In January President elect Donald Trump becomes President and will set policies – in terms of economic policies two of his ideas are: to create jobs he will spend $ 275 billion on infrastructure at the same time to cut taxes – seemingly across the board or at all levels. If the government wants to spend more, collect less leading to wondering what will make up the difference, given the US economy is heavily based on consumer spending?  Charles Stein of Bloomberg News asked Bill Gross of the Janus Global Fund (formerly he ran the biggest bond fund – Pimco) for he is one of the best bond traders in America, what does he think? Mr. Gross believes higher deficits will raise interest rates and inflation which can lower earnings and price to earnings ratios or lower stock prices. Mr. Gross questions the need for corporate tax cuts because the rates are among the world’s lowest and the idea that companies such as Apple will bring back the money they have lodged in overseas accounts will not lead to more investment in the US.

If the President does stimulate the economy to gain the 5 to 6% growth he discussed in the campaign, interest rates will tend to rise which means the era for cheap money will be gone. If rates rise it will cost more to repay the government debts, maybe the next President will only tackle debt payments. Since a large percentage of debt is held by countries around the world including China, what does that do for foreign policy?

Linking to dividend paying stocks, for many years US companies have diversified their holdings outside the US and that has been successful. As the President tries to stimulate the economy as well as seemingly not get along with existing trade partners or turn inward, perhaps investing in companies that do most of their businesses in the US is the best alternative. As Mr. Trump appoints the rest of his cabinet including those whose responsibility is the economy -they will bear careful examination for where and how the economy could perform.

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

In the markets there are many players but the ones who move the markets are the institutional players, which means you need to pay attention to them to understand what they do great and where their constraints are. Similar to any other grouping, some are more nibble, some are better but the most important aspect is every payday, money is flowing into their accounts on a very regular basis. In one of the Milken Institute’s conferences 5 of the largest funds were talking about their industry and the room was full.

The five were from Harvard Mgmt, China Investment Co, City of NY Pension Plans, Texas Teachers, and the Caisse in Quebec with the chair of California Teachers moderating the session. Together the group manages over $1.5 trillion.

Jane Mendillo from Harvard manages $33 billion with 30% of the funds managed in-house, big constraint is the fund provides 35% of the budget of Harvard University.

Seema Hingorani from NY City Pension Plans – part of it is 5 different plans with their boards and advisors which leads to many opinions. They have $150 billion under assets all the funds are run externally. Partly due to the governance issue, the fund is still run closer to the old style with large amount in bonds. Each year the withdrawls are about $7 billion.

Li Kaping of China Investment Company, the sovereign wealth fund of the China, has about $600 billion with $400 in shares; $ 200 billion in global investments. As it is essentially a reserve fund it can have a 20 year focus or on the long term.

Jerry Albright of Texas Teachers has about $135 billion is one of the more innovative funds and does 60% of the funds internally managed. Their goal is annual return of 8% and they think in 1 year, 3 years, 5 years and 25 years terms.

Michael Sabia of the Caisse in Quebec manages $200 billion in assets with 80-90% of internally managed. Their target is a 6.5% return and they try not to focus on the short term but the long term because not many firms are in that space. At the moment, one of the theories they are working on is the operations of the company creates value, as opposed to financial assets.

In terms of alternative assets:

Harvard University is 400 years old, they expect to be around for another 400 years and this allows 50 year time horizon including investment in trees.

CIC believes in having many partners to learn and grow.

City of NY before 2010 they were almost 100% in public markets, not it is 75% or 25% alternative including real estate. Working in NY, they are civil servants which means the pay is not as high as Wall Street – finding and keeping talent is an issue.

Caisse when investing are trying to tap into a knowledge network which is more than the deal flows (when you have a steady cash inflow, everyone pitches you) so the task is partner with relationships which are complimentary to the skills you have.

Private equity focuses on achieving 20% plus on their investments; the Caisse and others would be happy if achieving 11 to 15% on their equity. The most important lesson is you have to know what you do not know or you will get into trouble (lose money).

Harvard University – there are over 5,000 Private Equity firms, could we know more than they do? Their tule of thumb is if you have not achieve double digits return by year 4 or 5 you will not likely achieve it.

Looking at in the future and what keeps you up at night?

Caisse – the future – we are always recruiting people. They are looking at the energy, real estate, the food chain and upper income consumers.

concern – $ 70 billion in fixed income – what happens to interest rates?

Harvard – the future – food and agriculture, biotech and technologies,

China Investment – contrarian investments, selective real estate and looking long term

City of New York – they have $45 billion in fixed income for every 1% rise, they lose $ 2 billion.

Texas – they also have a large fixed income portfolio. Energy is good place to invest.

Linking to dividend paying stocks, the large players have or should have an advantage because the deal makers go there first, they have the money. However as it was said you have to know what you do not know, you can learn or partner, but thinking you know can easily lose money and the first rule of investing is try not to lose money. As small investor, you know and see many things which can help you make decisions on whether to hold or seek alternatives. While gaining 20% is great, the risk is also high or try to think similar to the institutions and be happy with the 8% to 15% on a long tem basis. One method to this is buy dividend stocks for the dividend and over time for the capital gain.

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

 

 

 

 

One of the President elect campaign slogans was to redo the trade agreements, how will that affect existing practices? In a recent article James Bradshaw examined the busiest port in the US – Los Angeles. Goods going through the port is over $270 billion of goods and the top 5 imports are: furniture, auto parts, apparel, electronics, and plastics.  On the face of those imports – walk around the average Wal-mart store where America shops for low prices. Many of the items for sale came from outside the US, not all, but many of them; if the President changes trade prices or products have to be sourced from the US at Wal-mart prices. There is a reason why they moved outside the US.

The top five exports are paper/waste paper, pet/animal feed, scrap metal, fabrics, and soybeans  On the face of it, the paper what we recycle is going offshore to come back as packaging for the things we import. The scrap steel is going to make steel to compete against US Steel. How will this change?

It is relatively easy to say exports and import trade should be change, we should make and sell more of what we consume from within the borders, every leader of every country says it! They have been saying it since there were governments and will continue to say it until the end of the world. Changing the infrastructure which allows the top 5 imports to be made elsewhere and then shipped to the store to the eventual consumer is going to be a big challenge. Some of the biggest investors in the infrastructure are pension funds, because of the continual fees the infrastructure companies make. Think about the railroads moving the goods, the ships, the ports, the roads. If the President wants to dramatically change trade agreements, there will be many companies and areas highly affected which means both Democrats and Republicans will be against the changes but for the principle of the change. Will the consumer want to pay more?

Linking to dividend paying stocks, every year things change in the world and companies try to adapt to the changes. In the case of trade, a President of a large company who does embrace the changes is likely not to have a long tenure as President for a competitor who does will begin to buy assets the company has to sell to remain competitive or pay the bills. If you ever watch a show like Shark Tank – one of the suggestions is to decrease the cost of the manufacturing (send it to China) to retain and increase margins. It is possible for politicians to change the rules, but in will take extraordinary discipline and getting through many competing sides to pass the new changes. In the meantime the status quo will remain which is good for those companies which invest in infrastructure.

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

With the election over, people use the winning slogans to mean whatever you want them to mean and in this case John Heinzl (jheinzl@globeandmail.com) use the slogan to talk about your portfolio in the article Make your portfolio great again.

The assumption is the average investor started with the best of intentions and over time has parts of the portfolio which could be fixed. If you were to adjust your portfolio you would need to take the following into consideration:

1. Sell those pooches – if your shares which are at best speculative or are in broken companies whose prices are closer to bottom, it is time to sell. Some of the reasons to sell included using your money for a better alternative or be in cash; the rules allow capital losses to offset capital gains (save money on taxes); the best stock pickers are only 50% correct, but they know when to sell; selling is not a bad thing.

2. Stop trying to break even – sometimes you buy shares and the price goes down, but you bought for a reason and the events pass. You still you hold onto the stock  because the stock could go up. If the outlook is still not promising, take your lumps and move to alternatives.

3. Focus on Quality – listen to Ford job one is quality. If you start with the best, even if the best have a bad year, it is still a great year for a stock of a lower quality. The stock will have cycles but for it to go dramatically down, the entire market has to go down. Eventually the best stocks rise first. If you add the added attraction of a rising dividend every year, there are plenty of quality stocks which make the grade. Using ETFs because of the their low cost is a good option.

4. Rebalance if necessary – when you bought your portfolio you bought a couple of stocks in different industries or added diversification to your portfolio. If one of the stocks has become a winner and that is great news, it maybe a good time to sell a portion to take profits and rebalance your portfolio to reflect risk reward levels.

5. Consider your costs – if you own mutual funds and there are billions of dollars in funds, try to have the lowest expense ratio, in that fashion if your fund is up most of the gains find a way into your pocket.

6. Consider cash – all the best portfolio managers use cash as an asset allocation. Warren Buffett is famous for generating cash and when the markets go down, he buys large numbers of shares of quality companies. The quality companies move up in the next cycle and he continues to do very well. That took patience, having the resources – cash and faith the cycle will continue so he can benefit. This is the classic buy low, sell high , it usually takes time measured in years to do.

Linking to dividend paying stocks, owning stocks is a good way to grow your wealth and over the long term the best stocks to own are those that pay dividends and can grow them. If you have a reasonably long time frame, the risk reward equation can be very low and that is good for you.

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

 

 

There is three ways to make money on the markets buy a stock to make a capital gain as the stock increases in price; buy a stock for its dividends and hold the stock and over time the price will increase as long as it continue to increase its dividend and make a capital gain by selling the stock short or expecting the price to fall and buying it at a lower price. The third one for 95% of investors should be avoided unless you follow commodity markets and link them to individual stocks. The reason the overwhelming majority should avoid is the leverage needed to do it and if you are wrong it will cost you. If you really believe a stock is going short look at the options market to buy puts. For dividend stock buyers, short selling is on the list because once the stock is paying no dividend (it has to conserve its cash)  its is time to seek alternatives.

Having said the above, there are lessons to learn from short sellers – how they look to find the stocks and what they are looking for. If you see anything like it in your mature company, it is time to find alternatives and exit quickly. Fabrice Taylor wrote a column called why I’m not buying this short selling argument concerning a company called Badger Daylighting. The company is in the service industry to the oil and gas drilling. The price of oil fell and a slowdown in drilling resulted, how good is the company’s future?

The first piece is a newspaper article – if the article is in the Wall Street Journal, Barron’s, a trade industry or the financial paper of a country the general public will read it. If you are a short seller, you need an article in the newspaper to sow doubt that maybe all is not right with the company. In this case, an article in Barron’s questioned the company’s valuation and accounting.

In terms of valuation or the price earnings (P/E) ratio, it is used as a comparison to the broad market and other companies doing similar things. One should not use valuation as a good reason to short a company. There are often reasons why valuation is higher or lower – in the case of Badger – it beat its expectations on the quarter and increased its dividend, two good reasons to having a higher valuation.

Accounting is what everyone focuses on in particular how is revenue collected and how much many days are bills outstanding? what is the write off policy? Naturally at every company, no one wants to write off debts but it is a normal course of doing business. One method of comparison is to see what the competition is doing? In this case when oil prices fell and companies cut back on their programs all companies must have felt the pain both in terms of growth and maintaining their position. In turns out Badger as the industry leader had a more diversified base than the competition and may not have to write off as much as the competition.

Besides voting for Board of Directors, you vote for auditors. Most companies keep the same auditors but if the company moves from one brand name auditor to another brand name to save fees, then it is a little concern. If the move is from a top brand audit firm to local one with a couple of partners who mainly do small business, as a shareholder you have to wonder why? This was a Bernie Madoff red flag.

Costs – if you short stock you will need to borrow the stock, in Badger’s case you also have to pay the dividend. The cost is about 13%, ideally if you short stock you will be sell in a reasonably short period otherwise the cost of holding begins to build up and the greater the price has to fall in order for you to make money. In the case of Badger, about 66% of the shares are owned by institutions which means they have been sold a story for them to hold the stock. Just because they are big, does not make them correct but the reasons why you are shorting the stock has to be even better. In the movie The Big Short it took months before people saw what the shorts saw. In the case of the oil industry and with the new President elect – he would be happy with more drilling.

Linking to dividend paying stocks, there are many theories on how to make money on the market and many will be right for a short period of time. For a longer period of time – buying companies which pay dividends and can continue to increase the payments will push up the P/E Ratio and translate into capital gains. The system has worked but trying to see what others see is always a good idea.

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

Every time the economy improves the outlook for financial companies is better because they write off less loans or as long as people can repay their debts, the better for the financial sector. The better the economy, the more loans that are offered by the banks which is good for small and medium sized businesses who consistently bear the restraint when a bank is under pressure. Ryan Gottschalk of Thomson Reuters examined the financial sector to see if there were potential bargains.

we used the Thomson Reuters Eikon database to find companies trading less than book value. Book value is determined by dividing the total market capitalization by the net assets of the company. Anything less than 1.0 is worth looking at.

price of the shares in early November.

companies need to have a long-term EPS growth consensus estimate of 5% over the next 3 years.

the dividend increase must be at least 5% over the past year.

Company                      Recent Mkt          Mkt Cap    Book Value    P/BV  Est EPS   Div Per   Div

Close                        ($bil)                                            Growth  Sh Grow  Yield

Bank of America       17.01                     171.886        256,176        0.67       8.0      24.9           1.47

American Intl           59.28                     60.888          89,658       0.68      17.9     51.9            2.11

CNO Financial          16.06                         2,812             4,138        0.68      7.7      14.8            1.93

Legg Mason               29.25                          2,954             4,213        0.70    13.6    10.7            3.02

Citizens Financial    27.35                        13,999            19,646     0.71       9.9    12.5             1.67

Capital One Fin          74.84                      36.095            47,284    0.76      5.7       6.7             2.14

Metlife                           47.97                    52,725              67,949   0.76       8.3      7.7              3.32

Regions Financial       10.96                     13.491              16,844    0.80      5.4    13.3               2.38

XL Group                        35.30                       9,497             11,677    0.81      16.0   11.7               2.27

Morgan Stanley            34.0                      63.675            75,182      0.85       9.5   26.7              2.09

Linking to dividend paying stocks, Mr. Gottschalk list has a few more entries but the closer to 1.o they are, the greater they are fully valued. The opportunity of the above is to see why for example Bank of America is trading at a rate which looks like a bargain. If the company goes to fully valued or 1.0 the stock price will rise and you will be paid a dividend with relatively low risk. Similar to the Presidential election your research why tell you why this is great stock and why it is not performing as well as can be expected.

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

 

 

 

South Africa makes for an interesting case study because of the effect of its politics according to Xola Potelwa of Bloomberg News. Generally the rating of the currency is based on economic performance of the country and what it exports to the world. South Africa has always been one of the stronger countries in Africa because of its valuable resources including diamonds, gold, great farm lands, etc. Another factor in the value of the currency is what does the central bank do? are they stimulating the economy? At the moment, the South Africa central bank is trying to pull back which leads to politics. The present President who has lead the country for a number of years is seen as corrupt or the very least unethical and is fighting with the Finance Minister for control of South Africa’s finances. Anytime politicians fight for control means there is instability in the currency.  Will South Africa slow spending and lessen debt or will there be more spending?

Linking to dividend paying stocks, fortunately companies making profits tend to have stable management because people can wait; companies that lose money will have control issues over how can the company be restructured to make money again. When you read the annual report and look at the senior management team, the first concern is do these people like each other to work together to build the company? who is power hungry or wants power? they will either be encouraged to leave or internally will push their divisions to be more profitable to ensure their star rises higher. While companies are about the sales and continuing of the sales to make profits, the rest of the story is people.

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

Similar to many people this blogger was expecting a Clinton victory not because of political party, but to send a signal to anyone who wants to run for public office they need to be prepared and offer a reasonable idea of what they would do with power. President-elect Trump is all over the map on his solutions, although he has identified many problems. This is why markets like consistency and some form of clear direction, with Mr. Trump we do not know what he will do and consequently what the effects will be. In all policies, some sectors benefit more than others, at the moment all you can do is try an educated guess, but it is a guess.

In expecting Mrs. Clinton to win, a book about the journeys to go west was read. In the 1800’s most Americans came to American from Europe and many of them settled on farms, but if you look around your place of living not all lands make great farming. In 1840’s to 1855, prior to the railroads, there was talk about better and less expensive farmland (free) on the Pacific Coast – California, Oregon and Washington and it was true. At a time when there was no railroads, to get to the Pacific Coast there were two methods – ship (6 month journey) or wagon across the west. There are many books written about the westward journey but few from the woman’s perspective. One such book was written by Lillian Schlissel called Women’s Diaries of the Westward Journey published by Schocken Books, NY, 1982.

Ms. Schlissel read diaries from women who travelled the trail. From the diaries one clear message comes forth, most of the women did not want to move, their husbands did. Their husbands after a few years of farming were looking for new opportunities for themselves and their families. They sold the farm, packed the things in the wagon and started the journey. Most of the people brought their kids and normal sexual activity prevailed as women became pregnant and were expected to deal with life on the wagon train trail. The journey across the plains was relatively easy for there was plenty of food for people and animals. Once in the mountain ranges, things change. There are more problems with carts, animals, weather, food and people and normal things in life. If you can imagine a road trip that took a couple days you took with your family and the kids asking are we there yet? what if the trip took 6 months to a year? It was the responsibility of the women to manage the household – cooking, looking after the kids, it is credit to the women that when many made it to the west new homes were created.

Linking to dividend paying stocks, as a society we often undervalue the work of women, but without their work and doing all the things men do not do well, would new homes be created? Ideally a woman President would have started the process to value women better, however democracy picks the right winner. Many dividend stocks, need women who traditionally buy items for the household to continue buying similar goods. If they do and the companies appeal to the value of the woman, sales will go up. If they appeal to men, sales go down. Who does your investments appeal to?

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

 

The largest Alternative Asset or Private Equity group in the US is the Blackstone Group led by Stephen Schwarzman. You can watch some of his interviews on You Tube and given his success over the past 40 years, lessons are easily learned. His company typically invests in companies or real estate under the method: (1) buy a company with $ 3 of debt to $ 1 of equity; (2) improve the company and accelerate the growth rate of the company (3) sell some or all of the new company. Repeat. For the past number of years his company has a internal rate of return (IRR) of 20 to 30% after fees. The task is try to buy at low prices and allow the rise the normal cycle of economy to greatly help your investment.

Mr. Schwarzman credits a number of elements for success:

1. In all businesses the objective is to fill the bus with the right people, have the wrong people get off the bus and ensure the people are in the right spots. To do this Blackstone strives to have those they rate 9 of 10 and 10 of 10, the company will spend more money and mentoring on them because if you can raise their productivity, the firm greatly benefits. If a person is rate a 7 of 10, the person will have less opportunity and there is a reason why there is a revolving door in the lobby.
2. The hiring is down through interviews to see how people handle stress. The business is stressful, it changes, to be on a cutting edge people will need to have a high learning curve, and be inventive. The stress factor helps answer the question when they are under stress will they be honest? The person also needs the ability to work with teams, have communication skills and fit into the culture of the firm.
3. Part of the culture is to get everything perfect, make no mistakes. All deals are examined from multiple points to ensure the risk factors are agreed and can be lived with. If the risk factors change, how does the firm react.
4. If you are interviewing people over 40, their reputations are set. You will not change them.
5. People all over the world do not like change, but change happens. It is up to the firm to ensure that people are comfortable with the changes.
6. Similar to most people, they like some form of control over their lives even though they like working for the firm. One method to do this is start new business where they can use their abilities and the firm benefits.
7. People needed to be treated so they tell the truth about deals which come before them as well as day to day business. To do this, the senior people must live and breathe the core values.
8. There is a difference between founding and CEO and one of them is people listen to the CEO way more than you think and amplify what you say and how you say it. People respond to you. Say your words carefully.
9. Human beings are your most important asset, to accomplish you goals you may have to strategize the goal while keeping confidence levels high.

Linking to dividend paying stocks, one of the lessons of Blackstone is how they do risk minimization and the expectation of the people in the firm. Fortunately Blackstone has been very profitable so compensation is good. Now why do wealthy people continue to stay and work? If they like solving problems, like new things, learn find the work inventive, interesting and fascinating with some fun along the way – people will stay a long time. In all your investments you can ask how is risk minimization done there and who has input on the decisions.

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