First Long Island Investors, LLC (“FLII”) a wealth management firm overseeing approximately one billion dollars in assets is pleased to announce a number of significant promotions. Edward C. Palleschi and Philip W. Malakoff have both been appointed Senior Vice President – Wealth Management. Both Ed and Philip had been Vice Presidents at FLII. In addition, FLII is also pleased to announce that Brian Gamble has been appointed Vice President-Wealth Management. All of these executives serve on FLII’s Investment Committee and are involved in research and investment management as well as providing various wealth management services to the company’s clients. FLII is celebrating its 30th Anniversary this year as a leading independent employee owned wealth management company on Long Island.

 

“Time is the friend of the wonderful business. It’s the enemy of the lousy business. If you are in a lousy business for a long time, you’re going to get a lousy result, even if you buy it cheap. If you’re in a wonderful business for a long time, even if you pay a little too much going in, you’re going to get a wonderful result if you stay in a long time.”
Warren Buffett

Summary Review

Our recent thought piece discussing performance for last year and our outlook for 2013 was mailed earlier in January and we hope you had a chance to review it. We believe it is worth again reviewing the “wall of worry” that we overcame last year to achieve strong investment results. These worrisome challenges included:

1. Slow economic growth
2. The Presidential election
3. European Banking and Sovereign Crisis
4. Stubbornly high unemployment
5. Fiscal policy uncertainty culminating in the “fiscal cliff” last minute deal
6. Geopolitical hot spots in the Middle East, North Korea, and South China Seas

Now on the plus side we have some significant positive developments or expectations as well:

1. Housing has bottomed and is on the rise rebuilding some lost wealth and helping employment
2. Auto sales are at robust levels and growing
3. Consumer debt is significantly down and deleveraging of consumers’ balance sheets is slowing
4. Unemployment claims have dropped to below the 350,000 level
5. Corporations have strong balance sheets with significant cash and have borrowed at historically low rates to further bolster their finances
6. Corporate earnings remain strong
7. European banking crisis is being dealt with although not solved
8. Energy development is leading to not only potential U.S. energy independence, but is a catalyst to a manufacturing renaissance
9. We expect both institutional and individual money to flow into equities as the asset class of choice bolstering stock prices

Our guardedly optimistic outlook is tempered from lingering but real concerns about the following:

1. Unsustainable annual U.S. deficit and sixteen billion dollars of cumulative debt
2. Entitlement reform to reduce prospective deficits including sequestration
3. Unknown economic consequences from the Affordable Care Act (Obamacare)
4. Political paralysis in Washington holding back employment gains and energy development
5. A nuclear Iran and other global hot spots
6. The continued squeezing of the U.S. middle class
7. Unknown consequences when the Fed shifts to a less accommodating policy
8. Slow global growth and concerns about Europe

Our view of the investing landscape is reasonably bright, but any of the enumerated concerns could cause some turmoil and volatility. The net result is that we favor a higher allocation to defensive equity strategies (Dividend Growth and FLI Partners Fund) whose quality companies should participate in appreciating markets but be less volatile in market disruptions. At the same time, we continue to believe that concentrated portfolios (again) in quality traditional equities are prudent over the long term as part of one’s asset allocation. However, here unanticipated volatility will do more damage in the short term. Both our defensive and traditional equity allocations will benefit from the continuing global growth driven by innovation (e.g., smart phones and payments by plastic) and an emerging middle class in other parts of the world. We also believe that the slow but sure healing of the financial system will benefit the entire global economy. Also, the slower global growth (particularly China and Brazil) has capped what had been highly inflating commodity prices. This continued slower global GDP growth and continued productivity gains should keep commodity prices somewhat subdued. As for gold, if inflation heats up in the future, or if there are regional outbreaks (e.g., the Middle East), gold could be a sound investment.

We remain cautious on bonds for fear of higher interest rates. We believe the bull market in bonds is at or near an end (see Exhibit 1). Better yields and growing income can be obtained from our Dividend Growth strategy (here the growing yield that we expect is a hedge against inflation). Therefore we continue to keep our bond portfolios with shorter duration through reasonable maturities. (Primarily no more than five to seven years on average, even if you plan to hold bonds to maturity.) We also believe that corporate, high yield, and emerging market debt have seen spreads contract. This limits the opportunity there as well.
Prudent individualized asset allocation among our four investment baskets should yield you the best road map to compounding your wealth at reasonable levels despite continued economic, fiscal and geopolitical uncertainty. And the reallocation of liquidity, if it occurs, should benefit all of our investment baskets excluding fixed income (security).

Please call upon us with any questions you might have. We wish you the best for this New Year and look forward to reporting to you at the end of April.

Best regards,

Robert D. Rosenthal
Chairman and
Chief Executive Officer

Ralph F. Palleschi
President and
Chief Operating 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 and Ralph F. Palleschi through the period ending December 31, 2012, 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 © 2013 by First Long Island Investors, LLC. All rights reserved.

“A pessimist sees the difficulty in every opportunity;
an optimist sees the opportunity in every difficulty.”

Sir Winston Churchill

2012 will be remembered as the year when it wasn’t easy being a long term investor, but it proved to be very rewarding. The “kitchen sink” of significant difficulties plagued investors including:

1. European fiscal union crisis
2. Political paralysis in the U.S. over deficit spending
3. An ugly and divisive Presidential election
4. Uncertain tax policy culminating in the “fiscal cliff”
5. Middle East turmoil
6. Continued high unemployment and slow growth

The above wall of worry led to investor pessimism. Outflows from equities by the average investor, both individual and institutional, continued during the year in favor of bonds and cash. Meanwhile, our clients enjoyed gains in the range of about 9% to 17% net of all fees and expenses from our unlevered defensive equity and our traditional equity strategies! This coupled with moderate gains in our bond portfolios and other alternatives permitted our clients to achieve a more than satisfactory blended return from an individualized asset allocation.

Thus the resilience of the American people and Corporate America once again demonstrated that despite ongoing fear and uncertainty, opportunistic long term investing is alive and well. Winston Churchill’s quote describes the typical confused and scared pessimistic investor whose sentiment is negatively influenced by biased media driven headlines and noise. That pervasive pessimism in many cases masks the underlying opportunities for long term investment.
That is not to say that we don’t face serious challenges in 2013 and beyond from:

1. Annual deficits and massive cumulative debt
2. Geopolitical concerns in the Middle East
3. Subpar domestic economic growth and resulting high unemployment
4. The need for structural reform of Social Security and Medicare
5. Impact from Obamacare
6. Economic and political turmoil in Europe

It is our view that many of these concerns will be worked out over time but will require our patience and ability to endure market volatility. It seems that none of the above are surprises and hopefully politicians and central banks will be able to deal with them. In addition, painful sacrifices will need to be made by both Americans and Europeans who are coming to grips with past fiscal irresponsibility.

Despite these challenges there are good things happening that give us “optimists” reason to look forward with a fairly positive view. The improving soundness of our financial/banking system and the strength of many of our corporations are encouraging. The development of our domestic energy reserves is leading to possible energy independence and a manufacturing renaissance in the United States (politicians at both the Federal and State levels have to cooperate). This will lead to many benefits including job creation and enhanced national security. After years of turmoil, our housing sector is picking up, which also is contributing to job growth as well as once again creating wealth among our consumers. And greater certainty as relates to tax policy will also permit both consumers and businesses to once again plan for the future. Finally, pro growth agendas and emerging middle classes in China and other emerging countries, as well as a more growth oriented government in Japan, add to our cautious optimism.

Yet our optimistic view recognizes that we must endure and tackle the serious challenge of unsustainable debt levels. This will lead to contentious political negotiations on entitlement reform in Washington that will likely unsettle equity markets. However, that will give an opportunity to those investors sitting with cash on the sidelines to redeploy that cash to the equity markets. In addition, as interest rates trend up at some point, long duration bond investors will suffer paper losses that should cause them to shift into the equity markets. Down the road, these two factors, along with solid fundamentals including fair valuations and some earnings growth, should contribute to further stock market gains.

So, much of the crowd still doubts the sustainability of the reality of our sounder banking system; a housing recovery; significant stock market gains; robust energy exploration; a mini manufacturing boom and the potential for politicians to work together in Washington. We see opportunity in this. However, we believe that given potential volatility and uncertainty from ongoing political negotiations and geopolitical issues, prudent diversified asset allocation with a bias towards defensive equities still makes the most sense for almost all clients. The key is to not get panicked out of equity holdings. And having sufficient defensive and traditional equity allocations in high quality multinational companies (for the most part) while bonds and cash offer paltry returns seems to be a sound formula for reasonable investment gains over the longer term. We continue to believe that a prudent asset allocation spreading one’s capital amongst our security; defensive and traditional equity and private investment (real estate and private equity) baskets makes long term investing sense. However, at this time we believe the bull market in bonds is over (1983 to 2012) and we would overweight our defensive equity investment strategies.

It has been almost five years since the great “decession” (the term I’ve coined to describe the recession/almost depression of 2008). Our financial system has improved dramatically and the housing crisis has now turned the corner. Our government can now turn to putting our fiscal house in order by constructively dealing with both our current deficit and cumulative debt. The world economy is still growing and despite the aforementioned challenges we still have opportunities as investors. However, patience, caution, and prudent diversification are needed when looking for sustainable investment gains.

Also, of importance to the evolution of our company and our representation of you, I would like to share with you the following promotions to key personnel reflecting their achievements and greater responsibility in the investment and wealth management functions within our organization:

Philip Malakoff  – Senior Vice President – Wealth Management
Edward Palleschi – Senior Vice President – Wealth Management
Brian Gamble – Vice President – Wealth Management
Michael Bernstein – Assistant Vice President – Wealth Management

Finally, in an effort to better communicate with you, we invite you to visit our newly refreshed website at http://www.fliinvestors.com. We believe that you will find it more informative and easier to use.

We look forward to working with you this year in guiding your wealth management. Please feel free to call upon us for any help you might need.

Best regards,

Robert D. Rosenthal
Chairman and
Chief Executive 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 January 10, 2013 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 © 2013 by First Long Island Investors, LLC. All rights reserved.

One week after the Presidential election clients and friends of First Long Island Investors met to analyze what President Obama’s re-election means to the economy and investors. FLI Chairman and CEO, Robert D. Rosenthal, and Economist, Robert DeLucia shared their thoughts on this subject. With interest rates remaining near historic lows, Robert DeLucia also discussed how investors should invest their assets in a zero rate environment.

Below are some of the highlights from the discussion:

Bob Rosenthal’s Election Observations:

1. Government composition largely unchanged
2. Exit polls suggest that a majority of Americans want a smaller government
3. Country will need to raise revenues in addition to reducing spending
4. Challenges of entitlements must be addressed and politicians understand this
5. The deficit must be addressed
6. Window of opportunity to address the deficit may only exist through 2013 due to 2014 Congressional elections

Bob DeLucia’s Thoughts on the Election and its Ramifications:

1. Election results were a negative, but not a huge negative
2. Politicians will do something to address the fiscal cliff by the end of December and this will lead to a stock market rally
3. Members of Congress don’t want a recession, but the President is less focused on the economy and more interested in helping low-wage earners and a financial redistribution of assets
4. If the fiscal cliff is not addressed it would be a $750 billion hit to GDP

Bob DeLucia’s Thoughts on the Economy:

1. The economy is better off than most people think
2. We’ve survived a difficult post-bubble deleveraging cycle over the last 4 to 5 years
3. Government will be the key to whether or not the full potential of the economy is realized
4. Economic catalysts include:  manufacturing, exports, where we will be a leader, and energy via fracking and horizontal drilling
5. We will overtake Saudi Arabia in oil exports by 2020, according to the International Energy Agency
6. Housing is beginning to come back and will be a tailwind for the next 5 to 10 years
7. Headline unemployment, which has averaged 6% in the past and is now 8%, will remain high
8. Growth is the most important tool for reducing our deficit

Bob DeLucia’s Thoughts on Bonds:

1. Bonds are a “disaster”
2. Fixed income returns will be among the worst in history over the next decade
3. Investors should avoid bonds
4. Investors can’t get acceptable yields on bonds without taking duration risk

Bob DeLucia’s Thoughts on Equities:

1. The “stars are aligned for better equity markets”
2. Equity valuations are historically inexpensive
3. Companies that grow their dividends are in the best segment of the equity market
4. Do not confuse high yield stocks with dividend growers
5. Sweet spot for dividend growers are stocks yielding between 2.5% and 3.0%, growing their dividends by 10% to 12% per year
6. Many stocks today have higher dividend yields than their corresponding bond yields

Bob DeLucia Biography
Robert F. DeLucia, CFA, is an independent consulting economist and the founder of Veritas Economic Analysis, LLC, specializing in global capital markets. He was formerly Senior Economist and Portfolio Manager for Prudential Retirement. Prior to that he spent 25 years at CIGNA Investment Management, most recently serving as Chief Economist and Senior Portfolio Manager. He currently serves as the Consulting Economist for Prudential Retirement. Bob has 38 years of investment experience.

 

“In the business world the rear view mirror is always clearer than the windshield.”
Warren Buffett

Investment Perspective

Despite a lack of clarity and many issues to be concerned with, our clients and most long-term investors experienced significant gains in the third quarter (see Part II, Third Quarter Investment Results). Our traditional equity and defensive equity strategies made impressive gains. Bonds did reasonably well and private equity and real assets continue to show promise in recovering from the economic “decession” of several years ago. Almost all companies in our dividend growth strategy this year have increased their cash payouts on average by almost 9% (three remaining companies are expected to increase their dividends by yearend by at least 9% on average) demonstrating the free cash flow strength of the companies in our portfolio. Our FLI Partners Fund (dramatically outpacing its index) and core equity strategies continued to reflect the power of earnings growth and reasonable valuations. All in all, it was a strong quarter for those investors who committed their core capital to long-term investment strategies with varying degrees of risk. However, these gains came with the continuing anxiety and uncertainty that investors never get used to.

As Mr. Buffet so succinctly stated above, it is easy to now look in the rear view mirror and see those wonderful gains, but at the beginning of the quarter the windshield was not so clear. Investors were concerned then and remain concerned today with a significant number of economic, political, and geopolitical issues. The following are some of the issues that still cloud the windshield as we try to view our investment path down the road:

• A muddled economic recovery in the US and around the world
• Unemployment that continues at an unacceptable level
• Financial repression reflected in a zero interest rate environment
• Uncertain tax policies going forward
• Political paralysis and election uncertainty
• European Union financial and social strife
• High energy prices for gasoline and heating oil
• A growing unconscionable Federal deficit
• Financial weakness in Medicare, Social Security and municipal and private pension funds
• The fiscal cliff and the impact of Obamacare

Ok, the list is long and it makes looking down the road through the windshield seemingly difficult. However, this was pretty much the case at the beginning of the last quarter and the quarter before that. So, as investors we have never gotten used to being able to see through the windshield very clearly.

The answer to this in our opinion remains a prudent and responsible individualized asset allocation for each client. What is demonstrated over and over again is that a prudent asset allocation works over long business cycles to give clients reasonable returns. These returns can be interrupted by “black swan” events such as in 2008, but patience permits investors to return to compounding if they have smart asset allocations. One must remember that compounding depends on not getting badly hurt by the “rogue wave.” One can improve their chances of avoiding the big loss by having a prudent asset allocation that gives diversification a chance to somewhat insulate one from the unexpected or just a plain miserable economy.
We don’t have a crystal ball. But if one invested with us in our Security and Defensive Equity baskets, a good part of the pain from the severe downturn of 2008 would have been mitigated. And by still having a reasonable allocation to traditional equities, with seasoned managers and quality companies, the recovery for those who held on was significant! Today, many companies continue to have strong balance sheets and growing earnings, housing is getting better, and emerging countries are still delivering reasonable growth. This is cause for some optimism.

So, let us make an analogy. One should view having a prudent asset allocation as the GPS system when you are looking through the foggy windshield and confusing road ahead. We believe it will guide you to reasonable returns over the longer term despite the uncertainty and queasy feeling you might currently have. We strongly believe that investing in bonds and cash with tiny returns will not help you overcome higher food and energy prices. So seeking a real return after inflation is critical and that requires having some faith in an asset allocation that departs from just the apparent safety of cash and bonds. Holding too much cash and overloading ones’ bond allocation is a long-term prescription for a negative return after inflation. And with all of the currency (Dollars and Euros) being printed here and abroad, inflation must be considered a danger sometime down the road we investors are travelling on.

The foggy windshield represents the proverbial wall of worry that investors must overcome. Neither should deter an investor from trying to make real returns after inflation to preserve their wealth. As we have often stated, preservation of capital is key and that means avoiding, as best as one can, negative returns from market downturns or inflation. We at First Long Island Investors have investment strategies made up of great companies that have over time made our clients real returns after inflation. Long-term equity investing is not dead. Just ask the owners of Apple, McDonald’s, Occidental Petroleum or so many others.

Finally, we are quickly approaching an important election, the aftermath of which we hope will bring Americans back together again. As a united people, our ability to see through the windshield will be even better. Whoever gets elected President, and those newly elected to Congress, owe us as much.

We will be holding a seminar on November 13th at the Garden City Hotel, with our guest, Senior Economist, Robert F. DeLucia, to discuss our view of the election as it relates to investing, as well as our strategy for investing in a zero interest rate environment. We hope you can join us. Also, as we approach our thirtieth anniversary next year, we are in the process of revamping our website and will invite you to visit it shortly. As always, we remain ready and willing to discuss our views on asset allocation, and how our investment strategies can play an integral part in your investment plans going forward. We also wish you a Happy Thanksgiving!

Best regards,

Robert D. Rosenthal
Chairman and
Chief Executive Officer

Ralph F. Palleschi
President and
Chief Operating Officer

P.S. Most of us have just endured a horrific storm. We have learned how cruel Mother Nature can be, and we hope that everyone’s recovery is as speedy as is possible.

*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 and Ralph F. Palleschi through the period ending September 30, 2012, 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 © 2012 by First Long Island Investors, LLC. All rights reserved.