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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The Weekly View (10/9/17)

What’s On Our Minds:

Donating Appreciated Securities

This time of year, charities may begin hounding you to make your annual donations. Have you ever considered donating appreciated securities? It’s a tax efficient way to support charities.  Read on to learn how you might be able to “kill two birds with one stone” utilizing this strategy.

Charitable giving provides donors with tax relief every tax season in the form of deductions. In an effort to encourage positive social action, the IRS provides incentives for all kinds of charitable contributions, from monetary donations to used cars. You can even donate your appreciated securities (stocks, bonds, mutual funds, etc. that have risen in value) to the charity of your choice. Long-term appreciated securities are the most common non-cash donations, and they can be the best way for donors to give more to their chosen charities. The tax advantages to donating stocks are such that both the donor and the charity benefit.

What are the benefits?

Donating appreciated securities yields two tax benefits for the donor. The first tax benefit is the elimination of capital gains tax. Normally when you sell an appreciated stock, you pay capital gains tax on the amount your securities have increased in value since being purchased. For example, if you bought stocks for a total of $1,000 and then sold them years later for $5,000, you would owe capital gains tax on $4,000 of income from the sale. This tax can add up significantly depending on what tax bracket you fall under, how many stocks you sell and how much they’ve appreciated over time. When you donate appreciated securities, however, you don’t owe any capital gains tax, no matter how much they’ve increased in value. The charity receiving your donation is free from capital gains tax on your contribution as well.

Tax Deductions

The second tax benefit is writing off the donation on your tax return. As long as you itemize, you can deduct charitable contributions on your return, and the more you donate, the more you can deduct. In this case, you’ll be donating more since you can donate the entire value of the asset, not the value minus taxes. Thus, your tax write-off will be greater. In other words, you can take a charitable deduction on money that hasn’t been taxed. This also benefits the charity, because they’ll get a larger donation than they’d otherwise receive.

There is a limit to how much you can deduct for charitable contributions, which varies depending on what you’re giving and what organization you’re donating to. Most organizations are subject to a 50 percent limit, meaning your charitable tax deduction cannot exceed 50 percent of your adjusted gross income. Other organizations have a 30 percent limit. You can check with the IRS or ask the organization themselves to be sure. These limits apply to monetary charitable donations. If you’re donating appreciated securities, the limits change; a 50 percent organization’s limit becomes 30 percent for appreciated securities, and a 30 percent organization’s limit moves to 20 percent.

Reducing Risk

Another benefit to donating your appreciated securities is reducing risk in your portfolio. If too much of your portfolio is dedicated to a certain kind of investment, your risk increases because your portfolio is less diversified, so your assets are all relying on that one kind of investment to succeed. To decrease that risk, you’d normally have to sell the stocks and pay capital gains taxes. Donating them, on the other hand, is a tax-free way to rebalance your portfolio.

Last Week’s Highlights:

Equity markets hit record highs again last week.  Stocks continue to “climb a wall of worry” but investors got some encouraging economic data releases last week. Reports showed stronger than expected trends in the automotive, manufacturing, and service sectors.  Friday’s job report was weaker than expected but that was attributed to the effects of the recent hurricanes in the southeast.

 

Looking Ahead:

Earning season is upon us!  We will kick things off with Delta and BlackRock on Wednesday. Thursday we will see earnings from JPMorgan and Citigroup and then Bank of America and Well Fargo on Friday.  Also on Friday, the U.S. Census Bureau will announce retail sales numbers for September. August’s figures showed a 0.2% dip from July to August, but an increase of 3.2% from August 2016.  We will also see how the American consumer is feeling with the University of Michigan’s consumer sentiment figure for October. Their survey found a 1.7% dip in confidence from August to September so it will be interesting if things change course.

 

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The Weekly View (10/2/17)

What’s On Our Minds:

“A year from now, it’s not going to be Tech.”

Such was the general consensus at last week’s investment meeting at Tufton Capital. While the Tech sector analyst is characteristically overenthusiastic about the forward march of technology, we are reminded by history that the high flyers are rarely up for very long, and when they are, the crash is ever the more painful.

As we look at this year’s winners, the Tufton approach gets pooh-poohed as more exciting names are gobbled up and soar ever higher. “Why isn’t half your portfolio cryptocurrencies?” is not quite the question we are always getting, but it seems that way. We are confident, however, that a disciplined approach will win out over time. But in the mean time, the temptation remains strong to jump into these names that just seem to keep going up in price. Why shouldn’t you?

Another joke around the Tufton offices when we have another big up day is to say, “Wow, stocks just always go up!” Of course, the joke is that they don’t, and to be careful of another fall. The tech stocks at the head of the run-up have amazing possibility in them: self-driving cars, artificial intelligence, interconnected everything, a new kind of currency that will reshape accounting and the financial world. Even if all these things come to fruition, there is a price for everything, and an overvaluation for everything. How does one determine the correct valuation for Bitcoin? We’re afraid no one will know for sure until after the climb comes to a screeching halt. Similarly, Amazon and Facebook are valued like they will rule their respective worlds someday very soon. Perhaps they will, but betting on the next world-changing trend has been nothing but a loser’s game in the past.

Amazon has had Price/Earnings ratios in the triple digits for years.

What’s a value investor to do?

 

Last Week’s Highlights:

Stocks were again higher last week and hit record levels. High hopes for the Republicans’ tax plan pushed stocks ever upward. Stocks are looking at moving into mid-teen growth for the year, a solid performance to be sure. The 10-year Treasury continued to rise. While resulting in lower bond prices, increased rates are signs of a solid recovery, and gives the Fed more breathing room.

 

Looking Ahead:

Plenty of economic data this week, including manufacturing PMI on Monday, vehicles sales Tuesday, and the September jobs report on Friday.

 

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The Weekly View (9/25/17)

What’s On Our Minds:

Tune your TV to CNBC on any given day and more and more attention is given to activist investors and the companies they target.  As activists, investors look to maximize shareholder value by often taking large enough positions to influence  management decisions- they are looking to shake things up at the company.  Activists may decide to move in on a company if they believe management has stumbled, it would be better off as a private company, it has excessive costs, or if the activist think they have a better capital allocation strategy, such as buying back stock or raising the dividend.

Often activists are targeted by the media and politicians for being “hit and run” investors, but activists will argue that they are genuinely concerned about companies and the U.S. economy.  The issues surrounding activism are not clear cut; some activist may just be greedy, while others actually want to maximize shareholder value over the long-term.

Over the summer, Nelson Peltz’s $12.7 billion hedge fund, Trian Partners, took aim at household product conglomerate Proctor and Gamble. His fund currently owns $3.3 billion worth of P&G shares. Peltz thinks P&G is not structured properly and believes that the company in resistant to change.  He is currently in a proxy fight for a seat on the company’s board.  The company says they have been actively working with Trian but is against adding him to the board.  In dollar terms, P&G is the largest company to ever face a proxy fight of this nature.

Activists take positions in all different types of companies, across many different industries and of various market caps, but more often than not, activist target companies that have been beaten up and are considered value stocks.  At Tufton Capital, we are not activist investors but we do look for undervalued stocks so it’s not uncommon for companies in our equity portfolio to have activist involvement.  Thus, we do have to pay attention to the hype created by these market players.

While activist investors grab plenty of headlines, it’s tough to determine the actual impact activism is having on the overall market.   According to a study conducted by the Wall Street Journal last year, of the largest 71 activist campaigns between 2009 and 2014, only about 50% of targeted companies outperformed their peers.

 

Last Week’s Highlights:

Stocks were marginally higher last week and hit record highs.  The highlight of the week was the Federal Reserve’s announcement that it would begin normalizing its balance sheet in October. The Fed also stated that it would keep its federal funds rate between 1 and 1.25 percent. The announcement caused 2 and 10 year Treasury yields to increase along with the the value of the dollar.

 

Looking Ahead:

Investors will see how the housing market is doing this week when the Case-Shiller Index of home prices and new home sales figures are released on Tuesday.  We will also get a report on consumer confidence on Tuesday and Janet Yellen is scheduled to deliver a speech. Investors are expecting her elaborate on the Fed’s plans to unwind the huge balance sheet it has amassed since the financial crisis.

 

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The Weekly View (9/18/17)

What’s On Our Minds:

There was a good amount of stock speculating in recent weeks as day traders tried to take advantage of the short-term effects of Hurricanes Harvey and Irma.  While it may be tempting to speculate how companies’ stock prices may gyrate around these types of events, we believe it’s important to remember that stock speculation is rarely successful over the long term.

Conversely, 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:

Equity markets were strong last week. The Dow Jones surged more than two percent and the S&P 500 was up over one and a half percent.  It was the strongest week for the S&P since January. Most of the optimism was spurred by news that congressional Republicans are planning on releasing their tax reform policies later this month.

 

 

Looking Ahead:

The Federal Reserve is holding their two-day Federal Open Market Committee meeting this week. It will wrap up on Wednesday and Janet Yellen will give a speech. Investors don’t expect a bump in interest rates but it’s likely that the central bank will hash out how they plan to start unwinding their 4.5 trillion-dollar balance sheet.

 

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The Weekly View (9/11/17)

What’s On Our Minds:

Tufton Capital Management is committed to helping our clients take control of their financial future. Armed with an effective estate plan, you can be sure you preserve your family’s legacy while minimizing taxes. By taking advantage of direct gift limits allowed by the IRS, individuals with estates totaling $5.49 million, and married couples with $10.98 million, can get a head start on generational wealth transfer and reduce the ramifications inflicted by estate taxes.

Taxes and direct gifts

Depending on their amount, direct gifts can be given tax-free. You may give up to a combined $5.45 million in life or death without the money being subject to estate or gift taxes, and there is also a $14,000 annual exemption rate per donee (recipient). Couples can combine their annual exclusions to double this amount, meaning they can give $28,000 per donee per year. Even if only one spouse technically makes the gift, as long as both spouses consent, it is considered by the IRS to have come from both. This allows couples to maximize their gifting ability. In addition, all gifts you give to your spouse throughout your lifetime are tax-free, as long as he or she is a U.S. citizen. Annual gifts can make a big difference over time, and since they are a “use it or lose it” exclusion, it makes sense to transfer as much money as possible this way as part of an estate plan.

Since annual gift tax exemptions are based on the calendar year, timing is important when gifting. For example, instead of gifting $25,000 to someone in December, if you gifted $14,000 in December and the remaining $11,000 in January, you could avoid gift taxes altogether. If your gifting amount for the year does end up exceeding the annual exemption amount, you have to file an informational gift tax return for that year and either pay 40 percent of the excess amount or use up some of your $5.49 million lifetime estate/gift exemption. One thing to consider with estate and gift taxes is that if you have to choose between the two, it will usually cost less to gift while you are living (even if it is above the exemption amount) than to wait until after death. Gifts made before death shrink your taxable estate by both the amount of the gift and the interest the money would have gained by the time of your death.

In addition to gift taxes, generation-skipping transfer tax (GST tax) is also a consideration for those subject to estate taxes. GST tax is applied to property that is passed to related persons more than one generation younger than the donor or to unrelated persons who are more than 37.5 years younger than the donor via a will or trust. This tax was created because many people had discovered that they could pass their estates directly to their grandchildren and therefore avoid one generation of estate taxes. GST tax rates and exemptions are the same as estate taxes, with up to a $5.49 million exemption and a 40 percent taxation rate.

Appreciated Assets

Gifts do not always have to be in cash. By gifting appreciated assets, you not only move money out of your estate, but you also move any future appreciation of those assets out of your estate and out of the grip of estate taxes. Another benefit of gifting appreciated assets is a possible capital gains tax advantage. Capital gains tax is enforced on the amount that the value of the asset increases from its original value. For example, if a stock was bought for $2,000 and then gifted when it was worth $2,500, capital gains tax would be assessed on $500. If the recipient of the assets is in a lower tax bracket than the donor, he or she will end up owing less money on this asset.

Last Week’s Highlights:

 

Stocks were lower last week. Political headlines and the impact of both Hurricanes Harvey and Irma weighed on investors’ minds.  The Dow Jones slipped .86% and the S&P 500 shaved off .61%.

Investors were relieved last week when President Trump reached across party lines to extend the nation’s debt ceiling which will keep the government funded for the next 3 months. Although they may have only “kicked the can” on the issue, the move showed some rare bipartisan cooperation.

The monetary cost of Hurricanes Harvey and Irma will not be totally calculated for some time but the overall cost of both storms together could be in the several hundred billion dollar range. It is likely that property and casualty insurers covering Texas and Florida will see large claims in coming quarters.

Looking Ahead:

Monday is the 16th anniversary of the 9/11/2001 terror attacks.

On Tuesday, Apple will release the highly-anticipated iPhone 8.  Experts are expecting the new iPhone to include “Face ID” technology that will recognize the owner’s face so that users and simply look at the phone to unlock it.

On Friday, retail sales, industrial production, and capacity utilization figures will all be reported. Also on Friday, contracts for stock index futures, stock index options, and stock options all expire on the same day.  These “triple witching” days occur four times a year and can result in escalated trading activity during the final hour of the day.

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The Weekly View (9/5/17)

What’s On Our Minds:

The S&P 500 has been on a ten-month run without a 3% sell off.  It has been a historically calm market that has some investors worried that we are long overdue for a pullback.  As we wrap up summer and move into fall, bears are concerned that markets are poised to get more volatile.

With plenty of geopolitical uncertainties currently in the mix, their worries are not without basis.  Congress must decide to raise the debt ceiling this month and the civilized world must deal with a North Korean regime that continues to threaten nuclear war.  Of course, the 24 hour news cycle is doing its best to frighten the average investor.

Optimists disagree with the bears and believe that any volatility spurred from these coming events will be short lived.  Bulls are pointing to recent double digit growth in corporate earnings and increased economic growth throughout the world as catalysts that can continue pushing the market higher.  Furthermore, market bears have continued to be disappointed this year as sell offs instigated by geopolitical and US political drama have been brief. (See the graph below from Deutsche Bank.)

At Tufton, we continue to remind our clients and friends that even though “noise” may affect equity markets from day to day, it remains crucial to remain focused on the long term.  Uncertainty is a fact of life in the investment business, and over the years, a disciplined approach through thick and thin has benefited our clients handsomely.

 

 

Last Week’s Highlights:

Equity markets moved higher last week in the face of devastating flooding in Texas and more hostile moves by the North Korean regime.  Hurricane Harvey dumped 50 inches on rain in the Houston area, killed 46 people, and temporarily shut down a good portion of the nation’s refineries which has pushed fuel prices higher.

Friday’s job report was strong and showed that the U.S. economy added 156,000 jobs in August.  Treasury Secretary Steven Mnuchin said that the Trump administration and Congress will release more details on their plans to overhaul U.S. tax code in coming days.  United Technologies announced they are closing on a deal to acquire Rockwell Collins. Gilead Sciences announced it was purchasing Kite Pharma.

 

Looking Ahead:

Domestic markets were closed on Monday in observance of Labor Day.  Factory and durable goods orders will be reported on Tuesday.  The ISM non manufacturing index for August will be reported on Wednesday. The European Central Bank is meeting on Thursday to issue its decision on interest rates.  Another hurricane is making its way across the Atlantic and could potentially hit Florida and head into the Gulf of Mexico

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The Weekly View (8/28/17)

What’s On Our Minds:

Over the weekend, Hurricane Harvey walloped the Texas coast and caused major flooding throughout the Houston area.  Five deaths have been reported so far and over 3,000 water rescues have been performed.  It looks like rain will continue through the week and the city could receive up to 50 inches of rain by the time it’s all said and done.  Along with the humanitarian issues brought on by the storm, many are asking how this historic weather event will affect business along the Gulf Coast.

The storm will without a doubt be a major hit on insurance companies covering homes and business in the area and it will also affect the local oil industry.  The hurricane’s path goes right through a corridor of critical energy infrastructure in the Houston and Galveston area.  Investors are expecting the storm to send ripples through the energy industry this week.  Thus far, the hurricane has forced 15% of the U.S.’s oil refining capacity to temporarily shut down, and it looks like it could get worse as the storm heads east towards refineries along the Texas and Louisiana boarder. Experts are saying that even though refineries may not be damaged, the Houston Shipping Channel has been closed since Friday. As a result, crude can’t get into port and refined product can’t be shipped. Several major pipelines that lead in and out of the Houston area may also see interrupted operations due to the storm.  Rest assured, the U.S. prepares for times like these and has a large stockpile of gasoline on the east coast that can sustain the entire country for 2 weeks.

Oil investors are expecting the crack spread (the metric that tracks the difference between the price of oil and gasoline) to widen in the short term following the storm.  Depending on how fast refineries can get back up and running after the storm will determine how quickly the crack spread will normalize.  Look for gas prices to spike in the short term following the storm.

Texas and Louisiana are bracing for more rain as Hurricane Harvey moves onshore. Source: Accuweather.

Last Week’s Highlights:

Domestic equity markets saw small gains last week.  The S&P 500 was up 0.72% and the Dow Jones increased by 0.64%.  Materials and telecom sectors had a strong week but consumer staple stocks declined.  Grocery store stocks had a tough week due to Amazon’s announcement that they would lower prices at their recently acquired Whole Foods stores.

With earnings season wrapped up, happenings in Washington D.C. continue to drive investor sentiment.  On Tuesday, markets were up 1% as President Trump renewed his focus on pushing pro-growth tax reform policies. Then, we witnessed a bit of a pullback on Wednesday when Trump threatened to allow for a shutdown of the federal government if Congress refused to fund his border wall.

 

Looking Ahead:

 

The last official week of summer going into the Labor Day weekend will have investors on their toes with a good amount of economic data coming across the wire.  U.S. GDP numbers are being reported on Wednesday and consumer spending figures will be released on Thursday.  Auto sales, ISM manufacturing data, and the unemployment number from August will all be reported on Friday.  Wall Street is expecting strong gains in Friday’s job report.

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The Weekly View (8/21/17)

What’s On Our Minds:

Tufton Capital has recently taken on the responsibility of sponsoring one mile of highway on Interstate 83 South. The firm is proud to partner with the Sponsor-A-Highway program.  It is an easy and effective way to help keep our local roadways and environment clean.  A sign with Tufton’s logo is now in place on our stretch of highway just north of our offices in Hunt Valley.

 

 

Last Week’s Highlights:

Stocks were lower again last week, mostly due to political drama in Washington D.C. and the terrorist attack in Barcelona.  Since the S&P hit a record high on August 7, the index has pulled back 2.2%.  President Trump’s pro-business agenda took a hit last week when it was announced that the White House Manufacturing Advisory council would be dissolved.  Reduced optimism about the likelihood of passing the President’s pro-business reforms clearly weighed on investor sentiment last week.  While we have witnessed some volatility lately, it’s important to remember that, in historic terms, markets have been unusually placid this year.

 

Looking Ahead:

Earnings season is over, so investors will refocus on big picture issues.  The Federal Reserve is holding their annual Jackson Hole symposium this week and investors are expecting them to remain dovish in regards to increasing short term interest rates.  Investors aren’t expecting any market moving news out of Jackson Hole.  Investors will also keep an eye on Washington after President Trump’s incendiary comments following the protests in Charlottesville, VA last weekend.

New home sales data will be released on Wednesday and existing home sales data will be released on Thursday.

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The Weekly View (8/14/17)

What’s On Our Minds:

The war of words between President Trump and North Korea’s Kim Jun Un caused the CBOE Volatility Index (“the fear index”) to spike 55% last week.  While volatility has been extremely low this year, last week’s spike serves as an important reminder that volatility will inevitably rear its ugly head every once in a while.  Read on to learn what drives high volatility and how investors should respond when markets gets turbulent.

High-volatility Markets

Originally used by chemists to describe chemicals that evaporate (and explode) easily, “volatile” has become the generic term for anything erratic or subject to sudden changes.

Today, most people hear about volatility in connection with investments and the stock market. But what does volatility mean in a market? Can we measure it?  What does it mean for an investor’s current assets?

A Measure of Movement

Just like in chemistry, market volatility is about change. Stocks (or other investments) that are thought to have more predictable price fluctuations have “low volatility” while those expected to make drastic movements (both up and down) are said to have “high volatility.”

Most people use volatility to gauge the risk they are taking when purchasing an investment or planning a portfolio.

Highly volatile investments are judged as unpredictable with their returns. Though this means a volatile investment could significantly exceed its projected return, it also means that it is more likely to fall considerably short or cause a loss.

Two Types of Volatility

Investors commonly use one of two types of volatility when looking at stocks: historical volatility and implied volatility.

An investment’s historic volatility is measured according to its standard deviation—that is, comparing how much it has fluctuated in the past to its average rate of change.

Implied volatility, on the other hand, shows the expected volatility of a stock over the next 30 days. It is calculated using the current premiums on stock options.

Implied volatility is a measure of both anticipated performance and market sentiment. When option writers have increased concerns about a stock’s future price, they compensate by charging more for option contracts. The higher the premium they charge, the greater the anticipated fluctuations. The premium, therefore, implies the level of volatility.

The standard indicator of total market volatility is the Chicago Board Options Exchange Market Volatility Index—ticker symbol: VIX. It relates the implied volatility of all options on S&P 500 stocks due in the next 30 days.

Because the implied volatility is greatly influenced by investor emotions, the VIX is commonly referred to as “the fear index.”

What does High Volatility Mean for Investors?

Volatility is an inescapable part of investing. The future is uncertain and every investment carries risks.

However, unless an investor is involved with buying or selling options, a brief increase in volatility or the VIX is unlikely to require any changes to his or her investments.

A volatile market might cause stock prices to rise and fall by significant amounts, but it does not necessarily affect the future value of owning shares in a company.

Investors should choose stocks based on the underlying value of a company, not a temporary price fluctuation. The fear associated with the VIX should not give way to irrational buying or selling.

Nevertheless, prolonged periods of high volatility can make it more difficult for investors to plan for retirement. Even though the market could be rising in value, high volatility makes it difficult to set reliable retirement dates.

Those nearing retirement typically desire less volatility in their investments, as significant downturn can delay retirement by several years.

A high-volatility market is one that can produce both significant gains and significant losses. Investors must recognize that every investment has the potential to become volatile. Volatility is an expression of market fears and past changes, not a guarantee about the future.

Last Week’s Highlights:

Domestic markets have been on a strong run recently during a solid second quarter earnings season. 90% of the S&P 500’s companies have reported and 74% of them have beaten investor expectations.  Last week, domestic stock indices experienced a bit of a hiccup due to geopolitical tensions surrounding the situation in North Korea.   After a strong run, the Dow Jones broke its 10-day winning streak on Wednesday.  The trash talk between President Trump and North Korea’s Kim Jung Un caused safe havens (bonds and gold) to rally last week.  Overall, last week served as a reminder that investors can be an anxious bunch and that geopolitics can in fact influence our markets here at home.  The team here at Tufton continues to remind our clients and friends that these types of short term market jitters should not weigh on your long-term investment objectives.

Looking Ahead:

Aside from keeping an eye on the situation unfolding between the United States and North Korea, investors will continue monitoring earnings updates and continue trying to figure out what’s next for the Federal Reserve.  The U.S Census Bureau will report retail sales for July on Tuesday.  The Federal Open Market Committee will release its meeting minutes from its July 26th meeting on Wednesday and the first rounds of NAFTA negotiations between the U.S., Canada, and Mexico will commence. Weekly jobless claims will be released on Thursday. On Friday, we will close out the week with University of Michigan reporting their Consumer Sentiment figures for the month of August.

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