Every large company has ideas and some are good and some just do not work. In the retail sector, senior executives look at Amazon and think how can we fend them off? they think about SWOT – Strengths, Weaknesses, Opportunities and Threats. The biggest retail in the world, Walmart thought about Amazon and came up with a solution – Walmart has the largest workforce in the retail world, some of its workers would likely welcome the opportunity to deliver packages to their customers. In an article by Nadita Bose of Reuters, for Walmart the advantages were: tap into their massive work force, boost e-commerce, lower shipping fees, and all would benefit. In Walmart’s executive minds lead by Marc Lore head of ecommerce – this could be a gamechanger – workers who make $11 a hour, could earn extra money after their shift. The advantage is with 4,700 stores with 16 miles of 90% of the US population. The idea at the moment is people shop on line, but come to the store to pick up the items. However if Walmart found a good way to deliver groceries, thing would be different.

The reality according the article for the process did not work. Workers realized after working at Walmart, they really did not want to deliver packages. Not surprisingly, Walmart wanted people to use their own vehicles, the program was set up with mileage but that was soon discontinued. Workers often had to wait to pick up the packages which was unpaid, and delivering 5 packages over 2 hours added $15.50 to the pay packet.

Under a new model, workers are hired to be a delivery driver and maybe do store work. The pay is slightly higher at $18.30 for 5 packages over 2 hours. Maybe Walmart should team up with Uber and have package delivery?

Linking to dividend paying stocks, all companies have great or good ideas, the execution to make a profit is what determines if the company is going to be profitable. In the case of Walmart, while they have many people, the people at the store level are seen as one more input. Looking back, the first model works for a small or start up company, not for a large one. The model has to make sense for the company’s culture in order to be executed properly. As you examine your company’s see how it executes its goals.

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

Hopefully over the course of the summer, you were able to visit a lake and spend time in and around it. Hopefully your pursuits were recreational, but have you ever thought about the eco-system under the water? In a book called The Death and Life of the Great ,Lakes by Dan Egan published by WW Norton & Company, NY, 2017 the author has and did. Although most of the book focuses on the Great Lakes – Superior, Michigan, Huron, Erie and Ontario; the eco-system of the entire US is discussed. Most of the time if you go to a lake, the lake is the end point of rivers and streams sending water into the lake. In the case of the Great Lakes, one really interesting method to look at them is they are a river flowing from Superior to the Atlantic Ocean. Niagara Falls means two things – one the waterfall is lovely to see, although 100 or 200 plus years ago it was 10 times the size and noise. However in terms of the ecosystem, because fish could not get over Niagara Falls, the fish were different on both sides of the falls.

In the world of fresh water systems – there is the Great Lakes system and the Mississippi system and they partial meet in Chicago at the Chicago Sanitary and Ship Canal. Chicago receives its fresh water from Lake Michigan and sends its sanitary waste down the canal to the Des Plaines River which connects to the Illinois River which connects to the Mississippi River. This means if there is something no good for the water in the Mississippi ecosystem it will not be good for the Great Lakes system.  In the book, the story of the Zebra and Gugga Mussels, Asian Carp, Lake Trout and Salmon were given.

In the case of the mussels, the good idea was in terms of ship building was to use water as the ballast to ensure the ship was steady in rough seas. The bad idea is where the water was picked up, the organisms in the sea was transplanted to the next stop of the ship’s journey. Until species developed and generally when new species develop at first they have few food chain “enemies” so they multiply. After some time, the animals in the sea change to their surroundings or die off. As the movie the Lion King said – the circle of life – we are all connected.

The issue is the cost to clean up is always more than the cost of prevention but until people or politicians see there is a need for cleanup, the balance typically falls out of synch and the costs are in the cleanup.

Linking to dividend paying stocks, in nature there are balances in the ecosystem until things change. Some for the good, some preventable and some because we believe nature can adapt to the changes. It can but it does take time. For dividend paying stocks, the balance is ability to sell goods and services at a healthy margin and make profits. Your task is to ensure you know how your companies are making profits and monitor those conditions do not change your balance.

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

 

Now that summer is officially over and many routines begin to be brought into the normal sphere, it is important to start off the next few months as fresh as possible. On You Tube, if desired besides many entertainment venues there are opportunities to learn things. If you think about short sellers, one of the prime names which comes up is Jim Chanos of the Kynikos Associates firm.

Mr. Chanos is a choice speaker for conferences because he looks at the market from what could come apart. Most of us look at the markets to see how much money we can make over the short and long-term. However just because a stock is on the stock market, it does not mean the company will not and has not stretched the line between legal and illegal. When companies are making money, all is good. When companies do not make enough money, the first instinct is to buy time to get their business model working.

If you short, which Mr. Chanos recommends you do not, the most important thing is after you have done your extensive homework and have the courage of convictions, you are well diversified. Even if you are right, but the market does not agree for now, you may lose money. Many investors have to agree with your ideas. Mr. Chanos’ firm sees shorts as insurance to make your longs reward you more.

There are always companies which stretch the truth because the model is not doing as well as the executives think it should be. Mr. Chanos noted there was a fine line between putting the company’s best foot forward and crossing the line to embellish or fraud. It happens more than you think it should and it past surveys of CFO’s when the person could not be identified, 2/3’s admitted the topic has come up and they were pressured to do so.

There are always some easy themes which Mr. Chanos’ firm examines:

Booms that go bust -Cash flows do not service the debt. Eventually something will happen

Real Estate bubbles  – we all want our real estate to go up in price but when is it too high too soon?

Technological obsolesces – business models which were great for a while, changed think about Kodak, Blockbuster Video, Record Stores

Growing by acquisitions – when a company buys another many times it does not work out, so accounting begins to see fraud to seemingly make it work.  some examples have been Baldwin United, WorldCom, Enron, Sunbeam, etc

Consumer Fads – the public latches on something,  a few months later they have move on to the next fad

Visionaries – some will be correct and change the world, most will not.

Movement of Senior Executives – people move between jobs, that is a good thing. For a company you have wonder when the senior level of people move more than normal. At the senior levels, one would expect people have a broader picture of information about the company. If they are moving to get out, then eventually the President and CEO need to be replaced and that means stock price falls for a time.

Linking to dividend paying stocks, when you buy these types of companies ensure you understand how they make a profit and can continue to pay you a dividend. As long as they continue to make a profit, the other companies will make wonderful reading in the press, but not necessarily great investments. You need to have a keen sense of skepticism of high flying companies, but remember ask how do they make a profit?

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

 

 

One of the most well known stories about a serial killer is Jack the Ripper. One of the reasons why it is well known is many people believe one person is the killer, no one has ever proved it. There are multiple books and plays about the time and one such book is called Jack the Ripper – The Complete Casebook by Donald Rumbelow published by Contemporary Books, Chicago-NY, 1988. The book was originally published in London UK in 1975.

In the late 1880’s London’s East End was considered and essentially was what is known as the other side of the tracks. The section of town typically where the railroad tracks cut through the city and in the old days of steam engine – the coal tended to settle on one side of the tracks or the other.  (as a side note, the other side of the tracks can change – in New York City there is an apartment building near the United Nations Building where there are very few windows looking west. On the east side is the river, when it was built the west side was slaughter houses. After the United Nations was built, the neighborhood changed but the building did not. Changes can happen). However in the late 1880’s the east side of London was poor, crowded, marginalized and best avoid by respectable people in the evenings. Rooms for rent were cheap and sanitation facilities – plumbing and water sewers were lacking.

In the above sort of environment, prostitutes were killed – not just be strangulation but their throats were cut and their bodies were sliced and diced. The pattern of killings was very distinctive. It was a mystery to why? and clues were not found – for example when someone is cut the blood comes out, blood is still hard to clean from clothes. Although the East End London was poor, people of various states tended to be outside and possible witnesses were high for a person who does not look like they belong to the East End. After the first murder, the person would need to have more than a working knowledge of the streets and laneways to get away. The person who was doing the killing seems to have a working medical training – this fact tends to eliminates people.

One idea for a movie which which was seen is the murders was connected to the Royals? it was never proven but the myth goes on. The author goes into details about the history, the ladies, the crime scenes and possible suspects.

Linking to dividend paying stocks, for most things in life we do not have to know everything. When you are investing, you do have to know what business the company is in and how does it make its profits? why would the company continue to make profits? is it a monopoly or near monopoly conditions. After you have answered those questions you can begin to look at alternatives – why one company over another? is it better to buy a fund or ETF? As time passes there will be more questions but if you want to preserve your capital and grow it, you do not need to know everything.

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

 

Every once in a while, one has to look at the macro effect, even though the micro effect is something we can easily see. David Rubenstein was at the Seeking Alfa sponsored by CNBC in mid July. Mr. Rubenstein is the co-founder of Caryle Group which is a very successful fund which owns 275 companies around the world. How he sees the world is important.

He was asked what keeps you up at night?

1. Budget deficit – when the public begins to sound off the deficit is too high.
2. Tariffs  – if tariffs become a trade war
3. Income inequality – more work does not translate to more income at the bottom

Mr. Rubenstein has 275 companies in the portfolio and every quarter the results are correlated with macro views. At the moment, Mr. Rubenstein believes his companies are doing well and will continue to do well.

The context he put tariffs in was the world has $80 trillion in trade, at the time of the interview about $50 billion was in tariff mode. The problem is when the percentage increases to above 5% and is expected to increase for example the President puts out a $500 billion tariff as if it will have no affect on capital investment or decision making.  The President believes companies bringing back money into the US from overseas holdings translates into investments in new jobs. (an example is Apple – they held $350 billion in overseas accounts – with the money coming back at lower tax rates, they increased their dividend and bought back stock. The investments were done with domestic money)

Linking to dividend paying stocks, if our personal lives it is relatively easy to project aspects or changes to systems. We think that some is good, but we are not positive when it affects us. At the time of the interview, it was thought the world economy could easily absorb the changes. It is always good to listen to people who have a bigger picture of the world than we do. There are always many challenges or fires to be put out, which one become larger we are not positive. The essence is ensure you keep doing your homework, try to narrow you field to see both the macro and micro picture and remember when you choose quality time is on your side.

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

In mid July, the President went on CNBC and discussed the fed policy. He later tweeted the same things, because he said as a private person I have views. Unfortunately, the President forgets or needs to be reminded he is not a private person, he is public figure and his view is taken very seriously. The President nominates the Chair of the Federal Reserve Bank and with just cause, the President can “fire” the Chair. The trick is the Federal Reserve is suppose to operate independently of the political structure.

The US President similar to all politicians going into the mid term or Presidential elections (in 2 years) wants the economy to be running on all cylinders or full steam ahead, the reason the overwhelming voters number one concern is their source of income. If a person is earning money from working they are likely to be more positive about the existing holders of public office.

The Federal Reserve is suppose to be independent because no politician wishes to raise interest rates, the politicians love to take credit for lower rates. Unfortunately, supply and demand means every once in a while inflation needs to tamed and the closer to full employment means inflation rises. Raising interest rates keeps inflation lower as well the Fed has to do quantitative easing or lowering the amount of debt which was needed to expand the economy after 2008.

In addition, the tax cut to corporations and the wealthiest individuals, most of it permanent helped stimulate the economy. Raising rates should lessen the stimulation as it does not need government assistance to keep going. If you add, the President discussing increasing tariffs on China and other countries around the world, then you have a problem caused by President Trump’s own policies.

The tweets moved the dollar, added uncertainty to the future and everyone said TGIF.

Linking to dividend paying stocks, often politicians who are reasonably new make mistakes because they fail to understand their words means investors need to react to them – both plus and minus. The President is almost 2 years in, there is no excuse for not considering the ramifications of his words. In the summit in Helsinki, the President had to correct his words, the markets will see if history repeats itself again.

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

In an article in mid July, Ian McGugan wrote about disruption. The poster boys for disruption are Elon Musk and Donald Trump.

Disruption growing appeal is on display in corporate reports. Top executives routinely claim they are planning to disrupt their industries, while fighting off the potential for disruption for new rivals and eyeing the disruptive potential of the latest technology. Media organizations publish lists of the most disruptive companies – venture capitalists are excited.

Mr. McGugan writes about Elon Musk and President Donald Trump.

The overarching lesson is that genuine disruption is hard, risky unpredictable work. Sometimes there are great successes, most of the time there is not.

Investors should be skeptical. Evidence suggests the biggest winners are not self styled disrupters, but simply businesses that simply find smart ways to thrive within an existing sector.

If you bought the same amount of shares of Google’s parent Alphabet or Domino’s Pizza which shares would have given the highest total return? It turns on to be Domino’s.

The idea you can pick out great disrupters early on seems particularly far-fetched. A classic 2001 Study by Louis Chan, Jason Karceski and Josef Lakonishok found there is no persistence in a stock’s long term earnings growth beyond what you expect from chance. Today’s high flier maybe a dud in the near future.

Linking to dividend paying stocks, there is glamor and excitement about stocks that cause disruption, but there are steady earnings and profits for a duller company and in the long run which one do you want to hold most of your investments in. Ensure you have some money in the glamor or hot industry, but be willing to know when to sell if you do. Many individuals and institutions have seen companies go up and come down faster. Institutions remain because by law they have to be reasonably diversified. Individuals the opportunity to rebuilt takes longer. If you invest in profitable stocks that pay a dividend, life will be easier for you.

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

 

In an article by Eric M Johnson and Tim Hepher of Reuters, Boeing’s Chief Executive Dennis Muilenurg said he is concerned about tariff talks and higher prices in the supply chain. (the author recently bought a hot water heater and prices had gone up because of possible tariffs)  At the end of July, Boeing had not seen any impact with US-Chinese trade.

The supply chain is where the parts of the aircraft are made. The final assembly plants are in  Washington State and South Carolina and maybe China. The parts come from around the world.

Mr. Muilenburg said Aerospace thrives on global trade, free and open trade. Boeing is one of the US biggest contributor to balance of payments, selling planes around the world creating thousands of jobs. Mr. Muilenburg spoke at Britian’s Farnborough Air Show which is an airshow which many purchases of planes signings are announced.

Boeing is in the midst of creating a new plane and has a target date of 2025. The plane would be more economical to run than existing planes. In the airplane world, there are airliners flying 757 and 767 fleets and they are beginning to need replacement.

Linking to dividend paying stocks, as a leading aircraft manufacturer, Boeing has to look into the future to determine what planes will be needed. As India and China develop a middle class able to travel by plane, thousands of planes are needed. Trade wars and tariffs ruin short term planning. Similar to large manufacturers based in the US, while the main product may be finished in the US, most of the parts come from somewhere else. Politicians or at least the President may feel trade wars are winnable, but if China decided to buy more from Airbus, then no matter how great Boeings are, fewer planes would be sold.

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

 

Artificial Intelligence is and continues to change the way we see things and the way we do things. For much of our lives there has been conventional wisdom, there are strong elements why conventional wisdom has lasted, but is it the best approach? In a recent book written by Nick Polson and James Scott titled AIQ published by St. Martin’s Press, NY, 2018, the authors examine artificial intelligence – what it is, how it works, where it comes from and how to harness its power for a better world. Note the optimism in the authors expectation, AI can help make the world a better place.

It is not unusual for 2 different published research findings to look at different data sets and find different answers to the same questions. This is often how science works. Only overtime does the evidence accumulate convincingly in a single direction.

AI has limitations, one can use the same data and come up with different conclusions and reports have done that. The lesson is simple, algorithms do exactly what they are told, there are biases or assumptions in the program. In reviewing data, find out about the assumptions to see if you agree or not. The assumptions are made more important because the consequences of a bad one can be amplified over and over again. What do you look for:

Rage to conclude

Model rust

Bias in, bias out.

Most calculations in data science require assumptions of one kind or another. The first was constant probability and the second is independence. Why are they related?

Data scientists have a favorite saying: all models are wrong, but some models are more useful. No model is perfect.

Linking to dividend paying stocks, over the course of investing you will see many projections. Some are right and some are wrong, learn from the ones that are wrong. What was the assumptions and why did it go wrong that you can easily notice. Start with the basics and build on them, why was a projection rate used? why are people going to buy the goods and services? by approaching the reports with a bit of cynicism you will save money, which means you will earn more.

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