The Next Digital Revolution?

by John Kernan

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


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


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


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


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


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


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

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Inside the Investor’s Mind

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


Whats Your Risk Tolerance?

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


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


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


Emotions That Affect Investors

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


Euphoria, optimism and overconfidence

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



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


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



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

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

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


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


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



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


Put Your Emotions in Check

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


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


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


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


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


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

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Company Spotlight: VF Corp. (Ticker: VFC)

by Scott Murphy

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


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


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


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

VF Corp. (Ticker: VFC)

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Have You Heard About the New Fiduciary Rule?

by Neill Peck

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


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


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


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


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


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


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The Fourth Quarter of 2016: Well That Changed Everything

by Eric Schopf

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


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


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

U.S. Core Inflation vs. Real GDP Growth

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

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


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


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

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

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


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The Tufton Viewpoint, Winter 2017: Steady Returns in a Roiling Market

Greetings from Tufton Capital, where the tinsel has been packed away, the winter weather has formally arrived, and your team of investment professionals has been busy closing the books on yet another banner year.

Of course, for many investors, “banner” may not be the first word that comes to mind at the mention of 2016. Faced with one of the most turbulent years in recent memory, an unfortunate number of market participants spent the last twelve months swinging from one bout of paralysis to the next. After all, in between British referendums, American elections, and all the other stories that kept us on our toes, how could one have possibly anticipated what tomorrow had in store?

Put simply, one could not. And regardless of what the market’s soothsayers would have you believe, that will remain the case in 2017. Perhaps, as some news outlets are quick to suggest, the broader economy will thrive under the coming administration, buoyed by the message that America is now “open for business.” Or perhaps, as other outlets have asserted—with equal volume and vigor—our new president will prove uniquely problematic, unduly influencing the market one late-night “tweet” at a time.

Short of procuring a crystal ball (which I imagine was on many a wish list this holiday season), your team here at Tufton Capital has no way of knowing which of these scenarios is more likely to unfold. But here’s what we do know: in a year marked by extraordinary surprises, this firm’s diligent, value-based investment approach comfortably outperformed both our benchmarks and the market at large. At the risk of seeming boastful, that’s no surprise to us.

Since our founding in 1995, it has been our firm’s guiding belief that a good business, bought at a fair price, is among the most powerful wealth-creation vehicles in the world. Reflecting back on 2016, I’m pleased to report that this belief continues to keep you, our valued client, in good stead. As we enter into our second year under the Tufton Capital name, we look forward to providing you with the level of service, insight, and performance you’ve come to expect—no matter what comes around the bend. From all of us at Tufton Capital, here’s to a Happy New Year for you and yours, and to our achievement of even greater success, together, in the year ahead.

Chad Meyer, CFA


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Donating Appreciated Assets

Before cashing out a profitable investment, consider making efficient use of its full value by donating it directly to charity.

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.

The Details
To make this type of donation, it’s important to examine the details and learn the nuances that apply to these particular tax benefits:
• In order for a security to apply, you must have owned it for at least one year prior to donating. If not, your charitable deduction would be limited to the security’s original cost.
• If your stock is worth less now than when you bought it, donating it directly to charity won’t help you or the charity—you’d be better off selling it first, deducting the loss and gifting your charity with a cash donation.
• Not all charities can and will accept stock donations, especially small ones. Make sure your chosen charity can accept your donation ahead of time.

If you have applicable stocks, bonds or mutual fund shares and want to maximize your tax benefits, donating them to a charitable organization is one of the best things you can do. You’ll save money in taxes, the charity will receive more in donations and it’s all completely legal. The IRS creates these incentives to encourage charitable contributions, so consider taking advantage by including appreciated securities in your charitable giving strategy. n

This article was written by Advicent Solutions, an entity unrelated to Tufton Capital Management. The information contained in this article is not intended for the purposes of avoiding any tax penalties. Tufton Capital Management does not provide tax or legal advice. You are encouraged by your tax advisor or attorney regarding any specific tax issues. Copyright 2013 Advicent Solutions. All rights reserved.

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A Return to Capitalism or Just a Return of Capital?

by Rick Rubin

The U.S. economy has grown for seven consecutive years since the Great Recession ended in 2009, marking one of our country’s longest economic expansions ever. It’s reasonable to conclude that this level of growth would have satisfied investors, workers, retirees and politicians alike. Unfortunately it hasn’t, due to factors like record low interest rates weighing on savers and retirees, as well as growing income and wealth inequality. In general, individuals at the top of the income scale have enjoyed higher real wage growth as compared to the rest of workers. In fact, real median U.S. household income peaked in 1999 and remains well below that level today. The struggle of the middle class has given rise to populist messengers… enter Donald Trump and Bernie Sanders.
We believe that U.S. investors have fared well given the challenges of uneven global growth, a strong U.S. dollar, and declining corporate profits. After all, investment returns have been strong since the financial crisis ended, with the S&P 500 and Dow Jones Industrial Average Indexes reaching all-time record highs in August. What accounted for the disparity between positive investment returns and consistently sub par economic growth? In our opinion, corporate capital allocation decisions have been, and may continue to be, a significant driver of both.

Public companies have a fiduciary responsibility to maximize shareholder returns. The management team decides how to allocate profits and what level to reinvest back into the business. For example, companies may increase capital spending (plants and equipment), raise workers’ wages, and step up hiring. Such investments should boost future profit growth and the economy over time. Unfortunately, many companies are holding off on long-term investments because of deep scars from the financial crisis. Instead, managements have increasingly selected a “safe path” by returning profits to shareholders through stock buybacks and dividends. Stock buybacks rose to $561 billion in 2015, a 40% increase from the prior year and the highest since 2007’s $721 billion.

At Tufton Capital Management, we are value investors, and we believe dividends and share buybacks are crucial to an investor’s returns. However, we believe many companies have relied too heavily on buybacks and dividends and have underinvested in their businesses, reducing growth prospects. How did we get here? Stock buybacks reduce the number of shares on the market and increase a company’s earnings per share (EPS) without the risk inherent in a new project. Further, companies are happy to leverage the balance sheet with cheap debt used to buy back more stock. Buybacks were a great use of cash when stock prices traded at a discount coming out of the financial crisis. But the market appears fully valued now, and there should be better uses of capital available to many companies.

In our view, company buybacks are a main source of the current demand for U.S. stocks. Buybacks have provided support for stock prices in the face of weak global growth and five consecutive quarters of year-over-year EPS declines for S&P 500 companies. Fortunately, stock buybacks have started to slow. Quarterly buybacks declined nearly 7% in 2Q 2016– the smallest quarterly buyback amount since 3Q 2013. We believe it’s time for companies to move away from stock buybacks and to start reinvesting in their business for long-term growth!


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Company Spotlight: Intel Corp. (Ticker: INTC)

by John Kernan

We have held shares of Intel (Ticker: INTC) for many years at Tufton Capital. Intel has undergone fundamental changes and continues to adapt to the future of computing. We think that these changes merit a closer look at what is a trophy company.

Intel is the leader in its field, has a strong balance sheet, and carries an above-market yield. Furthermore, Intel is the greatest second-party beneficiary to the automation as well as the “Internet of Things” (having many types of devices connected to the Internet), trends that are coming more quickly than many realize.

We believe that the addition of more high-performance computers in daily life (e.g., cars and trucks) and the exponentially expanding need to process all of this data in large datacenters will create a huge market opportunity for Intel.

While the excitement around self-driving cars seems like a lot of hype, Intel has put down some convincing numbers for us to consider. In ten years, Intel estimates cars will need to process 250 gigabytes (GB) per second of data. For scale, an iPad holds in total 32-128 gigabytes of data. Other areas, such as manufacturing, will also adopt large-scale processing and automation. Furthermore, by 2020, Intel estimates each self-driving car will generate 4000 GB of data per day. All together, it believes that self-driving technology will require $2000-3000 worth of silicon in every car. How many cars will get this amount of silicon? The low end of Intel’s estimate for 2020 is 100 million cars in the total addressable market. That sounds like a lot, but we must remember that there are ~1.3 billion vehicles on the road today.

Some of the growth in these segments is likely priced in to the stock, especially vis-à-vis the declining PC market. However, the current valuation does not look stretched by any means, and the PC market’s decline seems to be slowing. We believe that this decline of Intel’s legacy market has led to a severe depression in the valuation given to the Client Computing segment. While the segment’s current customer base (Dell, HP, etc.) is in decline, the same infrastructure can be used for Intel’s growth markets. We believe that the stock, while not depressed to the point we would recommend buying more, is at least in part undervalued.

We are recommending that clients continue to hold Intel. It is already a significant holding in our accounts. We will continue to watch valuation and developments in the semiconductor chip industry, but we do not anticipate recommending a sale of the stock in the near

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The Third Quarter of 2016: The Calm Before the Storm

by Eric Schopf

The third quarter proved to be somewhat docile for the stock market when compared to the first and second quarters. There was no interest rate increase hangover like we experienced in January, and no Brexit panic that rocked the market in June. A total return of 3.85% for the three months leaves the S&P 500 up 7.84% for the year. The bond market was much more volatile. The 10-year U.S. Treasury started the quarter with a yield of 1.47%. Interest rates steadily climbed during the quarter and peaked at 1.69% on September 21st, the day the Federal Reserve released its meeting minutes. To put the increase in interest rates into perspective, investors buying the 10-year note at a yield of 1.47% at the beginning of the quarter would have lost 3.8% of their principal when rates reached their intra-quarter peak. This 3.8% is the equivalent of over two and one half years of interest income. With only ten years to collect interest payments, there is little margin for error. Interest rates have retraced some of their gains, and the 10-year Treasury closed the quarter at 1.58%. The Fed’s dovish stance, reflective of the low growth and low inflation environment, continues to keep interest rates low and stock prices high. The S&P 500 reached all-time highs through July and August.

Although the market was more placid during the third quarter, we continue to remain on high alert. S&P 500 earnings will likely fall for a sixth consecutive quarter as we close the books in September. Corporations have responded by reducing fixed investment and slowing the rate of hiring. Productivity has slipped when comparing wage growth to the growth in GDP. If the situation does not improve, we may see a shift from slow hiring, to no hiring, to outright layoffs as corporations take measures to maintain profitability. Despite the difficult earnings environment, the S&P 500 is down only 2% from the all-time high reached in August. Equity valuations, a function of earnings and prices, are stretched. Many corporations have supported the cause by leveraging their balance sheets to repurchase shares. For the first time since before the market correction of 2000, the market capitalization of U.S. stocks is close to 150% of GDP.


Accommodative monetary policy is having a profound impact on global bond and stock markets. However, alternative views are beginning to emerge on the usefulness of ultra-low, and in some cases, negative interest rates. Rather than spurring demand, we are finding that low interest rates lead to greater savings rates as rational individuals act to offset their drops in investment income. The Bank of Japan has shifted its monetary policy to move closer to a zero interest rate instead of a negative rate. The U.S., in a position to learn from Japan’s experience, is less likely to travel down the same negative interest rate path.

The third quarter may have been the calm before the fourth quarter storm. The presidential election has the potential to be the eye of that storm. If nothing else, the rise in Mr. Trump’s popularity is an indication that fiscal austerity has lost its punch. Many members of the electorate feel disenfranchised and are ready for change. Regardless of who wins, deficit control may give way to tax cuts and expanded benefits. The Federal Reserve would then have to reassess its accommodative position in the face of fiscal policy actually being expansionary instead of neutral or negative. Higher interest rates would shift the current tailwind into a headwind for richly valued stocks.
The changing economic and political landscape has kept us busy this year. As you have noticed in your portfolio, we have sold or reduced numerous stocks over the past nine months. As always, we have been cautious and selective when buying new positions and adding to existing names. We took the opportunity in mid-September to increase bond positions in balanced portfolios when interest rates moved higher leading up to the Federal Reserve Open Market Committee meeting. Given the uncertainty that prevails and the solid equity returns, our focus has been to maintain asset allocation targets in the face of risk.


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The Tufton Viewpoint, Fall 2016

Greetings from Tufton Capital, where the summer heat is finally abating, the leaves are quickly changing, and—in keeping with Baltimore business etiquette—Fridays around the office are taking on a distinctly purple hue.

With the tumult of this summer’s “Brexit” ordeal now firmly in the rear view, market commentators are busy parading new boogeymen through the headlines. And in case you haven’t heard: there’s an election going on.

As a quick glance at the morning newspaper (or five minutes in front of the television) suggests, uncertainty over our country’s next president has crept into the financial sector. From corporate taxation, to industry regulation, to international trade policy and everything in between, the implications of the outcome on November 8th are keeping plenty of capital stuck on the sidelines.

To an extent, this “wait and see” approach is appropriate: as the Brexit episode adequately illustrated, divisive macro-economic events can prove troublesome to captains of industry and individual investors alike. Yet, to paraphrase the Brits themselves, our team here at Tufton Capital is taking a more measured approach to election jitters—by keeping calm, and by carrying on.

As strident fans of hard data, as opposed to political hysteria, we are encouraged by the fact that the current bout of hand-wringing in the marketplace is, from a historical perspective, entirely unremarkable. In fact, one could even go so far as to argue that 2016 is going well. Since 1928, the S&P 500 has dropped an average of 2.8% in election years such as this one, in which an incumbent does not seek re-election. So far this year, that same index is up over 6%—not too shabby, considering the sky is meant to be falling any day now!

Of course, that’s not the sort of information you’re likely to read with the mornings news. After all, positive thinking does not sell papers. But as faithful stewards of your hard-earned capital, we encourage you to remain calm, and perhaps even cautiously optimistic, as the din grows louder in the weeks ahead. No matter what happens on November 8th, we are confident that our thoughtful, time-tested, and emphatically long-term investment approach will prove fruitful through this election cycle…and through many more to come.

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The Tufton Viewpoint, Summer 2016

The toasty temperatures and lengthy days of June, July and August have long been called the Dog Days of Summer.  While the summer months usually mark a slow period for Wall Street and the financial markets, the business newswires have been anything but quiet.


Between political concerns at home and volatility abroad, the market continues to keep investors on their toes.  Nowhere was this more apparent than in Britain’s surprise decision to part ways with the European Union, resulting not only in the disappearance of trillions of dollars from global capital markets, but also, and more dangerously, the appearance of nearly as many breathless “Brexit” headlines.


In the late days of this past June, even the most optimistic observer could be forgiven for believing that the sky was falling. And while the market went on to regain the ground it gave up—and then some—the question now looms: with instability potentially lurking in the next news cycle, what should you do?


In a word: you should go on vacation and enjoy the summer months, even if the market refuses to follow suit. In times like these, filled to the brim with short-term uncertainty, we believe that our firm’s careful, disciplined, and emphatically long-term investment outlook is more important than ever—and that, while all investors look at current events, great investors strive to look through them. So whether this letter finds you at your desk or your dock, rest assured: our team here at Tufton Capital remains hard at work on your behalf…Dog Days of Summer be darned!


We begin this edition of Tufton Viewpoint with our firm’s outlook for the economy and financial markets beginning on page two.  As you’ll read in our investment analyses throughout Viewpoint, we continue to be cautious but still positive on the equity markets even as we approach new highs for the Dow Jones and S&P 500 indexes.  And while we anticipate a slightly positive second half of 2016 for equities, we anticipate another period of volatility in getting there.


Every four years, politics and finance converge as Americans elect a president and investors attempt to forecast how the outcome will affect their portfolios.  Our article on page four, “Trump vs. Clinton:  Who is Better for the Markets”, concludes that the uncertainty surrounding the outcome may have a larger short-term impact on the financial markets than who ultimately wins.


We hope that you find these and the other articles throughout Tufton Viewpoint interesting and thought- provoking and encourage you to reach out to our financial team to discuss any of these topics in more detail.  All of us at Tufton Capital wish you and your families an enjoyable rest of the summer, and we sincerely thank you for your continued support!


Chad Meyer, CFA


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The Second Quarter of 2016: Ending Where We Started

by Eric Schopf

Fireworks came early this year as the United Kingdom voted in favor of leaving the European Union.  The outcome of the nationwide referendum was not what the markets expected, leading to a wild ride in the stock market and tremendous price volatility, both down and up.   The outcome of the June 23 vote was not apparent until the following day.  The stock market reaction was swift, with the S&P 500 declining 3.6%.  After taking the weekend to digest the news, investors extended their selling mood the following Monday, resulting in an additional drop of 1.8%.  When the dust settled, the S&P 500 was sitting at levels first reached in the fall of 2014.


Fixed income markets reacted in similar fashion, with the safe-haven 10-year U.S. Treasury note dropping in yield from 1.74% prior to the vote to 1.43% the following Monday.  Later in the week, the realization that the immediate economic impact of the U.K.’s departure would not be calamitous had investors rushing back into the market.  The final three trading days of the month provided strong gains and led to a recovery of nearly all initial Brexit-related losses.  We closed June exactly where we started and are again within 1.5% of the record high set last July.  The 10-year U.S. Treasury yield, however, has remained low with a month-end close of 1.47%.


The stock market posted respectable results for the second quarter, with the S&P 500 delivering a total return of 2.5%.  Year to date, the total return is 3.8%.  The Federal Reserve continues their accommodative stance thanks to an economy that just can’t seem to find the next gear.  A weak Bureau of Labor Statistics payrolls report for the month of May combined with steep downward revisions to March and April figures kept the Fed on their back foot and appears to have eliminated any possibility of an interest rate hike in the near term.  Interest rates quickly reflected the Fed’s new dovish outlook.  As a reminder, the 10-year U.S. Treasury started the year at 2.3%.


Volatility in reaction to the future of the European Union will likely persist.  The United Kingdom’s exit negotiations with the EU will stretch out a number of years and there is no telling the composition of the final agreement. Trading relationships, potential tariffs, and investment flows are all now in question.  Consumer and business confidence will suffer until there is some clarity on these important issues.  It is also difficult to project the future standing of the remaining EU members.  Immigration curbs in England will place additional pressures on member countries to accommodate refugees. In addition, should the U.K. somehow manage to flourish under their EU independence, more members may defect.

General US Government Debt as a % of GDP

US Government Debt

The United Kingdom’s exit will not greatly impact the global economy, as the sovereign state represents less than 4% of the global gross domestic product.  The EU, on the other hand, collectively represents 23% of global gross domestic product.  The general health of the EU is a bigger concern than the decision by the U.K. to exit.  This we do know: the U.K.’s vote to leave the EU will result in a lower standard of living vis-a-vis a lower relative currency valuation.  The Pound/Euro conversion shot from .76 to .83.  Prior to the vote it took .76 Pounds to buy 1 Euro. The same Euro now requires .83 pounds.  That trip through the Chunnel into France will now be 9% more expensive.  The same is true for conversion to the U.S. Dollar.  .75 Pounds are now required for 1 U.S. Dollar, up from .67 Pounds.  A trip to New York is now 12% more expensive.


Back home, the Federal Reserve continues to greatly influence the fixed income and equity markets.  The steady drumbeat of bad news from around the world has the Fed looking beyond the U.S. economy when making interest rate decisions.  Brexit and its potential to disrupt economic activity in the short term are just the latest obstacles.  Slow growth in China and Japan, uneven growth throughout the Eurozone, and sickly economies in South America have central bankers working overtime implementing monetary policy.  The European Central Bank expanded their asset purchase plan in June to include corporate bonds.  The massive bond purchases have pushed interest rates into negative territory throughout Europe.  That’s right – bond holders, instead of receiving interest payments, are actually paying creditors for the privilege of holding their debt.  The Fed is in no position to increase interest rates in the current global environment.  The beneficiary of current monetary policy has been shareholders.  Equities become more attractive as interest rates fall.  The most disconcerting aspect of the whole exercise is the fact that economic growth has been so anemic despite the extraordinary monetary efforts.


It appears that there may be limits to the effectiveness of monetary policy.  The Federal Reserve has noted on numerous occasions that fiscal policy plays an equally important role in influencing the economy.  The government’s tax and spend policies, however, have been capped due to government debt reaching its permissible levels relative to the size of our economy.  It was just five years ago when sequestration reentered our financial lexicon.  The automatic budget cuts were a way of reducing the federal budget without being directly tied to the legislature.  Unless the new administration is willing to alter fiscal policy to generate more growth, we may continue to be stuck in our current low interest rate environment.


The investment environment continues to be challenging.  Corporate profit growth has slowed, and interest rates remain low.  The upcoming presidential election promises to keep investors on edge.  Regardless of the environment, we continue working hard to find attractive investments worthy of your portfolio while maintaining suitable balance to reduce risk.

Global Yield Curves

Global Yield Curves

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Trump vs. Clinton: Who is Better for the Markets?

by John Kernan

There are many hotly debated topics concerning the presidential candidates. One that people come to us about time and again is, “Who would be better for the markets?”


Markets hate uncertainty. Even uncertainty about two outcomes that are mostly neutral can push markets lower. While Trump supporters may believe that his pro-defense, conservative stance might provide more stability, Clinton supporters fire back with the fact that Trump is an unknown quantity and brings uncertainty. Clinton would be a known quantity, for good or for ill, and is often viewed as an extension of the current administration.


It is tempting to look to historical averages to get a better idea of what result would have the best effect on the market. Indeed, we found plenty of articles online that do just that. However, some very basic statistical analysis- just looking at the numbers- shows us we can’t rely on those averages. There are simply far too few elections for any average to make sense.

To analyze the effects on the market, we need to look at elections where no incumbent was running, of which there have been only eight in the last century. One of those, in 1928, had a 49% gain- which had more to do with speculative trading and the roaring 20’s than the election of Herbert Hoover. Similarly, it was the housing crash and financial crisis, not the election of Barack Obama, that led to a 31% loss in 2008. So, we look elsewhere.


Trump’s plan for a wall and increased immigration policing can be partially offset by decreased military spending. His plans are to support larger, more powerful armed forces with less money. However, his proposal to institute big tax cuts that are revenue neutral are under intense scrutiny (and sometimes ridiculed) by professionals. The Committee for a Responsible Federal Budget (CRFB) estimates Trump’s plan will reduce federal revenues by $10.5 trillion in the first decade, and increase debt by $11.5 trillion. Trump counters that his plan would generate enough growth that it would more than pay for all of the spending. The CRFB disagrees.


Clinton also looks to increase spending, but would increase debt by $250 billion, close to where it would be without any changes at all to the current plan. The difference is a tax increase on high earners and businesses. Without the promises of large tax reductions, her budget plans look much easier to realize.


There simply is not enough to go on here to justify a change in investment policy. Whether Clinton means lower growth, or Trump means higher borrowing costs, or vice versa, anything that is knowable is already priced in to the market. While some investors might believe they have a special understanding of the international debt markets, for example, and can earn a premium over the next several months, that is not how we believe most people should be investing.


We find it very unlikely that either candidate will by themselves cause the financial markets to change their patterns of risk and return. We continue to watch individual stocks for their exposure to tax plans that may affect their business—aerospace companies like Lockheed Martin, for example. But no election result would likely cause us to reallocate money out of, or into, different asset classes.  Furthermore, because indexes like the S&P 500 are market capitalization weighted, as the price of a stock increases, the stock receives a greater weighting in the index.  This conflicts with what we focus on as value investors – buying securities as they fall in price.

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Company Spotlight: Nordstrom, Inc. (Ticker: JWN)

by Scott Murphy

It is a well-known fact that Nordstrom (Ticker: JWN) is the retailer with the greatest return policy in the industry: if you are not happy with your purchase, return it for a no-questions-asked refund.  This laser focus on the customer experience is what separates Nordstrom from its competitors and inspires the customer loyalty that is the envy of the retailing world.  With its headquarters in Seattle, Washington, it is currently operating 315 stores in the U.S. and Canada.  These include 121 full-line stores and 194 Nordstrom Racks located in 38 states with good prospects for store growth in underserved regions of the country.


The stock price has fallen 20% year to date due to a significant reduction in its sales forecast and expected earnings per share for 2016. Nordstrom certainly isn’t alone in this consumer-led stock selloff, and of those in its industry that have sold off, Nordstrom retains a leading position. Management is pulling back store openings and will cut its corporate staff by 10% in order to better position the company for rosier times.  As value-oriented investors, we will continue to monitor this investment and stay patient. We believe our original thesis is still intact, and more time is needed for the underlying business of this great company to recover.


We still feel Nordstrom is a solid company and will trade higher as the industry conditions improve.  The company has a strong balance sheet, is selling at five-year lows using Price/Earnings and Price/Cash Flow metrics and has a generous 4% dividend yield. Sometimes it takes patience for a great company to work out to be a great investment.  Brick and mortar retailers are not “in fashion” right now on Wall Street, but we believe that fact means a good value for our clients.

Nordstrom (JWN) Price Performance

Nordstrom Chart

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