Portfolio Return of 4.2% for the 1st Quarter Ended 03/31/2018.

The large cap global portfolio closed out the first quarter of 2018 with an NAV of $215.14 USD. This compares to the NAV of $206.39 at the close of the prior quarter and results in a first quarter return of 4.2%.

In comparison, the DJIA produced a loss of 2.5% for the first quarter of 2018. The S&P 500 declined by 1.2%. The NASDAQ was up 2.3% for the first quarter of 2018. How the DJIA remains relevant, given the inordinate number of badly run companies within the index, is baffling. I have only identified a single, solitary, business within the Dow Jones Industrial Average worthy of ownership; that seems either a sad commentary upon the selection criteria employed by those who produce the index or, alternatively, represents too stringent a set of investment criteria on my part.


Dogs of the Dow aside, there are several companies within the DJIA that appear to be of concern in the coming three quarters of 2018. Trade wars can spill over to multinationals with significant Chinese divisions. The Chinese government thinks nothing of shuttering entire divisions of foreign firms for various “trumped-up” breaches of completely unknown regulations. GE is such a company with major China operations. More importantly, General Electric (GE-NYSE, $13.48) may well be in the early stages of major revisions to earnings and might eventually be subject to regulatory oversight for a host of accounting issues. For more than two decades, GE has failed my smell test for accounting cleanliness. Rumours aside of Warren Buffet taking a stake in General Electric, the dividend appears to be in jeopardy. More than one analyst suspects that even Buffett himself might be unable to break open Machiavellian accounting and financial machinations employed at GE, to reveal what is really under the hood.

Furthermore, hopes of a profitable General Electric bustup might be more fanciful thinking for hard-hit shareholders than reality; the business model of GE relies upon intertwining divisions so tightly, with cross guarantees of debt, arcane financial hedges and quiet purchase agreements for interdivisional supplies, that separation might well be impossible of most divisions, without revealing further woes. At best, General Electric shareholders might be advised to steel themselves for little more than a multi-year series of continued “one-time” writedowns, some token sales and a lot of bluster, in efforts to avoid breaching financial covenants. GE, in this author’s view, represents the American equivalent of a European sick bank; so messy to deal with that the corpse may need to be kept on life support for many years to come, in order to state that there is a semblance of a pulse. One can only extract value when there is something of value to sell. I see an enormous number of third rate businesses in the General Electric stable and some business lines that would best be shuttered completely. I would hazard a guess that certain M&A shops, when evaluating current divisions being shopped by GE, might reflexively spit out the acronym “WTF”, when truly seeing the non-consolidated balance sheets.

As for the rest of the DJIA, the pharmaceutical sector, a key subgroup with the index, appears to be under pressure. Far too many large pharmas have been engaged in manic trading of divisions. Divestitures at market tops are fine by me. To the chagrin of shareholders, in the large pharma space, proceeds are just redeployed to purchase other divisions, of other large pharmas, at equally inflated valuations. The end result of all of this shuffling and horsetrading are the same number of large pharmas, with the same earnings power as before, just with different parts. To add insult to injury for shareholders, accompanying these sales and purchases are big, fat, sets of dilutive transaction fees that add to amortization charges spanning decades. The only winners appear to be M&A departments that patted pharma executives on the backs and offered up a hearty “attaboy!” in appreciation for the billions of fees. IBM (IBM-NYSE, $153.43) is another worry to me. The firm appears unable to maintain the dividend payout provided during 2017, based upon sound financial practise. Should several DJIA components start cutting dividends in 2018, or if there is no upward potential in dividend payouts for most of the index in the coming year, the markets might have further to drop.

Stay frosty.

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