In the US election one of then candidate Trump’s stump speeches was how as the Master of Deal, he was going to tear NAFTA up and come up with a better deal for the US. In reality the tearing of the deal is much harder than President Trump made it seem. NAFTA is about supply systems and companies taking advantage of lower wages and benefits in Mexico. The large auto companies kept some of the facilities in Canada and the US to have bargaining positions with the government. We want to spend a $ 1 billion on a upgrade, while you (government kick in a third and reduce the taxes we pay? – yes we will says the government and the auto companies financing just went down in costs.

In Mexico, all the car and truck companies set up operations as well as the supplier or parts companies and when the market is for 20 million vehicles per year, a healthy amount of that number is coming from Mexico to be priced as it came from the US which results in healthy margins. It was not surprising the United States was not going to have a new NAFTA in mid May. The process of talking about the possibilities will go on for some period of time. The mid May deadline was about the election cycle and the possibility of seats changing in the Senate which means less Republican votes.

Perhaps just perhaps the Trump administration is becoming similar to other administrations and reality is coming to the White House – then the President will tweet something or other and you begin to wonder again.

Linking to dividend paying stocks, supply systems developed based on the rules of the day.  To change the supply systems except at the margin causes a great deal of uncertainty. For dividend paying investors, certainty is a good thing.

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

In the world of politics, some world leaders see issues as black and white or we should do something or nothing. In the world of investing, companies that are multinational in size have investments in many countries. In an article by Sudip Kar Gupta and John Irish of Reuters, President Trump has threaten to impose sanctions on Iran. He has very good reasons to do so, however doing so put companies doing business in Iran at risk.

Iran has oil and one of the multinational oil companies France’s Total is involved in developing oil fields. In 2017 they signed an agreement to develop the South Pars field. Now that President Trump wants to impose sanctions, what happens to Total and should they go forth? France’s President was in Washington and will be discussing France’s interests with President Trump. Meanwhile since European countries has an agreement with Iran companies such as Allianz, Maersk Tankers, Siemens doing business in Iran they have suggested they will wind down Iran because the US is a bigger market. The concern is if European companies leave, Chinese companies will set in because the oil from Iran goes to China.

Linking to dividend paying companies, diversification is wonderful until it brings up other concerns and companies have to decide what markets are the most important. As you invest, look at the diversification of the companies in your portfolio are you satisfied with them? Are there companies you want less country diversification?

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

 

In the past, communication from the President was very measured, calculated and expected to result in actions. With President Trump who likes to tweet or communicate, it seems not an expected result has been calculated into his tweets. However they can and do move markets because this is the President of the US deciding what his policies should be. It is very hard to keep up to the President because he seems to be all over the map.

In an article by Dale Jackson he discusses what investors should do when the President tweets, particularly about economic issues. Art Hogan, managing director and chief market strategist at B Riley FBR Inc. says You have an administration that wants to pound its chest in the beginning and hopefully get to a middle ground in the end a sort of art of the deal.

You have to look past Mr. Trump apparent contradictions. The President has trust issues because he tends to tweet things that are not correct.

The solution focus on long-term corporate earnings growth and stay diversified.

Another approach is offered by David Baskin who says since very little gets put into action try to treat the President as just another market distraction. It is very difficult to do this but understand what the truth is and if the President says something else carry on.

Linking to dividend paying stocks, no matter how much the President tweets the reality is profitable companies are worth more than non profitable companies. If President Trump was not President he would be another investor hyping his latest claim and then moving on to the next hot thing. It is easier to invest your money into profitable companies and let them figure out how to capitalize on the next greatest thing since slice bread. Usually time will sort out the consistent good things.

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

 

In the mid 1990’s one firm was dominating Wall Street with its great profits and Wall Street was jealous and wanted a piece of it. At the time the firm was called Long Term Capital Management and was one of the most successful hedge funds in the world. The firm has risen from a medium sized money management firm to controlling over $1 trillion in assets and for 3 years almost everything they did was profitable. A book written about the firm is When Genius Failed – The Rise and Fall of Long-Term Capital Management by Roger Lowenstien, Random House, NY, 200. In 1997 the firm had to force their original investors to take $2.7 billion or for every $1 someone invested they received $1.82 and still had their original investment. The firm was making a minimum yearly return of 25% and most years were better. The partners were on paper almost billionaires themselves.

After having winning days for four years and all that implies,  in 5 weeks starting in mid August of 1998 the money was gone, partly it was because the fundamental belief of the firm was markets are efficient machines. If they are efficient then they eventually return to normal and along the way securities are mispriced. If the models see the mispricing, options can used to make money when the securities go back to normal. The firm was one of the greatest users of options which implies a leverage and implies a method to calculate what level of volatility the market is was expecting. Long Term Capital Management used the Black-Scholes formula and the key element in pricing an option is the expected volatility of the underlying asset.

For years, Wall Street had loved leveraged, then when Russia defaulted on its bonds everyone ran to safety and while spreads did and always come back, the issue is when. Every flight to safety increased spreads which increased losses at Long Term. The model makers has missed the fact there was no liquidity in credit markets. When losses mount, leveraged firms must sell lest their losses overwhelm them. When a firm has to sell without buyers, prices run to the extremes of the bell curve. And rational people have to sell, they protect themselves at wait till the next time around.

Long Term Management rose similar to other firms people were dazzled by the partners’ reputation, degrees, celebrity and their very profitable performance. The firm tried to keep all its secrets and Wall Street allowed them access to credit so Long Term could leverage itself 30 plus to 1. The easy credit and the early days of making money in mispriced assets led to many others in the field doing similar things. Long Term leveraged itself so much it became the only player in the market and when that happens its it illiquid or can not sell. If the company is highly leveraged and illiquid it is playing Russian roulette for it must be right every single day or it is bankruptcy around the corner.

Another aspect the models did not take into account are traders are generally rational, they are impressionable and imitative; they run in flocks and retreat in hordes.

There was a belief that tomorrow’s risks can be inferred from yesterday’s prices and volatilities. Risk Management is an art not a science.

Linking to dividend paying stocks,  one aspect is the lack of leverage is expected. When you buy the companies you are expecting your dividends and over time the capital gains will increase your wealth but you have time on your side. With leverage sometimes it is very good and sometimes it is very bad particularly when you need money. Try to keep your leverage low, think longer term paybacks and read about leverage companies and try not to invest in them.

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

 

For many years, if you wanted to legally beg on sports, the only place to do it was in Nevada where the casinos in Las Vegas had a monopoly. It was considered ok because Nevada was different than the other states. Sports betting, casinos, legalized prostitution and other sins were to be found in Nevada and millions of tourists visited the state. As years go by states needing money as they cut personal taxes have looked to the sin taxes to growth their revenues. First it was a casino and the states are looking for revenues which money is already being bet in the underground economy. It is estimated sports betting takes over $50 billion in the underground economy and thanks to the US Supreme Court some of that money will be taxed and help pay for infrastructure.

The sports leagues preferred the old way to only have one legalized gambling spot, but the US Supreme Court disagreed. The states argued that the monitoring of sports betting will be easier now that it is legalized. One would think it is hard to monitor sports betting in the underground economy.

The impact on Wall Street because there are public gaming companies is positive because the money will come from the underground economy to the legalized more scrutinized economy. More money should flow into legal companies and sports betting will continue.

Linking to dividend paying stocks, with all companies governments play a role. Sometimes the role is in the background to protect their competitive playing field, sometimes it is to keep workers working, sometimes it is to change the rules. Part of the senior management analysis is what happens if the rules change – do you believe the company can adapt and benefit from the changes? In some ways companies are like people some people can adapt, others do not want to adapt, and others have to be kicking and screaming to adapt. Which company is the ones you invest in?

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

In War time, one of the objects of the opposing side is to target the movement of goods and services particularly infrastructure. If you can do that, it puts a damper of the production and movement of armaments. It is easier to say than do. An interesting book is called The Dambusters  by John Sweetman published by Time Warner, London, UK, 2003.  In 1955 a movie of the same name was made.

In WW II, the English were losing the war and spent long hours trying to slow down the Ruhr Valley which is similar to Pittsburg in the US – home to the steel mills. One method to do this was bomb the factories, but generally the area is very well protected. Then an idea came forth  why not destroy the dams which generate the electricity and flood the area? The British began to research the possibilities of trying to destroy a dam.

Similar to all ideas – in 1942 being tasked with the job, the first task was to gather information about which dams were vulnerable targets. After the identification, how to do the task? If you drop a bomb on a dam, assuming you were accurate what would the impact and how big a bomb must you drop? The bomb would be big, a bigger airplane would be needed to be built and the likelihood of success was limited. The reason is a better solution is to drop the bomb before the dam and have it exploded under water and beside the dam. How to do that was a mystery.

After many experiments, the conclusion was contact with the masonry underwater was essential. Have you ever go to the lake and picked up a stone to skip across the water? The idea was to drop a specialty bomb that would skip across the water to sink just before the dam and explode. In mid May of 1942, the report came out titled Spherical Bomb-Surface Torpedo. The plane would be in a fast glide travelling at 470 ft/sec and no higher than 26 feet above the surface. The bomb would bounce 4 times sink and blow up in the correct position to cause damage and the pressure of the water would add to the flow over the dam. In addition, since this is war and Germany was protecting the dams gunfire was to be navigated around.

By October running through many tests it was seen as possible. Engineers must “sell” the plan to higher commands to go from what is possible to probable to doable. In a country losing the war, what is possible takes a while to go to doable. In March of 1943. 617 Squadron was formed.

On May 17, the Lancaster bombers left England and flew to Germany to bomb the dams including Mohne and Sorpe Dams and smaller dams. Half the planes that left did not come back,for at war the enemy fires back. Dams were hit, rivers flooded, movement of materials stopped for 4 months and by October the dams were operational again. The dams continue to do their purpose to this day.

Linking to dividend paying stocks, in this instance a dam was bombed but dams have in the US (California) have almost collapsed from poor maintenance. If water is released from a dam, the water will play havoc downstream – that is a given and it is battle that utility companies must ensure does not happen on their watch. Once the dam is in place, the cost to generate electricity is minimal and long lasting and that is way investors like dams. Prices can rise over the years and cost remains relatively very low.

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

If you listen to the President, one takeaway that is true is the economy is performing well in terms of unemployment rates have fallen to the lowest level in 17 years and consumer confidence is near the highest in 17 years. The unemployment rate may be due to a natural shift in the demographics from the large baby boom generation to the next generation. The baby boom generation is retiring allowing more opportunities in the labor market to open up. However the reality is unemployment rates are down and that is a good thing.

In an article by April Joyner of Reuters one of the beneficiaries of the good trend is the home building industry. Presidents Clinton and Bush believed people living in a single family dwelling made a better society, the only thing they forgot was paying the bills where ever someone lives keeps society afloat. When too many people were in housing they could not afford, the housing market collapsed. Now days people still want to live in single family homes and demand is tight and growing. This leads us to the US housing industry – is it a good time to buy stocks which cater to the housing market?

There are a number of ways to invest – the home builders; the companies which distribute supplies – Home Depot and Lowes; the companies which make things to go into the home – appliances and such; often single family homes have a garage and driveway which means auto companies; you might look at where demand is growing fastest and look towards the utility companies because those bills are paid monthly and the list can go on.

The federal reserve has indicated it wishes to raise interest rates this year – higher rates would translate into higher mortgage costs for home buyers. Another cloud is last year’s tax bill which put a cap on deductions for state and local property taxes and lowered the amount of mortgage interest that can be deducted on tax returns.

The big companies to look at in the US housing market are Lennar, PulteGroup, D.R. Horton, Toll Brothers and NVR. Ideally, if you are investing in the home building industry – the ability to build from a starter home to luxury homes means not everyone will be affected by rising costs the same manner is a good thing. The S&P Composite 1500 Homebuilding Index has lagged the general market so there may be some good buys to be had as last year the Index was up nearly 75% on a yearly basis.

Linking to dividend paying stocks, in every industry there are very good choices and multiple ways to invest. Doing your homework on the companies and understanding what variables would send buy and sell signals is necessarily. An example is dividend company – does that company make a profit? can it pay its dividend? if yes then you do not have to do anything, but knowing alternatives is never a bad thing.

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

 

 

 

 

In many countries around the world there are stock markets, in North America we are bias towards New York but there are other stock markets. Often times, there are opportunities in the markets. It can be very difficult to change because in some countries the government and the largest companies are very intertwined. The government has over the years selected some companies to reach the scale needed to compete against world markets. In South Korea there are family run conglomerates that have long had the blessings of the government – the Hyundai and Samsung groups are the largest examples.

In an article distributed by Reuters, Elliot Management Corp is trying to change Hyundai Motor Group’s restructuring plan. Elliot does not believe the restructuring will add value and at the moment has let to what they feel are significant valuation discounts and underperformance.

Elliot Management owns 1.5% of the shares; Hyundai owns 30% and the state-run National Pension Service holds close to 10%. The odds are for management to win the vote.

Linking to dividend paying stocks, most of the time as long as the company is profitable and can pay dividends, most stockholders will vote for management’s proposals. If the company is losing money, stockholders will find alternatives and let others battle to see if the company can restructure and shares move upwards. In any shareholders vote, as a shareholder you have to believe the management will execute and hold the margins to be profitable. To go against management is often a long fight.

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

A number of years ago, Warren Buffett talked about investing in the things you know. He did not say, be curious and learn about the things you do not know. Over the years, Mr. Buffett has changed and owns less than 10% of Apple.

In an article by Noel Randewich of Reuters Apple Inc. is on the verge of becoming the first $1 trillion publicly listed US company. However Amazon is not far behind. Alphabet and Microsoft are in the $700 billion range. The valuation is stock price multiplied by the number of shares outstanding.

Apple has a $229 billion annual revenue and with its money that was offshore of the US but the President reduced taxes to bring it back has used $100 billion to buy back stock. The company still has $146 billion to buy back stock or increase dividends or both which is why if you do not own Apple directly, you should own them in a etf or mutual fund.

Linking to dividend paying stocks, we are all bias and if you remember that you can move on to other investments. Each of us due to how we generate an income know more about one sector of the economy or another. Who the public companies are in the business and how they are doing from your perspective. It is important to learn about other sectors for there is always opportunity in the market you just have to see it by being curious you will begin to know where to look to connect the dots.

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