Dear Friends and Family,

Second quarter review… It is too early to have comprehensive corporate numbers for the second quarter; however, some data is available. 95% of companies whose quarter ended early in June beat the analysts’ projections. A look at prior midterm election years may give us an idea of what to expect. Third quarter stock returns are poor, usually a small negative return, probably the result of the civility, optimism, and quality discussions by our candidates. The fourth quarter however is the best quarter in the four-year election cycle with stock market gains close to 10%. The electioneering and uncertainty ends, and families find at Thanksgiving that their conditions are much better than the media portrays. Yes, there are problems now, but most turn out to have less impact than imagined; think Brexit, Ebola and Y2K.

The best news for us in the second quarter was an article in the Washington Post business section. It was this year’s opposition article to share buybacks. In 1982 the SEC gave companies the right to repurchase shares without prior SEC approval, provided the companies announced the repurchase in advance. In 1982 we began our thirty-six-year use of the buyback factor. The reasons we are pleased to see negative views on buybacks is that we want as many investors as possible to avoid buybacks. Most successful strategies end when large numbers of investors compete away the advantage of the strategy.

Shortly after the SEC pronouncement a series of papers were published on both sides of the debate on corporate buybacks. The objections have changed over the years. At first the objection was economic, that there must be a better alternative use for the funds such as an acquisition. Later the objection was that buybacks were criminal activities by management to enrich themselves by pushing up the stock price. In the current environment the objections have changed to political. Now it is unamerican because the money should be used to build more plants or do more research or raise salaries or take over another company.

These objections are theories. In practice, well managed companies make a list of their best investment ideas in order of importance. Somewhere on the list is buybacks. They start funding the ideas from the top down. If they can fund buybacks they do. Maybe the out performance of companies buying shares back is because these are higher cash generators not manipulators.

As we enter the earnings report season, we are hopeful that a few investment ideas that we have been monitoring, will come to fruition this month. We will keep you informed.

Katz Family Financial