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Your FP/CM
Q2 2016
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Table of Contents
Key Investment Takeaways............................................................................................................................. 2
Short-Term Headwinds & Tailwinds ......................................................................................................... 2
Markets in Graphs… ................................................................................................................................................. 3
Decisions, Decisions…............................................................................................................................................ 4
Maximize the Tax Benefits of Your Charitable Giving .................................................................. 4
Celgene’s Opportunity......................................................................................................................................... 5
So, You Are Thinking of Moving to the U.S… ........................................................................................ 6
Why Own Them? ..................................................................................................................................................... 7
Real Estate in Graphs: We favor homebuilding over Apartments REITS at this time. ...........8
Our Investment “Balance Sheet” .................................................................................................................. 9
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Your
FP/CM
Q2 2016
Key Investment Takeaways

Brexit has created additional uncertainty and should result in a higher risk premium. As usual, it will take some time for the
market to sort out the current situation. Rallies are likely to be short lived for a while. We are planning to be opportunistic
and patient, as always, keeping an eye on your long-term objectives.

The probability of a recession has increased, especially in the UK and Europe, but it is still relatively low for the U.S.

Beware of interest rate risk. Global bond markets are overbought, “Bullish” sentiment is extreme, and the term premium (the
price of “time”& “inflation”) is low.

We are past the trough in credit spreads for the cycle. Credit risk has increased over the past few months because of lower
oil & commodity prices, lower economic growth and rising pressure on emerging market currencies.

The bear market in commodities and energy is in a late-stage. We believe oil prices below $50-60 are unsustainable in the
long-term.

Political and geo-political risks are high and could have meaningful impact on markets.

We favor high quality companies with durable business models, high free cash flow yields, high net cash and/or low debt
levels, positive earnings revisions, and some degree of relative price momentum.

In fixed income we favor inflation-indexed Treasuries (TIPS), intermediate corporates rated BBB- to A, and special
opportunities.

We expect volatility to remain high, so we are holding a large percentage of cash to be deployed opportunistically over time.

We believe investment returns will be mediocre over the next few years. Record low rates and relatively low spread leave
little room for adequate returns in bonds. Expectations for equity returns are also discouraging. The U.S. trades at a relatively
high multiple and near-record corporate margins, so further gains will be mostly dependent on economic growth. Europe
and Japan suffer from lackluster growth and the lack of a short-term catalyst for improving margin. Emerging markets are
highly dependent on a troubled China and commodity prices.
Short-Term Headwinds & Tailwinds
AARON COHEN, Ph.D.
Partner, President, Portfolio Manager,
Tailwinds
+ Monetary policy & interest rates.
+ EQUITIES are attractive relative to
interest rates.
+ Supportive Fiscal policy over the next
few years.
Neutral
o Not much room for positive impact
from monetary policy.
o Sentiment: significant skepticism in
the short term, but not enough
bearishness in the long-term.
Savings rate is low and leverage is
still high.
Headwinds
- Economic & financial impact from BREXIT.
- Slow global economic growth
- Credit is likely to deteriorate going forward
(spreads & availability).
- Risky assets’ absolute valuation level leaves
limited room for error.
+ Higher wages in the U.S. should give
additional support to consumer
spending.
o Higher wages in the U.S. are a
“tailwind” for consumer spending
- Increasing wages in the U.S. should put additional
pressure on corporate margins.
+ Overly “bearish” investor sentiment in
the short-term is a positive ‘contrarian”
indicator.
o No major economic excesses or
“bubbles” (except probably for
interest rates and monetary policy).
- The total debt level in the global economy is still
very high.
+ High free cash flow generation,
dividend yields and stock repurchases.
o Corporate earnings in the U.S. are
likely to rebound in 2016-17 after a
down year for the first time since
the recession.
- Chinese economy is unlikely to add meaningfully
to global growth, and poses a significant credit risk
due to high debt and lack of transparency.
- Political and geo-political risks are very high, and
unlikely to diminish over the next few years.
- Record high corporate margins leave little room
for potential improvements.
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Q2 2016
Markets in Graphs…
VOLATILY is back to the higher-end of the range
…. and CURRENCIES have been a focal point
The ECONOMIC conditions were improving before BREXIT
And CREDIT SPREADS didn’t widen significantly
…. but the FLATTENING yield curve indicates some stress
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Q2 2016
Decisions, Decisions…
CHRISTOPHER CONWAY
Portfolio Manager
company, its competitive environment, and
related industry trends. We do this so that we can
continuously assess the risk/reward profile of the
investment. We will sell or reduce a position when
an investment no longer meets our criteria, due to
specific aspects of the company itself, industrywide challenges, macro issues (economic,
technological,
social,
etc.)
that
impact
competitiveness, or changes that result in a
valuation that no longer compensates for the risk.
Our investment decisions are based on our
probabilistic assessments of numerous potential
scenarios. In this regard, our decisions to buy or
sell are not perfectly correlated with the
movements in specific stocks, i.e. in the short-term
we can make the right investment decision yet
lose money, or vice versa. However, we believe
that, over time, following a disciplined process will
yield better decisions and above average returns.
After we purchase a stock, we view ourselves as
“owners” of the business, and actively follow the


Why We Sold Alibaba (BABA)?
•
Increasing concerns about the company’s accounting practices; while the stock was trading at a
reasonable multiple to earnings, the accounting issues made us question the “attractiveness” of the
company’s valuation.
•
Company became more acquisitive, and we did not agree with the pricing and strategic rationale.
•
Deterioration and increasing risk within the Chinese economy.
•
Weak track record in corporate governance and shareholder rights.
Why We Purchased Alibaba in the First Place
•
Strong competitive position with significant market share.
•
Asset-light business model, good returns on capital, high margins & low debt level.
•
Potential for significant growth due to further penetration of E-Commerce within China.
•
Valuation: stock was trading at a reasonable multiple of earnings and cash flow.
Maximize the Tax Benefits of Your Charitable Giving
VINCENT MARSDEN
Partner, Senior Vice President of Financial Planning
However, charitable trusts, private foundations
and donor-advised funds do not qualify.
Qualified Charitable Distributions (QCD) from IRAs
were permanently added to our federal tax code
in December 2015. They are a tax-efficient way to
satisfy in whole, or in part, your IRA’s annual
Required Minimum Distribution (RMD).
In addition to the QCDs being non-taxable, they
also reduce the taxpayer’s Adjusted Gross Income
for the year, which may permit higher itemized
deductions and further income tax savings. Using
the QCD approach may also be preferable to
donating highly appreciated securities. Taxpayers
can choose to retain the securities instead,
ultimately passing them on to beneficiaries
through their estate with a step-up in cost basis.
Beneficiaries who sell the inherited securities can
then do so with little or no realized capital gains.
Under the QCD provisions, taxpayers who are
70 ½ or older may make donations of up to
$100,000 from their IRA, directly to one or more
qualified
charitable
organizations.
These
distributions are not reported as income to the
taxpayer, and their total amount reduces the
Required Minimum Distribution (RMD) for that year.
If the annual RMD exceeds the total QCDs made,
the taxpayer takes the remaining RMD as a taxable
IRA distribution for the year.
Generally, any
qualified charity may receive the QDC donations.
If you would like to consider QCD giving for 2016,
give us a call to review your personal situation.
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FP/CM
Q2 2016
Celgene’s Opportunity
AMIT FRIEDLANDER
Research Analyst
Imagine you could own, for a reasonable price, a rapidly growing business that makes the bulk of its money
selling a life saving drug that will most likely face minimal competition for the next ten years. Is that an
opportunity you might be interested in? Celgene Corporation (ticker: CELG) is the embodiment of exactly
such an opportunity.
What does Celgene do, and how do they do it so well?
Sales of REVLIMID and POMALYST, another
multiple myeloma drug, together accounted for
75% of Celgene’s 2015 revenues. Thanks to patent
protection and favorable legal settlements, it is
unlikely that REVLIMID will face meaningful
competition before 2026.
Celgene makes REVLIMID, the standard of care
drug for treating multiple myeloma. Multiple
myeloma is the third most common blood cancer,
with a median age of diagnosis of 70. REVLIMID
has become the standard of care because of its
high level of efficacy combined with lower toxicity
and negative side effects relative to Johnson &
Johnson’s VELCADE, the other main drug used to
treat multiple myeloma.
Why do we own the stock?
In terms of valuation, we believe Celgene stock is
attractive at 15x 2017 EPS because it has the
potential to double revenues over the next five
years (15% average annual growth), with the
possibility of additional earnings growth from
margin improvement.
In addition, under a
discounted free cash flow analysis that explicitly
assumes new products will only make up for part
of the revenue lost when REVLIMID’s patent
protection goes away in 2026, Celgene stock at
our average purchase price still looks attractive
relative to our normalized case fair value estimate
of $110-$120, optimistic case value of $130, and
pessimistic case value of $80. Note: Our optimistic
case assumes key pipeline drugs generate higher
sales than expected, and our pessimistic case
assumes newer and pipeline drugs generate sales
roughly 50% lower than expected.
Strategically, we like Celgene because the
company has a strong competitive position, and
high and predictable levels of growth and
profitability. In addition to REVLIMID’s patent
protection, new multiple myeloma drugs must
generally be taken in combination with REVLIMID,
and due to the clinical trial process, it would take
ten years for a drug to win approval for use as a
monotherapy, without REVLIMID.
We also like the fact that most of Celgene’s sales
growth comes from demand for larger quantities
of its drugs, and not from price increases, which
are increasingly at risk, especially given the
current political climate. Finally, results from
eighteen late stage, Phase III trials for Celgene
drugs are due by the end of 2018. Each one of
these trials represents the potential for a new
growth opportunity, and could result in further
share price appreciation.
What are the risks?
Celgene’s high degree of revenue concentration is a double edged sword. On one hand, REVLIMID revenues
have a high degree of predictability, which is wonderful. On the other, Celgene is extremely focused on
proving it isn’t just a one-hit wonder, and plugging in the revenue hole that will come in 2026 once generic
competition fully enters the multiple myeloma marketplace. As a result, Celgene’s key risks are (1)
Overspending on acquisitions, and (2) Poor drug trial outcomes.
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Q2 2016
So, You Are Thinking of Moving to the U.S…
ROBERTO VAINRUB, Ph.D.
Managing Director, Portfolio Manager
Pre-planning is particularly valuable from a
financial perspective because many key steps can
only be taken before you become a U.S.
Permanent Resident or Citizen.
There are a
number of important decisions that can either
make your financial transition a successful one, or
conversely, potentially hurt your financial health
for years to come.
Above all else, immigrating is a personal family
decision and a life decision.
It is also a
significant financial decision. As part of your
decision-making process, do not underestimate
the importance of developing a carefully crafted
transition plan. Many of your most important
decisions will be more easily implemented if you
make them before you immigrate.
Basic Considerations
Each family’s pre-immigration checklist will look different, but there are some basic considerations everyone
should evaluate ahead of time. Among them:

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
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If you will continue to work, does your occupation require any licenses or certifications, and what is the
process for obtaining them?
Should you rent or buy a home?
How do you find good healthcare providers, and what are your options for obtaining health insurance?
What are your options for life, home, auto and liability protection?
Are your current financial resources easily accessible to you from the U.S.?
What steps should you take to move funds in advance of your immigration?
How much money will you need to provide for your basic living expenses, and how much is the gap
between your basic living expenses and the cost of the lifestyle you would like to maintain?
Do you have enough liquidity to cover a short-term emergency or any unexpected transition costs?
Some Complex Financial Issues



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Understand the impact U.S. tax laws will have on you and your family. The U.S. taxes its citizens and its
permanent residents on worldwide income.
Understand U.S. gift taxes. U.S. gift-tax laws limit the amount of money you can gift to others on an
annual basis without incurring additional tax liabilities. And, while gifts to a spouse (regardless of amount)
are normally exempt from taxation, gifts to a spouse who is not a U.S. citizen are taxed if they exceed
certain thresholds.
Understand U.S. inheritance and estate taxes. As of 2016, a married couple can avoid estate taxes on up
to $10.8 million of their assets. However, absent proper planning, half that exemption can easily be lost,
and limitations can dramatically constrain the ability to bequeath assets tax-free to your spouse if he/she
has remained a non-resident alien.
If you are a director, owner, trustee or administrator of a foreign company or entity, your immigration
could unintentionally cause it to convert to a U.S. entity and become subject to new reporting obligations.
Engage Qualified Professionals
Of course, the task of finding the right advisors is
not a simple one. We often find them through
referrals from family, friends or trusted work
colleagues. Don’t make a hasty choice. Consider
such things as the advisor’s proven professional
knowledge, discretion, language skills, physical
location
and
availability,
network
of
complementary advisors, and reputation for
efficiency and follow-up.
Lastly, do not
underestimate the importance of personal
chemistry and trust!
The soundest advice of all is to work with
competent and experienced advisors before you
immigrate. Your Immigration Attorney, Tax
Accountant and Estate Attorney should be
regarded as essential partners in this process. You
may also consider working with a Financial
Planner who will assist you with formulating a
comprehensive financial plan and coordinate your
team of advisors, making sure your financial and
transition strategies are consistent, integrated and
suitable for your needs, and to ensure their proper
execution.
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Your
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Q2 2016
Why Own Them?
CHRISTOPHER CONWAY
Portfolio Manager
in the U.S. to enjoy healthy growth over the next
few years due to the low number of new homes
built over the past 7 years, projected growth in the
number of households in the U.S., low vacancy
rates, and stabilization in the home ownership rate.
Both PHM and TOL will benefit from this industry
growth due to their good balance sheets,
commitment to generating good returns on
capital, and geographic diversification. The stocks
trade for approximately 1.25x book value, and if the
companies can consistently generate low-to-midteens returns on equity, the stocks have significant
upside potential. (See the Real Estate graphs on
page 8)
Alphabet (aka Google, ticker is GOOG): Google is
the leading global search and online advertising
company.
The company has a dominant
competitive position due to its scale, network
effects and brand, all of which will help the
company take further market share in the global
advertising industry. We believe the stock is
attractive at approximately 20x EPS because the
company has the potential to grow revenue at
approximately 15% per year going forward, can
improve operating margins through more expense
discipline, and has a large cash balance on the
balance sheet.
JPMorgan Chase (JPM): Led by CEO Jamie Dimon,
JPM has a superior and deep management team,
leading franchises, and strong synergies among its
various divisions.
The company has a solid
balance sheet, its capital metrics remain strong,
and credit conditions for the company and the
industry are still positive. Similar to other banks,
the company has been negatively impacted by
increasing regulatory pressure, low interest rates,
and limited revenue growth.
Despite these
challenges, we believe management can improve
earnings through better expense reduction and
generate returns on tangible equity in the low-tomid-teens. With the stock trading at a Price-toTangible-Book ratio of approximately 1.2x, we
believe the stock represents a favorable
risk/reward investment.
Pfizer (PFE): Pfizer is a global pharmaceutical
company that has a stable, non-cyclical business
model and enjoys significant advantages from
patents and scale. The company is diverse both
geographically and by product, has a good
balance sheet, and generates good returns on
capital. Revenue growth will be healthy due to a
number of new drugs coming online that should
offset the impact of the loss of exclusivity of some
of their current drugs. The stock trades at a lowteens multiple to earnings, which makes it
attractive given their stable business model and
potential to grow revenue in the low single digits.
Finally, the company expects to reach a decision
within the next 6 months as to whether it will split
itself into two separate companies. We believe
the split could serve as a catalyst for the stock
because it would result in more focused
management teams, better capital allocation
decisions, and enhanced capital structures.
Pulte Group & Toll Brothers (tickers: PHM & TOL):
PHM and TOL are two of the largest homebuilders
in the U.S. We expect the homebuilding industry
.
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Your
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Real Estate in Graphs: We favor homebuilding over Apartments REITS at this time.
RENTING has been very popular since the recession
and MULTIFAMILY properties have increased in price
Rental rates have increased. BUYING is now cheaper than RENTING
and AFFORDABILITY has remained HIGH
We are not building enough houses to meet LONG-TERM DEMAND
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Your
FP/CM
Q2 2016
Our Investment “Balance Sheet”
AARON COHEN, Ph.D.
Partner, President, Portfolio Manager,
POSITIVES
+
+
+
+
CONCERNS
Except for the risk of serious external
shocks, it is difficult to foresee another
deep recession at this time because the
typical down-levers (capital expenditure,
auto production, housing, excess leverage)
are not extended.
-
The risk of recession has increased over the past few
months.
-
BREXIT, although potentially positive for the UK in the
long-term, is likely to generate serious economic &
financial disruptions in the short & medium term.
Central banks are unlikely to tighten
monetary policy aggressively over the next
2 years.
-
The global economy, and in particular manufacturing,
has slowed down over the past 18 months.
-
Earnings & earnings estimates have been negative
since mid 2014. An upturn in earnings is necessary for
U.S. equities to move higher.
-
The Federal Reserve reversed policy with last
December’s hike, with the expectation of further
increases over the course of the next couple of years,
albeit at a moderate pace.
-
The Chinese economy has slowed down considerably
over the past 3-4 years, exacerbating the decline in
commodity markets, and slowing down emerging
economies.
-
The U.S. Dollar strength has put pressure on the U.S.
industrial sector, and emerging market currencies.
-
Higher leverage and the drop in oil and commodity
prices are putting some emerging economies in a
difficult position.
-
Inflationary expectations are extremely low. Even a
random increase in headline inflation figures could
scare the markets and put significant pressure on
monetary authorities.
-
Lower productivity, the aging of the population in the
developed economies, and low labor participation are
important long-term headwinds for global economic
growth.
-
Geo-political risks continue to increase across the
globe.
-
Political “Populism”, on the rise across the world, could
have major long-term economic consequences.
-
Valuation: Equity valuations are at best at fair levels.
U.S. consumer spending should continue
to grow thanks to increasing employment,
higher wages, a recovery in U.S. household
wealth, and the end of consumer deleveraging.
Economic growth in Europe and in Japan,
while still lackluster, has improved.
+
The rate of inflation is expected to remain
low in the short- and medium-term.
+
U.S. Corporate balance sheets are in good
shape. Free cash flow is plentiful, returnon-capital is high, and leverage is low.
+
Slow growth might be exactly what the
developed economies can sustain and
need at this time: lowers inflationary
pressures, discourages re-leveraging,
incentivizes savings, forces firms to remain
efficient & keeps speculative tendencies in
check.
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Q2 2016
We hope you have enjoyed this publication. Please contact us with your questions, and with your
thoughts and ideas to [email protected] We look forward to hearing from you!
Thank you for your continued confidence and support.
Your
FP/CM Team
Financial Partners Capital Management
150 East 52nd Street, New York, NY 10022
20900 N.E. 30th Avenue, Suite 517Aventura, FL 33180
t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm.net | LinkedIn
This newsletter might contain forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from the results described in the
forward-looking statements. The information contained herein is for illustrative purposes only and should not be considered an offer to sell or a solicitation of any offer to buy
interests in any particular investment. The inclusion of real estate properties discussed herein should not be perceived as investment recommendations and may no longer be
held. Opinions and estimates expressed herein reflect the current judgment of Financial Partners Capital Management (FPCM), and are based on information obtained from
sources, which are believed to be reliable, but FPCM does not offer any guarantees as to its accuracy or completeness. Nor are they intended as a forecast or guarantee of
future results. The information is not necessarily updated on a regular basis; when it is, the date of the change(s) will be noted. In addition, opinions and estimates are subject
to change without notice. FPCM, its officers, directors, employees, customers, or affiliates may have a position, long or short, in the securities mentioned herein and/or related
securities, and from time to time may increase or decrease such position or take a contra position. FPCM may have other relationships with any company mentioned in this
commentary. Past performance is not a guarantee of future results. No future or current client should assume that the future performance of any specific investment,
strategy or product referred to directly or indirectly will be profitable or equal to any corresponding indicated performance levels. Reproduction without written permission is
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