The Trump Campaign Struggles with the Real America

Poor, poor Trump. As successful as he may have been in the business world, he’s clearly out of his league when it comes to Washington. Try as he might, he’ll never be as polished, his record never as scrubbed, his views never as focus-group tested as it takes to win a major election. He’ll fail to cut the back room deals that build support within his own party, fail to carefully cultivate the media that so expertly shapes public opinion, nor will he promise the favors of access sought by powerful special interest donors. 

His campaign will struggle with finances, raising only $94 million by July 1, 2016, versus the $386 million raised by his Democratic opponent. A pathetic $5 million of his funding will come from Super-PACs, compared with the $121 million raised by Hillary Clinton. He won’t get the $1 million donations given each by JP Morgan, Citigroup, Goldman Sachs and Morgan Stanley to Clinton, nor the $1.2 million given by the taxpayer-funded institution, the University of California (note, Obama’s former head of Homeland Security, Janet Napolitano, is now the President of UC). His paltry $2,000 in funding from the hedge fund industry will be dwarfed by the $25 million received by Ms. Clinton’s campaign. He’ll lack the two-faced, deceptive, partisan skills of successful members of the US Congress, a body that now enjoys an approval rating by the American people of just 11%.

In the end, he’ll likely be returned by the electorate to his role as real estate developer, never to amass the 400% gain in personal wealth of Barack Obama during his tenure in the White House, nor the $111 million fortune built by the Clintons through their public service. Washington will go on as it has, an ever escalating arms race of special interest donations, with never a serious effort at campaign reform. We’ll fail to meaningfully attack the federal deficit, perhaps allowing the US national debt to double once again, as it has over the past eight years. We’ll fail to fix social security, disability insurance and medicare, leaving a ticking time bomb at the doorstep of an aging population. We’ll continue to shift the ever-increasing burden of health care costs to middle and upper-middle income consumers, compromising the quality of their health care while devastating disposable incomes. We’ll become even more polarized in our wealth as a society, as we have undeniably become over the past eight years. All the while, Congress’ day to day activities will stall in senseless, immature partisan bickering to form, what President Obama so aptly characterized in 2014 as, “the least productive Congress in modern history.” And, we the American people will be left wondering, is this really all we can expect from government?

No one can defend Trump. All the same, it would be interesting to see someone who thumbs their nose at both the Republican and Democratic parties stumble their way into the White House. Paul Ryan would suffer irritable bowel syndrome for four years. But here's the real concern: a binary political system we Americans have somehow come to accept. If it it's not this, then it's that. If you're not a liberal, then you're a tee-bagger. If you oppose illegal immigration, then you're a racist (by the way, notice the word "illegal" in that sentence). We demonize the opposition. And it's all designed to foster the interests of the two parities who only fein attention to what benefits our country when focus groups show voter support. Once that nonsense is out of the way, the politicians can return to the actual business of government, addressing the concerns of special interests and Super-PACs. Sorry Mr. Trump, but we live in a post-democratic technocracy, where the parties only exist to perpetuate their incumbency.

Understanding Dividend Yields

The search for high dividend yielding stocks continues as investors seek alternatives to the abysmal yields on fixed income securities. A stock yielding 3% in the context of a US Treasury 10-year yield of 1.55%, definitely looks attractive. Well, maybe.

Dividend yield is the projected annual dividend per share of a particular stock, divided by the price. So if General Motors, for instance, is paying an annual dividend of $1.52 per share and the stock is trading at $32, the dividend yield is 4.75%. Far better than the 10 year Treasury.

But there are three important points to remember for those investors buying high dividend yielding stocks. The first consideration is that dividends are declared each quarter by the board of directors and, therefore, can be cut or suspended at any time. We've all seen this happen to stocks like Conocophillips (COP) that announce a dividend cut earlier this year. After entering 2016 with a dividend rate of $0.95, the company cut its dividend in Q2 to $0.79, and in Q3 to $0.49.  The stock now trades at $41, fully 25% off its recent November 2015 high of $55.  Meanwhile, other large integrated oils, not cutting their dividends, have risen considerably over this period.

Second, the dividend yield is an annual number. In other words, if you purchase the stock, hold it for a year and the dividend rate does not change you earn a dividend yield, in the case of GM, above, of 4.75%. Now, of course, what is important to investors is not the annual dividend yield, but rather the total return in holding the stock. For instance, taking this same example, if you buy GM today at $32 and it closes one year from today at $30.5, just one and one-half point lower, your total return for the year is exactly zero - quite a bit less than the yield on that US Treasury.

These two considerations are fairly obvious, but there is one more point for dividend investors that's often overlooked. The dividend yield when you purchase a stock is only the projected yield you are to receive (assuming no cut to the dividend rate) at the price at which you acquire the stock. In the example above, the dividend yield for GM purchased at a share price of $32 today is projected to be 4.75%. 

But what happens to your yield over time, is of equal importance. Let's say that you find GM an attractive investment at the prices and yields mentioned. Now, let's say that you hold GM for a year and the price rises to $35. Well, you've done quite well on the investment. Your total return for the year would be $14.12% (9.375% in price, plus a 4.75% dividend). But at this point, assuming no increase in dividend rate, your projected dividend yield has fallen to 4.34%. Still a very impressive yield. But for stocks that have risen appreciably, the current estimated dividend yield may be far less than when the investor purchased the stock. As such, investors should periodically reconsider why they are holding the stock and its estimated dividend yield on capital currently deployed.

Is a Fed Rate Hike Good for Bank Stocks?

With talk of a Fed rate hike at its September meeting increasing, following comments of Stanley Fischer and other Fed governors at Jackson Hole, bank stocks are enjoying quite a run. Bank of America is currently trading at $16.14, a nearly 45% gain from its February 2016 lows.  Citigroup is up 38% and JP Morgan +28.5% (a nice game for Mr. Dimon who publicly purchased $26 million of its shares on February 12). The financial services ETF, "XLF" is up an impressive 27.5%.

Some of this gain was a bounce off the February lows, but a healthy share of the return has been produced over the past 30 days as focus turned toward the Fed's Jackson Hole Symposium. Rightly or wrongly, the market thoroughly believes that higher rates are good for banks, as long-suffering bank net interest margins profit by a higher interest rate lending environment.

Truth be known, a hike in the Fed funds rate, in and of itself, is negative for bank earnings. Such a rise in short term rates has to be accompanied by a far larger increase in term lending rates to produce net interest income benefit to the banks. Part of this disconnect has to do with the mystery surrounding the Fed. Despite the Fed's noble efforts at transparency, market participants remain convinced that the Fed has secret data insights, not otherwise available to the markets at large. If the Fed is moving on rates, the economy must be heating up and with it the UST 10-year, or so the thinking goes.

Of course, the Fed is not privy to some covert set of data, but rather is looking at the same economic data as everyone else. In fact, their prolonged hesitation over the most minor of (and nearly insignificant) rate increases should be ample evidence that the data on the economy is more confusing than it is compelling. Nonetheless, as the chatter rises, bank stocks head higher while utility stocks, bonds and gold - each of which thrive in a low interest rate environment - drift lower.

This being said, it's probably worth taking a look at how markets actually reacted in the days and weeks following the Fed's 25 basis point rate hike last December.  As discussed in a previous post, in the several weeks following the Fed's December 15, 2015 rate hike, the 10-year UST actually fell in yield (bad for bank earnings, by the way) while utility stocks and gold posted some of their best gains in recent memory. 

The XLF shows a similar phenomena, rising to a close of $24.44 on the day following the Fed decision, up nearly 32% from its August 2015 lows. But in the days that followed, the XLF quickly began to fade, falling nearly 5% the very next day. By the time of the February 2016 lows, the XLF had fallen nearly 20%. Eerily, the XLF today, as we approach the September Fed meeting stands at precisely the same level, $24.56, as it did on the day prior to the December Fed meeting.