3rd Quarter 2015


Volume # Issue # Volume XXIV Issue III



“If you can look into the seeds of time, and say which grain will grow

and which will not, speak then unto me.”

-William Shakespeare

Cheers turned to tears on Wall Street as a long-anticipated “correction” exacted a heavy

toll. All of the popular indices posted sizeable losses during the quarter just ended (S&P

-6.9%; Dow Jones Industrial Average -7.6%; NASDAQ -7.4%) and by quarter’s end, yearto-date

performances were also "in the red" (S&P -6.7%; DJIA -8.6%; NASDAQ -2.5%).


The 2016 Economic Outlook

A Make or Break Year?

Volatility Playbook

Preparation Rewarded

About Us

Safe harbors were hard to find. Even the Dow’s mighty blue chips suffered. 1 Still,

improved price points notwithstanding, Wall Streeters remain fidgety over today’s

lackluster economy. 2 It’s a legitimate concern. After all, if capital is to be exposed to

equity risk, economic performance will be critical to corporate profits, dividends and, in

turn, share prices. So will 2016 be a breakout business year? Is opportunity knocking?

The question is easily asked, but the answer can be elusive. Fortunately, there’s an

objective way to estimate which way the economy is headed. Empirical evidence and real

-time experience confirm that interest rate fluctuations can be harnessed to provide

exploitable insights. 3 Remember, the price of credit is forward looking and benefits from the

collective wisdom of people who back opinions with their wallets – an important reason to

“get it right.” Knowledge of the relationship’s error term allows us to estimate the probability

of a given GDP scenario panning out. (continued)


Of the Dow’s 30 constituent stocks, 22 were negative on a year-to-date basis. Of these, 13 were down at least

10% and 7 were off by more than 20%.


Measured on a fiscal-year average basis, Gross Domestic Product increased some 2.7% for the 12-month

period ended June 30, 2015 according to the Bureau of Economic Analysis.


Our proprietary multiple regression analysis uses market prices for credit to project year-ahead GDP

changes. Since 1962, more than half of the GDP’s calendar-year growth can be explained by interest rate


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Inc. is a private wealth management

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Massachusetts. We specialize in

providing comprehensive services to

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content unless otherwise noted.

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Boston Research and Management, Inc. | 40 Beach Street, Suite 200 | Manchester, MA 01944 | P: 978.526.9700 | F: 978.526.1804 |

Boston Research and Management, Inc. | 40 Beach Street | Manchester, MA 01944 | P: 978.526.9700 |



While it’s a tad early to be issuing forecasts, our “best point” implicit market GDP forecast is 2.98% -- a projection generally

shared by many prominent economists.

Figure 2

The 2016 GDP Outlook

BRM Implicit Market Forecast (Derived From Market Prices) 2.98%

National Association For Business Economics 2.90%

BlueChip Economic Indicators 2.70%

Federal Reserve Board 2.4% - 2.7%

Average 2016 Forecast: 2.80%

While encouraging, GDP predictions (much like hurricanes), have a cone of uncertainty. At this juncture, our preliminary

2016 estimate suggests roughly a 48% chance that GDP growth will exceed its historical average (3.1%) with two-thirds of the

probable outcomes between 1.5% and 4.4%. So a lot can happen. What's more, even if the economy breaks the 3%

barrier, robust economies don't guarantee market booms. Just as the anemic recovery of the past 7 years failed to trigger

a “bear” market, it's entirely possible that the run-up in share prices witnessed over the last several years was discounting

the recent upticks in GDP growth. Should market participants foresee another slowdown, the going could get tough. What

to do? Think defense.

When it comes to equity investing, few valuation methods have weathered the test of time. One survivor is the importance

of dividends to overall performance. At first glance, dividends don’t seem all that exciting. But now that Wall Street is

littered with stocks gone bust, long-term investors are rediscovering that companies with generous, ever-increasing

dividend payouts deliver superior stock market performances over market cycles. And here's a big point. The strength of a

company's dividend policy isn’t measured solely by the size of its payout. The ability to religiously grow the dividend in the

face of ever-changing economic conditions is vital. Let’s take a closer look at some of the blue ribbon dividend payers in

the Dow. (continued)


For a detailed discussion see Charles E. Babin & William J. Donovan, "Investing Secrets Of The Masters", McGraw-Hill (1999), Chapter 5.

Boston Research and Management, Inc. | 40 Beach Street | Manchester, MA 01944 | P: 978.526.9700 |

Volume XXIV

Issue III


Figure 4

Blue Ribbon Dividend Payers In The Dow

(As of September 30, 2015)

The value proposition underlying the dividend model is immediately evident from the table. Using Procter & Gamble as an

illustrative example, notice that the company has hiked its dividend for 59 consecutive years. Over the past ten, the payout

ballooned from $1.09 to $2.65 -- a whopping 143% increase in the face of recession, wars and all the other extraordinary

challenges buffeting the financial markets. Records like this aren't a fluke. They're corporate policy. And if the next decade

mirrors the past, P&G's dividend would be roughly $6.44. Based on today's price, the yield-on-cost would be nearly 9%...

and growing. Now that's a defensive issue worth owning.

Investing isn’t a team sport. There’s no comfort in losing money alongside countless others. Financial plans, if they’re to be

effective, must carefully balance each investor’s objectives against the risk of achieving them. And investor profiles vary

widely. For some, given their circumstances, equity investments may be warranted. For others, the safety of cash

equivalents and government securities may be prudent. Finally, the importance of this lies not so much with developing a

stock-picking capability as in providing a quantifiable structure for evaluating common stocks. While any number of factors

influence stock prices, it’s not surprising that smart money has long recognized the importance of dividend growth and yield

support. As Graham and Dodd, the patron saints of equity investing, put it more than a half century ago:

“The considered and continuous verdict of the stock market is overwhelmingly in favor of liberal dividends as

against niggardly ones. The common-stock investor and securities analyst must take this judgment into account in

the selection of stocks for purchase.” 5

Sage advice.

Price YTD Change Yield







Div. Change


Annual Div.


Exxon $74.35 -19.6% 3.83% $1.14 $2.92 156% 33

3M $141.77 -13.7% 4.10% $1.68 $4.10 144% 57

Procter & Gamble $71.94 -21.0% 3.68% $1.09 $2.65 143% 59

United Technologies $88.99 -22.6% 2.88% $0.88 $2.56 191% 22

Wal-Mart $64.84 -34.5% 3.02% $0.60 $1.96 227% 42

Perhaps exaggerated by it’s long absence, the sudden market volatility in late August seemed fierce. In ~4 weeks, the

S&P 500 lost more than 12% (peak to trough). Consider the chart on the next page. Notice how broad this selloff was.

Hardly any sectors were spared. Further, Q3 largely dictated the overall YTD performance for most sectors. In the time

since then, it’s rebounded more than 8%, leaving us only 5% off the July peak, a range completely within month-to-month

market expectations. Yet many investors reacted poorly and sold into the panic while others just covered their eyes and

hoped for the best. The true investors however were out bargain shopping. This quarter, we want to discuss how we

view market fluctuations, distinguish real problems from mere panic, and build portfolios to withstand and profit from this

somewhat regular occurrence.

Hockey great Wayne Gretzky famously said of his playing style, “A good hockey player plays where the puck is. A great

hockey player plays where the puck is going to be.” He, of course, makes the second part sound easy. This is applicable

to the Investment Management business. While it’s important to understand where the markets are today, we build portfolios

based on where things might be going. That means seeking out opportunities but also intentionally building in protections

since markets can and will fluctuate. Being research intensive is helpful, as it allows us to separate the signal from

the noise. And there is plenty of noise right now. (continued)


Benjamin Graham and David L. Dodd, Security Analysis, McGraw-Hill Book Company (1934).

Boston Research and Management, Inc. | 40 Beach Street | Manchester, MA 01944 | P: 978.526.9700 |


Volume XXIV

Issue III



In last quarter’s INSIGHTS, we discussed some potential concerns that we were watching including Greece, Puerto Rico and

China. The latter seemed to kick off the panic in late August that led to the 12% selloff. It’s essential to identify the underlying

data points and realities when markets suddenly move outside their norms. We firmly believed that this was a short term correction—and

thus far markets have come to agree with this. The economic data simply doesn’t point towards a domestic recession.

While foreign risks could certainly trigger a slow down state-side, we’re still pretty far from that. Unlike prior sell offs,

this market decline doesn't appear to be the start of a Bear Market. Thus, a sudden reduction in prices with little to no change

in earnings presents a savvy investor with potential opportunities.

It may surprise those outside the investment

management community that investing into

strong upward markets is often more frustrating

and stressful than operating in a volatile market.

When everything is relentlessly moving higher

regardless of fundamentals, things get expensive

and expectations are lifted to dangerous

levels. Attempting to outperform illogical valuations

is a surefire way to lose a lot of money.

However, a patient investor thrives on volatility.

When suddenly presented with “sale prices”,

they should be prepared for rapid entry and acquisition

of companies at far more attractive

valuations. For this reason, our research is

constant. We always have companies “on

deck”, waiting for more attractive pricing. Note,

this doesn’t guarantee prices won’t decline further,

but it does protect against overpaying for a


Too many investors underestimate the likelihood of lower prices. A 4-year run-up in markets exaggerated this behavior. Investors

should be constantly prepared for a correction. This means both being patient with their buys (demanding attractive entry

levels) as well as holding names that act defensively to protect capital. Risks are often magnified during strong rallies as investors

sell stocks that appear to be underperforming, only to watch those same names provide significant outperformance in

downturns. Too often, the shock of a sudden market move freezes investors in their tracks. This is puzzling given the almost

certainty of it. Having a playbook for corrections, bear markets, rallies, etc. is essential. If you don’t know what you’d buy, hold

or sell in either of those situations, the likelihood of making the right decision in the middle of the storm is very unlikely.

Note, this is very different from a simple “buy and hold” strategy. That’s never made much sense to us. Simply because there

was a good company with attractive fundamentals at one point, says nothing of that company, industry, or its competitors in the

future. The evaluation process should continue for existing holdings as well as prospective positions.

While investors shouldn’t expect to always know where the puck is headed – having a strong understanding of what’s moving

the puck and a playbook for both ends of the ice is essential.

Please remember past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. No assumptions can be made that the

future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by Boston Research &

Management, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter will be suitable for your portfolio or individual situation, achieve

any particular investment result, or be profitable or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer

be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as, or as a substitute for, personalized

investment advice from us. Readers, to the extent you have questions regarding the applicability of any specific issue discussed above to the your situation, you are encouraged

to consult with the professional advisor of your choosing. Clients, please remember to advise us, in writing, about any changes in your personal or financial situation, or a

decision to change your Investment Objective, or a desire to impose, add, or modify any reasonable restrictions to our full discretion over investments. We are neither a law firm nor

accounting firm and no portion of the newsletter content should be construed as legal or tax advice. A copy of our current Disclosure Statement discussing our advisory services and

fees is available upon request.

Boston Research and Management, Inc. | 40 Beach Street | Manchester, MA 01944 | P: 978.526.9700 |

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