Lloyds Banking Group (LYG) and Royal Bank of Scotland(RBS) are two of the top five banks based in the U.K. Both these banks used to have solid dividend yields and performed well up until the credit crisis of 2008-09 hit. In order to prevent the banks from collapsing due to heavy losses the British government stepped in and bailed these “Too-Big-To-Fail” banks. Even though many years have passed since the rescue these two banks have yet to return to profitability. Royal Bank of Scotland has been the worst performed compared to Lloyds Bank.
Here is a five-year chart showing the performance of the two banks against FTSE 100:
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Source: Yahoo Finance
Lloyds Bank is up about 20% so far this year based on positive developments such as increasing lending and expectations to post a profit this year. It should be noted however that the bank is 39% owned by the British government. Since the share price has increased and is getting closer to the price paid at the time of bailout, the state may dump its stake at any time. Hence investors need not get too excited about buying shares at the current levels. Llyods has also not reinstated its suspended dividend payments since it hasn’t earned a profit and has not repaid the state.
Founded in 1727, Edinburgh-based Royal Bank of Scotland(RBS) seems to have lost its conservative roots during the bubble years.Currently the state owns 81% of the bank. On Friday the ADR closed at $10.33. But that price is a bit misleading since the company implemented a reverse split in the ratio of 1:20 in late 2008. The stock has fallen heavily from around $16.00 after the split to the current price. RBS also has not paid a dividend since 2009.
Disclosure: Long LYG
The elevator industry is highly concentrated with just four companies accounting for two-thirds of the global market. The these companies are:
- Otis, part of United Technologies of the USA
- Kone of Finland
- ThyssenKrupp, part of the conglomerate by the same name of Germany
- Schindler of Switzerland
Some of these firms can be considered as the world’s top “least popular” transportation companies. They can be considered as least popular since not many people think of elevator makers as transportation companies. However in reality they offer a form of transportation that is simply vertical or horizontal in a fixed location such as a high rise building or an airport or a mall. These companies offer a service that is so important yet mostly under appreciated by people. For example, Schindler moves 1 billion people per day according to their site. To put this figure in perspective, the total world population now is about 7.86 billion.
From an investment point of view, elevator makers are attractive for long-term investment since they operate in a highly specialized industry and have high profit margins.
From an article titled The lift business - Top floor, please in The Economist earlier this year:
People live more vertically than ever before. An estimated 70m the world over—more than the entire population of Britain—move to cities every year. Many live in blocks of flats or work in high-rise offices. Nearly all use escalators (which the big four also make) from time to time. Few can be bothered to take the stairs.
Jürgen Tinggren, Schindler’s boss, talks of a “second planet” of new consumers who are discovering the elation of elevation. Global demand for new lifts has gone from 300,000 a decade ago to nearly 700,000 this year. China, where two-thirds of new units are installed, accounts for much of the rise. Annual revenues are climbing steadily: the Freedonia Group, a consultancy, thinks they will have doubled to $90 billion in the decade to 2015.
The secret to the industry’s whopping margins, however, is maintenance. People hate getting stuck in lifts. So they pay $2,000-5,000 a year to keep each one running smoothly. Since 11m machines are already in operation, many needing only a quick look-over and a dollop of grease every few months, this is a nice business. Margins are 25-35%, compared with 10% for new equipment. Revenue from maintenance is far more stable than that from installations, which are affected by the ups and downs of the economy.
Here is a brief overview of the top elevator companies:
1. Based in Connecticut, U.S. Otis is one of the six units of United Technologies Corporation (UTC), a major defense and aerospace giant. Last year United Technologies’ s total revenue was about $59.7 billion. Currently the stock has a 2.20% dividend yield.
2. Kone trades on the OTC market under the ticker KNYJY. The company has a market capitalization of about $18.0 billion and the current dividend yield is 2.75%. The stock is rarely traded on the OTC market.
3. The German conglomerate ThyssenKrupp AG trades under the ticker TYEKF on the OTC market. It is one of the world’s largest steel producers.
4. Based in Ebikon, Switzerland, Schindler shares on the SIX Swiss Exchange.On Friday it closed at CHF 137.10 per share. In the past year the stock is up by over 25%. The Schindler and Bonnard families control 70.1% of the voting rights of the share capital. Schindler Holding AG is highly illiquid on the OTC market with the ticker SHLAF.
Note: Dividend yields noted are as of May 17, 2013. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.
Disclosure: No Positions
Inequality rising in wake of crisis (OECD Insights)
Why austerity may be wrecking the recovery (Maclean’s)
The U.S. crude production is estimated to reach 7.4 million bbl/d this year and 8.2 million bbl/d in 2014 according to EIA. However gasoline consumption alone is projected to be 8.68 million barrels per day. When other products of crude oil such as jet fuel are added the daily consumption far exceeds production making the country a net importer of oil.
However in the past few years, production of oil from Shale rock has increased dramatically. Today U.S. Shale oil production accounts for a significant portion of the total U.S. oil production and even impacts the global oil output.
From a recent report on Shale oil industry in AXA Investment Managers:
The scale and pace of the development are already big enough to modify parts of the US economy. It channelled US$133.7bn worth of investments between 2008 and 2012,1 and hundreds of thousands of jobs in North Dakota and Texas. The result is an unprecedented push in crude oil production, reaching almost 2mbpd (million barrel per day) according to the latest data (Exhibit 2). According to EIA’s central scenario, US shale gas should culminate around 3mbpd by 2020, bringing total US oil output to 8mbpd (10mbpd according to the most bullish estimates, e.g. by BP). Today, US shale oil already represents a very significant 2.2% of global oil output.
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Whether this surge will continue, fall off or even accelerate remains however an open question.
iPath S&P GSCI Crude Oil TR Index ETN (OIL)
Disclosure: No Positions
US becoming energy kingpin (The Hindu Business Line)
“Sell in May and go away” is one of the popular Wall Street strategies. According to this concept, an investors is better-off selling his or her stock holdings in the month of May and then buying back in late in November. When trading volumes are traditionally low during the hot summer months as traders and fund managers head off to the beaches or the golf courses stocks tend to languish go nowhere. In theory, following this strategy an investors can avoid the travails of the direction-less markets. However the strategy has both supporters and haters.
From a 2012 article debunking this theory:
Larry Swedroe, head of research at Buckingham Asset Management, ran the numbers a few years ago using 30-day Treasurys during the off months, and says the strategy is bunk.
He looked at returns through 2007 from six start dates since 1950. “Sell in May” beat “buy and hold” if you started investing in 1960, 1970 and 2000, but not if you started in 1950, 1980 or 1990.
“It’s pure randomness,” Swedroe says. “How would you ever know when to start?”
Then there is the problem with using averages to say anything meaningful about stocks. If you know the average temperature for a month stretching back decades, you can pretty much guess how hot or cold that month will be this year.
But that’s not true with stocks. They move too widely above and below their averages in most years, and in most subsets of years, for those numbers to be used to predict where they’re heading.
Ken Fisher of money manager Fisher Investments says “Sell in May” is “garbage” precisely for this reason. He gives the example of September, which has dropped an average 0.72 percent since 1926. But the month has had many big up and down moves over 85 years. He says if you remove just two of the worst Septembers, stocks break even for the month.
“The average is made up of extremes,” says Fisher, who devotes a chapter skewering “Sell in May” in “Debunkery,” his book on investing myths. “If you steer by averages, you’re going to get thrown off.”
Source: Why ‘Sell In May’ Doesn’t Work, Huffington Post
However a recent chart post in Canada’s Maclean’s magazine shows that the strategy does work based on investment returns in the Dow Jones Industrials Average:
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Source: ‘Sell in May then go away.’ It really works, Maclean’s
While traders may follow this concept most investors can ignore it. It would be foolish for an investor to liquidate the entire portfolio in May and then buy back the same stocks later. Some of the issues that such investors should be aware of include taxes on any capital gains realized, losing out on dividends when stocks are not held, losing the “Qualified” dividends status, trading costs, etc.
The answer to my title question is “Sell in May and go away” may work for traders but not investors. This is especially true for long-term investors who are not swayed by the short-term gyrations of the market.
- SPDR S&P 500 ETF (SPY)
- SPDR S&P Dividend ETF (SDY)
- Vanguard Mid-Cap ETF (VO)
- iShares S&P MidCap 400 Index Fund (IJH)
Disclosure: No Positions
Last December I wrote an article about the countries that are vulnerable due to a slowdown in the Chinese economy. The latest edition of Bloomberg BusinessWeek has a short article discussing the same topic:
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Source: Bloomberg BusinessWeek
It is interesting that the tiny city state of Singapore appears in the above list. Though the country does not any natural resources that China needs, it is a major manufacturing center for electronic goods. It is also a main trading hub due its port and location.