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.

In many instances you will like a product or service and that is good for you as a consumer. If you are an investor, you want to know about the business model and how the company makes money. If it is easier and you understand how profits are made, it is worth considering. If the company does not make money, you should be patient and see if it can make money.

In an article from Reuters, Twitter is a social media site and millions of people use it and they like it. However, as a business, the business model is to make money for advertisements. If you use Twitter you can see how many ads are coming onto your feed and the value for you. Last year, Elon Musk, who is one of the wealthiest people on the planet bought Twitter for reasons that made sense to himself. In mid July he reported Twitter’s cash flow remains negative because of a 50% drop in advertising revenues and a heavy debt load.

In March, Mr. Musk believed Twitter would be cash flow positive by July, his forecasts are way off. However as one of the wealthiest people, he could cash in some Tesla shares and pay off the debt.

Twitter’s annual debt payment is $1.5 billion

Twitter in the last 6 months has let many employees go in an effort to cut costs. Twitter has reduced its non-debt expenditures to $1.5 billion from $4.5 billion.

Twitter was on track to post $3 billion in revenue down from $5.1 billion in 2021.

Linking to dividend paying stocks, if a company does not make money you can be very patient before you consider investing. There maybe reasons why you want to invest, but being patient saves you money. In the meantime, Twitter has more competition including from Meta’s Threads. We all read about companies and we gain an interest, but being patient means to do your homework before and have a medium to long term view. If you miss the short term jump, so what? you are more interested in will the company be functioning in 5 years. If a company is not cash flow positive do you think it will be operating?

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

Before the internet, how people who made movies were paid was a relatively straight forward process, although Hollywood does have a history of creative accounting. Not all movies make money and the ones that do help subsize the cost of those that do not. In Hollywood and around the country where there are movie film hubs, being in the industry from a non acting job can be a good paying job. There are superstar actors with large salaries and the rest of the people doing a better than middle income job. There are hundreds of people who work around and within a movie and they are the ones on strike.

The strike is by the screen writers or the Writers Guild of America and SAG-AFTRA unions and they are after 3 aspects – a wage boost, a greater participation of income from streaming views and protection against replacement by artificial intelligence or AI.

The Director’s Guild has signed a 3-year agreement and they cannot be replaced by AI.

In the music industry, if a song is heard on the radio, the radio station sends money to the record company who sends money to the artist or residuals. In the movie industry the residuals are good for TV and DVDs, but less for streaming services. As more people stream video content, the residuals are less, will people pay more for the service to give higher residuals?

In terms of AI, you may have heard or you will hear more every year that many jobs will be affected by AI, the jobs known as the creative ones are only now coming to the forefront. In one interview, a suggestion was for people in the background to be paid for one day, then their image would be CGI or AI for the rest of the movie. It is hard to make a living as an extra if that happens. We will see what happens, but we will see more job changes in the near future.

Linking to dividend paying stocks, ideally you want the companies you invested in to embrace the latest technology to benefit the company. The rise of the technology means many people will be displaced or jobs changed and there are few solutions for them, when we look at the government in Washington, some of them live in different world. From an investor perspective, you want the company to embrace change and move with the new funding models to generate profits to pay dividends.

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

Part of every company is trying to grow both organically or externally which means to buy another company. The senior management examines the strategic plan and finds a company that fits and offers a price that will keep the talent in the company as well as market share. Then the world sees it and makes a judgement, part of the judgement will come from the stock market if the companies are publicly traded, and part will come from the government or regulatory bodies. If you remember the movie Pretty Women staring Richard Gere and Julia Roberts, away from the romance the Richard Gere character was trying to buy a ship building company to sell the assets. One of his negotiation tactics was to say I will tie up the approval for the next ship in the naval appropriations department and you will have no money to build ships. (this is the reason why Senators receive funding from hedge funds, sometimes they are needed to slowdown or speed up the process).

All governments have the ability to regulate and sometimes it seems they go through the motions and the results are a given, but once in a while, the process seems to work.

In an article by Mattt O’Brien of the Associated Press, about 18 months ago, Microsoft offered to buy Activision the maker of video games for $69 billion. A merger of 2 giants meant that regulators had to sign off and the competition wanted to ensure Microsoft would allow Activision games to be played on their systems. The competition is Sony’s Playstation versus Microsoft’s Xbox. The Presidents of Microsoft and Activision agreed to allow Activision to be played on Sony’s Playstation and a US Judge agreed with Microsoft’s case and the merger will go forth.

There are other hurdles to overcome such as the regulators in Europe, but the die is cast for the merger to forward. If you think about the revenues of the movie industry, the gaming industry is bigger. Microsoft has been spending and bulking up on cloud storage for corporate clients and it turns out a large user of the cloud is gaming, so this deal works on many different levels in the world of Microsoft.

Linking to dividend paying stocks, all large companies have legal and government relations staff which work with the government. If the competition is threatening their profit centers, the government relations staff tries to influence legislation to ensure the company maintains its margins. They also find avenues of regulation which the competition has to jump through hoops to fight on the same battlefield. Regulations can be helpful to profitable companies and while they may say they want less regulation, they want more for the competition.

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