September 2021


A General Overview

Being a punk/grunge/rock fan “wake me up when September ends” would be a great way to introduce this post.

I have had a VERY BUSY month, and the thing that scares me the most is the fact that this was just the or d’oeuvres of what is yet to come.

But let’s do one thing at the time… After 2 months of summer holidays finally Leonardo was sent to primary school. There was a lot of build up to this event, and to be honest Leo seemed quite happy with the “new school” idea and all.

In reality the fire was brewing under the ashes, and it’s not something that we can impute on Leo at all, it’s more to do with the public sector in Italy.

There are many people that work in the public sector here, too many. Unfortunately many of them are there just to get the money, trying to do absolutely nothing at all. The law is on their side, politicians protect them (they are votes after all), they have lots of rights and very little duties. Unfortunately the head teacher of Leonardo’s class belonged to this category, having probably lost interest in her job.

To us this meant that since the very first day, even before my kid was to set foot inside the school, she told me that “it is better to leave him at home in the afternoons because he’s not potty trained”. On the first day they called me after 20 minutes I’ve left my son there, saying that he was crying a lot, to come and pick him up…

Fortunately my sister has been through this hell already and told me that in reality many primary schools teachers tre to “test” the parents that are more responsive to calls from school for menial issues (crying or changing a baby, for example, is something that the teachers need to deal with). The idea there is that they try to get kids to stay away from school at the beginning, giving more time for the others to adapt to the new school and then “trying again” the problematic ones later. All in order to make their lives easier with very little interest in the development of the child or the problems that they can create to families.

After all is a “fixed term employment”, nobody can fire them, there is no real “service” to render to society, just to themselves…

Well, I took my sister’s advice and did not go to pick Leo up immediately, I showed up 10 minutes before the normal time, and told the teacher that I work and my wife is pregnant at the last weeks, it’s not possible for us to have Leonardo stay at home, unless there is something serious of course.

She kept telling me about the fact that “afternoons are not possible with him” until the day she resigned, basically after 1 week of the start of school. The new teachers are different, they seem like the really want to work and put an effort, and despite the fact that they also told me that Leonardo seems to take more time to adjust, they seem more collaborative. I really need to hope that Leo gears up on this whole school thing, as much as getting to play with other kids. Hopefully time will help on that side, but every morning is very very hard to get him to move.

Couple the fact that he’s the youngest there (he will turn 3 in December), and the age is the “difficult one” and we have the recipe for disaster.

As if this was not enough my wife is about to give birth, with all that this condition brings. She’s great and I cannot complain in the slightest, but it adds to the stress levels.

Oh, to cap it all off, in November we need to do some home renovations too, unfortunately they cannot be postponed for fiscal reasons, and we’ll have that too on our plate.

If there is no post for October, start worrying!

LH FUND

Explanation of terminology and graphs is HERE.

Let’s see the numbers:

MonthTRYTERNYYoCForex
31 Dec 20140.00%0.00%0.00%0.00%
31 Dec 2015-3.33%1.22%-0.13%-1.00%
31 Dec 20167.06%1.14%1.16%-4.35%
31 Dec 20179.94%1.04%2.64%-5.94%
31 Dec 20183.28%1.24%2.70%-3.53%
31 Dec 201923.50%1.35%2.72%-1.40%
31 Dec 202015.76%1.28%2.70%-7.60%
Jan 202115.52%1.27%2.71%-7.03%
Feb 202117.42%1.26%2.71%-6.69%
Mar 202125.19%1.24%2.67%-4.85%
Apr 202124.93%1.23%2.69%-6.98%
May 202128.02%1.24%2.76%-8.12%
June 202127.67%1.40%2.61%-5.59%
July 202127.39%1.39%2.61%-5.54%
August 202128.79%1.37%2.62%-5.64%
September 202129.02%1.37%2.68%-3.84%
LH Portfolio Milestones + Monthly current year

TR is increasing (vs. previous month) – Mostly because of the currency effect, as the dollar is gaining strength again.

YTER is stable (vs. previous month) – As long as it doesn’t go up…

Net Yearly YoC is increasing (vs. previous month) – 6 BPS is pretty good, it was a good month on dividends and options after all

Forex is getting better (vs. previous month) – The dollar woke up and gained back a lot of terrain vs. the euro!

Dividends and Options

Income this month was 2635 Euro

Dividends accounted for 1900 Euro (+51% vs 2020) and Options ended up with a 735 Euro score (+228% vs 2020).

Dividends

Incredible month, I wasn’t expecting it, but there is a catch. Because I was called a bond I owned, the interest was paid to me this month and not in November as it should have been. But in general even without it it would have been a great month.

Options

Again, thanks to some calls I sold a long time ago I’ve managed to post a very good option income this month, much higher than my 200 euro target.

DCA/Increased Positions

N.A.

New Positions – Sold Position

Bought 100 DGICA @ 14.63 USD

Small, but very interesting Insurance company. Not finding a lot of stocks to buy you have to start looking at smaller players, hoping that they are not going to be necessarily worse than bigger companies. Donegal has good financials, and seemed undervalued, a good dividend and strategic views. In it goes!

Bought 100 HRL @ 40.99 USD

Hormel Foods is a dividend King, so there, we know already why it’s in my portfolio… It’s falling, due to margin issues created by inflationary prices on raw materials. The dividend is small, just north of 2%, but I am interested in the company, the history and attention to dividend, and their brands. I expect HRL to fall even further, if that is the case I will likely double up the investment, although I am going to play this stock with options too.

Sold 200 BIT:CASS @ 7.17 EUR

Cattolica Assicurazioni was one of the bad investments made recently, as it cancelled the dividend right after I bought it! Thanks to a possible buyout from Generali price recovered and I managed to sell it without loosing all that much. Good riddance!

Sold 140 LON:PRU @ 14.41 GBP

Prudential also got the boot, netting a very interesting gain for the portfolio. I’ve realised that they decided to change dividend policy and effectively they reduced payments quite substantially leaving future developments in the dividend area quite “foggy” and very hard to understand. Again, sad to see it go (I bought it during COVID so I had a reasonable average price), but I can’t keep stocks that yield below 1%.

Sold 120 Petrobras 2023 bond @ 106.13 USD

I did not want to sell this bond, the only one that I still owned. But Petrobras called it, so there it went, ciao ciao and see you…

The Financial Conclusions

This month was “unusually busy”, portfolio-wise. Lots of trades for DGI oriented portfolio, let’s try to give some explanations on what I did and why.

HRL and DGICA are different acquisitions, but they serve the same purpose: beef up the dividend production capability of the portfolio.

There is no secret to the fact that this “game” of compounding only works if dividend are reinvested. Actually, I should say, “it works at its best” when dividend are reinvested.

After a buying spree when COVID pandemic started, I didn’t find many opportunities. At fist I could not fathom the idea of a V shape recovery. Now because of prices that I believe to be too high.

I did play along with options, so in a sense I rode the short term sentiment, but I did not commit to many acquisitions. In short I am relying on companies increasing dividends (or paying bonus dividends) in order to grow the portfolio yield, which is not the best strategy in the long run.

On the other side I see all signs of a potential “serious” downturn of the market. Inflation is on the rise, there is little to say about it, in Italy we are experiencing lots of increases in raw materials for staple foods and construction materials, which will soon find their way to the consumers. Government are saying that these increases are temporary, but I don’t think it’s like that at all. When companies increase prices, very very very rarely they drop them after 6 months because conditions changed. It’s much easier to simply increase margins and keep things as they are.

Same story goes for energy, I know it’s the talk of town, but oil is increasing steadily, fuel prices are rising, and here it goes again, anything that uses oil is potentially exposed to inflation risks.

Add the new “green deal” that everyone is jumping on recently, is a major inflationary driver (it’s clean but it’s more expensive) and is driving oil even higher (you need “old” energy to make infrastructure for the “new” one).

So if inflation is going to be rising, sooner or later interests rates will HAVE to follow and this will bring the market down.

This explains why I’ve started cleaning the portfolio e little, trying to sell the positions that are not producing well (PRU and CASS). The Petrobras bond was recalled, and that adds greatly to cash reserves, which I am not going to employ right now.

So what am I going to do with the cash at hand? I have more than 8% of the portfolio in cash, which is quite a lot considering that for years this figure has been around 1%…

One option is to revert to derivatives to create a sort of “cash deposit”. Cash deposits are starting to come back to life in Italy (rates ARE increasing after all), but of course I am not going to use a bank for that. My idea is to open a very long short put on stocks that I would like to own, at very low OTM prices. The aim here is to make 2/3% gross, no more than that, with an expiration in 10/12 months. Effectively this “blocks” the cash, as I would need it to cover the short if things went “bad”, in reality the cash is still at hand to be used (if a major opportunity arises…).

The other option that I have to employ the extra cash is to sit idle and wait for developments, not very fond of this solution, but of course it’s the safest of the all…

Anyhow, my view stays the same, we are at the end of the bull market. There might be some more euphoria leading towards the end of the year and all the festivities, but after that I do not expect other rallies at all. By then we’ll know more on what inflation is doing and what real interest rates are doing, then game is all there. Central banks do not control this part of the business cycle, so their decisions are almost irrelevant, because if inflation picks up they will have to follow with interest rate increases. The fact that everyone is rushing to say that it’s “all temporary” seems to me as an attempt to delay as much as possible the inevitable…

2 thoughts on “September 2021

    1. Ciao Nico, thanks for commenting!!
      Admiral is interesting, and I have it in my watchlist, but Prudential had a more international scope (weighted on Asia mostly) and that was the rational for adding it in the fist instance.
      Unfortunately the dividend is too small to have a meaning in this portfolio, I walked out with a very good gain, so I am happy. Right now I have no ideas on the UK market, at least at these prices…

      Like

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