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HOlmes Osborne

    Osborne Global Investors

  With interest rates dropping lower, our accounts have performed quite well thus far in 2019. When interest rates drop, bonds rise in value as their coupons become worth more. We have many, what we would consider moderately conservative accounts, up 7%.

As for activity this quarter, things were pretty quiet. We sold B&G Foods and bought Jardine Matheson, Swire Pacific, and Hoshizaki.

The riots in Hong Kong gave us a buying opportunity. We are hoping that the unrest has come to an end.

In Argentina, the peso completely collapsed. Why did the peso collapse, the government was running unbalanced budgets and printing money. Sound familiar?

We discuss the merits of investing in gold in this newsletter. With interest rates so low, a lot of unrest in the world, and financial markets at all-time highs, gold could be an interesting place to invest for a small amount of your money. We discuss several ways that investors can partake in gold. This is one area where Wall Street is at a big disadvantage because of its enormous size.
    
   Corporations Wanting to Refinance Debt

Just like home -owners with mortgages, corporations want to refinance their debt with lower interest rates. We get an influx of notices from companies making offers to call in their bonds. Lower interest rates are good for the companies but not so great for our clients. Our clients are savers and must invest their money at far lower interest rates. Even going ten years out, it’s very challenging finding bonds that yield 4%. We think rates are too low.
    
 Third Quarter 2019 Activity

We purchased three new stocks and sold one during the third quarter of the year. We cut our losses in B&G Foods. B&G owns Green Giant, Ortega, Mrs. Dash, McCann’s Oatmeal, Clabber Girl, Cream of Wheat, Spice Islands, and dozens of other brands. Like many food companies such as Kraft/Heinz, B&G is struggling to grow. We lost about 17%.

At the end of June, we purchased Japan-based Hoshizaki. Hoshizaki is arguably the best manufacturer of ice machines in the world. You probably have seen their machines at hotels or restaurants—they are adorned by a small penguin.

Sales and earnings have been growing for years. The ice machines are high quality with well made parts. The stock dropped because a division of the company was overstating sales. We think they will be able to get past accounting shenanigans and that the stock will rise.

The unrest in Hong Kong has given us what we think is a buying opportunity. Protestors were upset that Hong Kong was going to extradite people to mainland China. When the British handed Hong Kong back to the Chinese, Hong Kong was supposed to have a modicum of independence.

It was announced that Hong Kong would not send citizens to China. We thought this would squelch the riots but yet they continue.

We purchased two old conglomerates— Jardine Matheson and Swire Pacific. These two companies have been around since the early 1800s and even partook in the opium trade. They are known as “Hongs”— large land owning conglomerates in Hong Kong.

Jardine has a large portfolio of real estate, hotels, car dealerships, convenience stores, and dozens of other businesses. Jardine owns a controlling interest in the Mandarin Oriental Hotels, runs the Ikea and Starbucks in Hong Kong, and owns a controlling share of Hong Kong Land, the largest land owner in Hong Kong. The 1970s novel Noble House by James Clavell was based upon Jardine Matheson.

Swire is similar to Jardine in that it owns a lot of land in Asia. It also owns a controlling interest in a Coca-Cola bottler and Cathay Pacific. Imagine drinking a Coke in Kansas that is owned by a company based in Hong Kong!

Cathay and Swire drew the ire of the Chinese government when some employees joined the protests. The CEO stated that the political views of employees were not of the company. That was not good enough for Chinese officials. Two top-ranked executives at Cathay had to step down as China can exert a lot of influence on Cathay. Cathay has lost a lot of sales with a decrease in traffic to Hong Kong.

We think things will cool down in Hong Kong and the stocks will regain footing. We’re not sure if we want to be in for the long haul as the Hong Kong real estate markets look expensive.

About ten years ago, Holmes visited Jardine’s headquarters in downtown Hong Kong, what the locals call “Central”. A plaque on the wall commemorates all of the employees lost in World Wars I & II. Jardine and Swire have seen everything from the Opium Wars to the Japanese occupation of Hong Hong.

We think we’ll do fine in these investments and will even pocket a nice dividend while we wait.

 Is Gold Back?

We’ve been fans of gold over the years. Some of precious metal investments have done very well and others not so great, depending upon timing. We’ve held mutual funds, exchange traded funds, individual mining stocks, and funds that hold actual bars of the precious metal.

Gold is challenging to value because it pays no cash payments. It’s based upon supply and demand. We think that perhaps it could do well with interest rates so low and the American stock market at an all-time high. We want to chat about what to look for and what to avoid.

Mutual fund and exchange fund
This is the easiest way to invest for busy people, retirement plans, and small amounts of money. The only problem is that because the industry is so small, a lot of the money is invested in a handful of the larger miners. We’ll get to why that can be a problem. Individual investors can get in and out of smaller companies. Mutual funds and hedge funds cannot because they are too large.

Canadian and U.S. Miners
These are safe countries in which to do business but the costs of mining are quite high. Both countries have very stringent laws.

Australia
Australia can be a great place to invest in miners as there is an abundance of minerals and the government is friendly to the industry.

Larger Miners
Some of the larger miners like Barrick have a hard time replacing the minerals that they mine from the earth. Building new mines is expensive and time consuming. We try to avoid the larger miners. Their stocks have not performed so well over the last five years. Also, the larger miners are often in countries where the costs can be high.

Country risk
Some countries can be very tough to do business in. Look at Venezuela. It nationaled a mine a few years ago. As mines grow in size, countries can change their taxes and take more in royalties. South Africa can be very risky with electrical outages, strikes, and government issues.

Gold bars or Funds?
You can invest in exchange traded funds that hold the metal. We’ve done that for many years. It can be an easy way to invest directly into gold, platinum, or silver.

We have been sifting through dozens of companies looking for the right mixture of lower country risk, high amounts of minerals, and low costs. We’ve identified a handful of companies that we like.

In a perfect world, you wouldn't need to invest in things like this. You’d buy a stock, collect its dividend, and watch it grow with operations.

With huge amounts of corporate debt, consumer debt, and government debt, gold could do well. There is a myth that gold does well during inflation. Gold seems to do well when investors become concerned with something and bail out of mainstream investments.

Perhaps, at the right time, some of these investment could do well. Gold has averaged 7% a year in growth for the last 20 years. It has even outperformed the U.S. stock market.

 

holmesosborne@holmesosborne.com


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