One of the most successful venture capital companies is from Japan and is called Softbank. It owns a large stake in technology firms and companies that are disrupting the traditional method of doing things. The company lead by Chief Executive Masayoshi Son success allowed it to raised billions of dollars in its Vision Funds. After COVID hit, one of its higher profile investments in We Work had to be written down. The company offered virtual offices for start up companies and was increasing the space it offered at a rapid rate. Could the company keep very high occupancy rates, there was a concern the founder (who has since left the company) was doing real estate deals and then getting We Work to sign contracts in his office buildings. Virtual offices came at home, but not in a office buildings in downtowns of large cities. It was obvious, the Vision Fund wrote off billions.

In the US, the merger of Sprint and T-Mobile was because of the Vision Fund.

Now it comes to the quarter, the company says we will not disclose operating profit in quarterly results, saying the measure was not useful to gauge performance and tried to highlight a gain in investment assets.

When companies change the method in which they are reporting results, it sends big flags of confusion and signals investors to find a method to exit some or all of your holdings. It is wonderful to invest in a company and it does well, there are no questions what the rules are, how close to the grey area they are and the measurement standards are adhere to and well known. When a company experiences a downturn that is when the true measure of the character of the company is shown. Everyone loves a winner, the cheerleader is good, but results on the field matter. If a company has shown success, it is given latitude to right the ship for the next quarter. When it fudges, the confidence in the company fades and as losses are made, confidence goes fast.

Linking to dividend paying stocks, when you invest in companies which pay dividends there are two basic questions before the rest – is the company profitable? and can it pay its dividend from the profits? If the answer is yes, then as dividend holder you can decided to do nothing for your first concern are the dividends then capital gains. When the company says we have lots of hope, it is time to look for alternatives where hope is a given and reality is profits.

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

If you think back to President Trump’s 2016 election he was going to do something for the steel industry. He imposed a tariff on China and some things were changed a bit, then US Steel companies invested a great deal of money to upgrade their properties which meant steel prices fell and finally we had COVID. Many things slowed down, although the President has promised an infrastructure bill to help build up roads and bridges which need steel. To make steel, the main ingredients are iron ore, coking coal and water. The biggest producer of steel in the world is still China.

In an article by Clyde Russell of Reuters, the price of a tonne of iron ore and coking coal have almost reach parity according to data from S&P Global Platts.

Iron ore was $118 a tonne, while coking coal was $118.50 a tonne, the reason this is different is for the past 10 years iron ore has been 57% of the cost of coking coal. Since the establishment of a viable spot market for iron ore around 2008 and setting up coking coal futures on the Singapore Exchange in 2014, the price of 62% iron ore has never risen above coking coal.

The reason for the change is the demand in China. China imports the bulk of the iron ore needed from Australia and Brazil. China imported 546.91 million tonnes in the first half of 2020, up 9.6% from the same period in 2020.

China steel output hit a record high in June with 3.05 million tonnes a day or a monthly total of 91.58 million tonnes up 4.5% from the year earlier. That amount of steel requires 384 million tonnes of coking coal to produce working on the industry standard of 770 kilograms of coking coal per tonne of steel.

China imported 38.1 million tonnes or imports were meeting 10% of China’s coking coal needs or domestic output provided the rest. In contrast, China imports 70% of the iron ore needed or buys 2/3s of global seaborne iron ore volumes.

Linking to dividend paying stocks, in the Rocky Mountains there are tonnes of coal found and exported. Millions of tonnes used to be sent to electrical utilities to make electricity, to steel mills domestic and internationally. Utilities are generating more electricity by solar and wind (about 14% of needs), natural gas is cheaper than coal, and the demands for coal in China has fallen. Sometimes a great asset is no longer the first choice as alternatives come forward. The change was slow and then it seemed to accelerate. No one did anything wrong, but change happens. Always look at alternatives, what are they and how do they affect your investments?

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

In all countries, people run for office for a wide variety of reasons, but it helps to have a background in the finance portfolio before taking that job. Giving the financial report to the country is exciting, but it is only good if the country can pay its bills. For a wide variety of reasons, the country of Argentina debt increased, then it increased more and the feeling with a government is they can always raise taxes. At some point it is hard to get money from a rock or stone, the country says to its bondholders we need to restructure the debt.

In early August, according to an article by Tom Arnold and Adam Jourdan of Reuters, President Alberto Fernandez announced the relaunching of the Argentine Credit Program.

The Economic Ministry said an agreement had been reached to restructure about $65 billion in sovereign debt. The deal ensures the ghost of the last time Argentina had to restructure does not happen again. The last time, the country said essentially we are broke, you debt will only be paid out in pennies on the dollar. The creditors went to the courts, the time dragged on, the politicians were hoping the economy would improve. Unfortunately, Argentina is in a recession and it is estimated a 12% economic decline will happen. This plus all the COVID costs.

Bondholders were grouped into 3 groups, the Ad Hoc Group, Argentina Creditor Committee and Exchange Bondholder Group. Some of the normal large funds were and are involved: Blackrock, Ashmore, BlueBay Asset Management.

The deal is for 54.8 cents on the dollar. In addition payment dates on the new bonds were changed from March 4 and September 4 to January 9 and July 9. The new bonds mature in July 2029 and changes were made which ensure creditors have a say if Argentina wants to make changes.

In 2018, Argentina borrowed $57 billion from the International Monetary Fund and will try again.

Linking to dividend paying stocks, sometimes when companies are successful for a long period of time we begin to think they are automatically going to make profits, they are almost institutionalized similar to countries. The reality is all companies have to be managed well and management counts. Is there adaptability to change? does management want change? how does management continue to make profits? As you do your homework, you can determine if you need to look at alternatives.

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

I was reading the book London by Edward Rutherfurd, and on page 177 there is an interesting passage about debt.

Two people are talking:

Who, generally is stronger, a man with cash or a man with debts?

Answer a man with cash.

Suppose that man owes you a debt and can not pay?

Answer He will be ruined.

But then you lose what you lent him.

Unless I seize all he is payment, but if that is worth nothing, then I lose.

So as long as he owes you money, you fear him?

I agree, consider this what if this man can in fact pay you what he owes, but chooses not to?

Now you fear him because he has your money, but since he can pay, he does not fear you.

I agree

Suppose you need that money badly. He offers to settle for less than he owes. Do you take it?

I might have to.

Indeed, you might have to. And now, do you agree, he has made money out of you? Because of the debt owed, he was stronger.

It will depend on whether he wants to do business with me again.

No it will depend on many things. On timing, on whether you need each other, on other opportunities, on who has the more powerful friends. It is a question of hidden balances. Remember this: Men trade for profit. They are driven by greed. But debt is about fear, and fear is stronger than greed. The true power, the weapon that defeats all others is debt.

Fools search for gold. The wise man studies debt. That is the key to all business.

Eastman Kodak at the turn of the 19th Century was one of the most important companies in America and for generations millions of people turned to Kodak to see pictures. Kodak made cameras and developed the pictures for countless homes across the US and the world. Then came the smart phone with its ability to take pictures, who needed Kodak? Kodak has tried many things since then most of them unsuccessful. In 2013 it came out of bankruptcy and has been worth about $100 million. In late July it signed an agreement with the US government for production of key pharmaceutical ingredients and the company is now worth about $1 billion.

Along the way, Jim Continenza the Executive Chairman was granted by the Board of Directors options for 1.75 million in shares, 30% which vested immediately. This means due to the government contract the shares traded higher and Mr. Continenza can sell 30% of the 1.75 million shares at a profit. The difference was Mr. Coninenza’s gains were $83 million versus the $53 million if he did not get the additional shares. The Board gave him a $30 million bonus, Mr. Continenza says he has not sold any shares. (what likely has happened is the options are used against bank loans or lines of credit for other activities)

Many Executives receive options, that is not the story. The story is the understanding with the Board had previously never been listed in his employment contract nor made public. Every company has to make filings with the SEC and the understanding was not in the filings. The company says the options were granted to shield Mr. Continenza’s stake in the company or he would not be diluted by a $100 million convertible bond deal which prior to the government contract kept the company in business.

A convertible bond works the company pays interest to bond holders and they have the right, depending on the price of the stock at the end of a set period of time to change the bonds for stock or more shares would be issued. The effect of the issuing of the shares is diluting existing shareholders percentages held. For example if Mr. Continenza held a 10% stake after the bonds being converted he would hold a 9 % share unless he bought more shares or owned some of the bonds. The options keep his shares at 10%. The unusual aspect is why would the shares vest automatically? Why not at the time of conversion? Is Mr. Continenza that valuable to the company? The company was in bankruptcy and came out of it with new strategies why are more options given – what is the risk – reward equation? If the options vested in 5 years, one might understand the rationale better.

On another front, an article by Michael Liedtke of the Associated Press noted the SEC has opened a file examining Kodak’s stock performance, it was trading at the $2 range, the government contract announcement lead to shares trading at $60 and then Kodak issued 30 million additional shares to dilute existing shareholders and in early August the shares traded at $14.

Linking to dividend paying stocks, in the management circular is executive compensation and for most shareholders as long as the company is profitable and if it can pay a dividend, if the options expire in a reasonable length of time or the long term aspects of the company, most shareholders vote yes to increase the shares for executive compensation. When the company does not make money, and it seems options are there to reward executives the decision making process should be why? what is in it for small shareholders and people who work in the company who are not executives? The company should not be a cash register for executives.

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

If you think about the public image of Apple’s advertising, you would think people needed to go to an Apple store to buy the latest iPhone to take great pictures and send them to friends and family. Due to COVID the stores are shut down and people have not been able to gather in groups. Is this good for Apple? one could make the rationale argument that no it is not good and Apple should have lower sales.

However, in large July Apple reported its quarterly results, and in every category and across the globe, people were buying its products and services. Apple reported great results.

iPhone sales were about $4 billion above analyst expectations, with 60% of sales coming from international markets and sales were $26.42 billion.

The next large segment of sales was services which is growing every year. The quarter brought in $13.2 billion up 15% from last quarter. Services has over 500 million subscribers (think Amazon Prime and if Apple were to raise fees) It is not surprising that the company has over $30 billion in cash.

Apple’s fiscal third quarter revenue and profits were $59.69 billion and $2.58 a share beating expectations of $52.25 billion and $2.04 a share.

Apple will be split its shares 4 for 1, the last split was in 2014.

Linking to dividend paying stocks, when you think about profitable companies you think money that comes in no matter the economy, which is the reason there are utility stocks in dividend portfolios. The recurring money allows management to meet their goals and when the plan is executed very well all investors are happy for the moment. If a company has recurring money, sometimes it does not matter as much who is the President as long as they do not mess things up, it happens.

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

If you think about the Rockerfellers and its founder John D., in the 1900’s he was America’s richest man and his company was called Standard Oil. The company was eventually broken up into pieces and the largest piece has become Exxon Mobil. For generations, the oil from around the world has produced profits and dividends, in terms of a business success, there are fewer places to have consistently earned a dividend. The power of Standard Oil and for the most part Exxon (there is a book called Exxon and American Power which discusses how Exxon runs the business) have gone hand in hand with foreign policy of the US. Sometimes it seemed foreign policy and Exxon’s interests were a little too close, but that is different story.

In an article by Jennifer Hiller, Ron Bousso and Dmitry Zhdannikov of Reuters, Exxon was expecting to report a loss of $2.63 billion (it actually did better than expected with a $1.08 billion loss). The loss was first back to back losses in 36 years, which has resulted in the shares being down 35% in the year to about $42.

Exxon has an annual payout of $15 billion in dividends and management is firmly committed to ensuring dividends are not cut. This has resulted in a 8% yield, if you believe people will drive a little bit more, than 8% looks very good and safe.

The problem is Exxon is not generating the cash to pay the $15 billion in dividends from production operations. This has resulted in the company cutting back both capital expenditures and expects to raise cash through asset sales. (not all the large oil companies are doing asset sales, as well as many small and medium sized companies).

Exxon is a company run by engineers and they have changed their employee review system internally referred to as forced ranking. If someone lands in the bottom ranking, they have 2 choices determine how they are going to meet the manager’s standards or leave with 90 days pay. The company has 74.900 employees worldwide but the standards are only for professional employees.

In April, Exxon cut their capital spending program by $10 billion to $23 billion. The spending was in new and expanded chemical and refining operations which would increase earnings by $4 billion to $21.5 billion with a $40 a barrel for oil. Asset sales between 2019 and 2021 were hoping to bring in $15 billion, so far sales are $3.7 billion and this year $86 million. Hoping 2021 will be better.

Linking to dividend paying stocks, for generations oil companies have been a very strong performer and in many dividend portfolios is a oil company. Management in all the oil companies are committed to paying dividends and shortly after a vaccine is available to the public, commuting should begin again. The dividends will not be a risk anymore.

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

If you have been by an airport, it is interesting to spend time watching planes land and takeoff and there are places to watch planes at every airport. You might think of the passengers going somewhere or landing in the place where you are watching; the family reunions; which carrier or the name on the plane is landing; what type of plane and how much jet fuel is needed. Most of us do not think about the jet fuel, but traders in jet fuel do.

In an article by Stephanie Kelly, Koustav Samanta and Bozorgmehr Sharafedin of Reuters they looked at the jet fuel traders or energy traders.

According to Rystad Energy, international flights remain down more than 80% compared to a year ago.

Fuel stocks in Asia have decreased from 4 million barrels in early May to 1.1 in July. The exports come from South Korea, Japan and India. The exports were to Europe. In Europe, according to Dutch consultancy Insights Global, fuel stocks which had set a record of 984,000 tonnes were down to 937,000 tonnes.

Not surprising, the airlines are not carrying holiday travellers and in mid July the week over week rolling 7 day average for passenger growth in the US fell below 0 for the first time since April 20.

Jet fuel imports to the US in July increased to 190,000 barrels per day, still 45,000 bpd under year ago data, but up 33,000 from June.

Linking to dividend paying stocks, we all look at great amounts of data, but you need to narrow your focus and concentrate on to make a decision. At the moment, if you look at airports, airport traffic, airline companies and what they are doing, it is easy to see there has been a drop in passenger traffic. Often times we are looking connections between what we see, what we think we know, and what is really happening. When there is a boom or a bust, we all know what is happening, but what if there is something in between? where do you look, homework is important.

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

If you are a baseball fan, you will likely know the name Billy Beane, you may not know many other former General Managers, but Billy Beane is one name you may know. The reason you might know the name is Billy Beane was the General Manager of the Oakland A’s, the team did the correct thing in terms of farm system of players, but once a player demonstrated above average talent, the wealthier teams would sign the player. The A’s were owned by an owner who besides the money from the league, had the misfortune of playing in Oakland. The big TV contracts were with the city across the bay – the San Francisco Giants. The Giants stadium is beside the head offices of city and more people cheered and supported the Giants. Oakland A’s for a number of years ranked as the lowest payroll costs in the major league, which is not a bad thing, however for most teams to win the championships you need a few quality players who are a better than their peers. Oakland was competitive but it would be luck if they were going to compete.

Billy Beane found a new way to analyze baseball players and how to think about wins and runs. At the time, baseball scouts used to look for intangibles which they believed lead to success. Sometimes it did, sometimes it did not (a baseball movie you might want to watch is Trouble with the Curve with Clint Eastwood). Organizations such as those with little money have to be creative and open to new ideas and Billy Beane was the first to embrace the use of data-driven analytics, mainly because he had no choice. The success of the use of data to look at baseball differently, allowed the team have success on the field. The success meant every team in all major leagues has a data analytics group. If you want to watch the movie starring Brad Pitt it is called Moneyball and/or you can read the book by Michael Lewis titled Moneyball: The Art of Winning an Unfair Game.

After a career in baseball, Mr. Beane is teaming up with former Goldman Sachs banker Gerald Cardinale to raise $500 million in a public offering. Redball Acquistions, a special purpose acquistion company (SPAC) will issue 50 million units which include shares and warrants.

SPACs typically raise money in an IPO to pursue an acquisition without telling their investors in advance which specific company they will buy.

According to an article from Reuters, SPACs have raised more than $19 billion in 2020. Recent raises were by Churchill Capital Corp IV lead by Michael Klein raised $1.5 billion and Pershing Square Tontine Holdings Ltd lead by Bill Ackman raised $4 billion.

Linking to dividend paying stocks, if an investment bank has a record of beating the stock market, everyone believes they have a great system. If they do it for 5 years, the bank will raise more money and there are enough institutions to give them money to do it again. For smaller investors, we have to look at companies making consistent profits and believe they will do it again. The risk reward is much less as smaller investors but buying into profitable companies allows you to increase your wealth and that is a good thing.

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

Prior to COVID, people had a very distinctive routine and eating out was part of their routine. Many people due to a host of factors, tended to buy food on their way to and from work. Given the many choices it was not a bad thing to do. A company such as McDonald’s originally catering to the those eating hamburgers which tended to be lunch and dinner. Over time, they recognized breakfast was a profit opportunity and they were in a great position to capitalize on people having less time to themselves. Many folks eat at McDonald’s. Then COVID happen and routines for many commuters changed. Restaurants had to change and it was believed a large restaurant chain such as McDonald’s would be adaptable to the changes.

In an article by Nivedita Balu and Hilary Russ of Reuters, in late July McDonald’s released their quarterly results and there was a broad drop in global same-store sales and lower profits. The store due to health regulations was only able to offer take out and delivery. Globally the same-store sales were down 23.9%, which was in line with analyst expectations of 23.34%.

In the US, same-store sales were down 8.7% better than what analysts had expected 9.97%. About 96% of the stores are operating and marketing dollars were cut 70% in the second quarter. According to CEO Chris Kempczinski as lock downs eased, sales improved which provided optimism.

Linking to dividend paying stocks, the expectation is companies which have a continuous record of being profitable can make changes when negative things happen. Large chains typically have to deal with a disaster or two, ie hurricane which allows them to bounce back. However in the restaurant world, discretionary income is key and with Congress allowing the extra $600 a week to lapse, those government actions will not help the quarter. Government policy can be helpful.

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