The Weekly View (3/20/17)

What’s On Our Minds:

The Economics Team at Tufton Capital normally takes the helm of the blog only every fourth week. It is filling in this week for its vacationing colleagues, and would like to take the opportunity to talk about the fabled “economic equilibrium” that is used as a guiding star- but somehow never reached.

We begin with Kenneth Arrow, a Nobel Prize-winning economist who passed away last month. Arrow mathematically showed many economic ideas to be true, and in fact has a mathematical theorem named after him, but of interest to us now is his work on market equilibriums. Arrow showed in his Nobel-winning work that a market exists where an equilibrium price can be reached for all goods. This intersection of Supply and Demand is an extension of Adam Smith and Economics 101. However, Arrow’s theorem requires, among other things, that a futures market exists for all goods. And of course, we do not trade our babysitter’s labor costs two years from now on the NYSE (that said, could babysitter futures be a good product for an enterprising salesman on Wall Street?).

Despite this and other discrepancies, the idea that there is a perfect equilibrium price that will be reached and will balance all costs- human, economic, and otherwise- prevails in many discussions of the markets and politics today. The Tufton Economics team is quick to caution (as it always does) that real life is rarely so orderly as the simple graphs of 18th century economics. While they certainly illustrate some basic ideas about markets, applying them to a society at large can be overly simplistic.


Last Week’s Highlights:

Stocks managed to eke out some gains last week, returning  tentatively to what has been the bull market of early ’17. The S&P 500 and Dow Jones both gained under a quarter percent. Both remain up roughly 6% year to date.  Interest rates, while still very low by historical (or any) standards, seem like they might be rending up, with the Fed indicating more rate hikes are on the way, despite the tick down this week.


Looking Ahead:

A pretty quiet week ahead. We’ll be interested to see home sales numbers, as they could be confirmation- or a warning flag- of the general belief that the US economy is still chugging healthily along.


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The Weekly View (3/13/17)

What’s On Our Minds:

Many investment companies will advertise their strategies as “value” or “growth.” According to standard definitions, these two types of investment strategies stand opposite to one another. Each uses its own elements and metrics to determine a sound investment, and each has its own standards and expectations for returns.

Defining “Value” and “Growth”

In traditional terms, “value investing” is the purchase of stocks or other securities that are currently undervalued by the market. To make a value investment, an investor must find a security that is being sold for less than what its calculated and/or historical value suggests. Value investing works off a person’s logical expectation that a security will return to a normal price.  At Tufton, our value philosophy takes advantage of the emotions in the market. The price of a stock gyrates around its intrinsic value as investors’ emotions cause them to make irrational decisions. We try to buy securities when the market has given up on them – when it feels “dread” and “desolation”. Later, when the market is “deliriously” happy with an investment, we look to sell. We don’t chase hot stocks higher.

On the other end, “growth investing” is the purchase of shares in a company that is expected to grow in importance or become more valuable than it is now. To pursue growth investment, an investor seeks out companies that have excellent potential to expand. The current cost of their shares are not undervalued, their growth has simply not yet been realized. Growth investing is based on the optimistic anticipation of a company’s future.


Investors will undoubtedly notice that several firms and funds will either label themselves “value” or “growth.” In general, this reflects the funds volatility: value funds are often less volatile than growth funds. Though growth funds make up for their risk by offering the potential for higher returns, economic downturn can cause them significant losses. By purchasing securities at a significant discount, Tufton provides a “margin of safety” which provides downside protection.


In recent years, several well-known investors, including Warren Buffet, have stated that the difference between “value” and “growth” investing are arbitrary. A company’s shares might be a good deal because they are undervalued, but an investor is expecting some form of growth or performance to push it back to its normal value. Similarly, if an investor feels a company’s growth is certain, then he or she sees its shares as undervalued at their current price.

The differences between “value” and “growth” are only noticeable if an investor is speculating on growth or continued performance. An experienced and well-informed investor will consider a company’s past and future before purchasing a security. After taking everything into account, it becomes a simple judgment of whether the company’s expected future is worth the current price, market risk and length of time.

If you have questions about your current market positions or would like to learn more about Tufton’s value strategy, please give us a call today!.

Last Week’s Highlights:

Stocks broke their six-week winning streak last week. The S&P 500 and Dow Jones both fell by less than 0.5%. Both remain up roughly 6% year to date.  Oil prices declined by 9.1% last week which pulled shares of energy companies lower. Healthcare stocks moved up and down as President Trump and the GOP proposed major changes to Obamacare.  On Friday, we closed out the week with a solid jobs report.

Looking Ahead:

Earnings season is wrapping up.  Tiffany, DSW, and Oracle report earnings this week.  The Federal Reserve is expected to increase interest rates on Wednesday. Investors are viewing a 25-basis point increase as an almost certainty after last week’s strong jobs report.


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The Weekly View (3/6/17)

What’s On Our Minds:

Interest rates are, to put it mildly, a complex beast. There are a few mechanisms by which rates affect the economy and the stock market, not all of which are obvious, but which have large effects. We’ve tried to break down these levers without getting too granular or using financial jargon.

The first is the most obvious: a lower interest rate means it’s cheaper to borrow. Consumers borrow more money to buy houses or cars, businesses borrow money to expand production. And thus, we get economic growth. Everybody’s happy. Except, maybe, the people who get less money in interest for loaning out their hard-earned cash.

An interest rate raise, like the one that seems imminent, is a signal that rates are moving higher, might cause both consumers and Chief Financial Officers to cut back on spending. So businesses earn less, and earnings fall.

Another very important but more abstract concept is the valuing of stocks via a discount rate. If I think a company is going to earn $10 million in ten years, the interest rate would have to be 0 for me to want to buy its stock now for a $10 million valuation. But if interest rates are higher, I’d be better off just putting the money in the bank for ten years and earning some interest in those ten years. In this way, investors compare interest rates with their expectations for the earnings of companies. If interest rates are low, companies’ stocks are more attractive, and therefore worth more in today’s dollars.

When Janet Yellen and the Fed meets this month, they have to think about all of this, with the added complexity of inflation. The inflation target is 2-3%: at this level, prices are fairly stable, but there is incentive to spend, rather than save, money, and to push the economy along. With inflation at zero, you know that the car you want to buy will cost about the same in year, so you might just think about it for a while, dampening economic activity.

Deflation, when inflation falls below zero, is a major problem: here, you might wait to buy that car, since it will be cheaper next year. And the year after that. And…

This gives rise to the “pushing on a string” phenomenon that was one of our founder Jim Hardesty’s favorite metaphors. You can’t entice people to spend money by cutting rates indefinitely, since rates below zero (usually) are avoided by simply keeping the cash. This illustrates, in part, one of the major limitations of monetary policy (setting interest rate, money supply, etc.) vs. fiscal policy (where and how the government spends their money). But fiscal policy is a topic for another post.


Last Week’s Highlights:


For the fourth straight week, stocks increased and closed at record highs on Wednesday. Donald Trump laid out an optimistic vision of the country during his address to Congress on Tuesday evening. Economic data was strong last week. Consumer confidence reached a new high and the ISM Non-manufacturing index, which measures business activity and employment trends, rose to a level last seen in October of 2015.

Warren Buffet shared that Berkshire Hathaway had taken a larger position in Apple stock earlier this year.  It’s now one of their largest equity holdings.

Target shares had a rough week as they decreased 14% in value after the company announced it had missed earnings expectations. The company reduced profit targets and said they are focusing on investing in stores and lowering prices to bring back customers.

Snapchat went public on Thursday. Shares surged from their $17 IPO price to as high as $26.05.  The company is now worth about $33 billion even though it lost $515 million last year.

Looking Ahead:


Companies continue releasing earnings reports this week. Armstrong Flooring and Korn/Ferry International report first quarter results on Monday. On Tuesday investors will hear from Dick’s Sporting Goods and Navistar International. Breakfast chain Bob Evans Farms reports results on Wednesday.

February’s jobs report will be released on Friday. A surprise to the upside would likely increase prospects for the Fed to raise interest rates after their 2-day policy meeting on March 15th.

On Friday, the Department of Labor will issue a report detailing the status of its new fiduciary rule. President Trump has mentioned he might cancel the new rule’s implementation.

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The Weekly View (2/27/17)

What’s On Our Minds:

Everyone remembers the old saying, “don’t put all your eggs in one basket”.  Well, sometimes investors end up with a whole lot of their eggs in one basket whether it be intentionally or unintentionally.  Often times, entire fortunes are tied to the prospects of one single company and while this is great when business is good, it can get ugly when the tides turn.  Large individual positions in companies are acquired every day through employer retirement plans, inheritances, stock options, and business sales.  It’s not unusual for successful professionals and executives and their heirs to find themselves with too much of a good thing: owning a large quantity of highly appreciate stock or a large equity position in a private partnership.

While countless individuals and families have accumulated great wealth by holding large amounts of a single position, betting your financial future on a concentrated position is rarely the best course of action.  Even if an investor has the utmost faith in their largest holding, the return prospects simply are not worth the risks.  If you are approaching retirement age and will need to start living off of your investment portfolio, a concentrated position can create a problem because your long-term financial security is dependent on the success of a single business.

The only way to reduce the inherent risk of a concentrated investment portfolio is to diversify.  Of course, this is easier said than done!  Due to the bite of capital gains taxes, fully selling out of a concentrated position can be a long process, but over time an investor can sell a certain amount of shares, per quarter, or per year and reinvest the proceeds into a well-diversified account.

At Tufton Capital, we take a customized approach to wealth management which allows us to manage the complex situation brought on by a concentrated portfolio.

Last Week’s Highlights:

Equity markets continued their 5-week trek higher last week. The Dow Jones closed at 20,822 on Friday, which was a record high.

A better-than-expected earnings season has helped stocks move higher. Nearly 66% of S&P 500 companies have reported earnings above analyst estimates.

Treasury Secretary, Steven Mnuchin, laid out an ambitious time frame last week saying that a tax-reform package could be passed by Congress before their August recess.  He also said that the Trump administration is aiming for sustained 3% or higher economic growth.

While equity markets have been chugging along, bond investors have been hunkering down recently. Despite a reflationary trade in stocks and expectations of an interest rate hike in by June, the 10-year U.S. Treasury ended the week at 2.317%, its lowest since last November.


Looking Ahead:

On Tuesday evening, President Trump will address Congress in a televised speech. A lot is expected from this speech as he will lay out his plans for the rest of the year. He will likely touch on his fiscal-policy plans, and discuss tax reform, border security, healthcare, and future infrastructure spending plans.

Economic data from January is coming across the wire this week.  Retail sales will be reported on Tuesday. On Wednesday, construction spending and automotive sales will be reported.


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The Weekly View (2/21/17)

What’s On Our Minds:

The “Trump Rally” or “Trump Bump” continued the Tuesday morning after President’s Day. Since the election, sectors that had underperformed the S&P 500 began to rally on the back of the possibility of higher interest rates, stronger economic growth and President Trump’s agendas. The Financial sector, which includes the “Big Banks”, Insurance companies, and asset managers, has led all sectors with a 23% return since President Trump’s win. In the more cyclical sectors, Industrials are up nearly 13%, while the Materials sector is up 11%. Consumer Discretionary and Technology also barely outperformed the broader index with a roughly 10.5% return from each sector. Health Care, Telecom, Consumer Staples, Energy, REITs and Utilities sectors have all underperformed after mostly leading in 2016.

Looking “under the hood,” higher interest rates will help earnings growth for the banks as their loans spreads widen, creating higher profits. Investors are also speculating that President Trump’s plans for deregulation will allow the financial companies, specifically the systematically important financial institutions, to hold less capital, which would give them the ability to lend more.

Industrial companies have rallied on speculation that President Trump’s infrastructure plan will translate into new orders for the group. Leaders include United Rentals, which is up nearly 69%. The company rents construction equipment and tools to the construction industry. Other beneficiaries of infrastructure investment would include the railroad companies as they would be utilized to transport the new orders from the industrial companies. As a result, CSX Corporation and Norfolk Southern Corporation are up 52% and 29%, respectively.

Investors also believe that the Materials sector will benefit from stronger economic growth and potential inflation. Earnings growth would be expected if further demand for their raw materials and products created price increases to their customers. Material leaders include steel manufacturer Nucor, paint maker Sherwin Williams and chemical producer LyondellBassell Industries.

Of the S&P 500 companies that have reported 4th quarter results, 68% of them have beaten on earnings. However, only 52% of the companies have beat their sales estimates, suggesting that companies are growing earnings more through cost cutting than growth of their business. The market may keep making new highs on the back of potential policy changes, but eventually, sales growth will have to follow.

Last Week’s Highlights:

Stocks extended their winning streak last week as both the S&P 500 and the Dow Jones gained over a full percentage point.  The Trump rally continues.  Investors remained euphoric as most expect President Trump to reduce U.S. corporate taxes and introduce some sort of fiscal stimulus package.  Strong earnings reports along with robust economic data have also helped to push indexes to record highs.

Janet Yellen took a hawkish stance last week during her testimony to Congress.  Her tone increased the odds that the Fed will raise interest rates before their next policy meeting in June.  Her latest stance on rates helped push the financial sector higher.

Kraft Heinz offered to acquire Unilever last week.  However, over the weekend, Kraft said it “has amicably agreed to withdraw its proposal.” Unilever shares took a hit on the news.

Shares of Boeing enjoyed a 1% bounce on Friday when President Trump visited their South Carolina manufacturing plant.  Shares of Campbell Soup Co. decreased 6.5% last week because second quarter profit and revenue missed.

Looking Ahead:

Markets were closed on Monday for President’s Day.

This week, investors’ attention will be focused on economic data reports and minutes from the latest Federal Open Market Committee meeting.

Earnings reports from retailers will also be on tap this week. Wal-Mart, Home Depot, and Macy’s release earnings on Tuesday and Nordstrom reports on Thursday.

On Saturday, Warren Buffet will release his annual letter to Berkshire Hathaway shareholders.

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The Weekly View (2/13/17)

What’s On Our Minds:

At Tufton, we are value investors. We seek to purchase securities trading at significant discounts to our internal assessment of their values.  Our value philosophy is based on the principles of Benjamin Graham.

If anyone could be considered the father of modern stock analysis, it would be Ben Graham. During the ‘30s, ‘40s and ‘50s, Graham pioneered the ideas of “value investing” and taught the next generation of investors to see the difference between stock evaluation and market speculation.

Graham is possibly the most academic-minded investor of all time. He not only took a purely mathematical approach to investing but also used his knowledge to improve his principals and formulas to educate future investors.  The heart of Graham’s strategy was value. He did not purchase shares assuming a company would have success with a new product or venture. Instead, he found companies that already had solid book values but were selling for below their logical price. He spurned the idea of buying trendy or on-the-rise stocks and believed most investors were just speculators.

Graham’s principles would have no credibility if they had not proved so effective. His concept of a close analysis of a company’s books proved to be extremely useful in an age when few others were doing the same. On one occasion, Graham’s analysis found that the Northern Pipeline Company was trading for $65 a share when it had bond assets worth $95 a share. He purchased a large number of shares and convinced the company to sell the assets, resulting in a $70 dividend. Graham walked away with a huge profit, simply because he was willing to look at the fundamentals of a company.

Graham’s lessons are still a foundational part of modern investing, but his teaching career is possibly best known for the students it produced. Warren Buffett, Walter Schloss and David Dodd are among the most famous students Graham taught at Columbia. Their successes have inspired a new generation of investors and have created a continual public interest in Graham’s theories.

These days, the epitome of Graham’s teachings lives on in his two popular books Security Analysis (1932) and The Intelligent Investor (1949), both of which are still in print to this day.

Last Week’s Highlights:

Major market indexes were up about 1% last week. The Dow Jones and the S&P 500 closed at a record high on Friday. The market rallied toward the end of the week after President Trump said he would announce his “phenomenal” tax plan in coming weeks.  His plan is expected to include a massive cut in corporate tax rates.  Based on last week’s move, it’s clear that investors are optimistic that a reformed tax code will benefit U.S. companies.

On the economic front, the cost of imported goods increased by 0.4% last month, mostly because of rising oil prices.

Despite a court’s decision last week that upheld Obama’s fiduciary rule, the Trump administration is working on a proposal to delay the April 10th implementation.  A Texas court upheld the rule and rejected a lawsuit filed by business groups that challenged the new regulation. The court ruling could make it tough for Trump to make substantive changes to the new rule in the future.

Looking Ahead:

Federal Reserve Chair Janet Yellen is giving her semiannual testimony on the economy and monetary policy before a Senate committee on Tuesday.  Most are expecting her to stick to the message of three interest rate hikes this year.

Earnings season continues this week. Teva Paramedicals reports earnings on Monday.  On Tuesday, Noble Energy, Vornado Realty Trust, and Discovery Communications post their results. Wednesday we will hear from Pepsico. On Thursday, we get results from Avon Products and TripAdvisor.  We will finish the week on Friday with reports from Campbell Soup and V.F. Corp.


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The Weekly View (2/6/17)

What’s On Our Minds:

What’s on our minds is the same thing that’s been on everyone’s minds lately: the Trump Presidency. We are going to take off our political hats for a moment and put on the economist’s cap. What effects will the Trump White House have on the economy?

(image source:  k schirmann getty images/cnn money & Gwen Sung getty image/cnn money)

The Good

There are promises for many kinds of stimulus that would help the economy grow. A “Highway Bill” or other fiscal stimulus would work differently than monetary stimulus by actually spending real dollars and putting people to work, rather than adjusting federal interest rates, etc., to influence how financial institutions borrow and lend money.

However, the difficulties that the Republican Congress has had in repealing Obamacare something that was supposed to be priority #1, may forebode a long road to serious fiscal action.

Likewise, sensible tax code reform and reduction in financial and other regulation could boost business, but getting there may be more difficult than some had imagined.

The Bad

The “Trump Effect,” whereby a presidential tweet can make or break a company, a treaty, or a trade deal, seems to have had some destabilizing effect. It would be best if the president could tone down the speed and content of his tweets.

Tariffs, too, while good for headlines, are almost universally scorned by economists. They result in a net loss for a country in financial terms. While American businesses may gain on an individual level, American consumers pay the price.

Finally, the tax code overhaul could have “debt spiral” consequences if it is overzealously applied. The results of tax reform are often complicated, and it may be unwise to push a large reform through quickly.

The Uncertain

In geopolitics there is a huge question mark. What will the country’s relationship be with Russia? Are Trump and Putin secret friend, secret enemies, or neither? Will we let Russia’s influence continue to grow in the former USSR and China to become a major world power? Or are we going to reassert ourselves as the global leader both in finance and the military?

In healthcare, Obamacare seems to be on the way out. What will replace it? Trump has said we are going to “take care of everyone,” but what does that mean? Importantly, insurance companies might be in the crosshairs, no matter which way this goes.

And what about that wall? Limiting immigration is certainly bad for the economy as a whole. Will we decide that the security gains are real and worth that sacrifice? What would the effect be on our major trading partners?

Tufton is watching all of these topics carefully. Our long term views on the stock market did not (and likely will not) change, but we continue to be vigilant in guiding our clients’ investments around any stumbling blocks.


Last Week’s Highlights:

Equity indexes finished the week close to where they began.  Markets sold off early in the week but rallied by almost 1% on Friday after a strong jobs report and news that President Trump signed an executive order aimed at rolling back financial regulations.  The market rally was led by Financial stocks.

The US Federal Reserve left interest rates unchanged at its first meeting of 2017.  The fed’s Open Market Committee noted improved consumer and consumer confidence.  Currently, market participants are expecting two, twenty-five basis point increases on interest rates this year.

So far this earnings season, 65% of S&P 500 companies beat mean earnings per share estimates and 52% have turned in better than expected sales figures.

Looking Ahead:

4th quarter earnings season continues this week with 84 of the S&P 500’s companies are scheduled to report earnings.  Sysco reports on Monday. General Motors and BP report on Tuesday. Exelon and Allergan report on Wednesday. Thursday we will hear from Twitter and Coca-Cola and on Friday we will hear from EMC.

Lately, it appears investors are taking their cues from President Trump as everyone is focused on what his policies mean for the economy and individual companies.  We expect that to continue this week.

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The Weekly View (1/30/17)

What’s On Our Minds:

As education costs continue to rise year after year, the expenses have become an even larger component of a family budget.  According to, four years at a private nonprofit college, including tuition, fees, and room and board costs roughly $175,000 and a public four-year in state college, while less expensive, costs close to $80,000.  One of the best options for families is to save for future education costs by opening 529 plans for their children.

Anyone can open a 529 plan and may list anybody of their choice as the plan’s beneficiary. Also, the plan’s owner can change the beneficiary at any time. For Maryland residents, contributions to the account are tax deductible against your state income tax.

While the state income tax deduction is a good benefit, the real power behind a 529 comes from the tax-deferred growth and tax-free withdraws the the plan allows.  Distributions from the account are tax free so long as the funds go towards education expenses such as tuition, room and board, fees, books, or the purchase of necessary computer technology.  With a long term investment horizon these accounts can grow into considerable assets.  There will be added peace of mind knowing you don’t have to dip into your own personal savings to pay for college and your child or grandchild won’t be burdened by student loans when they graduate.

Tax issues around 529 plans get a bit complicated in that they count as a present interest taxable gift to the beneficiary of the account.  Because contributions technically qualify as gifts, limit your contributions to $14,000 per person to avoid paying federal gift taxes.  When saving for education costs it’s important to remember, the earlier the better!

Last Week’s Highlights:

Last Wednesday, for the first time in history, the Dow Jones Industrial broke through 20,000.  The new high water mark was celebrated on Wall Street.  The S&P 500 and the Nasdaq also closed at record highs on Wednesday.   In general, investor sentiment was up last week and it seemed that many were optimistic that Trump’s economic policies will initiate a growth period.  Since the election, the S&P 500 has risen 7.2%.

Some merger news broke last week. Verizon is considering a merger with Charter Communications and Johnson & Johnson agreed to purchase the biotech firm, Artelion.

In economic news, it was reported that fourth quarter U.S. GDP increased by 1.9%.

Looking Ahead:

The Trump Rally has stumbled a bit going into this week after the President issued an executive order last Friday barring immigrants from seven Muslim-majority countries from entering the US.  The Dow opened below 20,000 on Monday morning.

Earnings season continues this week with Apple, Exxon, and UPS reporting on Tuesday. On Wednesday, the FOMC releases a policy statement on interest rates. Investors are not expecting the Fed to increase rates.  On Thursday, Donald Trump is planning on announcing his Supreme Court nominee and International Paper and Merck release their quarterly results. On Friday, we close out the week with Hershey reporting earnings.

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The Weekly View (1/23/17)

What’s On Our Minds:

Acquisitions in the oil patch are finally back in style. Over the past few weeks, several multi-billion dollar acquisitions have occurred, particularly in the Permian Basin of West Texas. The Permian Basin has been established as the most prolific shale patch in the United States, possibly the world. Given this status, it should be to no one’s surprise that last week, energy bellwether ExxonMobil announced a $6.6 billion acquisition of Permian assets, their largest deal since the acquisition of XTO Energy in 2010. The company will net approximately 250,000 acres, paying roughly $27,000 per acre. On other metrics, Exxon paid $35,000 for each flowing barrel of oil per day – both attractive valuation multiples compared to other transactions in the oil patch.
In another transaction, Noble Energy agreed to purchase Clayton Williams Energy, another Permian based company, for $3.2 billion. The announced price values the assets at approximately $32,000 per acre, slightly higher than Exxon’s purchase price. It’s hard to believe that five years ago, the average price per acre in the same area was just roughly $4,500 when oil was trading in the range of $80 and $120 per barrel. This goes to show the profitability and efficiency of drilling in the shale patches.
All of these transactions come at an interesting time – most analysts expected distressed companies to sell themselves or their assets around the time oil bottomed at $26 per barrel nearly a year ago and the rig count bottomed last May. However, due to the efficiency of shale production (and cheap credit), the drillers prevailed. With interest rates on the rise and the price of oil somewhat range bound, time will tell which companies continue to survive.

Last Week’s Highlights:

Last week, the Dow Jones Industrial Average fell 0.29%, the S&P 500 fell 0.15% while the Nasdaq slipped 0.34%. After beating the S&P 500 in 2016, the Dow is now barely positive on the year (up 0.33%), the S&P 500 is up 1.45% and the Nasdaq is leading the three major indexes, up 3.2%. Investors were focused on President Trump’s inauguration speech as well as rhetoric surrounding his changes to public policy.
Earnings season continued with most companies in the Financial sector reporting fourth quarter results. So far, 13% of S&P 500 companies have reported and 65% have had positive surprises relative to their earnings estimates.

Looking Ahead:

This week, investors will continue to focus on President Trump and his policy initiatives. Earnings from several Dow Jones components will be released on Tuesday. Dupont, 3M, Johnson & Johnson, Travelers, and Verizon will all report before the opening bell. On Wednesday, AT&T and United Technologies will provide investors with their fourth quarter results. Thursday will give investors further insight into the oil patch as Helmerich & Payne and Baker Hughes both report. On Friday, the markets will be focused on the first read of fourth quarter GDP growth.

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The Weekly View (1/17/17)

What’s On Our Minds:

The investment professionals at Tufton Capital believe that a long-term, buy and hold investment strategy is the to safest, and smartest, way to build wealth in the stock market.  Quite simply, it’s been proven time and time again to return exponential gains on invested capital.

Cultivating Your Portfolio

The term “buy and hold” doesn’t mean investing and forgetting about your portfolio for the next 20 years. There are ways to cultivate and prune your portfolio while still maintaining a long-haul investing strategy. For instance, if a company you invest in changes fundamentally, you may not want to continue owning that security. If the overall market changes dramatically, as it has in the past, you may actually benefit from selling an investment or group of investments. Finally, changing goals as you get closer to retirement may warrant a more conservative portfolio.

Bad Markets

The typical investor is tempted to get out of a bad market by selling when prices are low, which is a poor strategy. The economy fluctuates between good and bad all the time, and those who constantly buy and sell will be hit the hardest in a bad economy. By holding on to your investments, you’ll be better able to ride out a down market, especially if your portfolio is diversified.

Taxes and Fees

Frequent trading results in higher fees, so long haul-investors pay less while fees eat up much of a day trader’s profits. Additionally, short-term gains are taxed at a higher rate than long-term gains. Even if you have the fortune of timing the market successfully, your profits will be diminished by taxes and fees.

Investing for the long-haul is the best investing strategy for the majority of investors because it not only ensures modest gains but is also less likely to yield major losses. A long-haul investment strategy is based on informed, careful decision making and patience.


Last Week’s Highlights:

Investors were focused on the beginning of fourth quarter earnings season and political headlines last week.  Stocks were slightly lower.  After getting close earlier this month, the Dow Jones just can’t seem to crack the 20,000 point threshold.

President-elect Donald Trump held his first press conference in more than five months on Wednesday. Investors were looking for him to cover taxes, fiscal policy, or infrastructure spending but he didn’t elaborate on those topics.


Looking Ahead:

The market was closed on Monday for Martin Luther King Day.

Some important earnings announcements will be coming out this week including CSX on Tuesday, Netflix on Wednesday, and General Electric on Friday.

On Friday, Donald Trump will be sworn in as President. Investors are expecting a shift towards pro-growth policies that should result in better economic and earnings growth.  Trump’s economic plans are broad and he hasn’t gone into specifics but he will likely focus on corporate tax cuts, repatriation of foreign cash, a fiscal push towards infrastructure spending, and perhaps some protectionist tariffs.  We will have to wait and see if Washington can keep the bull market going in 2017.

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The Next Digital Revolution?

by John Kernan

We believe automation in factories, self-driving big rigs, self-driving cars, drones, automated warehouses, and countless more are going to reshape retail and the economy of this and every country in the world. This is a long-term view, but we believe it is not as long-term as one might think. The ripple effects will be profound. For example, the occupation of “truck driver” holds a plurality in every or almost every state in this country. Entire towns have sprung up and have economies based on truck stops (think Breezewood, PA). What’s more, artificial intelligence has advanced to a point where the technologies that IBM and Google have right now would have been science fiction just a decade ago. We at Tufton Capital tend to believe that the pace of this change is going to take large swathes of the population by surprise (including the government).


However, the interplay and timing of these factors are impossible to predict. We have seen the rise of populism and a leader who may not consider the long-term economic consequences of legislation and executive orders. For instance, say that Amazon and Uber are successful in driving truck drivers out of the supply chain. There are an estimated 3.5 million professional truck drivers in the country, and 8.7 million employed in the trucking industry. Suddenly we would have millions of former truck drivers who focus their blame on Amazon for “taking their jobs.” Amazon might be broken up, or a restriction or onerous tax on self-driving technologies could be levied. None of this would ultimately prevent the march of technology, of course, but it would be very bad for Amazon, or whatever player finds itself at the receiving end of displaced workers’ ire.


We are not saying any of the above will happen to Amazon or Uber. In fact, those two companies have teams of the brightest innovators in their respective spaces (the other standout being Google). But these are examples of what could happen to any given company.


As it is right now, we can’t say who the winners and losers will be. In Tech, it seems that any company that has any modicum of proven “cloud” or “hyperscale data technology” gets immediately launched into the stratosphere of valuation by West Coast investors who also see these trends coming.


Our last caveat is timing. We are confident these changes are coming, but do not know when they will take hold.


A final macroeconomic point is that the Roald Dahl-inspired idea that these workers can “get new jobs programming the trucks” is misguided. First, it will take only a handful of programmers to maintain the code on an entire fleet of trucks. Second, those who are losing the trucking jobs are far from qualified to transition into advanced computer science applications. This shift in job requirements will create a massive amount of friction in the labor market, and unemployment will be inevitable.


So, what is the investment strategy? A general overweighting in the Tech sector might be warranted, but even something as broad as that would be exposed to political moves. We expect the digital revolution to be bumpy.

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Inside the Investor’s Mind

Emotions substantially affect rational thinking; when you let certain emotions fuel your investment decisions, your portfolio could be in trouble. Understanding the psychological weaknesses that typically afflict investors will help you prevent them from damaging your own investment portfolio.


Whats Your Risk Tolerance?

Before identifying the emotions that typically affect investors, it’s first important to understand risk tolerance. Risk tolerance is how much unpredictability a person can financially—and especially “mentally”—handle in his or her investment portfolio.


Those with high risk tolerance—meaning they’re comfortable with investing in riskier markets—usually reap the highest long-term gains. But their chances of suffering short-term losses is just as high. Especially for retirement investments, investors in their 20s usually have a higher risk tolerance than investors in their 60s who are nearing retirement. Aging investors usually have a low risk tolerance; a short-term loss could deplete their portfolio and they don’t have time on their side to recoup what they’ve lost.


Risk tolerance and emotions go hand in hand; successful investors know their risk tolerance and how certain emotions can either increase or decrease the amount of risk they take.


Emotions That Affect Investors

Emotions are the part of your psyche that influences your motivation and behavioral tendencies. In any area of our lives, when emotions run high, it causes our rational, commonsense brains to shut down and prevents us from making rational decisions. Euphoria, greed, fear and regret are just a few of the emotions that affect investors and the decisions they make for their portfolios.


Euphoria, optimism and overconfidence

Euphoria—the state of intense happiness and self-confidence—gives an investor that surge of adrenaline. Euphoria causes investors to be more optimistic about the stock market and certain stock picks. But the elation and pride from a gain can also prevent the investor from detecting risks. As their self-confidence increases, investors tend to view themselves as more competent to choose the right stock picks than they really are. Many times, overconfidence leads to greed.



Greed is the excessive desire that alters investors’ judgment, leading them to poor decisions and irrational actions. Most people want to make as much money as they can, in as little time and with as little effort as possible. Investors have the instinct to always try and get a little bit more; but this “get-rich-quick” mentality can cause a frenzy in their portfolios, not to mention, the overall stock market.


Greed is not an easy emotion to overcome, and it can be the foundation for reoccurring investment errors such as “following the herd” and jumping on the bandwagon of the latest investment fad, or hanging on to stocks too long.



On the opposite end of the spectrum from greed is fear, an emotion just as debilitating to both investors and potential investors. Fear is an instinctual reaction to what someone perceives as an anticipated or actual

threat. It can cause investors to do any of the following:

  • Sit on cash that should be invested
  • Sell winning stocks too soon or enter and exit the stock market too soon
  • Hold on to losing stocks too long or stay in the stock market too long


Some people believe the stock market is too risky. They would be unable to stomach the ups and downs of their investment losing and gaining money. These individuals feel more comfortable protecting their money somewhere with very little risk, such as a savings account. Little do they know that stockpiling their cash in a savings account is a risk, too. While their money is safe in the short term, it’s not growing to meet the rate of inflation over time. Preparing for major life events, living expenses in retirement and major purchases, your money must grow to afford the higher price tag of these expenses in the future.


Those who actually do invest are also susceptible to fear. Paralyzed by the fear of making errors, some investors either sell winning stocks too soon or hold on to losing stock positions that should be sold out because they’re afraid of losing money. Some studies show that the pain of losing a certain amount of money is actually greater than the pleasure derived from winning the same amount.



Who likes to admit they’re wrong? No one. For investors, it’s difficult to admit they’re responsible for making poor decisions about stocks. The pain of regret can cause investors to hold on to losing stocks too long or sell winning stocks too soon. A loss of wealth can be so painful to your psyches that you want to make the pain go away quickly. Usually driven by fear, investors will make any decision possible—however irrational it may be—to avoid experiencing regret.


Put Your Emotions in Check

It’s easier said than done, but keeping your emotions in check will lead to personal investment success. So how can you accomplish this?


Know you’re in control. Only you can prevent your emotions from clouding your investment decisions. Understand that once the emotion is released, it’s difficult to contain. Identify your emotions before you act on them, and take time to think things through before jumping on an investment decision.


Educate yourself. Understanding how the stock market works will decrease much of the fear and anxiety that comes with investing. Thoroughly research your investment and examine the history of the stocks you’re interested in. Don’t simply look at how a company is performing now; analyze the history of the stock’s performance. When you finally decide to buy, select your investment based on facts, not on speculative forecasts or because everyone else is buying them.


Choose an asset allocation mix that’s right for you. This means diversifying your portfolio and finding that balance between riskier and conservative investments. Some investors build their portfolios largely out of stocks in order to have the best chance of providing a high return. Other investors buy mostly bonds and cash equivalents; these are low risk, but the returns are also very small. To combat the risk of huge losses for both those with high and low risk tolerance, investors diversify their portfolios by spreading their assets among different types of investments to minimize loss. Diversification is a reliable method to decrease risk while still getting solid returns.


Think long term. Avoid watching the day-to-day peaks and plummets of your stock. This can stress you out. Instead, concentrate on the long-term performance of your entire portfolio.


Talk to Tufton Capital Management. We are here to discuss your personal financial goals and educate you on investment strategies to meet those goals.

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Company Spotlight: VF Corp. (Ticker: VFC)

by Scott Murphy

VF Corp. (Ticker: VFC) is one of the largest apparel and footwear companies in the world.  VF has a diverse portfolio of brands, including five with revenue exceeding $1 billion: The North Face, Vans, Timberland, Wrangler, and Lee.


The stock has underperformed the market by (16%) in 2015 and (24%) in 2016.  This 40% relative underperformance to the S&P 500 should prove to be a nice entry point. It seems Wall Street is questioning VFC’s ability to maintain its prior growth. Other issues potentially causing a drag on the stock include a strong dollar, which has impacted earnings growth over the past few years, and some downgrades by Wall Street analysts.


VF Corp is a pioneer in inventory management, enabling them to partner with their customers (retail stores) to effectively and efficiently get the right assortment of products that matches consumer demand in a real-time environment.    Retailers value this “just in time” inventory replenishment system since it allows them to minimize inventory costs.  Internally, VF is organized into four segments: Outdoor and Action Sports, Jeanswear, Imagewear, and Sportswear/Contemporary Brands. VF derives approximately 70% of revenues from the Americas, 20% from Europe and 10% from its Asia Pacific business.


Steven Rendle will become the new CEO in the first quarter of  2017.  He is currently the President of VF and his tenure with the company began when VF purchased The North Face in 2000.  This was a planned transition and he is succeeding current CEO, Eric Wiseman, who will continue as the Chairman of the Board.  With an improvement in earnings slated for next year due to better internal performance coupled with a reinvigorated consumer, the stock is ripe for a recovery in 2017.

VF Corp. (Ticker: VFC)

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Have You Heard About the New Fiduciary Rule?

by Neill Peck

In 2016, the Department of Labor finalized its rule expanding its definition of “investment advice fiduciary.” The new rule, which is applicable as of April 10th, is meant to force financial advisors and brokers to give advice that is in clients’ best interests – not their own.


Believe it or not, until now, anyone giving advice (like stockbrokers or insurance salespeople) only had to meet a “suitability standard.” This low bar meant that whatever option the advisor recommended only had to be a “reasonable” option for the client. In practice, this meant that the advisor could recommend a high-fee fund (with a nice kickback to the advisor, of course) instead of a low-fee fund. The scale of the problem is significant: The White House Council of Economic Advisors estimates that these conflicts of interest lead to $17 billion in lost retirement savings every year.


The new rule greatly expands the circumstances that call for an advisor to meet a fiduciary standard. The concept of “fiduciary” has a specific legal definition that a given advisor can’t get around, and it is the highest standard of care. There is extensive case history in which courts have imposed separately-defined duties of Care, Loyalty, Good Faith, Confidentiality, Prudence, and Disclosure upon fiduciaries1. A client whose advisor meets a fiduciary standard knows that they are in good hands. The new rule can’t eliminate all bad investment advice, of course. Advisors can be careful, loyal, and honest and still be wrong. And there are still some small holes by which bad advice can be disseminated. But overall, this is definitely a step in the right direction for the industry.


The new rule might seem like a no-brainer, but it has been met with criticism from some parts of the financial industry. Predictably, the critics of the rule are those who benefit financially from the ability to receive kickbacks from 12b-1 and other fees from fund management companies. Also, there are many in the insurance business who push expensive annuity products that pay high commissions but aren’t necessarily in their clients’ best interests. To be frank, a good number of people saving for retirement have been paying too much for bad advice.


On the other side of this rule are Registered Investment Advisors (RIAs), who have always acted as legal fiduciaries. Tufton Capital falls into this category. As an RIA, our firm is not affected by the rule change. Our structure by its very nature puts our clients’ interests ahead of our own. Unlike the salesmen in our business who parade as “financial advisors,” our firm has no motive to recommend one investment product over another – other than its suitability for the client. Nor do we gain any benefit from extra or excessive trading in our clients’ accounts. Here at Tufton, our primary focus and only incentive is to grow our clients’ assets by following our investment process.


Some expect that Donald Trump will undo the new D.O.L. rule. For our firm, though, it won’t matter: we always have and always will put the client first.


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The Fourth Quarter of 2016: Well That Changed Everything

by Eric Schopf

Donald Trump’s victory and his subsequent tweets announcing fiscal policy initiatives dominated the fourth quarter.  The Standard and Poor’s 500 had posted modest gains for the year heading into the election.  However, from November 8th through the close of the year, the market tacked on over 5%, bringing the year’s total return to 12%.  Not bad reflecting back to mid-February when the market was down over 10%.


President Trump’s platform of fiscal stimulus has resonated with equity investors.  More spending, lower tax rates, and fewer regulations are a stark contrast to the restrictive policies in place since the financial crisis.  With a Republican-controlled Congress, many of the financial goals should be attainable.  Early Cabinet appointees, which have included many experts from the corporate world, are proof that Mr. Trump is quite serious about achieving his goals.


The Federal Reserve has stated on many occasions that monetary policy alone wasn’t enough to revive the economy.  The Fed encouraged greater fiscal action by lawmakers.  Mr. Trump has delivered.  The Fed’s response to more robust economic growth could be the difference between success and failure.  Although the Fed did increase the Federal Funds rate by 0.25% in December, the rate hike is just the second in the past eight years.  Interest rates remain low, reflecting anemic economic growth and inflation levels running consistently below the 2% target.  Letting inflation run hot for a period may allow the economy to build momentum to withstand higher interest rates.

U.S. Core Inflation vs. Real GDP Growth

Future market returns will depend on two key variables.  First, what incremental growth will be provided by the new policies?  Second, how and when will the Federal Reserve respond to stronger growth and higher inflation?  Before answering these important questions, we must first understand the limitations of lower tax revenue and greater spending.  The U.S. national debt now stands at roughly $20 trillion, or 106% of gross national product.  The debt/GDP ratio is at record levels (discounting periods of war).   Entitlement programs, Medicare/Medicaid and Social Security, combined with defense spending, account for approximately 78% of total spending, leaving little room for financial maneuvering.

Various sources have estimated that the fiscal policy could add anywhere between 0.25% and 1.8% to economic growth.  While the improvement would be welcomed, the estimates fall short of the 4% economic growth trumpeted by Mr. Trump.  The U.S. has not posted a 4% annual GDP growth since 1999.  However, just reaching 3% growth could provide the perfect blend of growth. This rate would likely not ignite inflation and would thus avoid the commensurate response of higher interest rates.


Interest rates have also had a dramatic move since the election.  The rate on the 10-year U.S. Treasury moved from 1.78% prior to the election to 2.48% by year-end. Higher rates reflect expectations for better economic growth and the need for the Treasury to issue more debt to finance anticipated spending.  Interest rates on one-month to five-year Treasury issues are at multi-year highs in anticipation of further Fed tightening.  Municipal bonds did not fare well in the quarter as the prospect for lower individual tax rates reduces the appeal of tax-exempt income.  Higher interest rates will come as a relief to investors who have watched yields continuously fall from the peak reached in 1981.


An improving economy coupled with an accommodative Fed can provide a powerful environment for the equity markets.  Soaring consumer confidence adds a strong third rail.  However, there are two potential hurdles in this rosy scenario.  The first is the uncertainty surrounding U.S. trade policy.  Mr. Trump has talked tough on trade, continuing his campaign theme of staunching the exodus of U.S. jobs.  Intervention in current trade pacts, regardless of whether they are free or fair, may lead to retaliatory actions.  Trade restrictions or other protectionist measures would have a profound impact on the economy and the fortunes of many multi-national companies.  Second, the continuing strength of the U.S. Dollar presents challenges to corporate profits.  Revenue and profit generated overseas is translated from foreign currency to U.S. Dollars for financial statements.  Weak foreign currencies lead to fewer U.S. Dollars being reported and a possible reduction in earnings.  The Mexican Peso, Canadian Dollar, Chinese Yuan, Japanese Yen, British Pound, and the Euro are all trading at multi-year lows versus the U.S. Dollar.

As we begin the New Year, we are confronted with risk and uncertainty.  The strong post-election response of the stock and bond markets has quickly discounted the potential positive results of policies that aren’t even in place.  However, risk and uncertainty present opportunity.  We will continue to maintain our value discipline in identifying high quality investments that, in our opinion, are trading at temporarily depressed levels.  We appreciate your support and confidence as we remain focused and dedicated to achieving favorable results, regardless of the market environment.

U.S. Debt as a Percentage of U.S. GDP


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