The Weekly View (12/18/17)

What’s On Our Minds:

The economic team at Tufton has been thinking about employment quite a bit lately. We have a few internal reports, the first of which we’ve adapted here for our blog.

The employment rate has remained remarkably low, while wages have refused to budge. In theory, when labor is in low supply, employers will raise wages to attract talent. That increase in wages tells us that our economy is starting to heat up, and we need to be caution of above-trend growth- the kind that causes recessions. At least, that’s how it’s always happened in the past. What is different now? Our labor force is changing, in age, skill, and desires.

That is to say: not only are consumer preferences changing, but so are labor preferences, as evidenced by the below chart. The reasons for the labor force decline among young men are likely threefold: drugs, jail, and video games. The opiate epidemic has hit hard, especially in those young males who found themselves jobless. Additionally, supply has been fueled by drug companies who have pushed these drugs on doctors. Because of these and other causes, the percentage of previously-incarcerated males has risen from 1.8% in 1980 to 5.8% in 2010. Of course, this makes it harder for this segment to re-enter the workforce, and they may choose to stay on the sidelines. Finally, to the dismay of parents everywhere, it seems that many young men would rather simply stay home and play video games (see charts, from Bank of America / Merrill Lynch).



Last Week’s Highlights:

We are experiencing a bonfire Santa Claus rally this month.

Markets continued their march higher as investors continue to weigh the impacts of the tax reform deal.  The S&P 500 rose nearly 1% and the Dow Jones added 1.3%.  The S&P experienced a drop on Thursday when Senator Marco Rubio said he would oppose the bill if it didn’t include a larger tax credit for parents with children.  On Friday, senators gave in to Rubio’s suggestions and equity markets charged to reach new all-time highs.  Since the tax reform bill passed in Congress, the S&P 500 has gained roughly 3%.

As investors had expected, the Federal Reserve increased its federal funds target rate by 25 basis points to 1.25%-1.5%.  Janet Yellen shared an optimistic view on the economy and upgraded the Fed’s outlook on GDP growth citing the impact of corporate and personal tax cuts.


Looking Ahead:

Market futures are up big to begin the week before Christmas.  The House of Representatives is set to vote on the tax bill either Monday or Tuesday and Senate will vote shortly thereafter.

Important housing data will be in focus this week. New home starts and permit data will be released on Tuesday and new home sales will be reported on Friday.

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The Weekly View (12/11/17)

What’s On Our Minds:

Even with a strong year in equity markets, the meteoric rise in the value of Bitcoin has been grabbing headlines left and right.  Bitcoin’s run up in price has been nothing short of astounding.  For instance, if you invested $1,000 in bitcoin at the start of 2013 and never sold any of it, you would now have around $1.3 million. In 2010, a software developer paid 10,000 bitcoins for two large pizzas which today would be worth about $160 million.  Bitcoin has seemingly deified the laws of gravity as levels of speculation and fascination continue to increase.

Just this morning Bitcoin’s value has surged again as the Chicago based CBOE launched a futures exchange Sunday evening that allows traditional investors to trade futures contracts on the unregulated currency.  Even though it has been exciting watching Bitcoin’s meteoric rise, Tufton Capital does not believe there is a place for Bitcoin in a traditional investment portfolio given its “Wild West” like nature, its volatility, its shady history, and the cyptocurrency’s unproven track record.  Many critics of Bitcoin are suggesting it shows the classic signs of a bubble.

Market bubbles, like the tech bubble of the 1990’s, have formed for as long as there is record of exchange, and all follow a similar pattern of speculation.

In the early 17th century, the Dutch became enraptured by tulips, and created the first chronicled speculative bubble in history. As recorded in Charles Mackay’s Madness of Crowds, tulips began to grow rapidly in popularity all around Europe, and therefore tulip prices rose sharply. Many deft merchants identified this trend and made a large profit in trading tulips. Other merchants and the nobility, seeing these extraordinary profits, jumped into the tulip market. As a result, prices for tulips kept rising and rising, backed by nothing but speculation. Soon enough, nobles, farmers, seamen, chimney sweepers, and maidservants alike were all dabbling in tulips. Below is a chart of what one individual paid for a single tulip bulb!

Eventually, the tulip market ran out of new money to keep bidding up prices. As reality sat in, speculators all ran for the exit and prices plummeted. Many speculators lost all their savings as contracts they purchased were ten times the price that tulips were then trading.

This is an important lesson for us in 2017. As Benjamin Graham poignantly argues, “an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Graham would certainly have chuckled at otherwise serious individuals who lost a whole year’s salary on buying tulips.

Buying something, be it tulips, Bitcoin, or the hot stock of the day, as an investment because everyone else is doing it, or because of tremendous recent returns is not investing, but speculating. It may work in the short term, but it always has devastating effects in the long term.

The lessons of manias past are always important to keep in mind in an ever changing market. This isn’t to compare any particular asset to the tulip bulb craze, but it is always smart to study history in an attempt to understand the present. Many people will make bold claims about “X being in a bubble” or “Y will never go down.” A prudent investor, not speculator, will not be swayed by the opinions of crowds and will continue to drown out the noise and invest in quality assets at good prices.

BitCoin Price Cart (2014-Present)

Source: World Coin Index


Last Week’s Highlights:


US stocks had a strong week.  Equity markets closed on Friday near record highs as investors continue to wait for a finalized tax reform bill.

Friday’s job report was better than expected.  The US economy added 228,000 jobs in November.  Average hourly earnings grew 2.5% over the past year which is up from November’s 2.3% number.  GDP has risen by more than 3% over the past 6 months which continues to show a favorable backdrop for stocks.



Looking Ahead:

Investors will keep their focus on Washington D.C.  The GOP’s plan promises to be the biggest change to individual and corporate rates since Ronald Reagan’s tax overhaul in the 1980s.

Investors are expecting the Federal Reserve to increase its federal funds rate from 1.25% to 1.50% on Wednesday. Janet Yellen recently restated that she and her colleges, “continue to expect that gradual increases in the federal funds rate will be appropriate to sustain a healthy labor market and stabilize inflation around the FOMC’s 2% objective.”


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The Weekly View (12/4/17)

What’s On Our Minds:

The hum of the holidays has begun at our offices in Hunt Valley, and with equity markets at or near all-time highs this year, investors are feeling joyous indeed.  With plenty of green flashing across traders’ screens this holiday season as opposed to the dreaded red, the hangover left by the Great Recession feels like a distant memory to most. Not everywhere is the good cheer so merry, though.  Customers are experiencing sticker shock thanks to the 2008-2009 downturn somewhere many wouldn’t guess: the Christmas tree lot.

During the financial crisis, cash-strapped Americans cut back on their spending and bought fewer trees. As demand plummeted tree growers either went out of business or planted fewer saplings during those years.  Because it takes 7 to 10 years for a Christmas tree to grow, the entire market is now faced with a shortage this year.

The leading source in the Christmas tree business is the state of Oregon, which harvested an estimated 5.2 million trees in 2016. They are followed by North Carolina with 3.5 million, Michigan with 3 million, Pennsylvania with 2.3 million and Washington with 1.5 million. Since a freshly cut tree can retail anywhere between 60 and 80 dollars, that adds up to some serious money in the Christmas tree business.

The high prices of authentic trees this year has growers worried that families will switch to artificial trees that outlast their natural competitors.  The American Christmas Tree Association estimates that artificial trees accounted for nearly 81 million of those displayed in the U.S. in 2016, while 19 million were natural.

Last Week’s Highlights:

Happenings in Washington D.C. had investors on their toes last week. Stocks were higher but more volatile. The Dow Jones passed 24,000 for the first time in history.  Tuesday and Thursday were both strong days as investors grew more optimistic that the Senate was getting closer to passing a tax reform bill. On Friday we saw a pullback when news broke that President Trump’s former national security advisor, Mike Flynn, might testify regarding interference in last year’s Presidential election.

GDP data from the third quarter was revised higher to 3.3%. This was the second consecutive quarter that saw growth above 3%. Business investment figures were up, suggesting that economic conditions continue to improve.


Looking Ahead:

News coming out of Washington will likely drive investor sentiment again this week. Funding for the government is set to expire on Friday. Government officials are hoping to avoid a government shutdown by pushing the deadline out into the future but President Trump has signaled that he could play hardball.  Meanwhile, the GOP is looking to pass their tax reform bill before the end of the month.

On Thursday, AT&T will go to court against the Justice Department over AT&Ts bid to acquire Time Warner.  The government has cited antitrust concerns.

Friday’s jobs report will also have investors watching.

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The Weekly View (11/27/17)

What’s On Our Minds:

Oil investors will be focused on the OPEC meeting this week. The Organization of Petroleum Exporting Countries (OPEC), which controls over 30% of the world’s oil production, will meet this Thursday in Vienna, Austria to discuss the continuation of production cuts. The cartel agreed to a production cut at the meeting one year ago and investors are expecting a continuation of the deal – keeping roughly 1.8 million barrels a day offline.


Brent crude oil, the global oil benchmark, has risen 12% year-to-date and the price is near the highest level in nearly two years. The Brent crude oil futures curve has returned to backwardation – meaning that the Brent crude price today is higher than all future price in months and years ahead. Historically, a rotation into backwardation has been a bullish view for oil and despite the S&P Energy Index down 7% year-to-date, the index has rallied about 3.5% over the past three months as the futures curve has shifted.


It may be too soon to call, but the futures curve is saying the worst of the oil glut is behind us. Though that may not be an advantage for prices at the pump, client portfolios should benefit from rising energy stocks.


Last Week’s Highlights:

Last week, the three major indexes reached all-time highs. The S&P 500 closed above 2,600 for the first time last Friday, despite lighter trading volumes due to the Thanksgiving holiday and a shortened trading session. The Dow Jones Industrial Average is less than 2% away from breaching the 24,000 mark and the technology driven Nasdaq is rapidly approaching 7,000. Earnings season is winding down with 98% of S&P 500 companies having reported earnings updates. Up to this point, S&P 500 earnings grew 6% year over year. In corporate news, Department of Justice is suing to block the AT&T merger with Time Warner.


Looking Ahead:

This week, investors will continue to monitor news out of the Federal Reserve as well as the White House. On Tuesday, Federal Reserve Governor Jerome Powell will have a confirmation hearing before Congress. Powell has been selected as the next Chair of the Federal Reserve once Chair Janet Yellen finishes her term. Also on Tuesday, President Trump is expected to meet with congressional leaders to discuss a deal that could avoid a government shutdown in December. On Wednesday, Fed Chair Yellen will provide her views on monetary policy. Finally, on Thursday, OPEC will meet to determine oil production strategy and the Senate will vote on tax legislation.


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The Weekly View (11/20/17)

What’s On Our Minds:

With the end of the year quickly approaching, portfolio managers are busy reviewing accounts and, if the opportunity presents itself, harvesting tax losses in accounts.

Aside from research roles, Tufton Capital’s portfolio managers are responsible for all aspects of portfolio construction and supervision, which includes the management of gains and losses that are realized in our clients’ taxable accounts. Of course, tax implications are not the paramount concern in the management of a portfolio, but trading responsibly with this in mind can make a big difference for investors come tax day in April.

Selling at a loss may seem to run counter to your investment goals, but because the IRS allows for investment losses to be used to offset capital gains, investors should look to make the best of an otherwise unprofitable investment. With that in mind, investors should consider selling poor performers in their taxable accounts by conducting tax loss sales. This strategy is especially good for investors in the 25-35% Federal tax brackets who must pay a long-term capital gains rate of 15%. The tax savings increase for the highest income earners in the 39.6% Federal tax bracket, who must pay 20% on long-term capital gains. Plus, depending on where you live, you may be subject to capital gains taxes at the state level. Our clients in Maryland know this all too well!

Of course, we don’t make trades just for tax purposes. If we think a stock is going to increase in value, we hold it. If we think it is going to go down, we sell it. But using a tax wash sale, in which a security is sold and then repurchased after 30 or more days, enable an investor to claim the tax loss but still hang on to an investment that he or she thinks has long-term potential.

Take for example a single person who has an annual income of $100,000. He would be in the 15% long-term capital gains bracket. In his brokerage account, he has a realized long-term capital gain of $50,000 in Investment A and an unrealized long-term capital loss of $30,000 in Investment B. If he sells his shares of the losing stock, he can offset the $50,000 gain against the $30,000 loss, resulting in $20,000 of net long-term gains. If he does not harvest the loss, the Federal tax on his $50,000 long-term gain would be $7,500. By partaking in this tax loss harvest, he will save himself $4,500, which would have otherwise been a piece of his Federal tax liability for the year (See Figure 1).

Portfolios with large unrealized gains will likely have some positions that have unrealized losses. Although a loss may be hard to look at, sometimes it’s best to bite the bullet and clean these losers out of a portfolio. This management strategy allows investors to free up cash in the portfolio, which can be deployed into other, more attractive investments.

While it’s important to avoid the tax tail wagging the investment dog in your overall investment strategy, a disciplined approach to managing tax liabilities is an important component of wealth management.


Last Week’s Highlights:

Stocks were lower for the second week in a row. After a calm summer and placid fall, we have seen a bit of volatility return over the past two weeks.  Markets reacted to lower oil prices and worries surrounding the progress of Republican’s tax reform plan.  Investors seem to be a bit doubtful that Republicans will be able to reconcile Congress’s plan and Senate’s tax reform plans in a timely fashion.


Looking Ahead:

Existing homes sales will be reported on Tuesday and the Federal Reserve is releasing minutes from their meeting earlier this month on Wednesday. Markets will be closed Thursday and will close early on Friday.

The entire team at Tufton Capital Management hopes all of our friends and clients have a wonderful Thanksgiving holiday this week!

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The Weekly View (11/13/17)

What’s On Our Minds:

This morning, Tufton Capital Associates Ted Hart, John Kernan, and Neill Peck taught a sixth-grade math class at Mid Town Academy in Bolton Hill.  The purpose of the trip downtown was to teach the students about stocks and the stock market.  The students participate in the Stocks in the Future program which is a 501C3 charitable organization that partners with schools in downtown Baltimore and provides a three-year financial literacy curriculum for middle school students in under-served communities.

The Stocks in the Future Program introduces students to business concepts, expansion possibilities, reasons for taking a company public, and ways to compare company performance. As students progress through the program, they earn money by attending school regularly and improving their grades. The students can earn up for $80 per year which enables them buy shares in a publicly traded company.  When they graduate from high school, they get to keep the shares they have purchased.  Today, our Associates explained how an investment advisory firm operates and we showed them how to analyze two companies; Facebook and Under Armor.

By the end of the class, the students remembered the 3 most important rules of investing.

1. Don’t Lose Money.

2. Don’t Lose Money.

3. Don’t Lose Money.


To learn more about Stocks In the Future’s Mission, follow the link below:

Last Week’s Highlights:

After 8 straight weeks of gains, U.S. large-cap stocks fell last week. Investors were focused on tax reform and the overall consensus is that the federal government is nowhere close to passing a bill. Congress and the Senate have both presented a plan and it will be in limbo until both houses compromise and present a mutually agreed upon plan.

On Thursday, the Dow was down over 200 points at its lows and the S&P 500 nearly broke its more than 40-day streak of no losses greater than 0.5% for a given session.  Investors should see last week’s dip as a healthy retreat based on the rally we have seen in the last year.  Remember, we have been experiencing one of the calmest markets in history this year and we remain close to all time highs.

Looking Ahead:

Earnings season is coming to an end.  483 companies in the S&P 500 have already reported. Economic news and progress on tax reform will likely rule the headlines this week. On Wednesday, retail sales numbers will be released and on Friday, we will hear housing starts and building permit figures.

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The Weekly View (11/6/17)

What’s On Our Minds:

House Republicans released their long-awaited tax reform bill last week. They are calling the bill the Tax Cuts and Jobs Act and are looking to have it passed by the end of the year.  The bill aims to permanently lower the corporate tax rate from 35% to 20% and to reduce the number of individual tax brackets.  The plan eliminates the alternative minimum tax and it doubles the standard deduction for individuals and couples.  The plan limits the home interest deduction to loans up to $500,000, increases the child tax credit to $1,600, and doubles the estate tax exemption immediately and then will eliminate it by 2024.

Under the Republican plan, people will still be able to deduct up to $10,000 on the property taxes they pay locally, but they will no longer be able to deduct the other taxes they pay to state and local governments from their federal tax payments. This compromise appears to cater to a Republican’s base living in states where local taxes are relatively low and has drawn criticism from GOP representatives from New York, New Jersey, and Pennsylvania.

The tax plan does not make direct changes to how income on your investment portfolio is taxed.  While the new plan doesn’t directly address capital gains and investment income taxes, setting new income tax rates means many investors will pay less in taxes on short term capital gains and dividends because their ordinary income tax rate will effectively be lower.

Though cutting benefits for 401k contributions was allegedly on the table at first, the official plan makes no changes to retirement savings tax breaks provided by contributing to 401k and IRA accounts.  That is good news for investors saving for retirement.

Last Week’s Highlights:

Stocks has a strong week and were in the green for the eighth week in a row.

President Trump nominated Jerome Powell to replace Janet Yellen as the 16th chairman of the Federal Reserve board early next year. Powell is a lawyer by training who served as a top Treasury Department official under H.W. Bush and then joined the Carlyle Group (a private equity firm), where he remained from 1997 to 2005. President Obama nominated him for a spot on the Federal Board of Governors in 2012.  Powell has always been supportive of Yellen’s moves, which suggests a continuation of slowly raising rates and easing regulations.

October’s Jobs Report was released on Friday. Nonfarm payrolls rose by 261,000 and the unemployment rate dropped to 4.1%.

Earnings season continued. Facebook and Apple reported strong numbers. Baltimore’s Under Armour reported poor performance and shares took a beating.


Looking Ahead:

We are getting close to the end of earnings season but hundreds of companies are set to report third-quarter results this week.  48 companies in the S&P 500 report earnings will share their results this week.  President Trump will spend the week touring Asia. University of Michigan’s Consumer Sentiment report is set to be released on Friday.

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The Weekly View (10/30/17)

What’s On Our Minds:

The Tufton Investment Committee meets weekly to discuss our current holdings and examines our entire universe of companies that we would like to own at the right price.  Managing all assets in house and conducting independent research is a timely process but the strategy is designed to pay off over the long term.  We believe that it is our responsibility to manage a portfolio of individual securities, rather than merely play “quarterback” by redirecting funds to outside managers.

The Tufton Investment Committee is very conscious of price and we shy away from overpaying for shares in a company.  While this may hurt us when the rest of the street is chasing momentum stocks higher, we believe that by purchasing undervalued securities our clients are provided a “margin of safety”.  We believe that our independence is an advantage.

Tufton Capital seeks to build our equity portfolios of 40-50 stocks. Of these companies, 50-60% equities we hold are what we consider to be “trophy companies”. These companies are industry leaders based on profitability measures and market share.  These companies have proven and stable management teams, consumable products or services, operate in a relatively mature industry, pay a dividend, and their share price is typically stable.  We look to buy and hold these stocks for the long haul.

30-40% of a Tufton’s equity portfolios are made up of what we consider to be “economically sensitive companies”. These companies we purchase with no specific time horizon, but we set very specific price targets.  These companies are significantly influenced by the stages of the economic cycle and can be more volatile than our trophy companies.

The remaining 0-10% of an equity portfolio is what we consider to be “special opportunities”. These companies are typically have smaller market capitalization, operate in an emerging industry, have some sort of leading edge product with above average growth potential.  These companies’ share prices can be volatile but we recognize the value in buying shares in these types of companies at a reasonable price.

Last Week’s Highlights:

For the seventh week in a row, domestic equities were positive and reached record levels.  It was the busiest week of third quarter earnings season and investor optimism was confirmed by strong numbers. The technology sector had a particularly strong week.  The NASDAQ was up 2.2% on Friday.  While single stock volatility can be increased during earnings season, overall, equity markets continue to be strong.



Looking Ahead:

It’s a busy week with 135 of the S&P 500’s companies reporting third quarter earnings.  The Federal Reserve will issue its decision on interest rates on Wednesday.  October’s jobs report will come across the wire on Friday morning.

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The Weekly View (10/23/17)

What’s On Our Minds:

Equity markets have been on a roll lately, but don’t forget about interest rates!

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.

Whenever you hear about Janet Yellen attending a big Federal Reserve meeting, 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 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 investment committee’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.

5 year Federal Funds Rate

Last Week’s Highlights:

Equity markets enjoyed their 6th consecutive week in the green.  The Dow Jones and S&P 500 recorded record highs on Thursday on the 30th anniversary of Black Monday.  The Dow Jones had a great week and was up 2%.  So far, we have seen strong third quarter earnings reports that has investors pushing equity market ever higher.  General Electric was an exception to the news of strong earnings figures.  GE’s CEO opened earnings remarked by saying, “The results I’m about to share with you are completely unacceptable.”  He telegraphed big changes ahead for the company.  According to the numbers, American companies appear strong and the economy continues to improve. Investors were also supportive of the news that Jerome Powell could be nominated to replace Janet Yellen.



Looking Ahead:

Can stocks continue steaming upward? That’s the question on everybodys’ minds.

Politicians in Washington seem to be getting closer to proposing a tax reform plan.  Equity analyst will be busy listening to earnings calls this week. CNBC provided the chart below highlighting key earnings releases coming from blue chip companies this week.

Source: CNBC

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The Weekly View (10/16/17)

What’s On Our Minds:

This Thursday marks the thirty year anniversary of “Black Monday”. On that day, the Dow Jones tanked nearly 23% in a chaotic selling spree.  For the most part, the one day crash was caused by growing complexity in the market.  Computerized trading platforms were new at the time and complicated hedging strategies that used equity index futures contracts were just being introduced.  Today, on a percentage basis, that correction would knock over 5,200 points off the DJIA.  As a former stock broker told us this morning, “that was a tough day in the trenches”.  On the bright side, the S&P 500 has returned nearly 900% since.

Tufton Capital Portfolio Managers, Randy McMenamin,  saved the Wall Street Journal from that day.  This paper, along with other “fateful” days in the markets are kept it in our firm’s library as a reminder that corrections can and do happen.

Wall Street Journal: Monday October 19, 1987


Last Week’s Highlights:

Third quarter earnings season kicked off and investors were optimistic.

Going into the week, investors were expecting solid performance in the big bank’s earnings reports. On Friday, Bank of America’s report was met with happy investors and the company’s share price increased by 1.5%. JPMorgan and Citi sold off as they failed to meet some important metrics. Particularly, both banks failed to deliver strong loan growth and loan quality metrics.

Looking Ahead:

Investors will have a keen eye on earnings reports coming across the wire this week.   Many believe that in order to sustain the rally we have seen in equity markets, investors will need to see strong earnings growth over the next few week.

On Monday we will hear from highflier, NetFlix. On Tuesday we will see earnings from Goldman Sachs and Harley Davidson. On Wednesday, Abbot Labs reports their results.  Phillip Morris, Berkshire Hathaway and Taiwan Semiconductor report on Thursday.  On Friday, we will wrap up the week with reports from General Electric and Proctor & Gamble.

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The Tufton Viewpoint, Autumn 2017: Keeping Steady in an Unsteady World

by Chad Meyer

As the temperature finally drops, the landscape subtly shifts, and children everywhere resignedly dig out their real shoes and dust off their school uniforms, it’s difficult not to take pleasure in the perennial change that autumn brings. As anyone who has watched more seasons pass than they care to admit knows, this brand of change—the predictable kind—doesn’t really count as change at all. Instead, it represents a keeping of plans, and all the comforts that come with knowing the world is still spinning right on schedule.

Of course, in an autumn like this one, even the most optimistic among us could be forgiven for suspecting that there may be a different sort of change afoot—and that whatever “schedule” once reigned is now subject to revision with a few hours’ notice. As a glance at the evening news suggests, our country is plainly on the brink of a dramatic and unpredictable change on multiple fronts. From the hurricanes rocking our nation’s shores, to the political debates rocking our national dialogue, to the looming prospect of war with North Korea, stability appears to be a commodity that grows scarcer in America by the day.

Nor, it would seem, is the the financial sector bucking the trend. As hordes of market commentators (and, perhaps, your local cabbie) will eagerly attest, Bitcoin, Ethereum, and various other “crypto-currencies” may well be on the verge of sending dollar bills the way of the dodo bird. But even as the market’s enthusiasm for digital currency renders it the hottest asset class of the year, all the fervor has some experts crying foul. Bitcoin “is a fraud,” declared JPMorgan Chase CEO Jamie Dimon at a recent investor conference. “It’s just not a real thing.”

Finally, and perhaps most perplexingly, there’s the stock market itself, humming along nicely as the world around it rattles and shakes. In the third quarter of 2017, the Dow Jones, S&P500, and NASDAQ all rose by roughly 4% or more, with the latter index posting gains of nearly 6%. That level of performance and the low volatility that attended to it have, in some circles, given rise to the anxiety that the market is “ignoring” broader macroeconomic trends. Doesn’t the market see (so this brand of hand-wringing goes) all the change that’s lurking about?

Put simply, it does, but it also recalls that it has seen all this before. For the last two hundred years, while America has faced conflicts and crises of every ilk, at home and abroad, the U.S. stock market has quietly chugged along as one of the most reliable wealth creation vehicles in the history of mankind. And at the risk of seeming old-fashioned, we here at Tufton Capital tend to believe it’s going to keep chugging, no matter how the wind howls outside our door.

In a world that changes by the minute, we thank you for the opportunity to protect and grow your capital, and we remain honored by the trust you’ve placed in us.

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The Third Quarter of 2017: The Irrepressible Stock Market

by Eric Schopf

The third quarter gave us yet another solid advance in the stock market.  The Standard & Poor’s 500 delivered a total return of 4.5%, and for the year in full, the broad-market benchmark has delivered 14.3%.  Also keeping in line with the first half, the S&P saw little volatility in the quarter.  Wanting to give us at least a little excitement, the bond market gyrated throughout the past three months. However, by September 29, intermediate- and long-term interest rates closed essentially unchanged from June 30.  Short-term interest rates continued to move higher in reaction to Federal Reserve policy. And so, we march steadily upward.

The stock market’s lack of volatility is truly remarkable given the wide range of social, geopolitical, and meteorological events that punctuated the quarter.  The largest setbacks in the markets occurred in mid-August, when tensions with North Korea rose. Reports from the self-isolated nation revealed that it was examining an operational plan to strike areas around the United States’ territory of Guam with medium-to-long range strategic ballistic missiles, enough to rattle any market participant. Then, a week later, it was rumored that Gary Kohn, the Director of the National Economic Council and a chief economic advisor to President Trump, was considering resignation after the President failed to blame neo-Nazis for the Charlottesville, VA violence.  The resultant selloff was short-lived, though, and the stock market was within a few points of its all-time high by the end of the month.  The Category 5 forces of Harvey, Irma, Jose, and Maria only fueled the market’s advance. Investors looked past the short-term effects and saw that building reconstruction and automobile replacement will more than offset the temporary slowdown in economic activity.

Falling in line with the squadron of ho-hum, the interest rate backdrop changed little during the quarter.  Rates remain at historically low levels.  The Federal Reserve did announce plans to begin winding down their $4.3 trillion bond portfolio by letting bonds mature without reinvestment. This development didn’t raise rates, though, as the pace of contraction will initially be so slow as to be almost undetectable. Inflation is also keeping rates down below the Fed’s 2% target, despite a low unemployment rate of 4.3%.  Low unemployment rates belie the true state of the labor market, which is likely looser than we’d prefer, given the labor force participation rate.

Labor force participation, the ratio of payrolls to the working age population, is a clear indication that there is still slack in the work force (see chart).  The broader deflationary themes of an aging population (and thus, work force), globalization, and technological innovation continue to play a significant role in the disinflationary environment.  Low inflation undermines the Fed’s case for interest rate hikes.  Low interest rates in turn support higher stock valuations. Thus, we seem to be stuck with low inflation, low interest rates, and a richly-valued market.

Source: FactSet

We turn now from the “boring” market to the piece of modern America that seems more turbulent than it has ever been – politics. Washington’s focus has now shifted from the Affordable Care Act to tax reform. Potential changes in the tax code have replaced the Fed as the primary influence on interest rates for the balance of the year. If these reforms were both successfully passed and meaningful, they would be a major catalyst for the equity and credit markets.  The ultimate scope of reform will depend on Congress’ ability to compromise on change, something that has been rare of late to say the least.  The very idea of implementing a complex reform versus a simple tax cut gives some uncertainty to any such proposal. The more variables that are added to any plan, the less certain economic growth becomes. A tax reform cannot avoid adding many unknowns.

The current tax thinking goes like this. Seeking to reshape both tax structure and the U.S.’ prosperity, the heart of reform lies in reducing corporate tax rates.  Our statutory rate of 35% puts America at a competitive disadvantage with nearly all global peers.  So, the plan is to reduce corporate rates to a level that makes it economically feasible to keep jobs at home.  These additional jobs would lead to a greater collection of personal income taxes.  If the Administration’s math is to be believed, the larger take on personal income taxes will largely offset the loss of corporate taxes. Thus, a balance is achieved, and everyone is happy.

However, there is also discussion of lowering taxes on individuals.  Lowering personal taxes strains the Administration’s math, which to begin with is somewhat tenuous.  Many experts do not think that the taxes from the higher spending that are supposed to come on the back of greater growth will compensate for the proposed cuts in tax rates.  To help bring taxation and spending more into line, the elimination or reduction of tax deductions will be required.  This is the part that requires compromise and is so difficult, since no taxpayers want to give up their deductions. Furthermore, reductions in Federal spending have been absent from the conversation.

We have no doubt that the economy could benefit, at least in some small measure, from changes in the tax code or a tax cut.  There is little room for error though.  Should tax reform not generate the desired growth, the national debt will balloon (see chart).  A greater national debt at a time when the Federal Reserve is reducing their net holdings of Treasury securities will most likely push interest rates higher.  The Fed could always modify their strategy and slow the pace of balance sheet reduction.  Low rates have been the catalyst for the stock market for a long time.  The question is whether the economy and the stock market can support higher rates.

While Washington squabbles, the economy continues to churn upward in unimpressive but steady fashion.  Annual gross domestic product growth in the range of 1.5% – 3%, par for the course since the end of the Great Recession, appears to be the new normal.  However, accommodative monetary policy, gridlock in Washington, falling unemployment, and this slow but steady economic growth have provided a powerful foundation for stocks and bonds.  The trends are still in place but the sands are beginning to shift.

We are at an inflection point with Fed policy.  If the Fed raises interest rates, they would eventually become an economic headwind. But higher rates could also impact corporate profits in the near term, because higher rates would likely mean a stronger U.S. dollar. A stronger dollar makes corporations’ exports more expensive to foreign buyers, and thus less competitive.

Corporate profits have been aided by a dollar weakened by the Fed’s pivot to a slower monetary policy pace in 2017.  Also menacing are the classic late-cycle signs throughout the markets. Stock valuations are elevated, the yield curve has flattened, and balance sheets are more levered.  We remain cautiously optimistic but mindful of the environment as we work hard to grow and preserve your capital.

Source: FactSet

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Bulls Make Money, Bears Make Money, But Pigs Get Slaughtered

by Neill Peck

You may have heard this old Wall Street maxim that warns against greed and impatience, but have you followed it?  Without a doubt, the stock market can be an exciting place, and it’s easy to get roped into the allure of finding the next home run or timing a trade just right.  For instance, a friend at a cocktail party may tell you about the killing he made off that ABC trade, and you may think, heck, why can’t I do that?  Then there’s your inner trader who may get the best of you and get you thinking that you too can perfectly time your entry and exit points. If you have ever found yourself directing trades based on your emotions or you have attempted to time the market, are you really investing for the long haul? Or are you looking to make a quick buck?  At Tufton, we may even suggest that you are gambling (not investing) with your retirement savings.

Research has shown that investors are significantly better off by following the approach of “time in the market” rather than timing the market.  From 1998 until 2012, CXO Advisory Group ran a study to attempt to see if 28 self-described market timers could successfully time the market.  The overall results were not good.  They found that market experts accurately predicted the direction of the market only 48% of the time.  Only 10 of the 28 experts could accurately forecast equity returns more than 50% of the time, and not even one could outperform the S&P 500.  The evidence was so conclusive that CXO decided to stop tracking the statistics entirely! Unfortunately, sales skills triumph over investment skills on Wall Street from time to time, and often the loudest pundits get most of the attention.  If an investment strategy sounds too good to be true, it is.

Another caveat to deter you from timing the market is that, over time, it’s possible to underperform significantly by sitting on the sidelines.  Yes, it can be very costly to sit in cash. For instance, if you examine the chart below, you see that if you missed the top 12 months in the past 5, 10, 25, and 50 years, you would have underperformed the S&P 500 significantly in each scenario.

Even though a disciplined investment approach may sound like it’s old advice straight from your grandfather’s roll top desk, it’s an idea that has stood the test of time.  By staying the course and grinding it out over a long period, investors avoid the worst of which can happen and will happen over the years.  A disciplined approach to portfolio management keeps average investors from overreacting and hurting their long term positive return that we all need to retire well. It’s almost impossible to avoid the allure of “knocking it out of the park” with your investments. Just remember, as history has shown us, if you’re not careful, you may end up “getting slaughtered.”

Stay Invested (Please)Source: FactSet


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TJX Companies, Inc. (TJX)

by Scott Murphy

While the overall stock market has been rewarding for most investors in 2017, the same cannot be said for the retail sector. Amazon has become a “legendary and mythical beast” of sorts and has become the biggest competitive threat for every retailer, placing the stocks of traditional brick-and-mortar retailers on the sale rack. As value investors, we readily acknowledge the magnitude of change in retail but still believe there is a place in our portfolios for a traditional retailer like TJX Companies, Inc. (TJX).


TJX has a leading market position in the off-price retail market. They control 45% of the discount retail market and operate 3,800 stores under the brands TJ Maxx, Marshalls, HomeGoods, and HomeSense. In a tough and changing retail environment, TJX has been able to grow its same store sales for twenty one consecutive years. Simply put, they have proven they can grow sales and earnings through good and bad economic times. Many attribute this resilience to their customers’ “treasure hunting” experience.  At TJ Maxx, customers can arrive at the store not knowing exactly what they are looking for, and end up finding something they like at an irresistible price – a “treasure.”  This customer experience and incredibly low prices have largely allowed TJX to defend itself from the industry disruption caused by Amazon.


Therefore, we have begun to initiate positions in this well managed, industry leading discount retailer that has underperformed the market for two straight years. Our expectation is the market will realize they have misjudged the power of this off-price traditional retailer and will become buyers again, boosting the stock price in the process.


Source: FactSet

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The High Stakes of Low Volatility

by Ted Hart

As mentioned in our lead article, the S&P 500 is up 14.3% this year through the third quarter. With that gain, the market has witnessed the second-longest period without a 3% pullback since 1928. If this streak continues through October, the S&P 500 will set the record for longest such period. On top of that, the average range between daily highs and lows on the index is also hitting historical bottoms. Investors are attributing this low volatility to a number of factors, some of which include passive and quantitative investing strategies. In fact, many of these approaches might be providing investors competitive returns. However, all of them ignore company fundamentals and can often push stocks higher without any regard for how a company or an industry is performing. Money has poured into these strategies in the past few years. As volatility inevitably rises, these trades should begin to unwind.

Passive investing is the most basic form of this investment trend and simply involves investing money in a stock market index, such as the S&P 500. This strategy has rewarded investors over the course of the bull market, but despite having low fees, it still has a few flaws. To maintain the proportional stock weightings of a given index, the fund or ETF provider must buy shares in stocks that have increased, and sell shares in stocks that have decreased. This can lead to overvaluation of the companies that are consistently bought (think Netflix). In addition, because of the flows to passive investment vehicles, Goldman Sachs estimates that the average stock in the S&P 500 trades on fundamental news only 77% of the time, down from 95% ten years ago. When the markets eventually turn south and investors pull their money from these indexed products, the forced selling will likely create a cascade effect as index fund suppliers are forced to sell securities to meet investor redemptions.

Risk parity is another investment strategy that often ignores company fundamentals and feeds off low volatility. Risk parity investors make investments in a company, index, or asset class based on volatility. The strategy targets a specific volatility measure and will typically be buying securities as the volatility is declining and selling securities when volatility rises above the target. Recently, risk parity strategies have pointed to holding more stocks than bonds as the volatility of stocks has significantly declined. As volatility increases, the recent trends should flip as risk parity strategies begin selling stocks and proceed to buy bonds to “pare the risk.” Many investors believe that because risk parity strategies have grown, the forced selling could create a sharp selloff in stocks – possibly creating an opportunity for the patient investor.

While these strategies continue to push stocks higher and investors likely buy every dip in the market, market liquidity is also plentiful. As a result, buyers of stocks and ETFs are not having difficulty finding sellers and vice versa – sellers of stocks and ETFs are easily finding buyers. In fact, since the Federal Reserve started tracking the data, the M2 money supply (which includes checking accounts and mutual funds) as a percentage of nominal GDP has never been higher. The elevated levels of liquidity in the markets can be the result of many factors, including the Federal Reserve’s Quantitative Easing policy and low interest rates. QE, as it is known, took the Fed’s balance sheet from just under $1 trillion in 2009 to over $4 trillion today. Also adding to liquidity are additional flows into ETFs, particularly from the retail investor.

No matter what the cause of low volatility and rising markets, we at Tufton continue to search for new investment ideas and monitor our buy prices. As one investor said, “Investments are the only business where when things go on sale, everyone runs out of the store.” Whenever that happens, we will be right at the front door.

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