States and an international coalition commenced an air campaign against an extreme Muslim self-proclaimed caliphate in Iraq and Syria. If that was not enough, the first cases of Ebola reached our shores. This puzzling (and at times terrifying) picture has left no safe haven-where one can earn a return after inflation and taxes without taking on some risk. Further confusing the investment landscape is the decoupling of the U.S. economy from Europe and Japan. Our economy is expanding, while elsewhere rates of growth are declining and concerns about recession and deflation in the Eurozone are once again rising.

So, we at FLI are spending a great deal of time, both internally and with colleagues, seeking an objective evaluation of the various markets we invest in. Our mission is to seek an unemotional bottom-line approach resulting in an asset allocation focused on achieving investment gains over the long term for our clients. At the same time, we continue to focus our investments on opportunities in quality and deep-value companies as well as with proven outside investment managers who we deem capable of navigating this challenging investment landscape.

The good news is that we believe a number of great companies exist, to invest in and among best of breed managers in both the traditional and alternative investment spaces, that warrant our confidence. Thus, we believe that reasonable returns are attainable over the long term, although we will always face volatility and distracting noise as demonstrated in the period immediately following the close of the third quarter. So, balancing the emotions of greed and fear is the task at hand.

Some specifics are required to make our case for long-term gains. Right now we believe interest rates will increase at some point (probably mid-year 2015). This is actually good news, but its probable eventuality will cause volatility in the markets. The U.S. economy is continuing to improve despite little help from Washington. This growth in our economy, although moderate at best, continues to put more people to work (about 200,000 new jobs per month on average for this year) while gasoline and heating oil prices declined (down about 20% from recent highs!). That is a good combination that will provide a substantial nongovernmental stimulus to the domestic economy in the months ahead. Along with continued improvement in housing prices and the number of homes sold, this stimulus is a good sign that consumer balance sheets continue to improve. In addition, many domestic companies, both consumer and industrial

based, are continuing to increase their earnings. Our view of corporate earnings remains positive, and we believe that with some help from the still growing emerging markets, the S&P 500 will achieve record earnings both this year and next. This would place the price earnings multiple on S&P earnings in the 15x range based on 2015 earnings. Not expensive, but also not cheap. Of course, this assumes there will not be a recession next year nor do we see any evidence of that. Obviously, some companies will fare better than average and those are the ones that we, and the managers we work with, seek to invest in as long as their valuations are reasonable. Our internal research and discussions with the many managers we work with continue to suggest the opportunity remains to own high-quality companies with strong balance sheets that appear to have good value and continued earnings growth.

Given our quandary with extremely low interest rates ultimately trending higher, we remain cautious about fixed income investing. We continue to keep our bond portfolios with shorter maturities (short duration) thus resulting in low yields. Accordingly, we continue to recommend a greater than usual allocation to our complement to fixed income investing—our defensive strategies, especially Dividend Growth where we can still achieve a current dividend yield of 3.0% with projected dividend growth of 7% to 10% per year. This compares very favorably with money markets yielding almost nothing; 5-year AAA municipal bonds at about 1.2%; and the ten year treasury at about 2.4% (fixed for the next ten years). Of course, there is no escape from market volatility. Both our Dividend Growth companies and our bonds face market ups and downs, but probably less so for our Dividend Growth Strategy than for our traditional equity strategies.

Given the geopolitical uncertainty (including Iraq/Syria, the Ukraine and Russia, nuclear negotiations with Iran, and the cease fire in Gaza/Israel) coupled with the serious economic slowdowns in Europe and Japan, we continue to tilt our clients to our defensive basket of investment strategies. Seeking some comfort using defensive strategies makes sense especially given the robust investment performance of the last several years. Additionally, we do not mind at all having a strong tilt towards investing in U.S.-domiciled companies with substantial U.S. economic exposure. The U.S. consumer is in good shape and inflation is low. In addition, U.S.-domiciled companies are, for the most part, in strong financial shape and many continue to innovate with new products. Our strategy remains simple—over-allocate to our defensive strategies which should be less volatile and are over-weighted to U.S.-domiciled companies while we underweight fixed income and traditional equity strategies (especially foreign-based equities).

Our defensive and traditional equity strategies remain mostly positive so far this year, although many are below the market averages like most active managers. We attribute this to a recent market bias towards lower-quality companies which we believe is temporary and will correct itself. Accordingly, we will continue to own quality and value in our investments. Inexplicably, our fixed-income portfolios remain positive as interest rates, to the surprise of most, remain subdued. We believe that a prudent asset allocation with a strong tilt towards defensive strategies and some fixed-income exposure, will continue to work well for our clients in the future as it has in the past. Finally, irrespective of the political outcome, once we have endured the midterm elections we believe that there is hope that the political paralysis will give way to some bipartisan progress in the areas of taxation, infrastructure spending, and immigration reform. This, in our view, will be a positive for economic progress in the U.S. and positively impact the equity, real estate, and private equity markets. In addition, we believe that global concerns in Europe and the Middle East will continue causing foreign investors to allocate more assets to U.S. investments. This would continue to help our domestic markets as well (the combination of economic growth and a strengthening U.S. dollar is a powerful enticement to foreign investors).

In conclusion, we remain cautiously optimistic despite a growing wall of worry as fundamentals in the markets, and more specifically companies we invest in, remain attractive. Emotions of greed and fear must be kept in check as volatility picks up, reflecting the noise and concern surrounding many of the issues we face.
As always, please give any of us a call to discuss your asset allocation and our wealth management outlook as there is much going on. Also, we are approaching year end and there might be some strategies worth considering that could be favorable from a tax standpoint. Give Steve Juchem or Teri Vobis a call should you have any questions about taxes (on your investments or otherwise).

Best regards and enjoy the upcoming holiday season!

Robert D. Rosenthal
Chairman, Chief Executive Officer
and Chief Investment Officer
*The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance. Actual results may differ materially. Past performance statistics may not be indicative of future results.

Disclaimer: The views expressed are the views of Robert D. Rosenthal through the period ending September 30, 2014, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

Content may not be reproduced, distributed or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC . Copyright © 2014 by First Long Island Investors, LLC. All rights reserved.

With just a few weeks to go before the 2014 mid-term elections, clients and friends of First Long Island Investors gathered at the Garden City Hotel, on October 14, 2014, to hear John Zogby, political analyst and pollster, provide his of-the-minute perspective on the election and how it could impact the affluent investor and the landscape in Washington.

Robert D. Rosenthal, Chairman & CEO of First Long Island Investors LLC (left), and John Zogby, Political Analyst and Pollster (right).	John Zogby shares his perspective on how Millennials will impact on this election.

John Zogby started by cautioning the crowd that many of the elections may be decided by as little as 1-3 points and that factors are changing daily. Here are some of his insights, as of October 14, 2014.

The U.S. Senate

The US Senate majority is currently held by the Democrats (and independents caucusing with the Democrats) with 55 seats to 45 seats held by the Republicans. In order for Republicans to take control of the Senate, they need to gain a net of 6 seats. If elections were held today (10/14), the GOP would win the 6 seats and take control of the Senate with the following results:

• Assumed GOP wins are: West Virginia, South Dakota, and Montana
• Competitive seats that the GOP could win include: North Carolina, Arkansas, Louisiana, Colorado, Alaska, and Iowa
• Competitive seats the GOP could lose include: Kentucky, Georgia, and Kansas

Based on the number of competitive races the GOP likely must win more than 6 races to win the Senate because of the likelihood of losing at least 1 current seat.

GOP Advantages

• Obama: The Anti-Obama message is serving as a unifying factor. The GOP is trying to use Obama’s low approval rating to their advantage. Zogby did remind the group that while low, President Obama’s approval rating is not historically low for a 2nd term president.
• Independents are leaning towards the GOP:
  • ½ of Independents describe themselves as “conservative”
  • ½ of Independents are not sure who they will vote for and attack ads may be effective in keeping them from going to the polls. Low voter turnout helps the GOP
• GOP recruited a better level of candidate than in 2010: The 2014 class of Republicans are young and accomplished which should bode well for the GOP both in this race and in the future.

GOP Disadvantages

• Brand: The GOP brand has been badly damaged and while it is recovering, it is not yet fully restored. They are seen as the “Party of Old, White, Men” and voting Republican is “not on the radar” for the increasingly important 18 – 34 year old demographic.
• Latino Voters: Latino voters are a growing demographic within the voter base. Latinos made up 4% of voters in 1996, 10% of voters in 2012, and the trajectory is continuing. President Obama’s approval rating among Latino voters is 74%.
• “What’s the alternative?” It is not enough to campaign on the fact that you are not Obama. Voters are consistently asking all candidates, including the GOP, “what have you done for me lately and what are you going to do next?”
• Tea Party: The Tea Party is driving the GOP message and that message does not resonate with Independents. They are putting the party in a Catch 22 Position:
  • They came into Congress with the attitude of no compromise
  • Their failure to compromise means they cannot accomplish anything
  • It is difficult to be reelected without accomplishments
  • Yet, if they had accomplishments then they compromised on principles

Democrat Advantages

• The Economy: The United States has come out of a recession, the stock market is doing well, the unemployment rate has gone from 10.1% to 5.9% and job increases are at a better pace (approx. 225 – 250K per month).
• Obamacare: There are more people insured than ever and there is a possibility that we will see a higher turnout of voters who are now insured.
• Barack Obama: President Obama is the only one who has shown he can energize young, Latino, and African American voters. Looking back to 2012, young women voted for Obama and against the GOP. As the registration deadline nears, Obama has used media outlet Republicans “…have never heard of.” (i.e., Twitter, Facebook, and other social avenues.)

Mr. Zogby rounded out his presentation with a discussion of key demographic trends that will pay a role in this and future elections.

• The National vote is trending non-white:
  • 81% of Baby-boomers were white
  • 60% of Millennials are white
  • 48% of the next generation is white
• Millennial generation (those born in ’79 – ’96) is almost as big as Baby-boomers:
  • Millennials are 1/3 of workforce
  • Will be 1/3 of the electorate in 2020

Question and Answer Session

How will the low approval ratings of the President and Congress affect the Elections?

The President’s current approval rating is 42-43%, which is better than Nixon, Bush, Truman, and Carter and not near record lows. History has shown that the base can still turn out with these ratings.

Congress currently has an approval rating of 13% and as low as that is, the GOP receives even lower ratings. 37% of people trust the President to tell the truth; 17% of people trust Congress to tell the truth; and 37% don’t trust either. Generally speaking, a low turnout favors the GOP.

Is the younger generation aware of the global issues?

Young people are aware of what is going on globally. They were and are growing up in a “non-superpower world” where they have seen the limits of power. They see the US as an “empire in decline” and have lost faith in government changing things for the better.

This generation has a different perspective and comes at situations from a very different point of view than previous generations. They are users of global petition campaigns, crowd-sourced ideas and crowd-funded initiatives. They have a strong desire to work in teams and to be involved, but have no strong desire to vote or run for office. There are now “Libertarians” and “Communitarians”, no more “Liberals and Conservatives”. They are believers that the government should be efficient and not create as much debt.

How does the electorate tell Washington that the Middle Class is being squeezed? Are both parties becoming more extreme?

The message of the Middle Class has been delivered and acknowledged by politicians in private. The reality is that it is hard for politicians to empathize with the Middle Class because they are coddled in Washington. Politicians who “buck the political trend” are hard to deal with in Congress so it is difficult for them to break out.

Zogby went on to say that it would have been helpful if Obama had run something in his life prior to becoming president. However it is difficult when the strategy of the other-side is to “destroy” you.

Serious issues must be dealt with prior to 2016 election. Will there be cooperation?

Zogby shared that he does not feel the parties will come together. He does not see a healthy relationship between Republicans and Democrats today, and went so far as to say that Mitch McConnell (US Senate Republican Leader) and President Obama “hate each other”. Boehner (Speaker of the House) and Obama have a better relationship – they want to get something done. Much of their ability to do so depends on how the midterm elections go. Zogby expects that the President will announce an aggressive agenda at the State of the Union Address which will be all about his legacy and nothing more. There is worry of another government shutdown.

How does the situation of Illegal Immigrants with children in the United States impact the election?

In the years of Pataki and Giuliani and George H. W. Bush the relationship between the GOP and the Latin Community had been revived – George W. Bush carried 40% of Latino vote in 2004 and in 2006 Republicans carried 20% of the Latino vote. The GOP never recovered with the Latino Community and are in an “anti-Latino” direction. Anti-illegal is seen as anti-immigration which is seen as anti-Latino.

How will Ebola Crisis affect elections?

The current Ebola crisis does not play to the Democrats’ favor. It isn’t possible to say how it will effect turnout – Ebola may turn people off from voting but may not turn them on enough to vote.

What is the impact of events like Super Storm Sandy on elections?

The President looked presidential after Sandy. The images of him and Chris Christie walking through Atlantic City was a “powerful image” that resonated with many. That election was extremely close just prior to Election Day and ultimately Obama won 11 of 12 battleground states. Going into the election, many were not sure about the young voters and ultimately young women came out strong for Obama because the GOP “scared them” on social issues.

Likelihood of a Clinton vs. Bush 2016 Election?

Zogby explained that there is a dynamic in the US which naturally opposes dynasties. He does not see traction for Jeb Bush nor does he believe Hillary will get the nomination. Zogby’s feeling is that Hillary’s biggest problem is running against herself and that America likes Bill Clinton except when he is campaigning for Hillary. He opined that John Kerry may be a surprise for the nomination.

For the GOP, he feels Mitt Romney is still a likely candidate. He has a few things going in his favor – he is still the next republican in line, wants to run, possesses the “I told you so” factor, and does not currently have much competition.

Jericho, NY (October 7, 2014) – The Diabetes Research Institute Foundation (DiabetesResearch.org) is pleased to announce that Bruce A. Siegel of New York, NY, has been elected to serve on its National Board of Directors. He also serves as co-chairman of the organization’s Northeast Region Board, alongside Marc S. Goldfarb.

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Robert D. Rosenthal, Chairman, Chief Executive Officer and Chief Investment Officer of First Long Island Investors, LLC is honored by the New Leadership Division Pediatrics at Cohen Children’s Medical Center.

From left to right: Dr. Marsha Sherman, Robert D. Rosenthal, and Mark Claster, Chairman, Board of North Shore-LIJ Trustees.

For the 25th year, NLD for Pediatrics hosted their Annual Golf Classic at Fresh Meadow Country Club and Deepdale Golf Club in Manhasset, NY. The event honored Robert D. Rosenthal. Over $466,000 was raised to support the Child Life and Creative Art Therapies program at Cohen Children’s Medical Center, which is overseen by trained professionals with expertise in helping children and their families overcome life’s most challenging events that bring a child to a hospital.

“Success is not final, failure is not fatal: it is the courage to continue that counts.”
– Winston Churchill

The second quarter of 2014 was a successful one for our clients. All of our defensive and traditional equity strategies achieved new highs following record-setting domestic equity markets (certain international markets remain below record levels), bond prices remained high reflecting very low interest rates, and our private equity and real asset investments made progress. Despite these gains on top of significant gains last year, investors, including some of our clients, remain skeptical about the future. Thus, the quote above gives us some insight into why we believe that the uncertainty of the investing future should be viewed with cautious optimism.

Specifically, with each of our strategies at record levels, many are wondering where we go from here. The success achieved is never final because we believe there are future gains to be made over the long term. At the same time, a market downturn should not be viewed as failure, for as history has shown, it most likely will be temporary. We remain cautiously optimistic about sensible investing going forward, as long as our clients adhere to a prudent asset allocation and follow our defensive and traditional equity investing that reflect a philosophy of investing in strategies with high “active share.” We will describe high active share a bit later. First, for the record, let us enumerate the items on the wall of worry that investors are rightfully concerned with at this time:

1. Washington is still paralyzed, which is not good for growth, and controversies are still the word of the day (Benghazi, the IRS, the Veterans Administration, and immigration).
2. The geopolitical map is gruesome with wars in the Middle East, Russia still on the border of the Ukraine and perhaps culpable for shooting down a Malaysian Airlines plane, Iran on the cusp of a nuclear bomb, and the kidnappings and murders of teens in Israel.
3. Oil prices are high, which acts as a tax on all consumers and businesses.
4. The S&P 500 and the Dow have not had a correction in a long time, and some would argue that valuations are quite high.
5. The Federal Reserve continues its tapering, and higher interest rates are expected sometime next year, unless the economy falters.
6. The outcome of the Affordable Care Act remains unknown.
7. The middle class continues to be squeezed with very little wage growth in recent years.

On the positive side, the following must be considered:

1. Corporate earnings, on average, continue to grow and are at record levels.
2. Domestic companies’ balance sheets are flush with cash, and some companies have borrowed at very low interest rates.
3. Merger activity is high, causing the price of certain companies to appreciate significantly.
4. Oil and gas exploration in the United States is at a record high, which should lead to energy independence despite certain regulatory hold-ups.
5. Innovative companies with real sales and earnings are going public on a regular basis.
6. Medical breakthroughs are occurring and being led by U.S. companies, including a cure for Hepatitis C.
7. Employment continues to grow on a monthly basis, but with many low-wage and part-time jobs.
8. Consumer balance sheets are stronger than they have been in many years.
9. Housing continues to slowly recover.

So, yes, we have the proverbial wall of worry that is offset by many meaningful positives. While the government’s bickering and lack of bipartisan policy remains unpopular with Americans, business is prospering and benefitting from reasonable global growth:

Projected global GDP Growth Rates through the end of 2014¹:

1. U.S.: 3%
2. Europe: 0-2% (as opposed to recession)
3. China: 6%+
4. Japan: 2%

The above growth rates are encouraging, representing improvement in some cases, and when coupled with certain other emerging countries (such as India, which has just elected a progressive leader), the outlook is reasonably good (however, some countries face the possibility of recession, including, in our opinion, Brazil and Russia). Some U.S. companies are participating in this global growth, which suggests that earnings for some companies will continue to grow. Additionally, the global banking system continues to improve, although some concern lingers in Europe.

¹Strategas Research Partners.

Considering all of the above, our view remains guardedly positive as long as we continue to maintain a prudent asset allocation. Today, that prudent asset allocation must recognize the reality of, for the most part, certain bond interest rates hovering below the level of inflation. As a result, we continue to underweight bonds and are overweighting our defensive strategies. We are also, to some degree, reducing our traditional equity allocation in favor of increasing the allocation to our defensive strategies. Remember, our defensive strategies are designed and expected to produce good returns over time. However, each strategy has an element or elements that give each defensive characteristics designed to lessen the impact of unexpected market downturns.

Now comes the need to have high active share (and define what it is). Our defensive and traditional equity strategies are following the theme of high active share. In layman’s terms, we are using concentrated stock strategies. Our position is that we only want to invest in the best ideas available, as opposed to buying the averages or portfolios that might contain 100, 500, or 1000 companies (diworsification). This position is supported by the research of Cremers and Petajisto², which demonstrated over long periods of time that managers who exhibited high active share were most likely to consistently outperform the market. We continue to believe (and the research cited above supports) that performance can be enhanced by using concentrated strategies with weightings that are meaningfully different from the indices. This strategy should ensure that we are finding the best companies with high probability of earnings and cash flow success (or companies trading at prices well below the values attributed to them by our managers). We believe this will result in better performance in good as well as poor markets over the long term. Of course, we or the managers we use can make mistakes, and not all of the companies we invest in will prove to be successful. Nonetheless, we believe concentrating our investments in a limited number of high-quality companies increases our chances for success and appreciation.

We believe the success we achieved in recent years resulted from a bounce back from the “decession” in 2008, strong global central bank support through low interest rates and bond purchases, record setting corporate earnings, and efficiencies in the operations of companies driven by the bone shaking experiences of the “decession.” Global growth continues to slowly accelerate. Earnings and cash flow for many companies continue to increase. However, valuations reflect much of this growth and are not cheap in most cases. We believe that low interest rates and earnings growth from the companies we invest in will continue to permit our strategies to appreciate.

On the other hand, because of the unknowns in the future, particularly possible higher interest rates and/or declining profit margins at some point, we maintain a defensive, but positive, tilt (higher interest rates should mean the economy is getting better, but the initial market reaction could be volatile). As a result, our investment success is not by any means final at this point. We believe it will continue. Yet, a set back at some point reflected in stock market corrections or a slowdown in housing prices is not failure. In our view, any such setback would be temporary. When any such set back may occur, no one knows. Meanwhile, hiding out in cash or bonds earning a rate below inflation after taxes doesn’t make any sense to us. Valuation, interest rates, earnings growth, and cash flow growth are always in our mind when guiding your asset allocation.

² Cremers, K. J. Martijn and Petajisto, Antti, How Active is Your Fund Manager? A New Measure That Predicts Performance (2009).

It is worth mentioning that we continue to be active in guiding our clients, in concert with outside professionals, in estate, income tax, and life insurance planning. We view this aspect of wealth management as a key value add to certain clients and their families to assist in the passing of wealth from one generation to the next.

Finally, in our continuing efforts to do the best possible job for our clients, we encourage and support the further education of all at FLI. Alone these lines, we are delighted to report to you that Michael Bernstein, an Assistant Vice President and member of our Investment Committee, recently earned the coveted CFA designation. Michael worked long and hard, as well as passed numerous rigorous tests, to become a member of this prestigious institute. His enhanced knowledge is already paying dividends for all of our clients by adding further value to our investment process. I am sure you are as proud as we are of Michael’s accomplishment.

Enjoy your summer and call us at any time to discuss your asset allocation (or that of your clients). We look forward to writing our next quarterly report to you on or around November 1st, and we hope to see you at our next Thought Leadership Seminar in late October (our last one was well attended and provoked great questions about the redevelopment of the Nassau Coliseum and unfortunate loss of the Islanders to Brooklyn).

Best regards,
Robert D. Rosenthal
Chairman, Chief Executive Officer
and Chief Investment Officer

*The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance. Actual results may differ materially. Past performance statistics may not be indicative of future results.

Disclaimer: The views expressed are the views of Robert D. Rosenthal through the period ending June 30, 2014, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

Content may not be reproduced, distributed or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC. Copyright © 2014 by First Long Island Investors, LLC. All rights reserved.