their shot at the big leagues.

Linking to dividend paying stocks, owning a team which is very dependent on ticket sales means you have to be close to those buying the tickets for the big money of  TV and radio money is not in the cards. Each year the teams have to do all the things right including have good players so fans continue to come, it is an interesting business that puts many of the teams on the hometown sports pages on a consistent basis. The business remains the same but the players change every year which the business has to sell to the fans who buy the tickets.

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

 

 

A few years ago, ESPN or the sports channel was considered one of the crown jewels of Disney group. Sports is live and although many people watching can likely predict the outcome of the event, no one really knows how it will turn out until the athletes perform. In the last number of years, the cost of securing the big name events has steadily risen and advertising fees are not jumping as much. Although owning a franchise such as ESPN is still a good thing, the sports network has lost money for two years and just a few years ago was producing 70% of Disney’s profit. What should Disney do, if anything?

According to Christopher Palmeri of Bloomberg News Disney’s ESPN has 90 million subscribers paying $7.21 for the channel which is 4 times the leading competitor who is TNT their fees are $1.82. ESPN’s revenue is expected to be in the $12.5 billion category but growth has slowed. The reasons is partly demographic – the population is becoming older and not watching as much sports as they use to; in addition across all age groups people are not signing up to TV packages they way they use to, although the amount of content viewing on sports and entertainment remains high.

Linking to dividend paying stocks, every stock and industry goes through cycles and it takes time before trends change drastically. ESPN is still the leader in sports coverage but how people are accessing sports has changed. Going from 99 million to 90 million subscribers is still a big deal and ESPN commands high advertising fees, however one day something will change. ESPN will begin to think like a start up or the big packages for football, basketball, Olympics fees will have to taper off or actually decline. There is still plenty of value in ESPN and Disney and one way or another they will find a method to capture the value.

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

Every time the outlook for the US economy increases, one of the beneficiaries is bank stocks because one of the most important aspect of banking is the loan loss ratio – the economy improves and loan losses go down. Another aspect to the outlook for banking is after the 2008 meltdown, banking regulations were tightened. The banks have lived under the regulations which improved the safety of them, however regulations do not necessary bring in income. President elect Trump has discussed lowering regulations and with his appointments to the agencies who control regulations for banking, it would be an good educated guess some of the regulations would be coming off or changed it terms of the bank’s viewpoint. From a stock point of view bank shares could rise in value, Peter Aston of Recognia asked which bank should you focus on, assuming you do not buy the banking index?

His criteria are:

a market capitalization of $ 10 billion

examining the operating margin as a tool for efficient operations The bank needs to have greater than 20% for operating margin is the amount of profit the bank makes on each dollar of revenue.

forward Price Earnings (P/E) ratios of 20% or less

dividend yield of greater than 1.5%

Company                               Mkt Cap                 P/E               Operating            Dividend Yield

(US $ Bil)                this year       Margin                       %

Wells Fargo                          281.8                     13.9                       34.7                      2.7

BB&T                                         38.7                    17.3                       32.2                      2.5

US Bancorp                              89.3                   16.0                       37.4                     2.2

PNC Financial                         57.4                  16.6                        33.5                      1.8

BNY Mellon Corp                   50.4                  15.7                       28.6                      1.6

Regions Financial                  17.9                  17.4                        28.3                     1.8

KeyCorp                                    19.9                   17.7                       25.0                     1.8

Linking to dividend paying stocks, a well run bank should be in your portfolio of holdings for when they do well the economy does well. Depending on which bank you pick you may have holdings in one part of the country or another, but banks tend to be very profitable companies relative to other companies. If you change the about criteria you can find your bank if it is not listed. At the end of the year, the banks should continue to help grow the economy and you will have more money than you started with.

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