QUARTERLY INVESTMENT UPDATE
3RD QUARTER 2016
October 3, 2016
Dear Clients and Friends,
It is remarkable these days how quickly investors become unhinged. Whatever the cause, it seems that financial markets are reacting to any news with emotion rather than the mind, which is opposite of how we should behave. As we discussed in our last special update, we have had several and expect to have more emotional driven market swings. Stocks have leaped over a series of obstacles in 2016, the worst recent being the unfounded fear that the Federal Reserve might prematurely raise interest rates in September, which they did not do. With the Federal Reserve out of the rate-hiking business until December at least, only one factor is left that could trigger a big selloff in stocks over the next two months – the U.S. elections.
Once tipped by pundits as a potential Democratic sweep, the election is turning into a horse race. While most polls still show Secretary Clinton leading narrowly in the presidential race, it appears the GOP will continue to hold a solid majority in the House of Representatives and may even hang on to the Senate by a slim majority. From an investment standpoint, this shift in political prospects gives little reason for fear. Financial markets often thrive under a divided government in Washington. If Trump wins and Republicans retain their majorities in Congress then this could have a negative impact on Wall Street since it was not expected. Stocks, in particular, could undergo a 5%-6% pullback, comparable to what happened in June after the Brexit surprise. The economic landscape here in the U.S. still looks pretty healthy, with jobless claims near four-decade lows and corporate profits on the verge of a rebound.
Another emotional outburst took place last week in the oil market. During their meeting last Wednesday, OPEC chieftains informally met in Algiers and agreed to seek a production cut at the organization’s meeting in November. According to the brief statement released after the Algiers gathering, OPEC will look to reduce its output by 500,000 barrels a day, which is approximately 1.5% of OPEC’s total production. Also, at this point OPEC is only establishing a committee to “study and recommend” the proposed cut. Even if the deal goes through, there is little evidence to suggest a dramatic run-up in Crude prices before year end.
In our last Special Investment Update, we expressed our confidence in the stock market by re-investing the dividend income on most of our stocks and mutual into the respective company’s Dividend Reinvestment Plans (DRIP). However, this does not include taxable accounts with monthly cash distribution or other accounts that have their own cash requirements. We continue to have confidence in the stock market but it is essential to keep enough cash reserve to take advantage of opportunities during periods of emotional volatility.
As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is a reasonable prospect for double-digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continue to maintain an average asset allocation mix of 45%-50% Equity, 45-50% Fixed Income and 0%-10% cash for most of the portfolios.
On the Equity side of our portfolios, we added several positions including Kroger Company (KR), a retailer in the United States, Walt Disney Co. (DIS), a worldwide entertainment company, Liberty Media Corp (LMCK) who owns interests in subsidiaries and other companies, which are engaged in the media and entertainment industries, and Ralph Lauren Corp (RL), which engaged in the design, marketing and distribution of lifestyle products, including apparel, accessories, home furnishings and other licensed product categories. On the sell side, we sold our entire positions in DreamWorks Animation Inc. (DWA) and Adidas Ag (ADDYY) to capture some nice long term gain. In the case of DWA and ADDYY, we purchased them at the end of 2014 at a cost of $22.45 for DWA and a cost of $39.31 for ADDYY. We sold these two equity stocks over double what they cost us.
As far as Fixed-income is concerned, we added one new high yielding equity position which is New York Community Bancorp Inc. (NYCB), which offers banking products and financial services in Metro New York, New Jersey, Ohio, Florida, and Arizona. We also added TCW Total Return Bond (TGMNX); a high yield fund invests at least 80% of the value of its net assets, plus any borrowings for investment purposes, in debt securities. On the sell side, we sold our entire positions in Barclays Plc Adri (BCS), and Double line Total Return (DLTNX). As we discussed in our August 10 issue of our Special Investment Update, the 10-year Treasury note should start to move up from their July low of less than 1.40%. During the third quarter, the 10-year Treasury note climbed briefly above 1.70% yield before closing the end of the quarter at 1.61% yield. As we previously mentioned, if stocks are to enjoy solid gains through the end of the year, the yield on the 10-year Treasury note should climb above 1.75% during the fourth quarter.
We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact me should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news, and Market Commentary archives.
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