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.

Microsoft Corp is buying GitHub for $7.5 billion in stock. In an article by Dina Bass and Eric Newcomer of Bloomberg News, the company will bring in house a community of 28 million programmers who publish code openly and extending a shift away from a strategy of shrouding its software in secrecy.

Microsoft’s deal with GitHub will speed the company’s moves into the cloud and artificial intelligence spaces. Microsoft for the past decade has tried to do more in house and less for programmers to look at the software. Both Bill Gates and Steve Ballmer championed developers building proprietary software for Microsoft, rather than the kind of open-source projects found on GitHub.

Under the new President Satya Nadella has been increasingly relying on open-source software to open-source software to add programming tools, and the purchase of GitHub will be a key part of the way Microsoft writes its own software. Mr. Nadella acknowledged that he will have to earn the trust off GitHub’s users. For now GitHub will continue to operate independently in San Francisco as opposed to Seattle where Microsoft has its headquarters. The other deals above $2 billion Microsoft has made are: LinkedIn for $26.5 billion and Mojang video games $2.5 billion

Linking to dividend paying stocks, the purchase of GitHub means the management of Microsoft is changing or adapting to new styles. All companies have to adapt as society changes and it is important to see if your company is changing or can adapt to what is and can be.

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

If you read history books such as most of us do, there is a bias from the writers which is normal and natural. Much of the world is formally in a hierarchical process and given the nature of the beast, it is much easier to research. In a book called The Square and The Tower by Niall Ferguson published by Penguin Press, NY, 2018, the author suggests that one should also concentrate on the informal change or networks of the people with power.

In terms of connectivity nothing is easier to see that the internet and the companies that we all use.

In 2000 Google began selling advertising associated with search keywords, on the basis of a combination of price bids and click-throughs. By 2011 this was the source of 96% of their revenues. Since 2011 this revenue source has allowed Google to expand to a multiple of other platforms – gmail (2004), Android (2007), Chrome (2008), buying companies which became Google Earth, Google Analytics, Google voice, You Tube and more.

Facebook which is about social interaction in the US 82% of the people who are 18-29; 79% between 30 to 49; 64% of the 50-64 and 48% of the age group 65 years plus.

In China, 3 companies dominate because the Chinese limit Google and Facebook. The 3 companies are BAT – Baidu (the search engine), Alibaba (similar to Amazon) and Tencent best known of We Chat. These 3 companies have revenues in excess of $20 billion. Tencent’s We Chat is used by 86% of Chinese Internet uses and is fast replacing the business card with the snap QR code. Alibaba’s revenue in China exceeded Amazon’s in the US in 2015; its share of the total retail revenue in China is twice that of Amazon in the US.

In India, the cellphone company Bharti Airtel has a customer base as large as the US population.

In Kenya it took 8 years for all households to have cellphones. It took 4 years for Safaricom’s pioneering M-Pesa payment system to reach 80% of households.

Giving the world’s poor mobile phones telephony is proving easier than providing them clean water.

In the technology world, similar to most industries corporations will pursue monopoly, duopoly or oligopoly if they are left free to do so. This is why a small number of companies dominate the information and technology sectors. Despite the claims to be the great levelers, social networks are thus inherently unfair and exclusionary. This leads to two kinds of people – those that own and run networks, and those that merely use them.

In traditional societies, the advent of market forces disrupts often hereditary networks, and as a result promotes social mobility and reduces inequality. Meritocracy prevails. But when networks and markets are aligned, as in our time, inequality explodes as the returns on the network flow overwhelmingly to the insiders who own it,

When you read about the above numbers, you have to think if the trends continue they will get more entrenched and bigger. As an investor you need to be exposed to those companies whether it is individually or in an index fund. Along the way, invariably all those companies shares will go up and down, but as this is the system in which we live in. Try to be an owner.

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

If you read history books such as most of us do, there is a bias from the writers which is normal and natural. Much of the world is formally in a hierarchical process and given the nature of the beast, it is much easier to research. In a book called The Square and The Tower by Niall Ferguson published by Penguin Press, NY, 2018, the author suggests that one should also concentrate on the informal change or networks of the people with power.

In the book, Mr. Ferguson uses a number of different stories through the ages – for this blog the one of Breaking the Bank is relevant.

George Soros runs the Quantum Fund and when examining the European rates he knew that a system of fixed exchange rates would come under strain if there were significant and persisitent differences in the economic performance of the member states. He also understood financial crisis are not caused by individuals they are caused by herds – think of the movie Lion King and the herd of Wildebeest running. What they were running from and why, you do not need to know, all you need to know if the herd is running and to get out of the way or there will be trouble. Mr. Soros believes reflexivity played a role in financial markets. This means reality helps shapes the participants thinking and the participants thinking helps shape reality.

The critical thing is Mr. Soros could not by himself break the bank by himself. He observed most of the time I am a trend follower, but all the time I was aware that I am a member of a herd and I am on the lookout for inflection points. Most of the time the trend prevails; only on occasionally are the errors corrected. It is only on those occasions that one should go against the trend and try to be ahead of the curve.

In the bet against the English pound, the key was to get others to get a critical mass of investors to put on the same trade as he had in mind. That has not hard because Soros was already part of a network of like-minded investors. In fact Robert Johnson of Bankers Trust helped Soros devise the trade. The critical part was the Euro currencies were being maintained within relatively narrow bands; whatever happened, the values could not possible rise against the mark. so if the speculators sold the pound short and lost, they would not lose much money. However if  won, they stood to gain a great deal. Mr. Johnson thought at 20% on the upside. Mr. Soros thought why not go for the jugular or short as much as possible as the risk reward relationship was very favorable.

Other traders and hedge funds saw the same risk-reward and were in the trade and began the herd. As the hedge funds went in so did the commercial banks and the herd was betting against the English pound and won.

Linking to dividend paying stocks, hedge funds look for price opportunities or price differences that should not exist but do. They use a combination of short selling and options, to be safer with your money buy dividend stocks with no margin. It will take longer but over the years your money will roll in because you have invested in a profitable company. Over time, profitable companies are worth more than non profitable companies and you have achieved a dividend along the way.

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