Although we were disappointed stock prices didn’t react to spectacular first­quarter earnings (+25%), we remain very interested in what corporations are doing with the extra cash and how this might eventually boost share prices.

Share repurchases. First quarter buybacks alone set a record of $178 billion (beating the previous mark of $172 billion in 2007’s third quarter). Often referred to as ‘financial engineering,’ lower share counts result in higher earnings per share for remaining shares. Since corporations tend to buy high and shy away at the lows, the current frenzied activity may be a sign that share prices are rich.

Dividend increases. In the first quarter, 187 S&P 500 companies increased their dividends, and no company cut their dividend (a first in over 15 years). Counting both dividends and share repurchases, the 12­month total return of cash to shareholders was about $1 trillion! Many bulls cite this number (which equates to a 1.9% dividend yield plus a 3% yield on share repurchases) as one reason for their optimism.

Business investment. First quarter capital expenditures rose 21% over the prior year to an all­time high. Companies are both expanding for the future and investing in technology to make operations more efficient and profitable.

Bonuses and raises. Although many companies rewarded their employees with raises and one­time bonuses, the dollars pale in comparison to share buybacks and cap­ex. Continued heavy buybacks, larger dividend increases, and robust business investment are largely the result of the corporate tax cut which shouldn’t be underestimated by investors. Buybacks accelerate a company’s growth in earnings per share, sharp, outsized dividend increases can help ‘push’ the stock price higher, and healthy business investment expands capacity to prepare for greater demand in a growing economy.

Bond Market Contagion Causes “Risk‑Off”

Assuming the Federal Reserve raises rates once again in June as we now expect, they will have pushed up short rates (Fed funds) by 1.75% since the recent tightening phase began. The results of this rate policy “normalization” have been fairly benign to this point but we are beginning to see change in the markets. Most prominently, rising rates have caused significant losses in intermediate and longer maturity bond investments as we described in last month’s commentary. An unanticipated flight to higher quality assets (about a 2.7% price gain on the 10­year Treasury) at month end has temporarily reversed the trend.

Another more disturbing impact has surfaced recently as well. A much stronger dollar, beginning in mid­April, has caused emerging market debt to decline in value. Many of the more challenged currencies, including the Turkish Lira, Argentine Peso, and Venezuelan Bolivar, have also seen huge declines and the contagion is spreading. Other countries, dependent upon the dollar to finance trade deficits, are experiencing both bond price and currency deterioration. As the dollar appreciates, it becomes incrementally harder for these borrowers to repay their debts.

Risk­off, or moving away from higher risk assets, now appears to be the consensus. Italy’s recently elected populist government is also perceived as a very real threat to the long­term viability of its own debt and the EU. Investors are waking up to the risks. Emerging market debt liquidity is poor in the best of times; it may soon be nonexistent. Further complicating the situation, many retail investors have no idea what securities are included in their bond funds and ETFs. Continued losses will no doubt illuminate the situation.

Neither emerging markets nor Italy are currently in crisis. However, concern has now shifted from return on principal to return of principal. We don’t purchase bonds or funds holding emerging market debt or non­investment grade “junk” debt in client portfolios.

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Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

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This is achieved through an ongoing assessment of market risks given your specific financial situation and goals.

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Leadership Team

Richard Furmanski

Richard Furmanski

CFA

has been a portfolio manager and analyst for over 35 years. He manages conservative, tax-efficient portfolios for both pre-retirees and retirees. His lower risk approach appeals to investors who want less volatility and competitive risk-adjusted returns.

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Mary Ellen Adam

Mary Ellen Adam

Director of Operations

has been in office administration for over twenty years. Her experience includes customer service, firm operations, and office administration. She interacts with our clients on a day-to-day basis and handles any requests that may arise.

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Frequently Asked Questions

If you can't find the answer to your questions here, feel free to give us a call at 847-847-2505

Do you manage both stock and bond portfolios?

Yes. We build a portfolio of conservative, high-quality stocks and hold them for the long-term. The average holding period is 4 – 5 years. Our focus is on stocks that are suitable for retirement portfolios.

Our high-quality bond portfolios are designed to provide both income and stability of principal. Bonds provide the anchor for balanced accounts (those holding both stocks and bonds).

What is your investment philosophy?
We take great care in purchasing only high-quality stocks and bonds intent on a multi-year holding period. Portfolio turnover and taxable realized gains are modest in comparison to other active managers. We do not time the market but will become more defensive, in terms of stock holdings, when market conditions warrant.
Will the portfolio be managed in accordance with my financial goals?
Yes. Each of our clients has a custom-tailored portfolio. These custom portfolios are designed to meet specific client objectives with a thoughtful approach to specific constraints such as risk tolerance. And as each client’s situation changes, the portfolio does as well. There is no cookie cutter approach.
What kind of expertise do you have and how can that help me in difficult markets?
We have been working with high-net-worth clients like you since 1982. Over that time we have helped them to navigate several bear markets and financial crises (including the stock market crash of 1987). We hold the Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP) designations.
Are you sensitive to taxes when managing portfolios?
Yes. Our holding period for an individual stock averages 4 plus years which means our turnover is low and realized gains can be carefully managed. Further, where possible, we tax loss harvest small losses as a way of offsetting gains taken elsewhere in the portfolio.
How have you performed?
Results will differ by client and the level of customization but we have provided competitive investment returns for many years.
How do you charge for your services?
We charge a management or consultant fee based upon the size and level of customization of the account. As the account grows, we benefit together.

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