Perspective is everything in the world of the stock trading. If you cast your memory back to September, the FAANG group of Facebook, Apple, Amazon, Netflix and Google were trading higher as people believed in growth. In October there were thoughts maybe the growth will be slower, if that is the case the companies should be trading at lower prices. The multiple is the Price divided by Earnings or the PE Ratio. In an article by Noel Randewich of Reuters, he asks are the Big Tech companies now a potential bargain? should you buy?

In Apple’s case the world has not rushed out to buy the new iPhone in record numbers because most people do not need the extra features. The shares have slipped in price to trade at two year low of 13 times expected earnings. The drop in price of Apple shares means the company is no longer Wall Street’s most valuable company – at the moment it is Microsoft.

In mid December Netflix wass down 20% since early October, while Facebook and Amazon are down 10%. Google or Alphabet is down 9%.

Each of the above companies have many good reasons for high multiples including cash positions, stock buybacks announced and they are part of the mainstream economy. On the other side of the equation is trade concerns with China, the research and development is done in the United States, the manufacturing is done in China. The lowering of the tax rate on money outside the United States and the corporate tax rate has greatly benefited these companies and next year some sort of normal will be the course of events.

Linking to dividend producing stocks, the best time to buy stocks is when they are down or out of favor, not growing as fast they were thought to be. The companies are profitable and in time the market will continue to reward profitable companies. The FAANG group is not bought solely for the dividend but if you collect one, you can always buy more shares when they go down and you still have very good reasons to own it.T

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

In Brazil, if you look offshore and under the sea, there are billions of barrels trapped below the salt line. The good news is everyone knows it is there, the bad news to bring the oil to the country will cost billions. Petrobras has been linked to many payments to politicians as it boosted its debt load of $88 billion. To lessen the debt load, and still keep investing according to an article by Gram Slattery and Alexander Alper of Reuters will try to raise $26.9 billion in asset sales and partnerships from now to 2023.

Petrobras in early December released its 5 year plan, and the assumption is oil prices will have a reasonable increase in prices to help the producer. Brazil also has a new government coming in that will need the oil revenues to balance the government books.

The oil company expects a rate of return on capital of 11% in 2020 and the ratio of net debt to earnings should fall to 1.5 from 2.5.

Linking to dividend paying stocks, state oil companies can be tremendous drivers of wealth as can be seen in Norway, but somewhere along the line it seems many countries do not spread the wealth as much as others. It seems Petrobras helped the political elite rather than the average consumer, but things can change as long as those billions of barrels lie under the ocean.

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

When a dividend buyer looks to buy a utility the companies tend to be conservative in their management and operations. The generation of electricity by hydro, gas, oil or nuclear is reasonably secure and safe, as long as there were no cost overruns in the building, the operations are relatively non eventful. The utility has a near monopoly over customers and they have little choice but to buy power and all those bills ensure the utility ensures a tidy profit and generally can increase its dividend. It is not unusual to find companies which have increased their dividends over many years.

It was very unusual to read an article by David Milstead that Washington State regulators examined a new government in Ontario and said the Ontario company Hydro One should not be able to buy Avista which has operations in 5 western states. The Boards of each company had approved the merger, however an election happened. According to Mr. Milstead the Premier of Ontario fired the CEO, changed the Board, 6 independent directors had to hire an outside lawyer to deal with the Premier’s office and other consideration. It is as if the Premier and his people had never dealt with the ramifications of doing whatever you want. Fortunately, the Washington State regulators said, if you are willing to do those things to the parent, what would you do to the subsidiary?

As we go into the new year, the company has asked the regulatory body to review its decision, we shall if a new result is decided.

Linking to dividend paying stocks, one of the reasons you buy them is the stability of both management, the government which regulates them and government which encourages the company to do the good things that are suppose to help voters. When those pillars fall apart, it is time to look at alternatives till the politics settles down.

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

In the last few days of November, Bloomberg Global Business Forum 2018 had 3 guest speakers who are worth listing to: Mary Erdos CEO of JPMorgan Chase Asset Management; Jim Coulter of TPG; and Ken Griffith of Citadel Securities.

Question was asked what Lessons have we learnt?

Mary – 2008 was a lost of confidence in the banks and financial institutions.  Some of the problems were small changes that were thought to benefit the system did not for example making mortgages easier (2 Presidents believed a citizen being a home owner was better off than a renter) however the lower standards caused 40% of mortgages to be underwater with a 5% decrease in house prices. Another problem was changing the loan ratio from 12:1 to 35:1 and in 4 years the industry was overleveraged.

As individuals: if something is too good to be true, invariably it will be.

If you do not understand what you are buying, do not buy it.

If you invest in pools of underlying securities, that is not diversification. Diversification only happens if everything is not related to each other.

You need discipline and when asset prices go up, take some money off the table or sell to have cash or readily cash to take advantage of opportunities.

Ken – 2008 was the collapse of the housing market.

Quantitative Lending tries to encourage people to take risks. Debt is getting higher. If you look at the fundamentals, you are missing the added story of government’s role and activity in the economy.

Citadel is a hedge fund as well as a market maker. The role of the market maker used to be done by the banks. The old story of JP Morgan rescuing the market was replaced by government and the banks. The next time around when the government brings the players to the room, not everyone will be a banker. Market makers try to ensure the buyers and sellers are efficiently matched, so confidence in the system remains.

The first person to sell are those without the ability to forecast prices or not see the bigger picture of what prices should be? Which ones are unmatched? Citadel uses AI and big data to examine thousands of prices to see a bigger picture.

Jim  – from a private equity perspective, we try to look 4 to 5 years forward not day to day. In the 20th century, the product that dominated many industries and events was oil. In the 21st century, we see the dominant product as big data. How to use it both to sell and to make life better for everyone. One small example of selling is who should be a spokesperson for a product, TPG owns CAA. They use social media to figure it out as well as AI.

In private equity, which means companies do not trade on the market, it has grown to be an asset class of $900 billion which did not exist 5 years ago and has more than 250 companies worth a billion or more.

What danger signs do you see?

Jim –Constructive Paranoia or one hand it is very exciting or many opportunities. On the other hand what use to happen is companies tried to become better everyday; now there is stability for a time and instability happens, then stability, how do you manage the cycle? We are trying to invest in particular companies that can provide growth through cycles of the economy rather than a group.

Ken – there are no neon signs that will tell you when a downturn is happening. What you need to do is while see positive signs always managing for tail risk and ensure cash is king. One concern is in America, the US can print money there is an inflation risk but not a liquidity risk. In Europe, countries can not just print Euros, there is a process.

Mary – JPMorgan Chase does hundreds of stress tests everyday. We worry about downturns, however remember the power of compounding in the market and to be out of the market and miss top 10 days you cut your return in half; if you miss the top 30 days you have negative return.

There is great opportunity, but ensure you examine your portfolios regularly and have cash to take advantage of opportunities.

Linking to dividend paying stocks, having the dividends, ideally growing in size every year allows you to have cash to do something. Sometimes it is to buy more of the company, sometimes to ensure diversifications, the good thing is for the most part you will have time on your side and you will continue to do your homework to take advantage of opportunities.

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

 

 

In a conference held in New York and sponsored by Bloomberg Foundation, people who deal with millions and billions of dollars were supplying ideas to the forum and if you watch You Tube you can view some of the presentations.

All of us have some bias connected with our decision making. Many years ago, living in a resource town, the radio station announced the price of the commodity in the morning news, as the price went up production went up and more money was spent in the community. It is not surprising people knew the price of the commodity.

Bloomberg Intelligence is part of Bloomberg Terminal which provides trading data to traders on Wall Street and around the world. The company has 350 analysts who study 2000 companies to help decide which ones will break through and why.

To do this first broad themes are identified and then which company is capitalizing on the trends. Bloomberg Intelligence believes the coming trends are:

Internet Disruption

Internet of Things Efficiencies

Real Estate Overcapacity

Emerging Market Opportunity

Energy Transition

The company picked 50 companies who they believe will do will next year. If you want to know all 50 you have to be a customer. The 5 that were talked about were

IndiGo – an airline in India  – has both a low cost structure; dominant share and expecting growth in India.

Hammerson – a real estate company in the UK which has flagship malls

FAST – a Japanese clothing company you might have heard Uniqlo one of their stores in North America

Chenier – a leader in LNG or Liquidified Natural Gas which should benefit from global energy changes

NXP – a company making chips for computers

The other theme is as cell phone companies bring out the 5G Networks, rapid changes are possible.

Linking to dividend paying companies, most of the above pay a dividend and the reason is the great cash flow. Went you are looking for the growth, you ask which way is the wind blowing and can it help you or what are the tailwinds? If you find a company with what you believe is the correct theme, ensure it has a good cash flow which some can flow into your pocket. That way, as you wait, you will be rewarded, as the company grows you are rewarded again

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

 

 

In the last days of November the value of Microsoft went higher than Apple, partly it was because the tech had a selloff and Apple shares fell. The other reason was Microsoft shares have been climbing. Hopefully readers have heard and invested in FAANG stocks which are Facebook, Apple, Amazon, Netflix and Google; if you have not if you own a fund then it likely owned some shares. Microsoft has the name left out but the stock has gone up 30% in the last 12 months. However for a time, Microsoft was trying to do get into the FANG themes but was not successful, it stock was essentially flat for a decade.

In an article by Steve Lohr of the New York Times News Service, he asks what happened? Similar to many stories there is a short term reason and a longer one.

The short term is Microsoft has been a case study of how a once dominant company can build on its strengths and avoid being a prisoner of its past. It has embraced cloud computing, abandoned smart phones and returned to its roots as a supplier of technology to business customers.

The payoff since Satya Nadella became CEO in 2014, the stock has tripled. Mr. Nadella has made cloud service a top priority and now the company is No 2 to Amazon. Microsoft’s share is 13% while Amazon remains 33%.

Microsoft has retooled its popular Office applications such as Word, Excel and PowerPoint in a cloud version. This caters to people who prefer to use software as an internet service and gives Microsoft a competitive entry against online app supplies such as Google.

Microsoft sold off or closed bad investments – it bought Nokia and then wrote it off.

The company has refocused its offerings and ideas toward what does business customers want and need? This helped drive up revenues to $110 billion and operating profit increased 13% to $35 billion.

Think of Microsoft are about utility – productive tools, whether people are at work or at home. Azure cloud service is for businesses and a platform for software developers to build applications.

Microsoft bought LinkedIn, the social network for professionals and GitHub an open software platform used by 28 million programmers.

Mr. Nadella wrote in his book Hit Refresh, we need to be insatiable in our desire to learn from the outside and bring that learning into Microsoft.

Linking to dividend paying stocks, Microsoft has been a dominant player for a long time and it remained important but somewhere in the background generating lots of money but not necessarily moving the stock. Recently, the company has changed which means it may not be in the consumer spotlight, but is in in the business spotlight and they pay their bills and many will grow. Microsoft is now firmly into helping businesses grow and as they grow, money continues to flow into their coffers and into your pocket.

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

 

Every year, companies such as Bloomberg has conferences to look into the crystal ball and what do you see? They invite interesting people and most of the time you will hear common sense, once in a while a gem to take. At the conference in New York, some of which you can see on You Tube, the head of the New York bureau for Bloomberg interviewed Jonathon Gray who is the CEO and President of Blackstone. Blackstone is a large dominiant institutional firm dealing with private equity, hedge funds, real estate and alternative investments, if you wish you can buy shares in it.

The great thing about an institutional firm is they will have cash coming in to their firm that needs to be reinvested, in the case of Blackstone they keep $100 million looking for opportunities. This is one of the firms when the markets go down, they can buy great companies at lower prices. In the video, Mr. Gray talked about doing so.

He sees the equity market in the US, as they will be continuing pressure on the multiple or the PE Ratio a company trades at. In a growth company, one expects higher multiples, in a slower growth company lower multiples. This is when it is great to receive a dividend until the market decides the profitable company should be at a higher multiple and the stock goes up.

Mr. Gray sees a robust economy and does not see the excess of previous downturns when commercial real estate was being overbuilt and then high vacancies caused companies to default on their bank loans which hurt banks. In the housing market normally 1.6 million homes are built on a national basis, this year the number is looking towards 1.25 million or no overbuilidng in residential real estate. Although in residential real estate, carefully check local markets. As the economy is shifting, Blackstone has purchased more warehousing units as opposed to retail malls.

In terms of private equity, it is always important to be selective, but it is also very important to understand how growth comes about. Does a company intervene to a new market or ride the tailwinds to a new market. If you look in the sky and watch birds fly and glide on tailwinds, it is easier to fly on tailwinds. Do your homework to find out the easy tailwinds.

Blackstone does business in Europe and one of the good things about Europe is they have lower growth and the expectation of lower growth which means there prices are not as high. The prices are priced for slow but steady growth.

Blackstone purchased a company called GSO which is now one of the largest credit orientated alternative asset management. They like floating rates because they expect interest rates to rise, but not too much.

Linking to dividend paying stocks, when you listen to the big players although they have more zeros to write in the cheque, the same rules apply. It is always good to have cash to take advantage of opportunities. You need to be selective, it is good to take you time when making a decision, with an institutional company such as Blackstone deals are pitched on one or two days a week. The rest of the time is looking, doing homework and being ready to capitalize on opportunities.

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

In the world of tax havens and offshore banking, everything is supposed to be secret because in reality, there is a mixture of funds in the accounts. Some of it is from criminals, some of it is from people hiding money from spouces, some of it is money hiding from taxes because people hate paying too much tax and some of it is government money needed to keep the world safe. It is easier to point fingers and suggest it should not be done but for years trying to avoid taxes and the governmnet is a time honored tradition.

In 2016, papers from a law firm’s accounts in Panama which specialized in offshore accounts was leaked to the press. In 2016, 900 customers from Deutsche Bank were served by the British Virgin Islands generating a volume of E$ 311 million or $470 million in US dollars.

According to an article by Arno Schetze and Tom Sims of Reuters, in late November Deutsche Bank offices were visited by 170 police officers looking for files. The probe focuses on the years from 2013 to 2018. The police spokesperson alleged the bank employees forgot to report money-laundering suspicions about their clients and devised offshore companies to evade taxes.

Last year, the bank was fined $700 million for allowing money to flow between Moscow, London and New York.

Linking to dividend paying stocks, it is hoped that most profitable companies play within the rules and not completely evade taxes. It is one thing to move operations to the lowest tax but the company still pays something. One of the taxes, President Trump offered to companies was lowering the amount of money being kept outside of the US. Billions have come back, mostly to buy back stocks. If you are making lots of money, donate some – you will be given a legit tax break and it allows you to sleep at night.

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

On the 26th of November, GM Chief Executive Officer Mary Barra announced it was changing and shut down 5 North America factories and reduce its head office count, the plants would shut down in 2019, it people terms 15,000 employees will be affected.

Many will recall GM received an aid package from the government, do you remember why? In the book Autonomy by Lawrence Burns, GM ran out of cash from losing a $ 1 billion a month on lower sales. In 2007, GM sold 9.369 million vehicles out of the US market of 15 to 17 million vehicles. In 2008 the total sales were 10.4 million vehicles and GM had a cash reserve of  $25 billion and when it went to below $10 billion bankruptcy would be in order. The cash went below and GM needed money from Presidents Bush and Obama because the vehicle market fell to half of normal.

The company announced the industry is changing rapidly and GM is doing these things to strengthen core business. The company will focus on trucks, SUVs and electric cars. The industry is still profitable but times are a changing as sales in the US should be 17 million vehicles down from 17.5 million vehicles.

In 2017, GM made a profit of 8 cents on the dollar for every dollar of sales. In the last quarter, GM reported a net profit of $2.53 billion or $1.87 a share.

Linking to dividend paying stocks, for many years having an auto plant in your community was a sign of a healthy community for the auto plant paid well and absorbed many young people. Things were going to change for example, the number of parts used in an internal combustion engine is 25,000 while the same vehicle as electric is less than 2,500. This suggests changes would be coming soon.  Nobody likes to see auto manufacturing plants close, but as an investor you are investing for the health of the overall economy not particular plants.

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