Letter from Cobleskill – Spring 2016

By Tom Putnam 

Our story began at the intersection of Wall Street and Main Street here in Cobleskill. I was thirteen and read The Wall Street Journal each day while shining shoes “for a living.” That was a long time ago, but I learned some enduring lessons. For example, what I read in the newspaper did not always mesh with the activity I saw in town between consumers and commerce. I think we are seeing that disconnect today. The headlines and stock market are expressing negative sentiment; however, what our Investment Research Analysts are gleaning at the company level is actually pretty good.

Current Concerns

There are four prominent topics causing some investor angst: volatility, China’s economic slowdown, oil prices, and America’s election:

Volatility: After three months of considerable volatility, the stock market seems to have settled down. Market volatility, as measured by the VIX Index, was at 28.14 on 2/11/16 and quieted to 13.79 on 3/21/16. Early in the year we trimmed some high-performing stocks, several at or near their 52-week high price, and purchased select ones as much as 20% to 30% off their recent highs. Market drops often provide us with opportunities to fortify the Funds for long-term growth with our best selection of high-quality, bargain-priced investments.

China: China’s economic growth has slowed and it is an integral source of demand for commodity and industrial products. Of course, this is hurting many global commodity producers and industrial companies that conduct business there. To keep matters in perspective, China’s economy is still growing at about two times America’s pace. Simultaneously, U.S. businesses that do not rely on China for significant revenue are generally doing pretty well – this includes several FAM Funds holdings.

Oil: The plunge in oil prices has caused severe ripple effects across multiple markets and dampened earnings trends. For example, industrial companies that sell into the oil and gas market have witnessed profit declines while many people, unfortunately, have lost their jobs. At the same time, there are some green shoots:

  • U.S. oil production has waned this year, and prices have increased a little and stabilized so the supply/demand pendulum may be reversing.
  • While FAM Funds has limited exposure to the Energy Sector, our energy holdings are financially sound and have the stamina to prevail.
  • Consumers have more money in their pockets due to low gas prices and auto dealers have seen an uptick in sales

Elections: John Fox, our Chief Investment Officer, was asked about the elections in a recent newspaper interview. His answer was spot on. “Typically, the biggest political effects on investing are regulations in certain industries. The stock market has increased with both Republicans and Democrats in the White House so we do not foresee a huge impact.”


We focus on the underlying strength and future growth potential of our holdings, not short-term stock market fluctuations. Very often stock prices, in the short term, do not reflect a company’s economic worth – especially in times of heightened volatility. During declines we seek to put capital to work in high-quality, well-managed businesses at discounted prices. This has been a successful strategy to build real wealth over the long term and helps mitigate downside risk during uncertain times. In fact, we are pleased with how the Funds held up, on a relative basis, during this volatility.

Meanwhile, our analysts have already traveled significantly this year attending industry conferences, meeting with companies, and speaking with management teams. We call this “Kicking the Tires.” Our experience dictates that this is the best way to make informed, insightful investment decisions. Here is some of what we are seeing:

Earnings: In aggregate, year-end quarter earnings of the S&P 500 companies declined on a percentage basis. Based on this, we are satisified with how our holdings performed overall. The 2016 full-year consensus earnings estimates for S&P 500 corporations are flat to slightly positive, but this could improve during the year. The decline in Energy Sector earnings is causing much of the slower growth.

Banks: This is just one of the industries we have examined, but we believe it is a bellwether. Loan growth remains relatively strong, credit is holding up well, and banks and their customers are in better shape than they were in 2006 to 2007 with less leverage and more cash. There is some stress in loans made to certain energy firms; however, the regional/community banks in which we invest have limited exposure to these loans. Also, a modest increase in interest rates should be a positive for banks.

Positive Points: The U.S. unemployment rate is at 4.9%; housing sales are up nationwide; auto sales hit a record-high in 2015; and the stock market, as represented by the S&P 500 Index, is still about double what it was at its bottom in March 2009.

Overall, Main Street news is pretty good, especially from the high-quality businesses we follow. Although the economic data denotes continued slow growth, we do not see signs of a recession as we did in 2007. In our estimation, recent volatility is a Wall Street issue and not necessarily an indication of an economic downturn.

That being said, we understand that market turbulence, even though it presents opportunities, can be nerve-racking – especially for those of you approaching or in retirement. If you have any questions or need more assurance , please contact us at (800) 932-3271 or stop by our office.

Please see Fenimore disclosure.