How has the Trump circus effective your investments?

As a Canadian, I think that the Washington circus is no longer funny. It has become “very scary”. We came very close to a nuclear war. Tensions regarding North Korea have lessen temporarily and the market sell off could have been a lot worse. So far, investors have ignored the noise coming out of Washington as U.S. corporate earnings have been better than expected.

Canadian and European investors with holdings in U.S. dollars have seen their investment returns reduced by the falling value of the U.S. dollar. For example, my investment club’s U.S. portfolio is up 10.2% as of the end of July. However, it is up only 2.3% when converted into Canadian dollars. The value of the Euro is also up 10% compared to the U.S. dollar.

The recent rally in gold is another sign of a weakening value of the U.S. dollar. A falling dollar not only increases the value of other currencies, it also increases the demand for commodities like gold. Investors buy gold as a hedge against a further weakening of the U.S. dollar.

American investors with holdings outside of the U.S. have benefited the most from a weaker dollar. Corporations that generate revenue outside the U.S. will get an earnings boost from foreign profits.   Keep in mind that the bond market doesn’t believe the Trump growth agenda will get passed any time soon. The yield on 10 year treasuries has fallen back to pre-election lows. Returns in U.S. bond portfolios have been positive for American investors.

Biggest Market Risks

  1. More inflammatory tweets from Trump regarding North Korea
  2. The resignation of Trump’s key economic advisors, Gary Cohn and Steven Mnuchin
  3. The Fed increasing short term rates causing an inverted yield curve which historically causes a U.S. recession.
  4. In fighting within the Republican Party continues and they are unable to pass meaningful economic fiscal policy.
  5. Trump’s desperation for a win causes him to tear up the NAFTA agreement?

I find this very disturbing:

President Trump’s approval rating is at its lowest since he took office with only 35% of Americans giving him a positive rating, according to a Marist Poll released Wednesday.

Although he is still popular among Republicans, his key constituency, his job performance rating has dropped among strong Republicans from 91% in June to 79% now.

Hard to believe that 79% of Republicans still approve of President Trump!

Lets hope that American voters will come to their senses during the 2018 elections!!

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The Amazon effect could still benefit the following companies

The “Amazon effect” is the ongoing evolution and disruption of the retail market, resulting in increased e-commerce. The major manifestation of the Amazon effect is the ongoing consumer shift to shopping online.

You don’t have to be a financial analyst to realize that card credit usage has gone up. Most brick and mortar retail establishments allow the consumer the choice of paying with cash, debit or credit card. Almost 90 % of all purchases that happen on line are with credit cards. Credit card companies are a popular choice because they will reverse any fraudulent purchases plus some offer extended warranties and all of them have reward programs.

The three most popular credit card cards world-wide are Visa (V), MasterCard (MC) and American Express (AXP). The chart below compares all three to Amazon over a five year period. It appears that investors think that Visa will benefit the most from the “Amazon effect”.

Keep in mind that Amazon has a rewards Visa card which earns users a rebate on all their purchases. Cardholders get 3% back for purchases made at Amazon.com, 2% cash back at gas stations, restaurants and drugstores, and 1% back on all other purchases which earns users a rebate on all their purchases.

Despite news that Amazon is buying trucks and planes to better service their prime customers, delivery companies FedEx and UPS will still benefit from the “Amazon Effect.” The chart below compares these two companies to Amazon over a five year period. FedEx is by far the clear winner for investors.

While there is a glut of malls in America, there aren’t nearly enough warehouses across the U.S. to support internet retailers like Amazon. Retail sales are not in decline, but rather shifting toward e-commerce so all retailers will require large amounts of warehouse space.”

When retailers reconfigure their supply chain to accommodate the shift in consumer behavior, the requirement for warehousing space will increase substantially. This is true incremental demand and not a displacement of existing demand for warehouse square footage. Companies like Wal-Mart, Alibaba and Wayfair will also have to invest in new warehouses to try to compete with Amazon over the next few years.

Industrial REITs such as Rexford Industrial (REXR), Terreno (TRNO) and Stag Industrial (STAG) are at the top of most buy lists. Other industrial REITs that you should consider include First Industrial (FR) and Monmouth (MNR). 

Amazon’s deal for Whole Foods will likely spur a “last mile” investment by the internet giant and its competitors, Jefferies’ Petersen has predicted. “Last mile” is a reference to the warehouse that is closest to a store, a crucial point of the distribution chain that makes same-day delivery possible.

“By analyzing all of Amazon’s ‘last mile’ facilities by size and population demographics against the Industrial REIT portfolios, we found that REXR and TRNO are best positioned to serve the ‘last mile,'” Petersen said.

Then, Amazon investing in so-called secondary and tertiary markets will benefit a REIT like STAG, he added.

One of the biggest risks in owning REITs is rising interest rates. Higher borrowing costs can reduce cash flow and effect their ability to pay dividends. It also makes the financing of new projects less profitable.

A lot of the “Amazon effect” is already priced in to all of these stocks but the long term upward trend is still there.

Amazon takes a bite out of Costco & Home Depot shares, time to buy?

Both Costco and Home Depot have been regarded by money managers as “Amazon proof” until recently. Historically, these two retailing stocks have traded at very high valuations compared to other retailers.

Last month, news that Amazon was buying Whole Foods sent grocery stocks reeling. Costco, along with Kroger, Supervalu, Target and Walmart all tumbled in value. Even some European grocers like Sainsbury and Tesco sank on the announcement of the takeover deal.

Last week, Amazon said it would sell Sear’s Kenmore brand appliances. Shares of Home Depot, along with Lowe’s, Best Buy and Whirlpool were slammed. The loss of value for these stocks was about $12.5 billion. Keep in mind, with the Sears deal, Amazon will now be selling a product line that is not available at Home Depot or Lowe’s stores.

“Analysts at Robert W. Baird said the selloff in Home Depot and Lowe’s was an overreaction. The nearly $7.5 billion market cap loss in Home Depot stock equals slightly more than the amount of its annual appliance sales. Lowe’s stock loss was a little more than 50 percent of its $7 billion in annual appliance sales.”

Buying premium value stocks like Costco and Home Depot when they fall is very difficult. Sometimes looking at their charts can indicate when the bleeding has stop and all the panicky investors have sold their shares.

Looking at the one year chart of Costco, you can see that buyers are coming in near the $150 price range. The 52 week low for Costco is around $142 so the downside risk is relatively small. This could be a buying opportunity if you believe that the Amazon threat has been blown out of portion.

Looking at the one year chart of Home Depot, there seems to be investor support at the $145 level but the stock could fall to the next support level which is around $135 per share. It could be too early to buy because it has only been a week since the Amazon / Sears news announcement. You could take a part position now and average down if the shares continue to fall or you could wait another couple of weeks to see if the $145 level holds.

What do you think? Are Costco and Home Depot still Amazon proof?

 

 

 

 

Share buyback binge is going strong, investors beware!

Is there anything wrong with this? Yes, it means that companies are spending more money on “financial engineering” than on capital spending. It certainly does indicate that companies are at a loss on how to improve their top line, which is what will ultimately improve the bottom line. It leads to frequent complaints by analysts about the “quality” of earnings.

It’s a very important point. Apple is part of an elite group I call “buyback monsters,” companies that have been aggressively buying back stock for years. Apple’s shares outstanding topped out in 2013 at roughly 6.6 billion shares. Since then it has been down every year and now stands at 5.2 billion.

That is a reduction of 21 percent in shares outstanding since 2013. What’s that mean? It means all other things being equal, the company’s earnings per share are 21 percent higher than they would have been had it not done the buybacks.

But that’s only since 2013 … there are companies that have been doing this much longer. IBM shares outstanding topped out at 2.3 billion way back in 1995, it’s been going down almost every year since then, and now stands at 939 million shares. Think about that. That’s a 60 percent reduction in shares outstanding in a little more than 20 years.

Same with Exxon Mobil, after the Mobil acquisition in 1999, shares outstanding topped out at just shy of 7 billion in 2000 and have been going almost steadily downhill since. There’s now 4.2 billion shares outstanding, a reduction of 40 percent since 2000.

Here are just a few more buyback monsters:

  • Northrup Grumman: 50 percent since 2003
  • Gap: 55 percent since 2005
  • Bed Bath & Beyond: 50 percent since 2005
  • McDonald’s: 36 percent since 2000
  • Microsoft: 30 percent since 2004
  • Intel: 30 percent since 2001
  • Cisco: 32 percent since 2001

Why are there buybacks at all? They were originally used to support the issuance of stock options. The options increased the share count outstanding, so to keep the countdown the company bought back shares. But as the opportunity for significant top-line growth waned, buybacks to reduce share counts became a separate strategy to prop up earnings growth.

What is my beef with buybacks? Part of management’s compensation packages include stock options. Buying back company shares ensures that their stock options don’t expire worthless.  It not only fools investors that the earnings are growing but it rewards poor management.

Take IBM for example, despite being one of the most aggressive buyback monsters on the Street, you can’t say IBM’s stock price has soared in the last decade. In 2014, the company eased off a bit on its buybacks, and the stock headed south. It headed south because IBM was beset by fundamental growth issues: Its revenues from its old line businesses were shrinking and there was not revenue from emerging  businesses (like Watson and artificial intelligence) replacing it.

The lesson: No amount of financial engineering like buying back shares can replace management’s inability to grow the business.

 

 

Opportunities for option traders on the takeover of Time Warner

Back in late October, I wrote that AT & T had reached an agreement in principle to buy Time Warner for about $85.4 billion, Time Warner shareholders would get a combination of cash and AT & T stock. The total purchase price would be around $107.50 and the whole process could take around a year to complete.

Click here to read “Looking for option trades on the Time Warner takeover by AT&T”

The stock price of Time Warner was trading at around $86.75 at that time which was way below the takeover price. I suggested two option trades with April expiry dates and one that didn’t expiry until Jan 2018. All three trades turned out profitable.

  1. Buy 300 shares of Time Warner at $86.75 and sell 3 April $90 call options for $3.00 each. This reduces the adjusted cost base to $83.75 and I am hoping that these call options will expire worthless.

Results: Time Warner stock was called away at $90.00 in April for a $6.25 profit or 7.46% in 6 months.

  1. Buy 100 shares of Time Warner at $86.75, sell 1 April $90.00 call option for $3.00 and 1 April $85.00 put option for $3.80 reducing the purchase price to $79.95 a share. ($86.73-$3.00-$3.80 = $79.95)

Results: Time Warner stock was called away at $90.00 in April and the put option expired worthless. Profit of $90.00 – $79.95 = $10.05 or 12.5%

  1. Buy 10 Jan $97.50 call options for $3.50 that expire in 2018. If the deal goes through, these options could be sold for $10 each.

Results: Time Warner stock closed at $99.18 on Friday, I still have 8 more months to take profits. I could sell the Jan $97.50 call options for $6.05 on Monday for a profit of $6.05 – $3.50 =$2.55 or 73%

Being a senior, I totally forgot about this post, I have to apologize for not providing an update sooner. However, I repeated option strategy number 2 by buying 500 shares of Time Warner at $97.50, selling 5 May 97.50 call options for $1.95 and 5 May 97.50 puts for $1.45 (which reduced my purchased price to $94.10) and made $3.40 or 3.6% in one month.

Unfortunately, the VIX which is the ticker symbol for the Chicago Board Option Exchange volatility index has been falling. It measures the market’s expectations of 30 day implied volatility. (Referred to as the fear index) A falling VIX means a reduced amount of fear and cheap option premiums.

Despise the lower possibility of profit, I repeated option strategy number 2 and bought 500 shares of Time Warner at $98.96, sold 5 June 30 100 call options for $1.00 and 5 June 98 put options for $1.00 reducing my overall cost to $96.96 per share. I could potentially make $3.04 if TWX is above $100 by June 30th or 3.14.%

A falling VIX tends to widen the bid / ask price spread on most options. It makes it harder to get your order filled. I had to change my limit order a couple of times during the day to get this Time Warner trade completed.

There is always a risk that this deal will not be approved by regulators. However the takeover price gap has narrow from $86.75 / $107.50 in October to $99.18 / 107.50 in June. A good sign that investors believe that this deal will go through.

Disclaimer: This post is for educational purposes only.