Central banks in the US and Europe have signaled the economic crisis of 2008 is over. Growth and sustained growth is able to be seen and the role of the Central Banks can be diminished. The Central Banks have used all the powers given to them to bring back economies to what is considered more normal – they have used 0% interest rates and larger than normal bond purchases. he signals now allow the banks to slowly but steadily raise interest rates.

In a column by Ian McGugan in the Globe and Mail, he discusses what the Central Banks are going to try to do without allowing for inflation to run up, without allowing for politicians to mess up their plans. In Europe, the Central Bank bought E$ 2.4 trillion ($3.7 trillion) in bonds. ECB President Mario Draghi wants to slow the bond purchases down and allow economies to do what they can do. The process is designed that hardly anyone notices until the process is well underway.

The big problems in Italy is the new Italian government whose economy is not returned to normal or even grown. In Europe, Germany has prospered.

In the US, the President gave a tax cut to corporations, which was designed to help stimulate growth except for the economy was close to full employment and the only thing it may do is increase inflation which increases interest rates. If interest rates go up to fast, money will move from the stock market to the bond market and mortgage rates will go up which makes it more expensive to buy a house.

If Europe decides to hold interest rates low, while the Fed increases them, investors will tend to move towards the US dollar which pushes down the Euro. In terms of exports, the US goods would be more expensive and Euro less which would frustrate the President’s America First trade agenda.

Mr. McGugan notes the iShares S&P Global Financials ETF which follows many of the global banks is lower. In addition the 10 Year US Treasury bond is a haven for investors when their is anxiety. The yield moves in opposite direction to the price and is a reliable measure of global sentiment. The yield is around 3%.

The yield curve, a measure between short and long term borrowing costs. An inverted yield curve, in which short term rates are higher than long term rates has historically been a strong signal of a recession. In mid June, the curve was flat.

This flattening of the yield curve lessens options for the Central Bank as the ability to profitability to borrow short term and lend long term is crimped.

If you add trade wars into the picture, the outlook is less than positive.

Linking to dividend paying stocks, with all investments there are trade offs and better options depending. The economy does not have defined walls but signals and then moves on to the next crisis or hopefully when governments do nothing or close to nothing. Investors continually look for signals and for dividend paying companies there is nothing better than a company saying it made a profit and can continue to pay dividends and likely raise them once again. Look at the big picture, try to understand it but make decisions based on how you see your part of the world.

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

In North America we often hear the Italian economy is not doing well and a new government has been elected. The government is more anti establishment and one never knows what to expect from it. In a column by Reuters, PwC consulting believes Italian banks are set to shred E$70 billion or $107 billion in bad loans in 2018. There is in theory a strong market is to found for these bad loans. In order for the banks to be cleaned up and possibly merged to strengthen them, the bad loans have to be taken off their books. Vito Ruscigno of PwC said the volume of bad loan sales will remain healthy in years ahead… the banks have a pipeline for disposal. While banks have made great progress there is another E$ 94 billion in loans unlikely to be repaid in full. Many of these loans will go to default.

The reason why the banks wrote down loans was a favorable phase-in regime for a new accounting rule. Since the new rule, the government has changed and investors are not positive what the new government will or will not do. Investors in the bad debt expect to receive even bigger discounts for the buyers.

PwC calculates Italy’s gross soured loans totaled E$ 264 billion following disposals of E$ 64 billion which was twice the amount sold in the previous year.

Linking to dividend paying stocks, it seems whatever was loaned out in Italy during the boom is not being repaid unless there is a government guarantee it will be paid. The country’s credit is still not good. As investors you may love Italy but unless there are very, very good reasons to be there perhaps it is best to find an alternative.

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

 

For a large company, unless the company is losing a great deal of money, it is very difficult to move institutional investors to vote against management proposals. It is only when an activist shareholder fights for Board seats to change that something will be done. A case in point is a Canadian company called Hudson’s Bay Co which has been a retailer for over 200 years and owns large stores in Canadian cities. The company which is owned by Richard Baker owns Hudson’s Bay, Saks Fifth Avenue, Lord & Taylor, Kaufhof in Europe and other retail sites. Mr. Baker also owns Sears but the two companies are not connected. Mr. Baker made his money in the leverage real estate operations, but the people who follow retail he is seen as a real estate investor rather than a retailer.

Mr. Baker who is one of the top 5 shareholders decided he needed to be paid $54.8 million with some of the money used for retention purposes. Close to $40 million was for share-based awards. Similar to most retailers, HBC has been undergoing vast changes including leasing the top floors of its large retail footprint in the cities to companies such as WeWork. That companies provides shared space for small and medium sized businesses. In Toronto, HBC moved goods from 100,000 sq ft to other parts of the store without reducing inventory the store carries and leased the property for $50 a sq ft which is 6 or 7 times more than it could thought it could make in the retail world.

Linking to dividend paying stocks, as investors we vote for management proposals. Most of the time we vote the way management recommends and that is good. Most of the time management knows the issues and is working to solve problems, and as long as they seem to be executing their plans, we vote for them. Once in a while there are issues such as the pay package which in HBC received 70% of the votes, while the Board of Directors vote was closer to 90% which is typical.  It is an issue but not one that will determine whether the company is profitable or not.

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

One of the lowest risk to invest your money is the 10 year US Treasury bond, in mid June the interest rate was over 3%. This level is the highest it has been since 2011. The importance of the number is bond rates are moving upwards.

In the risk reward strategies which all investment professionals use, if government bonds are risk free at 3% and higher, then why should you risk your money on something not to get more than 3%. The 3% becomes a benchmark and that is good.

Reporter Dale Jackson interviewed Zachary Curry President and Portfolio Manager of Davis Rea Ltd. and he said, for older clients who rely on steady income as rates go 3.5% or 4%, it begins to make sense to switch from dividends companies to US Treasuries.

Ideally, you can keep your dividend companies because you bought quality ones which tend to grow their dividend which makes the level you are looking for closer to 5% before a major switch. If you wish to move to more US Treasuries in your portfolio try to do a ladder approach or having different maturities which can rollover. A ladder can be 1 year, 2 years, 3 years, 4  years, 5 years.

Linking to dividend paying stocks, for your investments look at your total return – stock price appreciation and dividend payments before you move out of the stocks. While owning US Treasuries is good, as stock owners you also get to watch the company to see how they are doing if you own the shares or are considering owning the shares. If you get out, when would you buy back in?

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

When one country imposes a ban on imports to another country invariably there is another company which will provide the services and products, however sometimes they will get caught. In the case of ZTE which is China’s second largest telecommunications equipment maker, it was caught selling to Iran and North Korea while the US had a ban on it. That would be fine, except the company needed to buy components from US companies. The US government would not allow the sales.

ZTE according to Reuters, will pay a $1 billion fine, put $400 million in a fund in case there are other violations (there will be); they also will be changing its Board and executive teams. The agreement says all members at or above the senior VP will be removed within 30 days. They are not to be rehired along with any executives or officers tied to the wrongdoing. The US Commerce will be able to inspect their sites and improve public disclosure of their supply chain.

ZTE has paid a heavy price to do business with Iran and North Korea. The affect on the Hong Kong stock stock market was ZTE stock was down 41%

Linking to dividend paying stocks, one of the reasons it is easy to buy these stocks is for the most part governance or playing by the rules should be ingrained into the dna of the companies. The companies make profits in their areas they compete which means ethically or morally they do not have to break many laws to make money. No company is perfect but dividend paying companies tend to be closer to the gold standard.

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

In Canada, according to Larry MacDonald of the Globe and Mail, more short sellers are placing bets that marijuana stocks are headed downward in price. In Canada and in several US states the legalization of cannabis is coming and could be a substantial commercial opportunity. The questions of how much growth there will be is the reason for the short sellers.

The company’s ran up in price but as legalization comes people ask what are the sales? what are the profits? and what ratios should a reasonable person use to see if the stocks are poised to grow or should be lower?

The importance of the list of short sellers for the past months which is a regulatory requirement. When you see it ask what theme do investors see or what story is behind the individual stocks? for example:

• the company had a monopoly like conditions, now there is more competition.
• there is a pricing difference between the convertible debentures price and the stock price which presents an arbitrage/hedging opportunity.
• there are problems with execution – in the past projects came in overbudget, not on time and produced less profit than expected.
• for a bank in a regional setting – the area has been experiencing slower growth prospects which means the bank may increase its loan losses
• a company is trying to diversify from a mature industry to one that is growing, however the company continues to carry high debt
• an airline which is dealing with higher fuel prices and more competition from discount airlines.
• the Fed and Central Banks are the world are beginning to tighten up money but raising interest rates, if a company has a high debt load what is the effect of 50 to 100 basis rise?
• a research company has great promise but are the products commercially viable?

Linking to dividend paying stocks, the good thing about a short sellers list is the narrowing down to why it should be on the list. What are the potential problems or what keeps the President up over the weekend? How is he/she fixing it. With dividend paying companies the questions start easier – does the company make a profit? it is reasonably safe and can it earn the money next year? There will be other concerns but as an investor if you are comfortable with the profitability then the other questions are something to balance out between concern and execution of details.

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

19e best and most well known investor since 1965 has been the sage of Omaha or Warren Buffett. Mr. Buffett’s company Berkshire Hathaway has generated 10 times the return of the S&P 500 Index. However since 1998 it has performed about the same. In the Globe and Mail, Ian McGugan offered his opinion.

What made Mr. Buffett successful in the first place?  A company called AQR based in Greenwich, Conn reversed-engineered the returns in 2012. In concluded Mr. Buffett largely a matter of consistently buying cheap, safe, quality stocks and then adding a hefty dollop of financial leverage or using other people’s money.

One of the holdings of Berkshire Hathaway is insurance companies including Geico, Mr. Buffett figured out how to structure his investment vehicle to employ generous amounts of leverage of the insurance float. Insurance float is the difference between the premiums the company collects from insurance holders and the claims it pays out. The float provides an inexpensive source of funds that allows Berkshire to amplify the returns from cheap, safe, quality stocks.

The questions for investors in the future is because Berkshire Hathaway is large will the returns continue or if you buy the notion that Berkshire is really just a cleverly constructed machine for making leverage bets on a few key factors – cheap, safe and quality stocks, it may be good to buy the company.

Linking to dividend paying stocks, most of us do not have access to cheap money, once in while you do, but most of the time we do not. However, staying with cheap, safe and quality stocks is a very good thing. If you go back 25 years to see what companies were the largest in Fortune 500 and take a look at them now, many would be different. It is a challenge to invest in cheap, safe and quality stocks, but if you do there are many rewards.

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

 

Companies can only make and sell their products but sometimes governments get in the way and they have to react to the changes. President Trump has decide to impose tariffs on aluminum and steel in companies around the world. He may have a very good reason for doing so, but countries around the world can react to the costs. In the case of Mexico, they will add a 25% tariff on Tennessee whiskey which is not good for Brown-Forman Corp. The company makes Jack Daniel’s whiskey and Mexico is a growth market for them, the tariffs will add 25% to the costs which will likely slow down the growth.

In an article by Anne Riley Moffat and Justina Vasquez of Bloomberg News, Brown-Forman noted 5% of the company’s sales are in Mexico but growing at 15% a year. This is higher than the 7% growth in the US. As a large company Brown-Forman has other products including Herradura tequila.

One method to blunt the impact of tariffs is to build up inventories prior to the tariffs. In Europe the company has its own distribution system and inventory levels are up in Europe. In Mexico, it is trying to build inventories but does not own the distribution level. Tariffs will hurt no matter.

Linking to dividend paying stocks, all companies are based in a home country and sometimes it is the best thing under the sun and sometimes it is not. There are methods to deal with competition but when the government forces problems on your doorstep there are limited methods to deal with it. Hopefully the tariffs around the world are lowered.

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

 

One of the areas of change is cannabis or marijuana which is becoming more legal than illegal. For many years just having a few grams of cannabis was enough to send you to jail, but now more states are legalizing it. The investment banks see money to be made and as cannabis becomes legal across the country according to Cowen & Co should grow from $6 billion to $75 billion by 2030. In an article by Jennifer Kaplan of Bloomberg News, she interviewed Wall Street fund managers getting into the industry. Where there is money to be made, people move to it, but until it is legal or more legal than not, no one wants to publicize their involvement. Danny Mosses of Merida Capital Partners now has 10 to 20% of his portfolio in the industry. The seemingly legal part of the exercise is slowing down the institutional money because all funds need to show their holdings and the big funds worry about “widows and orphans” reactions.

Linking to dividend paying stocks, at the moment there are none in the cannabis area because the companies are still waiting for the legalization to move forwards but there are ETFs which cover the industry. If the investment banks and consultants are correct on the growth of the size of the market you may want to invest in an ETF for growth.

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