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STOCKHOLM (Reuters) – Swedish biometrics firm Fingerprint Cards on Monday announced a new round of big cost cuts on the back of weak market conditions for capacitive sensors for smartphones and heavy price pressure.
The company said it expected the new cost cuts to yield savings of 350 million crowns ($ 39.8 million) on an annual basis, with full effect at the end of the fourth quarter.
Fingerprint Cards said it will cut around 179 staff, and the restructuring costs are seen at 65 million crowns, which will mainly be taken in the third quarter.
“We are continuing to adapt our operations to the fundamental and rapid change in business conditions, with the objective of returning to profitable growth,” Fingerprint Cards Chief Executive Christian Fredrikson said in a statement.
“The cost reduction measures we are communicating today are important in order to strengthen our competitiveness,” he added.
The company also said it would make an inventory write-down of around 336 million Swedish crowns and a 143 million crown write-off of capitalized research and development (R&D) projects.
During the first quarter of 2018, Fingerprint Cards implemented another cost reduction program, seen generating cost savings of 360 million crowns this year.
Fingerprint Cards’ shares are down 60 percent so far in 2018 year on the back of rapidly falling sales and earnings.
Reporting by Johannes Hellstrom
FRANKFURT/LONDON (Reuters) – Germany’s SAP (SAPG.DE) announced upbeat results in the seasonally tough first quarter, saying it was gaining ground on its main competitors Salesforce (CRM.N) and Oracle (ORCL.N) in the cloud and that its margin recovery was firmly on track.
SAP, Europe’s largest tech company by stock market valuation, also raised its sales and profits guidance for 2018 to take into account the $ 2.4 billion acquisition of U.S. sales software firm Callidus that was announced in January.
“We’re gaining share fast and we’re outpacing our toughest competitors pretty handily,” Chief Executive Bill McDermott told reporters on a conference call, calling the results strong at the top and bottom line.
SAP now expects total non-IFRS revenues at constant currencies this year of 24.8-25.3 billion euros ($ 30.28-$ 30.89 billion), representing growth of 5.5-7.5 percent, up from an earlier expectation of 5-7 percent growth.
Non-IFRS operating profits rose 14 percent in constant currency to 1.235 billion euros, compared to the average forecast of 1.19 billion euros in a Reuters poll of 15 analysts.
Cloud subscription and support revenues, SAP’s growth driver, grew by 18 percent to exceed 1 billion euros for the first time. At constant currencies they rose 31 percent, to which McDermott said: “Wow.”
Cloud growth accelerated outside the United States and grew faster than any of SAP’s major rivals, including Oracle, Salesforce and Workday (WDAY.O), he added SAP has faced currency headwinds due to the strong euro, and both the company and analysts focus on key metrics after adjustment for currency effects to get an underlying picture of performance.
Had SAP reported in U.S. dollars, like its competitors, the growth numbers would have turned out even better, said Chief Financial Officer Luca Mucic. Cloud subscriptions, for example, would have shown year-over-year growth in the first quarter of 37 percent in U.S. dollar terms, he said.
“We grew faster than every ‘best-of-breed’ cloud (competitor) out there,” McDermott said. “Faster than Workday, a lot faster than Salesforce, and a lot faster than Oracle.”
Mucic said that an expansion of 1.1 percentage points in operating margins in the first quarter boded well for SAP after a strong showing in the same quarter a year ago.
($ 1 = 0.8191 euros)
Reporting by Douglas Busvine and Eric Auchard; Editing by Tom Sims
The race to become the first public U.S. company valued at $ 1 trillion has largely been seen as Apple versus Google, with a recent surge by Amazon putting the e-commerce giant in the conversation as well. But on Monday, analysts at Morgan Stanley made the case that Microsoft has a good chance of reaching the $ 1 trillion mark.
With the company’s shares trading around $ 87 at Friday’s close, Microsoft had a stock market value of $ 680 billion. To reach $ 1 trillion, with some stock buybacks in the mix, its shares would have to hit almost $ 130. That’s plausible within the next three years, Morgan Stanley analysts Keith Weiss and Melissa Franchi wrote on Monday in a detailed report on Microsoft’s various lines of business called “Plotting the Path to $ 1 Trillion.”
“With Public Cloud adoption expected to grow from 21% of workloads today to 44% in the next three years, Microsoft looks poised to maintain a dominant position in a public cloud market we expect to more than double in size to (more than) $ 250 billion dollars,” the analysts wrote.
Microsoft shares jumped 5% to $ 91.90 in midday trading on Monday after the report came out. With a midday market cap of $ 707 billion, Microsoft almost exactly tied Google (goog) and trailed only Apple (aapl) at almost $ 849 billion and Amazon (amzn) at $ 733 billion.
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The software company run by Satya Nadella could impress investors enough to reach a $ 1 trillion value within three years by increasing revenue to $ 136 billion in its fiscal year 2020, up 41% from $ 97 billion last year, and operating income to $ 46 billion, up 58% from $ 29 billion, the Morgan Stanley analysts forecast. Nadella took over for CEO Steve Ballmer in 2014 and immediately prioritized the company’s cloud businesses, while getting out of distracting sidelines like making phones. It has worked so far, with Microsoft’s stock price nearly tripling since Nadella assumed the top job.
The key to reaching the needed level of additional growth would be Microsoft’s booming cloud business, both via its Office 365 subscription software and its Azure cloud platform for businesses, analysts Weiss and Franchi wrote. At the same time, shrinking sales of traditional Windows PCs and servers would need to stabilize.
That could happen as the number of corporate users of Office 365 could almost double from 105 million at the end of 2017 to 204 million at the end of 2020, the analysts said, with revenue from the popular software subscription package increasing from $ 10.7 billion to $ 25.6 billion. Revenue will compound even more quickly at Azure, growing from $ 3.9 billion last year to $ 21.6 billion in 2020. Altogether, total cloud revenue at Microsoft—which includes Office 365, Azure, search ad revenue and a few other items—should grow from $ 22.3 billion last year to $ 58.5 billion in 2020.
The analysts warned that they could also be underestimating Microsoft’s (msft) growth if its Xbox gaming business expands faster than expected, the company’s tax rate drops more than Microsoft forecast, or the company increases purchases of its own stock.
This means that the market has now retraced to its previous low, something I warned was historically likely to happen.
But still investors are understandably worried about the return of such volatility, after 2017’s freakishly calm and bullish year. In fact, according to CNN’s Fear & Greed Index, a meta analysis of seven different market indicators, investors are not just afraid but are petrified right now.
But since the root cause of fear is uncertainty and doubt, let’s take a look at what caused the stock market’s latest freakout. More importantly discover why these fears are likely overblown, and why the you shouldn’t be racing for the exits.
What The Market Is Freaking Out Over Now
On Thursday, President Trump announced that he would be imposing 25% tariffs on $ 50 billion to $ 60 billion worth of Chinese imports covering 1,300 products including: aerospace, information and communication technology, and machinery. This was in retaliation for years of Chinese intellectual property theft against foreign companies, including US firms.
The Chinese responded with calls for America to “cease and desist” and the Chinese embassy said:
“If a trade war were initiated by the US, China would fight to the end to defend its own legitimate interests with all necessary measures.” -Chinese Embassy
Thus far, Chinese retaliation has been modest, just $ 3 billion against 128 US imports including: pork, aluminum pipes, steel and wine. However, according to Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, those $ 3 billion in tariffs appear to be in response to Trump’s earlier steel and aluminum tariffs.
Those only affected $ 29 billion in US imports, before Trump began exempting most US allies.
The Wall Street Journal is reporting that China will now ratchet up its own counter tariffs, specifically against, “U.S. agricultural exports from Farm Belt states.” Specifically, this means tariffs on U.S. exports of soybeans, sorghum and live hogs, most of which come from states that voted for Trump.
Apparently, the Chinese began planning for a potential US trade dispute last month when the Chinese Commerce Ministry met with major Chinese food importers to discuss lining up alternatives sources of major US agricultural products. For example, China is considering switching its soy imports to Brazil, Argentina and Poland.
The concern that many people have is that during the announcement on the Chinese tariffs, which cover just 10% of all US imports from that country, Trump stated that this was just the first in a series of upcoming tariffs against China.
So many are worried that if the President truly believes that “trade wars are good and easy to win”, then he could potentially escalate this trade tiff into a full blown trade war. Something that history shows is never a good thing, and sometimes has disastrous consequences.
How Bad Would A Full Blown US/China Trade War Be?
The White House has stated that it wants to reduce the US/China trade deficit by $ 100 billion a year, or about 20%. Theoretically, that could mean that Trump might impose tariffs on all Chinese goods, in order to make them more expensive and less competitive with either US goods or those from non-tariffed countries.
So what effects would this have on the US? Well, first of all prices will increase initially, since companies like Walmart (WMT) have complex supply chains with contracts for sourcing for its stores. So in the likely case a 25% tariff on $ 50 billion to $ 60 billion in Chinese imports represents a $ 12.5 billion to $ 15 billion increase in US input costs.
Or to put another way Trump’s China tariffs are likely to boost inflation by 0.08%, and drive core PCE from 1.5% to 1.6%. Now that isn’t the total negative affect to the US economy. After all, China has already retaliated in response to steel tariffs, and is likely to now ratchet up its own counter tariffs.
How bad could that be for American exporters? Well, China supplies just 2% of US steel, meaning that the steel tariffs represent a $ 580 million loss of export revenue. In response, they slapped tariffs on US goods (with apparent plans to completely replace them with foreign alternatives) of $ 3 billion. That’s a retaliation tariff ratio of 5.2, meaning for every $ 1 in export revenue threatened by US tariffs, China appears to be willing to cut its US imports by as much as $ 5.20.
However, in 2017, Chinese imports of US goods totaled $ 130 billion, so there is no way this retaliatory ratio could hold. However, theoretically, if the US and China were to get into a full blown trade war, China could cease importing up to $ 130 billion of US products.
That worst case scenario would likely require Trump imposing similar (25%) tariffs on all Chinese imports to the US, which totaled $ 506 billion last year. In the worst case scenario, that could temporarily raise US prices by $ 127 billion.
Worst Case US/China Trade War Costs
Cost To US Economy
% Decrease In Real GDP Growth
Increase In Inflation
Higher US Prices
$ 127 billion
Lost US Exports
$ 130 billion
$ 257 billion
Sources: thebalance.com, CNN, Marketplace, Bureau of Economic Analysis
Nominal US GDP would not fall due to rising prices; in fact, it would increase. However, GDP is reported as inflation adjusted, meaning that price increases would not have an measured affect on economic growth since they are by definition excluded.
However, they do represent a true cost to the economy, since it means consumer pay more and have less money to spend on other things. The effect on GDP would potentially be seen via China’s replacement of potentially $ 130 billion in US exports with those from other nations. That would knock off 0.7% from US economic growth. Currently, the Federal Reserve is projecting 2.7% growth in 2018, so in our worst case scenario that would fall to 2.0%.
Meanwhile, the higher US prices would represent about 0.7% increase in inflation, pushing the core, (ex-food & fuel), personal consumption expenditure index to 2.2%. Core PCE is the Fed’s preferred inflation metric because it’s a survey of what people actually buy, taking into account rising prices, (switching to cheaper alternatives).
The bottom line is that a full blown US/China trade war has the potential to do significant damage to America. It could potentially lower economic growth 25% over a year, and raise inflation by nearly 50%. But just above the Fed’s stated 2.0% target. Fortunately, this worst case scenario is unlikely to actually happen.
Trade Wars Are Terrible But This “Tariff” Isn’t Likely To Become One
First understand these tariffs are not immediate. US Trade Representative Robert Lighthizer’s office will have 15 days to publish a list of the goods, which will be followed by a 30-day comment period before they go into effect. Tariffs and retaliatory tariffs are not a light switch, but a slow moving regulatory process.
This means that it will likely be six weeks (early May) before any US tariffs on Chinese imports begin. Chinese retaliation in terms of decreased exports would likely start by late June/early July at the earliest. Or to put another way, half of the impact of the worst case scenario would be eliminated by timing.
And time is our friend here because most trade disputes, even threatened tariffs, are merely negotiating tactics. Most of the time tariffs get called off relatively quickly as both sides seek some kind of resolution.
After all, China potentially could take a 3.8% hit to GDP if it lost its US export market, cutting its economic growth in half. That’s something it has no interest in. Meanwhile, the sharp hit to Trump’s constituency (states that helped elect him), plus slower US economic growth, would certainly not help the President’s re-election efforts in 2020.
We’ve already seen that the President’s threatened tariffs can get walked back. For example, the steel and aluminum tariffs that freaked out the market a few weeks ago. Trump has since “temporarily” exempted: The European Union, Canada, Mexico, Brazil, Australia, New Zealand and South Korea. These countries actually are responsible for 2/3 of all US steel imports while China represents just 2%.
In early March, China’s Supreme Court vowed to strengthen China’s protection of intellectual property rights, something that Chinese tech firms have been calling for. This means that the trigger for these tariffs might already be fading. It also means that both China and the US have a relatively easy way out, in which no one loses face, because each side can claim some kind of victory.
What The Fed Did To Potentially Spook The Markets
The other potential partial factor for this week’s sharp drop is the Federal Reserve’s March meeting in which it hiked the Federal Funds rate by 25 basis points to 1.5% to 1.75%. This was already priced in by the bond market and was a surprise to no one. The Fed said that, “The economic outlook has strengthened in recent months” and boosted its economic growth forecasts:
- 2018: 2.7% (from 2.5%)
- 2019: 2.4% (from 2.1%)
- 2020: 2.0% (from 1.8%)
- Long-Term: 1.8% – unchanged
The Fed also updated its core PCE projections:
- 2018: 1.9%
- 2019: 2.1%
- 2020: 2.1%
Meanwhile the Fed’s new unemployment forecast is:
- 2018: 3.8%
- 2019: 3.6%
- 2020: 3.6%
Now none of these upgraded projections are significant, since they basically mean the Fed is just more bullish on the economy. But what potentially concerned the market is the Fed’s slightly more hawkish stance on interest rates.
(Source: CME Group)
Basically, this revised plan from the Fed calls for:
- 2018: two more hikes (same as before)
- 2019: three hikes (same as before)
- 2020: two hikes (one more than before)
The Fed basically expects to raise its Fed Fund rate, which is the overnight interbank lending rate, to 3.5% by the end of 2020. Of course, that’s assuming the US economy keeps growing as quickly as predicted.
3.5% is still far below the historical norm (4% to 6%), so why should that have concerned investors? Simply put because it indicates that the Fed might end up triggering a recession.
Yes You Should Fear An Inverted Yield Curve…
While the Fed Funds rate has no direct link to the bond markets that actually control US corporate borrowing costs, most US banks do benchmark their prime rate off it. The prime rate is how much they charge their most creditworthy and favored clients.
The prime rate has now been raised to 4.75%. The prime lending rate is what most non mortgage consumer loans are benchmarked off. So this means that US consumer borrowing costs are rising, and could rise another 1.75% by the end of 2020. That could certainly slow the pace of consumer borrowing, and potentially increase the US savings rate. While a good thing in the long term, it would potentially cause consumer spending to slow. Since 65% to 70% of US GDP is driven by consumer spending that might in turn slow US economic growth and, more importantly to Wall Street, corporate profit growth.
But here is the real reason that investors should worry about the Fed Funds rate potentially rising another 1.75%. Because under current economic conditions, it would almost certainly cause a recession. That’s based on the single best recession predictor we have, the yield curve. This is the difference between short-term and long-term treasury rates.
The yield curve is 5/5 in predicting the last five recessions. If the curve gets inverted, meaning short-term rates rise above long-term rates, a recession follows relatively soon (usually within one to two years).
Why is this? Two reasons. First, if short-term rates are equal to or above long-term rates, the bond market is signaling that it expects little economic growth and inflation ahead.
More fundamentally, it’s because financial institutions borrow short term to lend long term, at a higher interest. This net margin spread is what creates lending profits and is why loans get made in the first place. So if short-term borrowing rates rise higher than long-term rates, it can decrease the profitability of lending, and result in fewer loans. Thus, consumer spending can fall, businesses invest less, and the economy slides into a recession.
And while the Fed Funds Rate has no direct link to the interest rates that companies care about (long-term rates that benchmark corporate bond rates), studies show that the short-term treasury bonds track closely with the Fed Funds Rate. But long-term rates, such as the 10-year Treasury yield, do not, as they are set by the bond market based mostly on long-term inflation expectations.
This is why the market freaked out over January’s labor report that showed wages rising 2.9%. The fear is that if the labor market is too hot, then rising wages trigger faster inflation which forces the Fed to hike rates high enough to trigger a yield curve inversion. This is what occurred before the last three recessions.
Basically, this means that if the Fed were to proceed with its revised rate hike schedule, then short-term rates would likely rise by 1.75% or so. Long-term rates, on the other hand, are set by inflation expectations and the 10-year yield of 2.83% is currently pricing in 2.1% inflation.
(Source: Bureau Of Economic Analysis)
However, inflation has been stuck at 1.5% for the last four months, and so far shows no signs of rising to those long-term expectations. Which means that 10-year yields are not likely to rise 1.75% by 2020, in line with rising short-term rates.
That in effect indicates that seven rate hikes would almost certainly invert the yield curve, heralding the next recession. The good news? The Fed isn’t likely to keep hiking if inflation remains low and threatens to invert the yield curve.
…But The Fed Isn’t Likely To Invert The Curve
So if the Fed’s current forecast calls for low inflation, but enough rate hikes to likely trigger a yield curve inversion and possible recession, why am I not freaking out? Two main reasons. First, Jerome Powell, the new Fed Chairman, is not an economist, but a veteran of Wall Street. Over his career, he’s been:
- Managing director for Bankers Trust – a US bank
- Partner at The Carlyle Group – a private equity firm
- Founded Severn Capital – a private equity fund specializing in industrial investments
- Managing partner for the Global Environment Fund – a private equity fund specializing in renewable power
Here is why this matters. Economists are big fans of economic models, such as the Phillips Curve. This says that as unemployment falls below a certain, (full employment), wages and thus inflation, must rise.
Powell has indicated that he’s willing to go where the data takes him, and not just assume the models are correct. In other words, Powell doesn’t buy into the fears of the Fed’s more hawkish members.
In fact, take a look at what he said during the last Fed post meeting press conference:
“There is no sense in the data that we are on the cusp of an acceleration of inflation. We have seen moderate increases in wages and price inflation, and we seem to be seeing more of that… The theory would be if you get below the sustainable rate of unemployment for a sustained period, you would see an acceleration of inflation. We are very alert to it. But it’s not something we observe at the present… We will know that the labor market is getting tight when we see a more meaningful upward move in wages… Wages should reflect inflation plus productivity increases … so these low wage increases do make sense in a certain sense… That is a sign of improvement (rising labor participation rate), given that the aging of our population is putting downward pressure on the participation rate… It’s true that yield curves have tended to predict recessions … a lot of that was when inflation was allowed to get out of control.” -Jerome Powell
What we see in these quotes is a man who understands finance and understands that the world is more complex than simplified models would indicate. He seems to realize that we are NOT at full employment. So until wages start rising there is no reason to assume we are and that inflation is about to accelerate to dangerous levels.
Powell has also indicated that he expects tax cuts to fuel more investment, boosting productivity, which would allow wages to rise without triggering higher inflation. This is something that I expect as well and the key reason that I’m personally so bullish on the economy, and expect the current expansion to continue for many years.
The bottom line is that Powell seems to be a man who will, for the sake of expectations, make a forecast. But he seems more than willing to ultimately alter monetary policy as the economic data indicates is necessary, not raising rates just because the Phillips Curve says to.
And as a former Wall Street banker who is well aware of the yield curve and its importance, I don’t consider it likely that he’ll blindly keep hiking rates based on a plan from a few years ago. When the facts change, Jerome Powell changes his mind.
Which brings me to the biggest reason to shake off and ignore this last terrible week in the stock market.
US Economic Fundamentals Remain Strong And That’s All That Matters
The stock market may be a forward looking instrument, but it’s also prone to fits of violent pessimism whenever anything bad happens. The market often takes a worst case scenario like “sell first, ask questions later” approach.
Trump announces tariffs? It MUST mean we’re headed for a full blown global trade war that will trigger massive inflation, a shrinking economy, and a bear market! Sell everything!
The truth is that while sometimes the worst case scenario happens (such as the Financial Crisis), 99% of the time negative effects of anything are not as bad as people fear. Or to put another way very seldom is it true that “this time is different.”
So let’s take a page of out Jerome Powell’s playbook and look at the data. I’ve already covered why the last jobs report was darn near perfect.
Meanwhile, the risk of a recession is the lowest I’ve seen since I discovered Jeff Miller’s excellent weekly economic report 18 months ago.
(Source: Jeff Miller)
Specifically, according to a collection of meta analyses of leading indicators and economic reports, the four- and nine-month recession risk is 0.39% and 15%, respectively. Of course, these can and do change over time as new data comes in. But the point is that based on the most recent evidence there is no reason to fear a recession.
Finally, the New York Fed’s Nowcast (real time GDP growth estimator) is saying that Q1 and Q2 GDP growth is likely to come in at 2.9%, and 3.0%, respectively.
Now that also changes with economic reports as they come in, but if true then this is how US economic growth is trending:
- 2016: 1.5%
- 2017: 2.3%
- Q1 2018: 2.9%
- Q2 2018: 3.0%
Does this portend doom and gloom for the economy, labor market, or corporate earnings growth? No it does not.
I’m not saying stick your head in the sand and ignore all risks. But rather than freak out over POTENTIAL worst case scenarios to the economy we focus on the facts as best we know them. Right now those facts are:
- low and stable inflation
- strong job market but not at full employment (otherwise wages would be rising)
- accelerating economic growth
- strong and accelerating corporate profits
- stock market trading sideways = valuation multiples falling = less risk of a bubble and crash
Bottom Line: Markets Are Driven By Short-Term Emotions, Your Portfolio Decisions Shouldn’t Be
Don’t get me wrong a full blown trade war with China would be a terrible thing. It would undoubtedly significantly increase inflation, slow the economy, and potentially force the Fed to raise rates to dangerous levels. These are things that could certainly trigger a bear market or even a recession.
However while all those risks are real, the probability of such a worst case scenario remains remote and speculative. What we do know for sure is what the economic data shows. Which is that the fundamentals underpinning the current economic expansion and bull market remain strong. More importantly, in an economy this large, it would take a large and protracted negative shock to derail those fundamentals and trigger the kind of market crash that many now fear is imminent.
That doesn’t mean that you shouldn’t protect yourself. I myself am continuing to de-risk my high-yield retirement portfolio with a strong focus on quality, undervalued, low volatility, and defensive stocks. But my point is that I’ve been doing that for several months now, back when the market was still roaring higher, and before fears of a trade war surfaced. That’s because I believe in building a bunker while the sun is shining so you never have to fear any market storm.
My recommendation to investors remains the same. Stay calm, focus on your long-term strategy, and don’t let the market’s knee-jerk reactions to likely overblown speculative fears cause you to make costly short-term mistakes.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
HONG KONG (Reuters) – China’s Tencent Holdings Ltd (0700.HK) saw its shares down 4.51 percent at the midday trading break on Friday after the internet firm’s largest shareholder, Naspers Ltd (NPNJn.J), said it would lower its stake for the first time in 17 years.
The Hong Kong-listed stock opened 7.8 percent lower at HK$ 405, its lowest opening price since Feb. 9, before regaining ground to HK$ 419.6 by noon. The benchmark Hang Seng Index .HSI was down 2.81 percent.
A day earlier, the stock fell 5 percent following Tencent’s late Wednesday report showing quarterly revenue missed estimates as well as expectations of margin pressure, although profit beat forecasts.
Friday’s decline wiped $ 24 billion (17 billion pounds) off Tencent’s market value, though at $ 508 billion, it is still Asia’s most valuable listed company and fifth globally behind Apple Inc (AAPL.O), Alphabet Inc (GOOGL.O), Amazon.com Inc (AMZN.O) and Microsoft Corp (MSFT.O).
South African media and e-commerce group Naspers said on Thursday it planned to sell up to 190 million Tencent shares, or 2 percent of its holding, in a sale that could earn Naspers up to $ 11 billion. It also said it had no plans to further reduce its holding for the next three years.
“The funds will reinforce Naspers’ balance sheet and be invested in classifieds, online food delivery and fintech globally,” said CICC analyst Natalie Wu. “We think it is a good opportunity to buy into dips given Tencent’s solid fundamentals.”
Jefferies analyst Karen Chan said, “Given Naspers’ largest single shareholding and board representation in Tencent, we believe its stake sale is unlikely to be a reaction to Tencent’s quarterly results. Instead of a timed profit-taking move, we believe this is more to improve Naspers’ own free cash flow and allow it higher flexibility in pursuing investment opportunities.”
A Tencent spokeswoman said it was informed and supportive of Naspers’ decision, and that Naspers’ intention to keep its remaining stake for the next three years demonstrated its confidence in Tencent.
Reporting by Sijia Jiang and Donny Kwok; Editing by Paul Tait and Christopher Cushing
There’s always a story. There’s always at least two sides to every story, depending upon whom you ask. Here’s mine.
My 2017 Story And What I Learned
While others fretted in the beginning of 2017 that the market had peaked and was ripe for a deeper correction, I maintained my focus. Leaving the market in the beginning of 2017 would have cost an investor 20% of gains in that year and about 8 percent in the New Year before the recent correction.
Corrections market-wide and company specific continued to bring opportunities for income investors to enhance their income with higher dividend yields.
Since I’m an income investor, I’m always on the look-out for these types of opportunities. Though I strongly adhere to the notion that time in the market is crucial and necessary to see the fruits of a compounding dividend investment strategy blossom, I also adhere to the large benefits that can accrue to the income investor if a dollop of timing the market is layered on top.
Developing And Refining An Income Investing Strategy
My laser-focused strategy of buying temporarily depressed stock prices on investor panic has served me and my subscribers to “Retire 1 Dividend At A Time” well the past two years. Since the bottom of the financial crisis, which occurred on March 9, 2009, I have honed and refined the strategies I use to build, grow and protect income for retirement.
An important refinement to the strategy has been to rinse and repeat it as often as possible and as often as accumulated dividends become available for reinvestment. Though I think employing a DRIP strategy can be quite effective for less active investors, or those that don’t want to monitor their portfolios on an ongoing basis, I believe that accumulating dividends as they hit the brokerage account lets us take advantage, in a much more effective manner. This is especially true when panicked investors wish to dump perfectly good stock and sell it to us at undervalued prices, which happened two weeks ago when the market experienced a 10% correction.
Whenever this occurs, prices fall and yields will rise. It works the same way in the bond market. It is this simple mathematical relationship that gives rise to the extraordinarily higher yield and dividend dollar totals we are able to put up on the board.
Accumulation Of Dry Powder
Some detractors would criticize this approach to dividend accumulation. It is their contention that money should be put to work at all times so it can always generate income for us. They’ll throw all sheets to the wind and reinvest dividends no matter how high a price they pay.
It is my considered belief that holding some amount of accumulated dividends in cash allows us the choice to decide when to invest it, when it can get us the biggest bang for the buck. In this sense, we have often experienced that patience pays.
Staying 10% to 20% in cash most times allows for the deployment of cash when it can get us that biggest bang for the buck.
Dealing With Risk In The Market
In an effort to assuage the fears of readers, followers and subscribers, I counsel them to keep approximately three years of cash or cash equivalents in reserve. This allows the investor to realize that even if a large correction or crash occurs, just at the time they might want to begin drawing down funds for retirement spending, no stocks need to be sold to accomplish this goal. At such times, the cash hoard can be relied upon to pay the bills. This strategy will allow plenty of time for stock prices on high quality companies to rebound and reinvigorate the investor’s courage. The average large correction lasts about eighteen months.
Average length of Corrections
So, keeping a cash cushion that will last twice as long can only bring more comfort and keep the investor from selling in a panic, depriving themselves of the income that that stock created in the first place.
A decent cash pile can go a long way towards holding the investor’s hand and walk them calmly through any correction, even one as big as the one we experienced as recently as the Great Recession and financial crisis of 2008-2009.
Preparing For 2018
Preparation for 2018 revolves around the theme that interest rates are most certain to continue to rise in an increasingly strong economy, one that is gathering steam and will get an extra boost from a large tax cut for corporations. Buying those companies bound to benefit more from a huge tax cut will give greater certainty to the overall outcome of an investment in the year to come.
Companies with large net operating loss carry forwards will benefit less than companies who don’t have them. Citigroup (C), for instance, currently has $ 16 to $ 20 billion of these NLCs. With the corporate tax rate reduced from 35% to just 21%, Citigroup will save that much less on their tax bill and operating income will suffer.
Here’s an example to help illustrate:
A $ 10,000.00 loss at a 35% tax rate can save $ 3500 on a company’s tax bill. But at 21%, a $ 10,000 loss will be worth just $ 2100 in tax savings. This will necessarily negatively impact a company’s bottom line.
Net Deferred Tax Assets
Companies with net deferred tax assets – those with significant net operating loss carry forwards (NOLs) or those with substantial deductions taken for tax before book (e.g., litigation expenses, loan loss accruals, etc.) – will see the value of those net deferred tax assets decline. Very simply, a $ 1,000 NOL is worth $ 350 under the current tax law’s 35% corporate rate, but would only be worth $ 210 with the new corporate rate cut to 21%.
As discussed earlier, Citigroup has said that such a change would cost it $ 16-17 billion. As a consequence, some corporations were exploring how they might accelerate earnings more quickly into 2017 so as to apply those NOLs under the current higher tax regime while they are worth more. Using these NOLs would lower a company’s taxable income for 2017 and, by reducing current tax due, increase its cash.
In contrast, firms with a net deferred tax liability stand to benefit from the new lower 21% rate.
The banking theme offers opportunity in two distinct areas. The first is represented by the hunt for financial firms that have low NOL carry forwards and stand to benefit more than their high NOL carry forward competitors.
Additional Opportunity in 2018
Additional opportunity comes with the realization that with a Fed rate rise already promulgated at the December, 2017 FOMC meeting, and two or three additional hikes coming down the pike in 2018, the financials stand to gain from a widening of the spread. They’ll be able to still borrow at competitively low rates if their balance sheets are strong while at the same time being able to charge more for the loans they make and the auto loans, home equity loans and credit card fees they charge to consumers.
The sweet spot will be finding those banks that stand to gain from both phenomenon. The regional banks, like Regions Financial (RF), or BB&T Corporation (BBT) doing all their business domestically, would appear to represent a good starting place to explore these possibilities.
Best Ideas For 2018: What’s The Story?
I recently wrote, “Shopping At Tanger Outlets Bought Us A Bargain” to emphasize the benefits of contrarian investing. Along with other REITs and mall REITs in particular, this company lost around 40% of its market value as millions of investors decided, wrongly I think, that brick and mortar was dying. I strongly believe that news of the death of brick and mortar has been greatly exaggerated, and Tanger Outlets (SKT) serves a high-end niche market that will do well.
It is well for investors to realize that, though online retailing continues to grow by leaps and bounds, it still accounts for only about 15% of all shopping. It’s also wise to remember that consumer spending accounts for 70% of U.S. GDP.
Just a few weeks ago, we recommended purchase of SKT to our subscribers at $ 22.67. As I write this, it is changing hands at $ 25.26. This 11.4% gain in so short a time illustrates the capital appreciation that can be captured by going against the grain and executing on a solid idea with a high-quality company.
We obtained a high yield of 6.04% for our subscribers. Today’s buyer must settle for a much lower 5.4%. Because there’s always a sale somewhere in the market, this type of market timing can be employed multiple times throughout the year in any number of names.
After the suits are finished litigating the lawsuit with the Department of Justice, if AT&T prevails, they’ll be able to handle the additional debt to do the deal. If the DOJ prevails, AT&T will simply move on to another friendly target that will aid in its adaptation to the future. Investors worried about the debt load will breathe easier and have new justification to buy the stock again, pushing its price ever higher. Author Michael Wolff wrote a best-selling book about the goings-on at the White House. He contends that numerous high-level White House advisors and staffers have said, “No way, this deal is not going to be approved”. Take that for what it’s worth.
In the meantime, we recommended AT&T to subscribers and followers in recent posts, at $ 32.60 per share. We guided readers and subscribers to a solid 6.01% yield on a stalwart that normally yields closer to 5.00%.
As I write this, AT&T is currently trading for $ 39.19, just weeks after our purchase. Today’s income investor will have to settle for a dividend yield of just 5.10% as it reverts to that 5% mean just discussed. Again, this compares to the hefty yield we received of 6.01%. Once T raised its annual dividend to $ 2.00 a few weeks later, our yield on cost rose to 6.13%.
For those capital gainers out there, we’ve also scored capital appreciation of 20.2% on this new position.
Time In The Market Vs. Timing The Market
Income investors often say that “time in the market is more beneficial than timing the market”. Because I’m a long-term investor, I subscribe to the first part of that statement. Because I’m also an opportunistic investor, I can also enhance my dividend stream by adhering to the second part as well. There is always a sale in the stock market, somewhere. You just need to know where to look for it.
Got A Pension?
Today, only 24% of workers are covered by traditional, defined benefit pensions at work. The rest of us must fend for ourselves. Big corporations who used to provide pensions now save enormous sums by no longer offering them. Instead, the other 76% have been encouraged to find ways to fill the gap between the meager amounts we’ll receive from Social Security and the actual spending needs we’ll all have in retirement. This was the genesis of the Fill-The-Gap Portfolio.
The Fill-The-Gap Portfolio
The FTG Portfolio contains a good helping of dividend growth stocks, like AT&T. It was built with the express purpose of benefiting from this and other strategies.
Three years ago, I began writing a series of articles on December 24, 2014, to demonstrate the real-life construction and management of a portfolio dedicated to growing income to close a yawning gap that so many millions of seniors and near-retirees face today between their Social Security benefit and retirement expenses.
The beginning article was entitled, “This Is Not Your Father’s Retirement Plan.” This project began with $ 411,600 in capital that was deployed in such a way that each of the portfolio constituents yielded approximately equal amounts of yearly income.
The FTG Portfolio Constituents
Constructed beginning on 12/24/14, this portfolio now consists of 22 companies, including AT&T Inc (T)., Altria Group, Inc. (MO), Consolidated Edison, Inc. (ED), Verizon Communications (NYSE:VZ), CenturyLink, Inc. (NYSE:CTL), Main Street Capital (MAIN), Ares Capital (ARCC), British American Tobacco (BTI), Vector Group Ltd. (VGR), EPR Properties (EPR), Realty Income Corporation (O), Sun Communities, Inc. (SUI), Omega Healthcare Investors (OHI), W.P. Carey, Inc. (WPC), Government Properties Income Trust (GOV), The GEO Group (GEO), The RMR Group (RMR), Southern Company (SO), Chatham Lodging Trust (CLDT), DineEquity (DIN), and Iron Mountain, Inc. (IRM) and Kimco Realty Corp (KIM).
Because we bought most of these equities at cheaper prices since the inception of the portfolio and because most of our stocks have increased their dividends regularly, the yield on cost that we have achieved is 7.67% since launch on December 24, 2014. Current portfolio income, including recent dividend raises by AT&T and Realty Income, and our newest addition of AT&T shares, now totals $ 33,323.86, which is $ 2142.00 more annual income than the previous month. This represents a 6.5% annual income increase for the portfolio.
When added to the average couple’s Social Security benefit of $ 32,848.08, this $ 33,323.86 of additional supplemental income brings this couple annual income of $ 66,171.94. We note that the dividend income on this portfolio has now surpassed the amount coming from the Social Security benefit. This far surpasses the original goal set to achieve a total of $ 50,000.00, which is accepted as a fairly comfortable retirement income in many parts of the country. That being said, this average couple now has the means to splurge now and then on vacation travel, dinners out, travel to see the kids and grandkids and whatever else they deem interesting.
Taken all together, this is how the FTG Portfolio generates its annual income.
FTG Annual Dividend Income
Insert FTG 2018 Annual Dividend Income pic, here:
Chart source: the author
As discussed in “Even A Cloudy Crystal Ball Comes Into Focus Twice A Year”, paying too much attention to the everyday price swings, even with stodgy stalwarts like AT&T can drive investors to drink. But for those investors willing to be more proactive in their investing, there is a lot to be said for putting favored stocks on a watch list and exercising the patience to wait, and then pounce when others have thrown the stock out with the bathwater.
My aim was to demonstrate that great capital gains and enormous growth of portfolio income can be accomplished if an investor is willing to spice up his portfolio with a dash of market timing, now and then. AT&T’s yield, shooting up from its usual 5% range to 6.01% was something we could not ignore. We could not stand by passively and look that gift horse in the mouth. We acted, for ourselves, our readers who follow me, and subscribers.
With the ten-year Treasury rate convincingly smashing through a 2.2%-2.5% range that has held for quite some time, now is a good time for investors to sharpen their pencils and get their orders set up. Rising yields, as evidenced by the ten year Treasury bond ticking up to 2.95% last week, are already bringing down the prices of favored REIT investments for retirees who seek income. With each tick down in price, yields rise. It’ll be time soon to enter limit orders to grab some accidentally high yield once again and buttress our portfolios with additional income.
We all have mistakes we’ve made that we can learn from. The key is having the courage to look back upon them, learn from them, and then act upon the information learned.
In regard to our recent successful AT&T trade, we have been reminded, once again, “If AT&T trades down to a point where it yields 6%, I will buy it, I can buy it, and I did buy it”.
I continue to learn lessons, have tried to apply them and I try to share them with you.
Your Engagement Is Appreciated
As always, I look forward to your comments, discussion, and questions. Do you use DRIP investing? Have you occasionally employed market timing? What has been your experience and have you found it worthwhile towards your ultimate goal of growing income for retirement? Please let me know in the comment section how you approach these situations in your own portfolio and how you arrive at your decisions.
Author’s note: Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, you will find them here.
If you’d like to receive immediate notification as soon as I write new content, simply click the orange “follow” button at the top of this article next to my picture or at the bottom of the article, then click “Real time alerts.”
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
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Disclosure: I am/we are long ALL FILL-THE-GAP PORTFOLIO STOCKS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
BEIJING/SHANGHAI (Reuters) – Apple Inc will accept Chinese mobile payment app Alipay in its local stores, boosting its ties with giant e-commerce firm Alibaba Group Holding Ltd amid a push by the iPhone maker to revive growth in the world’s No.2 economy.
The tie-up will make Alipay, run by Alibaba affiliate Ant Financial, the first third-party mobile payment system to be accepted at any physical Apple store worldwide, Ant Financial said in a statement on Wednesday. Apple’s own payment system has had a lukewarm reception in China.
The Cupertino-based firm will accept Alipay payment across its 41 brick-and-mortar retail stores in China, said Ant Financial, which was valued at $ 60 billion in 2016.
Apple, whose China website, iTunes store and App Store have been accepting Alipay for more than a year, did not immediately respond to requests for comment.
The deal comes as Apple is doubling down on the market and looking to strengthen ties with local Chinese partners and government bodies. The firm’s CEO Tim Cook has made regular recent visits to the country.
Apple is also shifting user data to China-based servers later this month to meet local rules and last year removed dozens of local and foreign VPN apps from its Chinese app store.
Alipay is China’s top mobile payment platform, but faces stiff competition from rival internet giant Tencent Holdings Ltd’s payment system that is embedded within its hugely-popular chat app WeChat.
China’s official Xinhua news agency said late on Tuesday that Apple would build its second data center in China in Inner Mongolia Autonomous Region after it set up a data center in the southern province of Guizhou last year.
Reporting by Pei Li in BEIJNG and Adam Jourdan in SHANGHAI; Editing by Himani Sarkar