Last Week’s Highlights:
Labor data was bittersweet, as the labor force added fewer jobs than expected during July but revisions to earlier months’ data brought the unemployment rate down below 4% again. The $1,000,000,000,000 question was finally answered on Thursday when Apple became the first company in history to hit trillion-dollar market cap. Indices were slightly up across the board, with the NASDAQ leading the way.
Looking Ahead:
In the revolving door of economic indicators, inflation is up next. The producer and consumer price indexes will be released toward the end of the week, giving us a hint at how well the Fed’s rate hikes have been keeping the economy from overheating. A fairly stellar earnings season continues to wind down, with most companies having already reported strong second quarter results. Media takes the spotlight this week, as investors will put Disney, Viacom, and Fox under the microscope in a shifting landscape of established names.
What’s On Our Minds:
As sure as the sun will rise in the east and set in the west, the stock market will go up and it will go down. Rather than getting caught up in these daily fluctuations, the investment professionals at Tufton Capital believe that a long-term buy and hold strategy is the safest and smartest way to build wealth. A disciplined adherence to this philosophy has proven time and time again to return exponential gains on invested capital, regardless of how the market is feeling on any given day.
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:
The Bureau of Economic Analysis released its GDP estimate for the second quarter of 2018, placing growth at 4.1% — the highest since 2014. Though there are a few one-time factors that have brought that number up, such as soybean and aircraft exporters rushing product out before retaliatory tariffs went into effect, increased spending by both businesses and consumers was the main driver. Indices flipped the familiar script last week, with the Dow posting the biggest increase and the NASDAQ losing just over 1%. The tech-heavy composite index came down from record highs after weak earnings reports and cautious guidance from Twitter, Intel, and Facebook, with the latter having the biggest single-day loss in value in the history of the stock market. Each of these tech giants experienced double-digit percentage losses in share price as spooked investors fled the technology sector. In a win for free trade, President Trump and the head of the European Commission agreed to working toward a zero-tariff solution, temporarily sidelining auto import taxes until a more detailed deal can be worked out.
Looking Ahead:
Earnings season is finally beginning to wind down, hopefully bringing some level-headedness to the markets. It’s not over yet, though, as big names like Apple, Caterpillar, DowDuPont, Procter & Gamble, Volkswagen, and Kraft Heinz report this week. The Federal Reserve, the Bank of England, and the Bank of Japan all have meetings before taking most of August off, making the next few days some of the most significant of the season in terms of macroeconomic policy news. Consumer Confidence and Employment reports are due by the end of the week, which, coupled with last week’s GDP numbers, should inform the Fed’s decision whether to raise rates again soon.
What’s On Our Minds:
Last week, Hunt Valley, MD based Sinclair Broadcasting (SBGI) faced stern criticism from the FCC on their proposed $3.9 billion purchase of Tribune Media Co. (TRCO) The mega-merger appeared to be on track to close this summer until last week when FCC Chairman Ajit Pai raised “serious concerns” on whether the deal served the public’s best interest. Pai is an appointee of President Trump who had previously been viewed as friendly to Sinclair and such a merger.
The issue at the center of the FCC’s criticism is that, under current laws, a single media company is limited to reaching 39% of American homes. This acquisition would have extended SBGI’s reach to 72% of American homes and therefore would have put SBGI’s reach well above the FCC’s limits. To remedy this, Sinclair planned to sell off certain stations to get under the 39% limit. Instead of selling stations to competitors, Sinclair planned on selling the stations to people loosely associated with the company who could would then be able to hire Sinclair to run the stations. Critics call this a “side car” arrangement. In this case, Sinclair would continue operating the station for a fee, handling everything from advertising sales to news programming. Under these arrangements, Sinclair has historically been able to skirt around the FCC’s ownership rules employing similar tactics. Regulators have occasionally taken issue with this growth tactic, but many believed that Ajit Pai would be friendly to the arrangements.
Not this time. The regulatory tides appear to have shifted for the Sinclair and Tribune merger. Pai has referred the case to the FCC’s lone administrative law judge for an evidentiary hearing that could take upwards of a year. The consensus on Wall Street appears to be that Sinclair pushed the envelope with the deal structure and therefore put the FCC in a tough position as they were facing political backlash for allegedly favoring Sinclair with previous deregulatory moves. As you can see in the charts below, shares of both SBGI and TRCO have taken a hit on this news.
SBGI – 3 Month Price Chart (Source: Yahoo Finance)
TRCO – 3 Month Price Chart (Source: Yahoo Finance)
Last Week’s Highlights:
It was a busy week packed with political drama. Donald Trump spurned Presidential custom by railing against the Federal Reserve chairman Jerome Powell and the central bank’s recent rate hikes. Over the past 20 years there has been a “Chinese Wall” between the Fed and the executive branch of the government, and ironically it seems to be tensions with China that have brought it down. The dollar has been appreciating against the yuan since the tariff rhetoric began, a change that does not bode well for the U.S. trade deficit. The President argued higher rates threaten to erase progress on that front. The market, however, seems to be ignoring the headlines more and more each passing week, as most indices gained ever so slightly on the back of mostly solid but not earth-shattering Q2 corporate earnings. Netflix’s share price tumbled 14% after-hours after the streaming media king announced it had missed its own new subscriber expectations by over a million users, marking at least a pause, if not an end, for the stock’s incredible run these past few years.
Looking Ahead:
Following financial institutions reporting earnings last week, large technology companies will dominate the earnings calendar in the week ahead. Notable companies reporting this week include Alphabet, Verizon, AT&T, Facebook, Comcast, and Amazon. Ford and General Motors also announce their second quarter results on Wednesday, hopefully giving us some insight into how the tariffs on steel and aluminum have affected their bottom lines. Economists continue keep a close eye on the yield curve for U.S. Treasuries, though many are saying a flattening curve (when short-term lending becomes riskier than long-term lending) is not the same glaring recession indicator it once was. The President’s administration will begin investigating China’s central bank activity for evidence of currency manipulation, and although the U.S. has declined to officially declare the country a currency manipulator, that seems likely to change with trade war tensions ratcheting up.
What’s On Our Minds:
Banks : Don’t Stress the Test
Our focus turns to financials this week, as the sector floods the newswires with reported earnings for the second fiscal quarter of 2018. Of the six largest American lenders, Wells Fargo, Citigroup, and JP Morgan released their results on Friday, and Bank of America, Goldman Sachs, and Morgan Stanley are slated to announce this week. For the most part, the “bulge brackets” took home record profits for the year’s first quarter, but the picture is a bit distorted from accounting changes due to the tax cut and relaxing regulations, making Q2 earnings a more accurate long-term indicator of financial health. It is not just the economic calendar, however, that has our minds on Wall Street. As a gloomy June has given way to clear blue skies these past couple weeks in the Tufton Valley, so too have the clouds lifted for most of the big banks in New York.
The Federal Reserve recently put 35 financial institutions through a series of tests intended to gauge their ability to survive a recession without requiring a government bailout a la the 2008 financial crisis. The test was implemented as part of the Dodd-Frank Act, and measures how well-prepared large (>$100 billion in assets) banks are to continue operating through adverse economic conditions. The results answered two questions:
1) Do these critically-important firms have enough capital to weather the storm of a severe crisis?
2) Is their proposed capital plan sufficient to keep them stable enough in the future through adverse economic conditions?
The Fed’s answer: yes, and maybe.
34 out of 35 passed the initial phase with no trouble, with Deutsche Bank’s U.S. arm being the only failure. Considering this is the first year DB has been subject to the entire process, it is certainly not a vote of confidence for the struggling German company. Others, such as Goldman Sachs and Morgan Stanley, passed the initial test but had their capital plans rejected. This is not a full rebuke, however, as the two firms are permitted to keep their dividends and share buybacks at previous year levels until an acceptable proposal is put forth.
So, what does it all mean for you? While we may shy away from concrete predictions on the timing of the next economic downturn, if history is indication, it is coming eventually. As we told you last week, the bull market is long in the tooth, and it is good to know that the organizations we depend on to spur economic growth can withstand gale force winds. Just don’t expect their stocks to go to the moon. Though most banks passed and had their plans accepted, they are still beholden to more restrictions than companies in most other sectors. The stress test process in general bodes well for the long-term health of the institutions involved and the economy as a whole, which we here at Tufton Capital will gladly take over short-term and perhaps short-lived quarter-to-quarter gains.
Last Week’s Highlights:
Celebrations erupted in Paris yesterday as France won the 2018 World Cup, beating underdog Croatian team 4-2. With little in the way of geopolitical news on the trade war front, it was a solid week for the markets. Most indices continued climbing up and to the right, and the Dow finally moved back into positive territory for the year, posting a 2.3% gain. The NASDAQ continued its 2018 tear reaching a record high, while the S&P 500 hummed along with solid gains as well. Government bonds stayed relatively unchanged, with overall trade volume staying low as expected for this time of year.
Looking Ahead:
Earnings season begins in earnest, with familiar giants like Netflix, Johnson & Johnson, General Electric reporting second quarter results. Financials lead the way this week, however, with many looking to Goldman Sachs, Bank of America, Morgan Stanley, BB&T, and BNY Mellon to see how the big banks have handled Q2 volatility. Retail sales data comes out today, giving us a clue into the larger consumer spending picture, followed by industrial production numbers tomorrow. Jerome Powell testifies in front of Congress on Tuesday and Wednesday, hopefully giving us more insight into the Federal Reserve’s intentions with monetary policy for the rest of the year, especially regarding the possibility of on economic downturn.
What’s On Our Minds:
Steps to Estate Planning
Setting up an expansive and secure estate plan can be difficult, time consuming and incredibly confusing. With such large values of property at stake, everyone wants to make sure their wishes are set in stone and that minimal money is lost in the process. Contrary to popular belief, a detailed estate plan is not about huge taxes and massive trust funds; many are as simple as a couple sheets of paper.
How much planning is enough? That depends on the goals you want to reach. Using a variety of methods, there is no limit to the amount of control you can put on your estate. And while not every estate requires every method of planning, it can be helpful to know the steps of planning available to you.
Benefits to Beneficiaries
The first and easiest step to planning an estate is establishing beneficiaries of private funds or policies, like life insurance policies, 401k plans and pensions.
This is the easiest step in estate planning because it is typically requested by most plans that a primary and secondary beneficiary be listed to receive funds in the event of a death. Though some plans, like life insurance, will require the beneficiary at signup, others may make it optional to do later. People often put off establishing beneficiaries, creating problems if they die suddenly. Whenever an option to name beneficiaries is offered, it should be handled immediately.
Wills
The next major step in estate planning is establishing a last will and testament. While a person who dies without a will (dying “intestate”) still has his or her property divided up among family, there are no guarantees over who gets what. A will is a simple way to make sure specific items get to the people who ought to have them.
Handing Over Power
Potentially as difficult as a death, the medical incapacitation of an individual can cause huge amounts of stress for a family. Living wills give instructions for the medical care of an individual given they are in an incapacitated, terminal condition. Though limited to these specific situations, living wills can spare a surviving family from difficult decisions and prevent conflict between members who have different views on treatment.
The creation of a “power of attorney” is a much more in depth document that gives a named individual the ability to act on behalf of the disabled in legal matters.
Trusts
Though many people think trusts are financial bodies that are only meant for the wealthy, the truth is they can be used by most people to create detailed control over an estate. A trust is simply a legal entity that holds property for the benefit of a few named individuals.
Gifting
Individuals looking to reduce their estate before death should consider simply giving money away to loved ones later on in life. Each year, a person can give up to $15,000 tax-free to each unique individual or institution they choose. As long as the gifts stay below this amount, they will remain tax-free and still not count against the lifetime gift tax exemption. There are no transfer taxes on gifts made to public charities, regardless of size.
Securing Estate Documents
After necessary estate documents are prepared, they should be adequately stored and protected. Wills are the most difficult to protect. Most states recognize only the original signed document as having any legal power. If the original is destroyed, a new will must be drafted. Typically, the law firm where the document was created will offer to keep the will in an extremely secure safe.
Other documents, such as living wills and power of attorney, can typically be copied and notarized to create duplicates that carry the same legal power as the original. As with wills, loved ones should be informed of the documents’ location so they can be accessed when needed.
Conclusion
Estate planning can be a difficult process for people. The concept of preparing property for an accident or death is hardly something people want to spend time considering. Though its creator will never see it used, a well-written, well-conceived estate plan can make all the difference for friends and family.
Last Week’s Highlights:
Last week marked the first week of the third quarter, and opened up the start of the second half of the fiscal year. June’s job report expressed strong results in the labor market, as unemployment is hovering around 17-year lows, despite ticking up slightly to 4% in the month of June due to increases in the labor market. Further, the economy added 213,000 jobs during the month, marking nearly eight straight years of monthly gains. Job increases were coupled with wage growth, as hourly earnings grew 0.2% during the month and are up 2.7% for the year. On the international front, trade tensions escalated as the 25% tariff on the first $34 billion of Chinese goods and corresponding retaliatory tariffs went into effect on Friday.
Looking Ahead:
This is the first full business week of Q3 2018, coinciding with the first effective week of new tariffs on Chinese imports. After months of back-and-forth rhetoric and posturing, we will finally see how significant their impact will be on the economy. President Trump is expected to announce his pick for Supreme Court Justice at 9 PM on Monday. The Bureau of Labor Statistics is set to release inflation data on Thursday, amidst concerns the Consumer Price Index may have seen its highest year-over-year rise since 2012. Earnings season is ramping up for companies reporting their second quarter results, and with it we should be able to gain a clearer picture of how effectively businesses have been using their extra cash from the tax cut.
What’s On Our Minds:
Bull Market Long in the Tooth?
Market pundits have recently turned their attention to the growing age of the bull market. Don’t fear what the specialists say; it’s their job to sell papers and they’re likely growing tired of writing about President Trump’s trade policies. In fact, they have been saying this since the bull market began 9 years ago!
Just this past weekend, Barron’s cover story was titled: “Why the Bull Market Could End in 2020.” This harks back to the old saying “a bull markets climb a wall of worry”. For years, the pundits have been saying the bull has gotten “long in the tooth” and that we are in the latter innings of the market cycle. While the threat of a looming recession always warrants a bit of caution for investors it’s not time to head for the exits. In fact, trying to time the market can be a dangerous (and costly) game.
Remember, bull and bear markets are not random or left up to chance and investor sentiment over the long-term is based on fundamentals. While all good things must come to an end and even though the current bull market has lasted longer than the historical average, the current strength of economic and earnings fundamentals suggest that this phase can be extended. Since 1950, the average stock market returns in the final two years of a bull market was 20% per year. While that’s certainly not indicative of what we may see in the near future, it goes to show that serious money can be made at the end of a bull market.
As long-term investors, it’s not our job to predict these market cycles but rather, it’s our job to position our clients’ portfolios for success over the entirety of the market cycle. Remember, as active managers focused on the long term, the Tufton Capital Investment Committee embraces the market cycle and even welcomes volatility. Both bull and bear markets offer unique opportunities that can lead to future success. We don’t head for the exits when good stocks are going on sale, nor do we go on a shopping spree when prices are at all-time highs.
Source: Wall Street Journal
Last Week’s Highlights:
Major indices continued to take a hit this past week, each losing over 1%. Of these indices, the Russell 2000 took the worst of the beatings, followed closely by the tech-heavy NASDAQ Composite, and the Dow Jones Industrial Average, which was pulled lower by poor performance from its latest addition, Walgreens. On the bright side however, the S&P 500 finally broke its 13-day losing streak, which was the longest of the index’s history. Moreover, we are starting to see some interesting ripple effects in the wake of international tariff tensions, as the dollar surged and China’s stock market tanked, giving the United States a strong vote of confidence in the ongoing back-and-forth between the two countries.
Looking Ahead:
The 3rd fiscal quarter began today, but it looks to be a quiet week on Wall Street, as the markets close early on Tuesday and remain closed on Wednesday in observance of Independence Day. We are wishing you and yours a fun and safe July 4th from all of us here at Tufton Capital Management.
What’s On Our Minds:
While much of the media’s attention lately has been focused on the possibility of a looming trade war, recent movements in the media space have set the stage for a battle royale in the industry. Headlines have been coming fast and furious these past few weeks, with the regulatory approval of AT&T’s acquisition of Time Warner and the escalating bidding war between Disney and Comcast to decide the fate of Twenty-First Century Fox’s entertainment assets. These deals have the potential to be the first dominoes to fall in an industry-wide restructuring of how content is created, distributed, and consumed. We think now is as good a time as any to break down what this means for the consumer, the companies involved, and the changing media landscape as a whole.
As you may know, cable and satellite television companies have seen a decline in pay-for-TV subscriptions in recent years. This is a result of what is known as the “cord-cutting” phenomenon. Much of this cord-cutting has been done in concert with the rise of Netflix and other direct-to-consumer over-the-top streaming services, which distribute streaming media through the internet. These platforms give viewers more choice in deciding what content they want to pay for and how, when, and where they consume it. However, much of Netflix’s incredible growth, to the point of being included in the prestigious FAANG (Facebook, Apple, Amazon, Netflix, and Google) group of tech stocks, has come at the expense of the very companies it now threatens to overthrow in the media landscape.
For years, Netflix relied on licensing content from media heavyweights, such as Disney, Fox, Comcast, and Time Warner, to build up its library and develop a viewer base. At the time, these industry titans were happy to sit back and take in the extra revenues provided to them by Netflix at little to no cost. Only recently have they realized that in doing so, they created their worst nightmare. However, traditional media companies are starting to strike back, with a vengeance.
The recent transactions involving Disney, Fox, AT&T, and Time Warner offer a glimpse into the future with regards to how these companies plan to compete with the 800-pound streaming gorilla of Netflix, as well as the direction media may go over the next few years. The main reasoning for these acquisitions was content; to attract viewers, you’ve got to have something worth watching. As Disney and AT&T bolster their creative ammunition with new studios and intellectual property, both companies also plan on pulling their content licenses from Netflix by the end of 2018 in hopes of weakening the behemoth by limiting its content selection to mostly original productions. This combined strategy will, ideally, drive consumers to their own over-the-top streaming services.
Last week, Disney successfully fended off Comcast’s best effort to buy Twenty-First Century Fox. The Fox acquisition allows them to combine their already-prolific library with box office heavyweights, such as Avatar and X-Men. After rolling out its first over-the-top platform in early 2018 with ESPN+, Disney plans to unveil another streaming service in early 2019 to directly compete with Netflix. Disney is counting on Fox’s assets strengthening its content offerings to the point of making its service indispensable. Furthermore, the 30% stake in Hulu Disney receives from Fox gives it a 60% controlling interest in the platform, affording them control over another established streaming service. With Hulu and its own proprietary over-the-top services in its back pocket, Disney can attack Netflix from multiple angles.
AT&T, on the other hand, has even grander plans for dominating the market. The company’s recent acquisition of Time Warner, combined with its prior acquisition of DirecTV, has effectively given the company a completely vertical supply chain in the industry. It can now produce its own content through Time Warner, distribute the content via DirecTV and its streaming service DirecTV Now, and provide high-speed internet service for its consumers to access the content. Arguably more important, however, is the fact that as the third largest internet provider in the country, AT&T will be getting its slice of the pie even if consumers choose not to use its distribution services. With regards to over-the-top services, a rising tide lifts all of AT&T’s boats, as its competitors in the streaming market are dependent on high-speed internet to provide their customers with a high-quality experience.
Despite Netflix’s rapid ascent in the industry, these recent transactions indicate that legacy media companies are not going anywhere anytime soon. In this sense, necessity is the mother of innovation, as traditional industry bulwarks have shown the ability to evolve in response to trends in technology. The only options to respond to a disruption on this scale are adapt or die, and Disney and AT&T have loudly declared they aren’t going anywhere any time soon. But, don’t expect Netflix to stop fighting back now as the company is putting on a full court press in the content game with recently-announced plans to invest $8 billion this year in original programming. However it shakes out in the end, the way we consume media is primed to undergo remarkable changes in the coming years. One thing’s for sure: this industry will be one to watch moving forward.
Last Week’s Highlights:
OPEC ministers met last Friday and agreed to raise oil output by an effective 600,000 barrels per day in an effort to curb rising oil prices. A Supreme Court ruling gave states the authority to require e-commerce companies to collect sales taxes on online purchases, marking a major victory for brick-and-mortar stores and states themselves. This reversed a 1992 ruling that required retailers to collect the tax only if they had a physical presence in the state. The nation’s biggest banks passed the first of the Fed’s annual stress tests, indicating that the banks have enough capital to survive a severe downturn in the economy, including recession, cratering housing prices, and double-digit unemployment.
Most indices finished slightly down for the week, with the Dow taking the biggest hit. The Industrial Average index had a rough week, announcing it was dropping GE and adding Walgreens, and has now moved into negative territory for the year. Government bonds stayed relatively stable, hovering around 3%.
Looking Ahead:
The consumer confidence report for June is set to be released next week, measuring the degree of optimism consumers have in the economy through their saving and spending activities. A looming trade war has the potential to escalate due to the President’s threats to increase tariffs to $200 billion of Chinese products. The second quarter of the 2018 calendar year ends next week, setting the stage for earnings reports in the coming weeks.
What’s On Our Minds:
The weather has been getting nicer and the days have been getting longer, but here at Tufton we have been ramping up our research initiatives with the help of our new summer interns. While many college students are spending their summers at the beach or enjoying vacations, our group has been hard at work supporting the research associates and portfolio managers with the information and analysis they need to stay ahead of the markets.
At Tufton, we are proud to conduct all equity research in-house. To help with this sizeable task, each summer, we hire talented college students with a focus and interest in finance to give us some extra horsepower. These interns run valuations, research industry trends, write reports, and bring fresh ideas to our Investment Committee. We believe our internship program to be mutually beneficial for both the firm and the students, and have a strong track record of helping our interns gain the experience they need to go on to get competitive jobs in the financial services industry all over the country.
This year we are excited to introduce our two interns joining us for the summer:.
Jackson Gibb is joining us from Stevenson University where he is majoring in Business Administration with a concentration in Finance. Jackson is the Treasurer of the Financial Management Association and a project manager for the school’s Enactus chapter.
Rick Roebuck is joining us from University of Richmond where he attends the E. Claiborne Robins School of Business and is majoring in Business Administration with concentrations in Finance and Accounting. Rick serves a member of the University of Richmond FinTech Club and the Entrepreneurial Club.
Last Week’s Highlights:
Once again, markets shrugged off trade war noise after an initial dip in response to news of tariffs being placed on Chinese imports. China’s response brought markets even lower, but stocks rallied on Friday afternoon to bring the major indices into positive territory for the week. Courts rebuffed the Department of Justice, definitively approving the AT&T-Time Warner merger. This has set the stage for a bidding war between Comcast and Disney for Fox’s entertainment assets in the rapidly-changing media space.
Looking Ahead:
The World Cup draws global attention to Russia, as underdogs like Mexico and Iceland look to make spirited runs on the largest stage in soccer. The United States Men’s National Team failed to make the tournament this year, but there is no shortage of excitement in the tournament so far. Later in the week, the U.S. is set to meet with OPEC to discuss oil production in the Middle East. The outcome of this meeting will have lasting implications for the price of oil through the rest of the summer.
What’s On Our Minds:
With the summer months kicking off, you may be itching to jump back into the real estate game by buying a second home or wishing your family had a beach or lake house. While interest rates are still low, it might make sense to buy a house to use as a vacation home, a rental property, or a home for retirement in a state with lower tax rates. The process of buying a second home is similar to the process you already undertook when you bought your first home, but the mortgage and tax implications will be different. Below we will discuss some of these differences.
Financing the House
At this point in your life, you may have more cash to put toward a down payment or may even be able to buy a second home outright. However, while rates are still historically low, it may make sense to finance a portion of the home. That being said, mortgages for second homes are often more difficult to qualify for and require stricter terms:
- Interest rates:Expect your interest rate to be half a point to one point higher than it would be if you were buying a principle residence.
- Down payment:For a principle residence, most mortgage lenders prefer 20 percent down, but don’t require it. For a second home, plan to put 20 to 25 percent down in order to qualify for financing.
- Credit score:Typically, you must have a credit score of at least 730 or 740 to get the best loan terms. Some lenders will require an even higher score for second home mortgage applicants.
- Debt ratio:The debt ratio (the ratio of your debt payments to your monthly income) that your second mortgage lender requires will probably be the same as for your first mortgage—typically no higher than 36 percent. However, when calculating the ratio for your second mortgage, you’ll have to include house payments, property taxes and insurance for two houses instead of just one.
Tax Implications
Your second home expenses will include additional property taxes. If you’re renting it out, you also need to pay income tax on your rent earnings, but you could be eligible to deduct operating costs. The sale of a second home is also subject to different capital gains tax rules than a primary residence.
- Property taxes: The taxes you pay on either of your houses will depend on where they’re located, how much land you own, and how many improvements the house has had. If you buy a run-down house with plans to make improvements, expect your property tax bill to increase. Similarly, if you buy a house that has seen major improvements since the last tax assessment, be prepared for it to increase after you buy it. You can write off your property taxes as a tax deduction, just as you can with a first home.
- Income taxes: If you rent your house out for more than 14 days and use it for personal reasons for less than 14 days of the year, you must pay income tax on your rent earnings. However, when you claim rental income on your taxes, you can also deduct rental expenses you incur from maintaining the property, finding tenants, etc.
- Interest deduction: You can also deduct your mortgage interest payments on your second house if you itemize your tax return. If the total value of both mortgages is below $1 million, you can deduct your interest in full.
- Capital gains taxes: When you sell your primary residence, you won’t be taxed on capital gains up to $500,000 (if you’re married) or $250,000 (if you’re single). With a second home, those limits don’t apply. Instead, you’ll be taxed on the entirety of your capital gains. To avoid paying high capital gains taxes, you must have lived in your home for at least two years before selling. If you’re selling a house that you used as a rental property or vacation home, consider making it your primary residence for two years before selling to reap the tax benefits.
While owning a second home comes with added expenses, the tax benefits provided by taking on a mortgage and potential appreciation of the home’s value can make it a sound investment strategy.
Last Week’s Highlights:
After months of escalation, it seems the markets have become desensitized to headline volatility with regards to tariffs and trade wars. Although the G7 Summit ended on shaky ground with threats flying back and forth between world leaders, markets finished the week in the green. Every major index posted strong gains, with the beleaguered Consumer Staples sector leading the way. The Dow Jones was up nearly 3% last week! From unemployment data released last week we learned that, for the first time in 20 years, there are more jobs available than people looking for work in the United States, giving investors plenty of reasons to be optimistic about the economy.
Looking Ahead:
All eyes are on North Korea, as President Trump is scheduled to meet with Kim Jong-Un to discuss denuclearization in Singapore. The Fed is set to raise interest rates on Wednesday, which will increase the cost of borrowing across the board for consumers, banks, and businesses. The E3 Expo, the premier videogame conference in Los Angeles, begins on Tuesday with implications for technology, consumer electronics, and media sectors. The Bureau of Labor Statistics will release their report on the CPI Tuesday morning, with the Retail sales report following on Thursday to give us a good picture of consumer sentiment.
What’s On Our Minds:
While Tufton Capital is focused on asset management and not legal or tax advice, we would like to take this opportunity to touch on some of the benefits of using a Donor-Advised Fund (DAF) to fulfill your philanthropic goals. The way we see it, if you are going donate to charities, why not make your good will as tax efficient as possible? In that light, donor advised funds have become increasingly popular under this year’s the new tax code.
Long before the contents of the 2017 tax overhaul were finalized, and in the context of a booming stock market, most tax advisors understood that DAFs would likely continue to grow significantly moving forward.
Charitable “clumping” has become popular under the new code, which allows taxpayers to claim a “standard deduction” that discourages itemized deductions. Given the challenge of having enough itemized deductions to exceed the standard deduction, it has become beneficial to lump together numerous years of donations into one tax year in order to take one larger deduction upfront. Furthermore, donor-advised funds can be funded with appreciated securities, which allows folks to avoid paying capital gains tax upon liquidating shares, while securities used to fund the venture can remain invested. In short, by clumping the charitable contributions together, donations that otherwise would have been itemized deductions that fell below the threshold for the standard deduction are at least partially above the threshold, thus providing an immediate tax benefit that simply would not have been received at all if the contributions had been made annually.
Along with the tax benefits, donor-advised funds are simpler to use than a family foundation, and require much less paperwork and bureaucratic maintenance.
How a Donor-Advised Fund Works
Source: Fidelity
1. You make an irrevocable contribution of personal assets.
2. You immediately receive the maximum tax deduction that the IRS allows.
3. You name your donor-advised fund account, advisors, and any successors or charitable beneficiaries.
4. Your contribution is placed into a donor-advised fund account where it can be invested and grow.
Last Week’s Highlights:
Political turmoil in Italy and continued uncertainty over trade tariffs made for a rocky week in the markets, but most indices finished strong. The May jobs report showed the lowest level of unemployment since 2000 at 3.8%. This beat most expectations, and paired with decent wage growth paint a strong picture of the overall economy. 10-Year Treasury prices were down slightly, as money began to flow back into equities due to increased confidence in the market.
Looking Ahead:
With fewer earnings reports to scrutinize, focus will turn to economic indicators and political events. Further labor data will be released throughout the week, and the consumer credit report is due to come out on Thursday. In the realm of politics, the G7 Summit begins on Friday where trade deals will be a hot topic.
What’s On Our Minds:
On Memorial Day, Yale University’s Men’s Lacrosse team took down Duke for the program’s first ever National Championship. While Yale may now be known for its strong lacrosse program, the school’s endowment fund has long been heralded as an investment powerhouse under the leadership of David Swensen, who has been the endowment fund manager at the school since 1985. While he underperformed the S&P 500 during their 2017 fiscal year, his long-term results remain in the top-tier of institutional investors. Over the past 20 years, Yale’s endowment has recorded annualized returns of 12.1%, and during that period the endowment fund grew from $5.8 billion to $27.2 billion. For the sake of comparison, the S&P 500 returned just 7.15% over that same period.
Swensen’s strategy has been so successful that numerous other endowment funds have followed suit and adopted his model. At Yale, Swensen plays “quarterback” where he allocates funds to various outside money managers that he believes can outperform. During his tenure, he has continuously increased Yale’s allocation towards alternative investments and hedge funds, or what he refers to as “absolute return” strategies. He is an avid supporter of hiring active managers and he believes their fees can be justified over the long term.
In last year’s annual letter, he wrote “Net performance matters. Strong active management has contributed to Yale’s outstanding absolute and relative performance. While passive investment strategies result in low fee payments, an index approach to managing the university’s endowment would shortchange Yale’s student, faculty, and staff now and for generations to come.” Swenson’s strong support for the active manager model is in stark contrast with Warren Buffet who believes most investors would be better off in an index fund.
It may seem tempting to try and mimic David Swensen’s strategy at Yale, but it’s important to remember that he has a few distinct advantages over individual investors, and unfortunately, it’s virtually impossible to copy his model. First, universities have a boundless time horizon, which means they can take much riskier investments than what would be prudent for an individual. Another consideration is that due to the size of endowments that utilize numerous complex strategies, they enjoy lower fees than even the wealthiest private investors. Lastly, universities don’t have to worry about Uncle Sam taking a piece of the pie. The tax free exemption is by far the biggest advantage that endowments have over everyday investors. With long term capital gains taxed at 15-20%, a school’s tax-free status makes a huge difference in their annual returns.
While it’s easy to get caught up in the notion that you might be able to beat the market over the short term, we suggest that our clients and friends take a note from Swensen and remain focused on the long term success of their investment portfolio. Yale’s endowment has underperformed in recent years but Swensen’s 20-year performance figures are extremely impressive.
Source: Yale Endowment 2017 Annual Report
Last Week’s Highlights:
Stocks edged out slight gains last week. Stocks were up and down over the course of the week as both setbacks and developments were made in trade negotiations with China. Ongoing tensions with North Korea also weighed on investor sentiment last week. The Federal Reserve also came into play as it announced it planned to stay the course and gradually continue increasing interest rates.
Looking Ahead:
U.S. markets were closed on Monday in observance of Memorial Day. The Conference Board releases its index of consumer confidence for May on Tuesday and the Federal Reserve releases its beige book on economic conditions on Wednesday. The Federal Reserve will hold a meeting in Washington on Wednesday to discuss possibly changing the Volcker Rule, which could ease restrictions that ban proprietary trading by banks. U.S. nonfarm payrolls for May will be reported on Friday. Investors are expecting the unemployment rate to hold steady at 3.9%.
What’s On Our Minds:
At Tufton Capital, we often bring in new accounts holding numerous mutual funds. It’s likely that the client’s previous advisor was “filling the buckets” by picking what they believed were the best funds for each category (large-cap, mid-cap, small-cap, international, etc.). It’s a common strategy that is not necessarily a bad one, but we believe investors with sizable assets deserve a higher level of service: a customized portfolio constructed with individual securities.
It’s commonly said that “diversification is the only free lunch in investing.” In its most basic sense, diversification involves the accumulation of assets that have negative or low correlations to reduce risk and increase potential return. At Tufton, we believe in diversification, but we’re not for over-diversification, or what famous fund manager Peter Lynch coined as “diworsification:”
The process of adding investments to one’s portfolio in such a way that the risk/return trade-off is worsened. Diworsification is investing in too many assets with similar correlations that will result in an averaging effect. It occurs where risk is at its lowest level and additional assets reduce potential portfolio gains, as well as the chances of outperforming a benchmark.
Consider that the average mutual fund owns about 100 different stocks. If you own 5 to 10 different mutual funds, do you know exactly what you own? An account invested in 10 different mutual funds may own over 1,000 different securities, and you may even hold the same stocks in different funds. Moreover, the fund likely charges a management fee on top of the fee paid to the financial advisor playing “quarterback” and picking the funds. If an investor wants this type of broad diversification, why not just purchase an index fund? It would be much cheaper!
At Tufton, we believe that an equity portfolio made up of 30 to 45 stocks is a sweet spot where portfolio managers can limit volatility stemming from each security (company-specific risk) and still produce alpha in an account.
Last Week’s Highlights:
Stocks declined a bit last week as investors shifted their attention away from earnings and towards to interest rates, macroeconomic developments and global politics. The yield on the 10-year Treasury Note had a high during the week of 3.115%, after closing the previous week at 2.971%. Market pundits have been fixated on this 3% number as some believe investors may favor these bonds over stocks. On the other hand, borrowing costs are still low, and rates have not yet climbed to a level that will begin choking off economic growth.
Looking Ahead:
First quarter earnings season continues to wrap up this week and economic data will be on the light side. New home sales will be reported on Wednesday, existing home sales on Thursday, and then consumer sentiment will be reported on Friday.
What’s On Our Minds:
5-Point Portfolio Checkup
The goal of investing is to see your money grow over time. However, even though you can’t control how your investments rise and fall, your portfolio is anything but automatic. Like most things, it’s important to check up on your portfolio to make sure nothing is out of date and that its goals are still in line with your own. Tufton Capital’s portfolio managers are always available to help guide you through a quick “portfolio checkup”.
Update Your Goals
Naturally, your investment goals will change as you get closer to retirement. The first thing to do is determine where you want your investments to be headed. Do you have a new goal, like a child’s college fund, or have you decided to aim for higher retirement income?
Check Your Performance
Are your investments on track to meet your goals? Do you need to aim for increased investment returns or start contributing more? If your portfolio is lagging behind the appropriate benchmarks over a long period of time, it is probably time to reconsider your investment strategy.
Review Assets
Over time, some assets may grow to be an oversized or undersized part of your portfolio, or perhaps your appetite for risk has changed. Often times, individuals inherit a large position in a single company and it’s necessary to diversify. Or, perhaps someone has worked hard over the course of their career and amassed a sizable equity stake with their company. Either way, re-balancing your assets is often a smart strategy as you plan for the future. 
Check Your Beneficiaries
Do all of your investment accounts have listed beneficiaries? While it may not be fun to think about, it’s very important to plan ahead. In the event of your death, having direct beneficiaries for your accounts will keep them from passing through your estate and incurring unnecessary costs.
Consolidate Extra Accounts
Many people forget about old accounts (past IRAs, CDs and 401(k)s) and do not coordinate their holdings with the rest of their portfolio. Talk to your Tufton portfolio manager about rolling these accounts into a single IRA that will be easier to manage. Along with streamlining your investment strategy, you also may be able to lower your management fees by consolidating more assets with a single firm.
Last Week’s Highlights:
Investor sentiment turned bullish last week and stocks logged solid gains. Strong earnings results lifting the S&P 500 and Dow Jones by more than 2%. At this point, more than 90% of S&P 500 companies have reported earnings, and results from the quarter are on pace to be the strongest since the 3rd quarter of 2010. On average, we have saw an impressive 8.2% increase in revenue from S&P 500 companies in the first quarter.
Looking Ahead:
Earnings season begins to wrap up this week with only 10 companies in the S&P 500 reporting. Thus, investor attention will likely return to any pending political news and economic data. Retail sales figures are reported on Tuesday, housing starts on Wednesday, and the Leading Economic Index figure is released on Thursday.
What’s On Our Minds:
“The Bulls and Bears in the Market” by William Holbrook Beard. Source: New York Historical Society
William Holbrook Beard was one of America’s finest animal painters. Many of his paintings employed animals to mimic and satirize human behavior. In 1879, Beard painted “The Bulls and Bears in the Market” which depicts a battle between bulls and bears on New York’s Wall Street. Over the past 140 years this fight continues!
There has been a bull vs. bear tug of war on Wall Street this year. On the bull’s side of the ring, analysts have been increasing their earnings expectations and yet companies are still beating their estimates at a record pace. 81% of S&P 500 have reported first quarter earnings this spring, with results on pace to be the strongest since the third-quarter of 2010. Furthermore, tensions on the Korean peninsula have eased in recent weeks which sharply reduces geopolitical tensions that have been weighing on investor sentiment this year. The market has been hesitant to read too much into the positive reporting trend though. A group that tracks bullish sentiment by way of survey, the American Association of Individual Investors, notes that bullish sentiment peaked back in January at 59.75% and has since decreased to 28.4%. Of course, this survey is useful with the benefit of hindsight, but clearly investors have become skittish this spring.
Which brings us to the bear’s corner of the ring. Heightened risk of trade wars, which could hurt manufactures of targeted goods and their suppliers are stoking investor fears. Investors are also worried about rising interest rates, which makes equities less attractive. An apparent lack of reinvestment of tax savings on the corporate level has also spooked investors. Instead of investing savings for long term sustainable growth, companies have prioritized stock buybacks and employee bonuses.
The constant back and forth between bullish and bearish sentiment this year may seem worrisome but it these types of conditions are expected as you invest over the long term. Remember, Tufton Capital’s portfolio managers are hard at work looking for undervalued companies, balancing your portfolio and trimming your winners. We’re not focused on short term performance, but rather, the long-term growth of your portfolio!
Last Week’s Highlights:
Daily moves were volatile last week but we finished the week close to where we started. It was a tough week until stocks rallied back on Friday. April’s Jobs report was released last week which showed that the U.S. economy added 164,000 jobs and the unemployment rate dropped to 3.9% from 4.1%. The report missed expectations though. Investors were expecting 190,000 new jobs. The Federal Reserve said it still plans to raise rates later this year.
Looking Ahead:
Earnings season begins to wrap up this week with only 9% of S&P 500 companies reporting first quarter results. Important economic updates this week include inflation on Thursday and consumer sentiment on Friday.
What’s On Our Minds:
The yield on the U.S. 10-year Treasury hit 3% last week: the highest level it has reached since 2014. Low interest rates have been a key ingredient for our current bull market’s run so recent increases have garnered plenty of attention from investors. The recent move higher puts upward pressure on borrowing costs and has driven investor attention back to the Federal Reserve’s plan to hike interest rates. Below, we break down the various levers that make this number so significant.
Interest rates are, to put it mildly, a complex beast. There are a few mechanisms by which rates affect the economy and the stock market, not all of which are obvious, but which have large effects.
The first is the most obvious: a lower interest rate means it’s cheaper to borrow. Consumers borrow more money to buy houses or cars, businesses borrow money to expand production. And thus, we get economic growth. Everybody’s happy. Except, maybe, the people who get less money in interest for loaning out their hard-earned cash.
An interest rates increase, like the one that seems imminent, is a signal that rates are moving higher, might cause both consumers and Chief Financial Officers to cut back on spending. So, businesses earn less, and earnings fall.
Another very important but more abstract concept is the valuing of stocks via a discount rate. If I think a company is going to earn $10 million in ten years, the interest rate would have to be 0 for an investor to want to buy its stock now for with a $10 million valuation. But if interest rates are higher, investors would be better off just putting the money in the bank for ten years and earning some interest in those ten years. In this way, investors compare interest rates with their expectations for the earnings of companies. If interest rates are low, companies’ stocks are more attractive, and therefore worth more in today’s dollars.
The Federal Reserve must think about all of this, with the added complexity of inflation. The inflation target is 2-3%: at this level, prices are stable, but there is incentive to spend, rather than save, money, and to push the economy along. With inflation at zero, you know that the car you want to buy will cost about the same in year, so you might just think about it for a while, dampening economic activity.
Deflation, when inflation falls below zero, is a major problem: here, you might wait to buy that car, since it will be cheaper next year. And the year after that. This gives rise to the “pushing on a string” phenomenon that was one of our investment committee’s favorite metaphors. You can’t entice people to spend money by cutting rates indefinitely, since rates below zero (usually) are avoided by simply keeping the cash.
The 10 Year Treasury Note’s Yield has ticked higher this year.
Last Week’s Highlights:
The S&P 500 was little changed last week and the Dow Jones was down just over half a percent. Crosscurrents continue to weigh on investor sentiment. We have seen strong first quarter earnings reports and improving economic growth but investors are skeptical because of rising interest rates. 10-year interest rates rose above 3% last week for the first time since 2014. On one hand, low interest rates have been a major factor for this bull market so recent increases have caused anxiety on Wall Street. On the other hand, corporate profits are still expanding and businesses are still realizing the benefits of last year’s tax reform.
Looking Ahead:
The flow of first quarter earnings reports continues this week. Analyst will be busy dissecting reports from 147 of the S&P 500’s components. So far, nearly 80% of the S&P’s companies that have reported have beaten consensus earnings forecast. The Federal Open Markets Committee will announce their interest rate decision on Wednesday. No rate increase is expected.
