Category Archives: News

Americans Now Spend More at Restaurants Than Grocery Stores. Is It a Problem?

The following column from Phoebe Venable, CapWealth Advisors President & COO, appeared in The Tennessean on June 2, 2017.

Recently I heard our chief investment strategist say that Americans now spend more at restaurants than grocery stores. I was astonished. Could that really be true? A couple quick Google searches confirmed that indeed, last year, retail sales at restaurants and bars exceeded those of grocery stores for the first time.

It’s Norman Rockwell at my house

My next thought was, well, the rest of country might be eating out more, but not so at my house. We’re very committed to having dinner as a family each night. Plus, I have a passion for cooking. In fact, our sacred mealtime ritual, a tradition carried over from my childhood, is quaint to many of our friends. I look forward to the conversation. I look forward to the connection. I look forward to seeing my husband and my son enjoying the repast I’ve prepared with my own two hands.

Yet, being a finance and numbers freak, I was curious. What was our ratio of eating at home versus eating out?

So I separated out our grocery and restaurant purchases over the past year. You guessed it. I was stupefied to discover that we, too, spent more at restaurants! What happened to my Norman Rockwell dinnertime?

A buffet of dining options

There are several reasons behind this reversal of a longstanding pattern in which the bulk of American food spending occurs at the supermarket.

Demographics have had a large impact on this shift. While baby boomers are eating at home in an effort to save money (perhaps because they under-saved for retirement), they are outnumbered by the millennial generation. Millennials have many frugal habits but they do have a penchant for eating out. Technology is also impacting the trend with apps like GrubHub, DoorDash and Seamless providing convenient ways to order food from almost any restaurant for delivery. Takeout has become so popular that restaurants are being reconfigured to handle the growing number of customers that come in only to pick up their order.

Somewhere between a home-cooked meal and eating out is the meal kit, another new dining phenomenon. Meal kits offer pre-portioned ingredients and instructions for preparation delivered direct to your doorstep. They require cooking but there is no actual grocery shopping. Blue Apron, HelloFresh and Plated are all examples of an industry which is touting annual sales of $1.5 billion and growing.

Is this trend a problem? It depends

Is this trend a problem for the American consumer? Dining out is certainly more expensive than eating at home, but if you’re adjusting your budget to accommodate, then it shouldn’t be a big deal. But the Federal Reserve’s 2015 report on the economic wellbeing of U.S. households showed that 46 percent of adults say they either could not cover an emergency expense costing $400.

A couple of weeks ago, an Australian real estate mogul was roundly lambasted on social media for suggesting that $19 avocado toast might be why millennials couldn’t afford homes. But the truth is, eating out does add up. One wonders, too, if it’s adding up in other ways — contributing to our escalating obesity epidemic, for instance.

It’s certainly not a problem for investors.

It’s an opportunity. When consumers change their preferences, they shift spending habits, causing some companies to benefit and others to suffer. Winners and losers can be hard to identify, but if you think this trend is here to stay, investing in companies that adapt to the changes in their industry could bring bountiful returns.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors, LLC. Her column on women, families and building wealth appears every other Saturday in The Tennessean.

CFA Institute Pens Open Letter to Investment Community in WSJ Today–CapWealth Claims Compliance With CFA Asset Manager Code Too!

The CFA Institute took out a full page ad today in The Wall Street Journal to write an open letter to the investment management industry, urging them to make a bold statement about putting clients’ interests first by claiming compliance with the Asset Manager Code. The letter listed several pension funds and retirement systems that had signed on, and we’d like to say that CapWealth Advisors claims compliance with the Asset Manager Code as well!

CapWealth Advisors Welcomes Financial Advisor Chris Burger to the Firm

Independent registered investment advisory firm CapWealth Advisors, based south of Nashville in Franklin, TN, has added public affairs and advocacy veteran Chris Burger to its roster of financial advisors, Tim Pagliara, CapWealth Advisors’ chairman and chief executive officer, announced today. Burger is the first new advisor to join the top-ranked firm since 2014 and the first new hire since bringing on former Goldman Sachs vice president John Lueken as the firm’s chief investment strategist. Burger will develop new business and provide financial and wealth management advice to clients.

Chris Burger, CapWealth Advisors’ newest Financial Advisor

Having spent the last decade in public affairs, Burger excels at strategic thinking, planning and execution. “That’s a one-sentence summary of what we do for our clients here at CapWealth Advisors,” says Tim Pagliara, who has known Burger professionally for several years. “We develop strong, carefully crafted plans for each client’s unique financial situation and goals, diligently execute those plans and work very hard to make our clients successful. Chris has been doing that for years in another tumultuous, anxiety-ridden industry—politics. Chris is going to be a tremendous asset for our firm, both in respect to serving our existing clientele and further tapping into exciting new opportunities such as the Millennial market. Chris is sharp, has a great can-do attitude and builds rapport with people so well. Our firm is excited to make this announcement.” This year, Barron’s magazine named CapWealth Advisors one of the top two advisories in the state of Tennessee, following five consecutive years named the state’s number-one advisory.

Burger has been onboarding with CapWealth Advisors since February, and has been busy training, shadowing and studying the firm’s wealth-management strategies, operational policies and procedures, and customer service protocols. He’s well versed in CapWealth Advisors’ trademarked investment approach of Sophisticated Simplicity®, the art of thoroughly understanding a complicated global markets landscape and boiling it down to high-quality, straightforward investment ideas.

Prior to joining CapWealth Advisors, Burger served as vice president of Advocacy and Public Affairs for Nashville-based Crisp Communications and, before that, as director with the DCI Group in Washington, D.C. In these roles, Burger led grassroots-management, coalition-building and strategic-communication efforts for both corporations and non-profits that faced legislative, regulatory and competitive challenges. Burger also has extensive political campaign and Congressional office experience, having worked for two presidential campaigns and two Congressional representatives, overseeing field offices, staff, events and communications.

Burger is a graduate of the University of Virginia, where he earned a B.A. in Economics and Government, and holds his Financial Industry Regularly Authority Series 65 securities license. He sits on the Business Advocacy Committee of the Williamson County Chamber of Commerce and on the committee of MLS2Nashville, a group of business, civic and sports leaders committed to bringing a Major League Soccer (MLS) team to Nashville. Additionally, Burger volunteers with UVA Club of Middle Tennessee and is a member of Midtown Fellowship (PCA) church.

About CapWealth Advisors

CapWealth Advisors is a fee-based investment advisory firm based in Franklin, TN, that provides wealth management services, including investment advice, personal financial planning and portfolio management to individuals, families, foundations and endowments. Founded in June 2000, CapWealth Advisors specializes in preserving, growing and distributing assets over our clients’ lifetimes. With over $1 billion in assets under management and advisement, we are one of the nation’s leading independent wealth managers. For more information, visit www.CapWealthAdvisors.com.

 

CapWealth Senior Advisor Jennifer Pagliara to Attend ABA Trust School

A trust can be a powerful tool in managing how your wealth is passed on to your loved ones.

CapWealth Advisors Senior Advisor Jennifer Pagliara will attend the 2017 American Bankers Association‘s Trust School in Atlanta this coming September 24-29. This intensive five-day program is designed to provide a solid grounding in the fiduciary, tax, investment, financial planning and ethical issues associated with the creation of trusts.

CapWealth Advisors Senior Advisor Jennifer Pagliara

The ABA Foundational Trust School offers a state-of-the-art, performance-based curriculum, designed and delivered by a prestigious group of trust professionals, including prominent bankers, attorneys, and industry experts. In addition, students have the opportunity to build a nationwide network of peers and industry leaders, a vital resource for years to come.

A trust is a legal document that can be powerful estate-planning tool for managing how your wealth is passed on to your loved ones and other chosen beneficiaries. Among the advantages of a trust, it can:

  • Put conditions on how and when your assets are distributed after you die
  • Reduce estate and gift taxes
  • Distribute assets to heirs efficiently without the cost, delay and publicity of probate court, which can cost between 5% to 7% of your estate.
  • Better protect your assets from creditors and lawsuits
  • Name a successor trustee, who not only manages your trust after you die, but is empowered to manage the trust assets if you become unable to do so

 

Over the five days of the Trust School, students will receive a solid foundation in the technical skills and knowledge required in the fiduciary and trust, investment, financial planning, tax, and ethics industries, including the latest strategies in:

  • Account Administration
  • Fiduciary Law
  • Tax & Estate Planning
  • Investment Management

Upon completion of the ABA Trust School, Jennifer will earn the ABA Certificate in Trust: Foundational. We’re excited about this continuing education opportunity for Jennifer, just another example of CapWealth’s commitment to our clients’ financial futures!

Tim Pagliara to Attend CFA Institute’s Investment Management Workshop at Harvard Business School

CapWealth Advisors CEO and Chairman Tim Pagliara will attend the Investment Management Workshop, a joint program by CFA Institute and Harvard Business School, on June 25-29, 2017. The executives who participate will focus on three fundamental business concerns: management issues, business strategy and development, and investment strategy.

CapWealth Advisors Chairman and CEO Tim Pagliara

For almost 50 years, the Investment Management Workshop (IMW) has played an essential role in shaping the principles and practices of investment management across the globe. This renowned program, developed by Harvard Business School (HBS) Executive Education and CFA Institute, brings together highly accomplished faculty and leading executives from around the world to confront the ever-changing challenges that define the investment management industry. Since its inception in 1968, the program has provided a forum for more than 3,500 participants to share broad-ranging insights and investigate cutting-edge strategies for balancing risk and return.

Among other issues, Tim and the other workshop participants will explore:

  • Disruptive innovations in both products and services in investment management
  • The challenges of size for both asset allocators and asset managers
  • Investing in a world of low expected returns
  • The future of hedge funds and private equity
  • The rise of smart beta and its implications for the competitive landscape of the active investment management industry
  • Fintech as a disruptive force in the investment management industry and strategic responses from incumbents
  • The drivers of success for activism as an investment strategy
  • Innovative fee structures for institutional investors
  • Investment decisions in a world of low expected returns
  • Implications of the growth in index investing for markets and for the investment management industry
  • Co-investments in private markets
  • Trade execution in a world of high frequency trade and multiple execution venues
  • Liquidity management in uncertain times
  • Innovative investment strategies and the search for alpha in today’s environment

 

CapWealth Invites Client Kids and Grandkids to Money Camp 2017!

The seeds we plant today will grow into future financial, intellectual, personal and philanthropic capital!

CapWealth Advisors would like to invite your children, nieces, nephews and grandchildren ages 6 to 10 to this year’s Money Camp, where children begin learning critical life lessons about spending, saving, investing and donating.

It’s never too early to open the dialogue with your young ones on what money is, what can be accomplished with it and how to successfully manage it. We send our children to lessons and camps for everything from swimming and music to horseback riding and scouting, yet managing money is an activity they’ll be responsible for all their lives—with potentially enormous positive and negative ramifications. And if your family is one of substantial wealth, it’s even more critical that the children begin preparing to become responsible, knowledgeable stewards of wealth.

Money Camp will be led by CapWealth Advisors President & COO Phoebe Venable, a veteran teacher of young people on matters of money, and CapWealth Advisors Senior Advisor Jennifer Pagliara. Phoebe and Jennifer try to make learning about money fun but meaningful. The basic lessons your young ones learn could be the foundation for a lifetime.

Who:   

Children 6 to 10 years old

What:

A FREE, fun, engaging, youth-oriented seminar that covers the basics of spending, saving, giving and investing. The seminar, offered on your choice of two days, will be two hours long and snacks will be provided.

When:

Tuesday, July 18, 9:00 a.m. to 11 a.m.

Thursday, July 20, 2 p.m. to 4 p.m.

Where:  

The Office of CapWealth Advisors, 3000 Meridian Blvd., Suite 250, Franklin, TN 37067

How:

To register your children, nieces, nephews or grandchildren for CapWealth Money Camp, please contact Raechel Mabry at rmabry@capwealthadvisors.com or call 615-778-0740. Thank you!

We look forward to seeing your children here!

Watch Treasury Secretary Mnuchin Discuss Fannie Mae and Freddie Mac

Treasury Secretary Steven Mnuchin spoke to Fox Business Network’s Maria Bartiromo today (May 1, 2017) about President Trump’s tax reform plan, efforts to drive economic growth, the tax plan’s potential impact on US business and state taxes—and the future of Fannie Mae and Freddie Mac.

His comments on the GSEs begins at the 3:55 mark and runs to 5:20. Be sure to watch!

Infowars: Senator Corker Caught Shorting Stocks He Demonized

Tennessee Republican Sen. Bob Corker, in his dogged determination to see Fannie Mae and Freddie Mac shut down, has frequently criticized hedge funds in their attempt to make money from the two Government Sponsored Entities (GSEs). Read the online Infowars.com article here.

World Economic Forum/Flickr

Corker’s critics have criticized him for his hypocrisy, producing evidence Corker himself profited from a strategy to short Fannie and Freddie in 2007 and 2008, while maintaining an investment portfolio that has invested as much as $50 million in the same hedge funds Corker attacks as “vultures” corrupting Washington.”

As Infowars.com has previously reported, in 2006, Henry Luken, a long-time Corker business associate and political backer, acquired from the then-Chattanooga mayor Bob Corker tens of millions of dollars in risky real estate holdings that were headed underwater, providing Corker the capital he needed to complete his successful run for the Senate.

After lending his campaign $4.2 million from the Luken transaction into his Senate campaign, giving Corker virtually all the money he spent in the final weeks of the campaign, Corker narrowly defeated his Democratic challenger Harold E. Ford, Jr., 51 percent to 48 percent, outspending Ford by $18.6 million to $15.6 million.

According to his Senate financial disclosures, upon his arrival in the Senate, Corker began using the proceeds from the Luken transaction to shift tens of millions of dollars to a series of hedge funds, including Chattanooga-based Pointer Management Company, whose founder, Thorpe McKenzie, was a political supporter of Corker and an investor in Luken’s companies.

Infowars.com has obtained a copy of a compliance “Adherence Letter” authored by Pointer Management, LLC, dated September 30, 2008, making it clear Pointer was taking a short position on Fannie Mae and Freddie Mac by buying derivatives, specifically credit default swaps, that would generate for Pointer a handsome profit, provided the share prices of the two GSEs went down.

This was the same period when investor Bill Ackman, the CEO of the now multi-billion-dollar Pershing Square Capital Management hedge fund, was also shorting Fannie and Freddie by purchasing credit default swaps, as evidenced by a letter dated Oct. 2, 2008.

Infowars.com has possession of two emails obtained by FOIA requests that document Sen. Corker had meetings with Jim Lockhart, then the director of the Office of Federal Housing Enterprise Oversight (OFHEO), the precursor to the Federal Housing Finance Agency FHFA, in April 2008 and again in July 2008, prior to the Pointer purchase of Fannie/Freddie credit default swaps.

In the first email, dated April 8, 2008, Courtney Geduldig in Corker’s Senate office, emailed to Joanne Hanley, Congressional Affairs, OFHEA, with a copy to Peter Brereton, External Affairs, OFHEA, asking how best to “follow-up on a meeting with the Senator (Corker) and the Director (Lockhart).

The second email, dated July 10, 2008, was again from Courtney Geduldig to Joanne Hanley, with a copy to Peter Brereton, stating: “Obviously, there’s a lot going on in your world.  The senator (Corker) wanted to see if someone could come in and talk to us about the new accounting proposals as well as the gse’s current situation.  Let me know what might work.”

It seems highly likely that material, non-public information was exchanged during these two meetings that took place 5 months and 2 months respectively before the GSEs were put into conservatorship.

Corker’s Senate financial disclosures indicate that after his successful 2006 Senate campaign, Corker invested between $8.5 million into hedge funds, including between $5 million and $25 million that he invested in Pointer.  Corker’s Pointer investment profited him a total of between 3.9 million and $15.5 million over the next nine years.

Corker’s own investments in hedge funds betting on Fannie and Freddie’s failure provide a damning context for his crusade against the GSEs and their investors.  Corker appears to have even enlisted members of the press in his campaign against the GSEs.

On Aug. 10, 2015, the Business Insider published an article noting that in a conference call with investors, Bill Ackman, an investor in Fannie and Freddie, attacked John Carney, a reporter at that time writing for the Wall Street Journal, for writing the “most factually inaccurate” and “frankly embarrassing articles about Freddie and Fannie, calling Carney’s coverage of Fannie and Freddie in the newspaper’s “Heard on the Street” column a “disaster.”

Ackman’s frustration was that Carney had argued the shares of Fannie and Freddie were not “living up to hopes,” without understanding the reason for that underperformance was the Net Wort Sweep, in which Treasury since August 2012 had begun stripping from Fannie and Freddie all earnings, without allowing either GSE to recapitalize or to pay dividends.

In the various jobs he has held in his writing career, Carney has consistently supported Corker by attacking investors that invested in Fannie and Freddie while supporting legislation Corker introduced with Virginia Democratic Sen. Mark Warner in 2013 aimed at shutting Fannie and Freddie down. Corker’s legislation favored a “bank-centric” mortgage finance model, where banks that have financed Corker, including Wells Fargo, could be expected to be dominant players in the future housing finance industry.

Before starting his latest assignment with Breitbart.com, Corker media stooge John Carney even took pains to disguise his years of publishing articles bashing Donald Trump, going so far as to erase from his Twitter archive dozens of tweets he had published critical of Trump’s 2016 presidential campaign.

In an article he wrote for DealBreaker, dated April 10, 2006, Carney ridiculed Trump’s performance at a press conference held at Trump Tower in New York City at which Trump announced the creation of Trump Mortgage.

Commenting that Trump seemed “confused by the crowds and media” as he assumed the podium, Carney asked Trump, “Will the homes bought with Trump mortgages have to be adorned with giant gold letters reading Trump?” – a question that got no response, as Trump turned away, with Carney reporting Trump’s hair scowled back at him.

In his most recent article, written for Breitbart.com on April 7, 2017, Carney continued his attack on “hedge funds and other big investors, including Perry Capital LLC and Fairholme Funds” for not understanding Fannie and Freddie were, in Carney’s opinion, “the primary cause of the financial crisis” in 2008 – an argument Carney asserted without considering the role played by major bank players in the crisis caused securitizing sub-prime mortgages.

The truth is that the crisis began when mortgage loan originators like Countrywide Financial and financial institutions like Washington Mutual began marketing sub-prime mortgage loans aggressively well before Fannie and Freddie got in trouble.

By the time Fannie and Freddie were seized in the fall of 2008, more than 311 major lenders more than 311 major lenders in the sub-prime mortgage market had failed, including financial institutions that provided warehouse lines of credit to independent lenders with the goal of originating increasing lower quality mortgage loans in the sub-prime market.

The widely read financial blog ZeroHedge.com on Feb. 2, 2010, took Corker to task for his “bank-centric” view that no commercial bank had failed while performing proprietary trading, arguing that Corker “must have received his information from the banking lobby, and did not do his own homework.”

An article published in Time Magazine on Feb. 5, 2010, made clear that Lehman Brothers had lost more than $32 billion from proprietary trading and principal transactions in the mortgage market in the year and a half up to the crash that occurred in the fall of 2008 – a sum nearly double the $18 billion in common equity Lehman Brothers had in late 2006, just before mortgage bonds began going south – a sum Time called “more than enough to wipe the firm out.”

The Time article further pointed out Merrill Lynch lost nearly $20 billion on investments in collateralized debt obligations in the mortgage market, while Morgan Stanly experienced nearly a $4 billion loss in proprietary mortgage-securities related trading in the fourth quarter of 2007 alone.

Time went on to note Goldman Sachs spent $3 billion to bail out one of its hedge funds, and Citicorp poured out more than $3 billion into fixing its problems with structured investment vehicles that it had set up with its own capital.

“Like Merrill, Citibank lost big — as much as $15 billion, on the CDOs [Collateralized Debt Obligations] it decided to hold rather than sell off,” Time concluded. “In fact, nearly every large financial firm that stumbled during the financial crisis had billions of dollars in proprietary-trading or hedge-fund losses.”

ZeroHedge.com referenced an article published by the Wall Street Journal on Sept. 26, 2008, noting Washington Mutual was seized by the FDIC and sold off to J.P. Morgan Chase in the largest failure in U.S. banking history, resulting from the bank’s extensive involvement aggressively originating mortgages in the sub-prime mortgage market, as well as buying sub-prime loans from outside mortgage lenders, and participating as a major player in the secondary securitized CMO, or collateralized mortgage obligation, market.

Joshua Rosner, a managing director of the New York-based independent research firm Graham Fisher & Co., an expert in mortgage financing, in an exclusive email exchange with Infowars.com, commented on Corker’s apparent hypocrisy investing heavily in hedge funds, including one known to have shorted Fannie and Freddie in 2008, while demonizing hedge funds for wanting to make a profit on their GSE stock.

“The hedge fund attacks are a sideshow to avoid scrutiny of Corker’s own proposals, which would turn over the U.S. housing market to Wells Fargo,” Rosner said.

“Corker has this amazing way of creating false villains to avoid the substance of real mortgage market reform,” Rosner continued.

“Making the argument all about ‘evil hedge funds’ captures the public attention and may sound right to those less knowledgeable about the importance of capital investment to the growth and development of the mortgage market in the United States,” he insisted.

“But the truth is that demonizing hedge funds is nothing more than a disingenuous and cynical claim by Corker – a legislator with a long history of too-close ties to too-big-to-fail (TBTF) institutions,” Rosner said in conclusion.

Tim Pagliara Ranked #2 Financial Advisor in Tennessee by Barron’s Magazine for 2017

CapWealth Advisors Founder, Chairman and CEO has been selected as one of the top two wealth managers in the state following five consecutive years as #1 in Tennessee. Pagliara has also been ranked a national Top 1,200 Advisor for the eighth time in nine years.

CapWealth Advisors Chairman and CEO Tim Pagliara

Middle Tennessee-based wealth manager Tim Pagliara, chairman and CEO of independent registered investment advisory firm CapWealth Advisors, has been named the second-highest-ranked financial advisor in the state of Tennessee by Barron’s magazine. Pagliara previously occupied the #1 spot in the state for five consecutive years (2012, 2013, 2014, 2015, 2016). Pagliara was also named this year among the nation’s “Top 1,200 Advisors,” the eighth time in nine years (2009, 2010, 2012, 2013, 2014, 2015, 2016). The rankings are published annually by the financial industry magazine and are based on data provided by over 4,000 of the nation’s most productive advisors. Factors include assets under management, revenue generated by the firm’s advisors, regulatory history, quality of practice and philanthropic work.

“Being named amongst the top advisors in the state is an honor for me and my entire team,” Pagliara said. “It affirms our simple but powerful business model: complete client focus. What flows from that focus is investment strategies about which we have great conviction but also which our clients can easily understand, state-of-the-art technology in accurately reporting our clients’ performance and, finally, in a word, trust. Our clients trust us to grow and preserve their families’ financial legacies. It’s an incredible privilege to serve our clients, and we are grateful to have an organization like Barron’s that recognizes firms for what they achieve for their clients.”

Pagliara started his firm in 2000 after nearly 20 years in the financial industry with the goal of serving clients better in two distinct ways: the exclusive use of market-traded securities and an emphasis on accountability and transparency. CapWealth Advisors practices Sophisticated Simplicity®, the art of thoroughly understanding a complicated global markets landscape and boiling it down to high-quality, straightforward investment ideas. To provide clients with a clear understanding of their returns and costs, the firm relies upon Provable Integrity™, a proprietary tracking and reporting system utilizing state-of-the-art data-aggregation technology and compliance with the rigorous standards of the Global Investment Performance Standards (GIPS). As a result, CapWealth Advisors specializes in preserving, growing and distributing assets over its clients’ lifetimes, backed by performance that can be proven to an auditable certainty.

Did Obama Rob Fannie, Freddie to Fund Obamacare?

The fact that the Obama Administration unilaterally changed the terms of the GSE conservatorship to sweep all their profits is irrefutable. It’s also clear that the administration did so just as the GSEs were becoming fantastically profitable again. This, too, is a matter of public record, thanks to ongoing litigation in more than one courtroom. What’s not always plain is what the administration did with those coffers swelling with ill-begotten riches.

The article below (click here to read the original publication) compellingly alleges that one of the ways the GSE profits–our profits, by rights–were used was by illegally funding Obama’s signature work as President, the Affordable Care Act. I encourage Fannie and Freddie shareholders, as well as anyone interested in citizens’ rights and the rule of law, to read it.

Obama Illegally Robbed Fannie, Freddie to Fund Obamacare

Obama diverted money from low-income housing to keep Obamacare alive

Jerome R. Corsi | Infowars.com – February 27, 2017

WASHINGTON, D.C. – Will this be the final nail in the coffin for the Affordable Care Act, commonly known as “Obamacare?”

Federal court litigation provides evidence the Obama administration illegally diverted taxpayer funds that had not been appropriated by Congress in an unconstitutional scheme to keep Obamacare from imploding.

In 2016, a U.S. District judge caught the Obama administration’s Health and Human Services Department acting unconstitutionally and therefore put an end to the illegal diversion of taxpayer funds, but the Obama administration didn’t stop there.

The Obama administration instead turned to the nation’s two government-sponsored mortgage giants – the Federal National Mortgage Association, commonly known as “Fannie Mae,” and the Federal Home Loan Mortgage Corporation, commonly known as “Freddie Mac” – to invent a new diversion of funds in a desperate attempt to keep Obamacare from collapsing.

A key date is May 12, 2016. That was the day when U.S. District Judge Rosemary Collyer, in the case U.S. House of Representatives v. Burwell, (130 F. Supp. 3d 53, U.S. District Court for the District of Columbia), ruled against Health and Human Services Secretary Sylvia Matthews Burwell.

Judge Collyer decided HHS Secretary Burwell had no constitutional authority to divert funds Congress appropriated to one section of the ACA to fund Obamacare subsidy payments to insurers under another section of the ACA, Section 1402 – the clause defining the insurer subsidies – when Congress specifically declined to appropriate any funds to Section 1402 for paying the insurance subsidy.

“Paying out Section 1402 reimbursements without an appropriation thus violates the Constitution,” Judge Collyer concluded. “Congress authorized reduced cost sharing but did not appropriate monies for it, in the Fiscal Year 2014 budget or since.”

“Congress is the only source for such an appropriation, and no public money can be spent without one.”

The U.S. District court in this ruling entered judgment in favor of the House of Representatives, barring HHS from using unappropriated money to pay insurers under Section 1402.

What was at issue in Section 1402 was the Obamacare provision that capped the amount of federal subsidies under Section 1402 that lower-income families could use to pay for insurance purchased on state insurance exchanges, particularly the difference between the capped maximum based on a person or family’s income in relation to the federal poverty level.

Congress had refused to pass an appropriation to fund Section 1402 – the section of the ACA that called for making the insurance subsidy payments.

In a report issued in March 2016, the Congressional Budget Office estimated the cost for providing Section 1402 subsidies over the next ten years (2016-2026) was estimated to be $130 billion.

Forbidden by Judge Collyer’s decision from diverting money Congress appropriated for other ACA provisions to pay Section 1402 subsidies, the Obama administration faced the prospect that the government could not pay subsidies to permit lower-income persons and families to buy the amount of health insurance Obamacare was written to provide them.

Either this, or insurers would be forced to charge middle and high income-persons and families such outrageous amounts for their insurance coverage (to subsidize the poor under ACA) that only the wealthiest could afford to buy health insurance.

In other words, Obamacare was dead in the water if the Obama administration could not find a way to circumvent the District Court’s decision U.S. House of Representatives v. Burwell to fund Section 1402 despite the fact Congress had refused to do so.

Determined to keep Obamacare alive, the Obama administration decided to find a way around Judge Collyer’s ruling.

The fix involved the Obama administration redefining the terms of the 2008 conservatorship agreements which advanced funds to Fannie Mae and Freddie Mac from a 10% dividend on moneys borrowed to the federal government’s confiscation of 100% of the future and imminent profits of these Government Sponsored Entities, or GSEs.

Miraculously, the Freddie and Fannie “pot of gold” turned out to be almost exactly the amount the Obama administration needed to meet the anticipated insurance company subsidies required to keep Section 1402 in business.

So, how did Fannie and Freddie get this pot of gold, given that only a few years earlier both GSEs were bankrupt?

In 2008, in the midst of the financial crisis caused in part by the collapse of the subprime mortgage market, the federal government decided to seize Fannie Mae and Freddie Mac, which at the time were two shareholder-owned companies.

In passing the Housing and Economic Recovery Act of 2008 (HERA), the U.S. Congress had fixed the regulatory issues at Fannie Mae and Freddie Mac, creating a mechanism for them to be placed into conservatorship at federal government’s discretion AND providing up to $187.5 billion in funds that could be advanced to the GSEs through a purchase of senior preferred stock paying a ten percent dividend.

In deciding to bail them out, the federal government took control of the two giant mortgage GSEs, with Fannie and Freddie effectively put into government “conservatorship.”

As part of the conservatorship, the federal government effectively acquired warrants, convertible at a nominal price, which allowed the federal government to acquire 79% of the GSE’s common stock.

This resulted in causing dilution in the percentage of Fannie and Freddie common stock ownership that was left in the hands of private and institutional investors.

Congress’ intent was that Fannie Mae and Freddie Mac would pay back the Treasury as the mortgage giants returned to profitability.

But after the Treasury was paid back, the terms of HERA anticipated Fannie Mae and Freddie Mac would pay appropriate dividends to stockholders, including the federal government, leaving enough funds within Freddie and Fannie to “conserve and preserve” the assets of the two GSEs, anticipating their eventual return to a “safe and solvent” operating condition.

In 2012, the Obama administration unilaterally decided to change the terms of HERA by sweeping all the profits of Fannie and Freddie into the Treasury’s general fund.

The Obama administration took this action, the so-called “Net Worth Sweep,” without any Congressional authority to do so.

The result was that the U.S. Treasury “found” a way to sweep 100% of Fannie and Freddie profits into the Treasury’s “general fund,” leaving the giant mortgage GSEs vulnerable to the need for another government bailout should another disruption occur in the nation’s economy.

Because of this decision, the Obama administration on its own authority simply decided to discontinue paying dividends to private and institutional owners of Fannie and Freddie common and preferred stock.

Congress, in passing HERA, never anticipated the Obama administration would take over Fannie and Freddie and strip the agencies of all profits – a move that left private and institutional shareholders in the cold.

Leading up to the decision to sweep Fannie and Freddie’s profits, the GSEs return to imminent profitability was known only by a few government officials and their consultants.

Their own internal forecasts, uncovered in unsealed court documents, showed that Fannie and Freddie’s profitability would soon dramatically outperform the amount of the allowable 10% dividend that the Treasury would receive under the existing Senior Preferred Stock Purchase Agreements.

On August 17, 2012, these same officials and consultants succeeded in engineering with the Federal Housing Financial Agency, FHFA, and the Department of Treasury an amendment to the Senior Preferred Stock Purchase Agreements that allowed the U.S. Treasury to grab ALL Fannie and Freddie profits – regardless how large Fannie and Freddie’s earnings might be.

Between 2012, when the Obama administration began its policy of confiscating all Fannie and Freddie profits and now, Fannie and Freddie have paid the U.S. Treasury general fund more than $240 billion in dividends.

The point is that after May 12, 2016, when U.S. District Judge Rosemary Collyer ruled that HHS had to stop diverting ACA funds to pay Obamacare subsidies, the Obama administration realized that HHS somehow had to fund the estimated $130 billion the HHS would need in un‐appropriated monies to pay health insurers the ACA subsidies required to keep Obamacare alive in Fiscal Year 2013.

Plaintiffs litigating against the Obama administration’s confiscation of Freddie and Fannie earnings have challenged in court whether the Obama administration’s decision to amend the Preferred Stock Purchase Agreement in August 2012 and sweep GSE profits of $130 billion in 2013 ($82.4 billion from Fannie Mae, and $47.6 billion from Freddie Mac) was an attempt to circumvent Congress on the single most important policy priority of the White House.

The timing was particularly interesting given that September 2012 marked the beginning of the sequestration discussions.

Government documents leave little doubt profits from Fannie and Freddie confiscated by the U.S. Treasury have been used by the Obama administration to pay Obamacare subsidies and other items not appropriated by Congress, in complete and illegal circumvention of the District Court’s ruling and the Constitution’s determination that only the Congress shall have the power to tax and spend.

For instance, Chapter 3 of the Congressional Budget Office publication “The Budget and Economic Outlook: 2015 to 2025” notes on page 63 that the major contributors to mandatory U.S. government spending include “… outlays for Medicaid, subsidies for health insurance purchases through exchanges, and the government’s transactions with Fannie Mae and Freddie Mac.”

Why Fannie and Freddie are specified in this context, when Fannie and Freddie have had sufficient earnings to operate without government subsidies since 2008 is made clear a few pages later.

On page 65, in Table 3-2, the CBO report notes “mandatory outlays projected in CBO’s baseline” from Fannie Mae and Freddie Mac for 2014 is -$74 billion and for 2015 a total of -$26 billion.

The figures are “negative dollar amounts” because instead of paying out to Freddie and Fannie, the U.S. Treasury is collecting from Freddie and Fannie, with the proceeds going into the U.S. Treasury general fund to pay “mandatory outlays,” including evidently continued subsidies to insurers, as specified by ACA Section 1402.

In footnote 14 on page 8 of that CBO report lets the cat out of the bag, noting the Obama administration considers payments from Freddie and Fannie “to be outside of the federal government for budgetary purposes,” recording cash payments from Freddie and Fannie to the Treasury as “federal receipts.”

The Obama administration evidently considered this all-too-convenient redefinition of terms allowed the government to argue the use of Fannie and Freddie profits to pay Obamacare Section 1402 subsidies was not in violation of the District Court ruling.

Why? Evidently because Fannie and Freddie profits were not taxpayer-generated, but were profit payments generated by Government Sponsored Entities that still had some common and preferred stock private and institutional shareholder ownership.

In the same footnote, the CBO takes exception with the Obama administration, commenting the CBO considers profit payments to the Treasury made by Fannie and Freddie to be “intragovernmental” receipts going into the same Treasury general fund pot, to be mixed indistinguishably with taxpayer revenue, not distinct public/private GSE “receipts” separately accounted for in the Treasury general fund as distinguishable from taxpayer revenue.

If the federal courts conclude Fannie and Freddie GSE “receipts” to Treasury still need Congressional appropriation to be spent legitimately by the executive branch of government, the Obama administration will have been exposed as having operated outside the Constitution in its desperate attempt to keep the ACA from imploding.

What should be outrageous to progressives understanding the Obama administration subterfuge to keep the ACA alive is that by confiscating Fannie/Freddie profits to keep Obamacare alive, Obama ignored core members of the Democratic Party’s core constituency – affordable housing advocates and minority groups – with little explanation.

CapWealth Senior Advisor Jennifer Pagliara Selected to Nashville’s Young Leaders Council

We’re pleased to announce that Senior Advisor Jennifer Pagliara has been accepted into the Young Leaders Council (YLC)/Massey Graduate School Alumni Class 2017, an organization committed to broadening and strengthening Nashville’s volunteer leadership base!

Founded in 1985 by the Council of Community Services in conjunction with the Frist Foundation (formerly the HCA Foundation) and the United Way, the YLC selects participants between 25 and 40 years of age from a broad range of corporate, civic and volunteer backgrounds. They may be nominated by YLC alumni, their group’s management or may be self-nominated with management’s recommendation.

“I am so excited to begin the YLC training program,” says Jennifer. “As my career has progressed, as I’ve worked with our clients’ children and high school girls to better understand finance and frankly as I’ve watched my dad’s philanthropic commitment, my own passion for giving back to our community has grown continually sharper. I want to do more to support Nashville and its people. YLC will provide training and insight to help me discover where and how I might best do that.”

The YLC consists of a eleven-session training program, addressing fundamental board skills. These interactive sessions reflect on such leadership indicators as collaboration, diversity and the role of catalyst deemed crucial for today’s nonprofit leadership roles. The training is followed by a year internship with a community agency. At this time, the YLC participant serves as a non-voting member of a working board.

Jennifer Pagliara, Senior Advisor, has served on our client advisory team since 2014. She works closely with President and CEO Phoebe Venable and Senior Advisor Traci Olive to help ensure that our clients have the best experience with us as possible. Jennifer spearheads our efforts to reach the Millennial market and serves as personal advisor to our growing number of Millennial clients. While pursuing her Bachelor of Science degree in Business Administration from Birmingham-Southern College, Jennifer interned with the firm in the summer. Upon graduating in 2010, Jennifer joined the firm full-time, working in both compliance and client services.

In 2014, Jennifer completed her MBA degree at Belmont University with a concentration in Finance. While there, she was a member of Beta Gamma Sigma (the top 10% of her class). In her program’s culminating course, each year students participate in a business-simulation competition. The same product is assigned to all teams, and each as a competing company must plan research and development, production, pricing, marketing, employee benefits—everything that real-world companies must wrestle with. Ultimately, after being pitted against three other student teams as well as three computer-model teams, Jennifer’s team won, scoring higher than any team in Belmont University history.

Along with Phoebe Venable, Jennifer hosts “Money Camp” for our clients’ children and grandchildren, teaching them the fundamentals of saving, spending, giving and investing. She has recently begun to give “guest speaker” presentations to local businesses and organizations about finance, speaking specifically to certain topics like 401(k)s, college savings and the stock market. For the past two years, she’s served as a mentor and teacher for Rock the Street, Wall Street, a national organization dedicated to inculcating a passion and a vocation for finance in high school girls.

Jennifer holds FINRA licenses including the Series 7, 63 and 65, and is a member of the National Association of Professional Women, a national membership organization representing professional women of outstanding leadership and accomplishment.

She grew up in Franklin, Tennessee, and today resides in Nashville. She loves animals, particularly her dog Luna, she reads a about novel a week on average, and she enjoys yoga and the area’s great hiking trails. In 2016, she summitted Tanzania’s Mount Kilimanjaro, the highest peak in Africa.

A proud member of the Millennial Generation, Jennifer writes a bi-weekly financial column for The Tennessean that speaks to her peers and anyone else that wants to get ahead financially.  You can follow her columns on our blog or at Twitter and LinkedIn.

Bruce Berkowitz’s Latest Annual Letter to Fairholme Fund Shareholders Is a Must-Read

We here at CapWealth Advisors have long followed Bruce Berkowitz. As his brand tagline states, he ignores the crowd. We not only admire that, but our firm subscribes to the same tenet. Focus on your best ideas with conviction, regardless of the outside noise. Mr. Berkowitz and his shareholders have something else in common with CapWealth Advisors and our clients: we all have been abused by the GSE conservatorship. For both of these reasons, I invite you to read his latest letter to shareholders and directors of his Fairholme Fund.

January 30, 2017

To the Shareholders and Directors of Fairholme Fund (Trades, Portfolio)S, Inc.:

Since Fairholme’s inception, we have pursued a value-oriented investment approach that avoids popular securities in favor of companies that are both unloved and undervalued. Although the world has become more uncertain and the recognition of value is taking longer, we remain optimistic. Business cycles exist. History continues to rhyme. Investors march to the drums of both greed and fear. Markets move with asset values, but not always. Since 2000, our letters have tried to explain how we assay fundamental values and assess the differences between such values and their market prices. Our goal remains to buy dollars for fifty cents or less.

Technological disintermediation and regulatory overreach have increasingly affected investment conditions, including the supply of and demand for human and capital resources. Fairholme’s investment checklist has necessarily adapted to these and other evolving dynamics. Continuous review of risks and returns resulted in transitioning the Fairholme mutual funds (collectively, the “Funds”) from common equities toward shorter term, higher yielding, and more senior debt obligations and reduced exposure to financials that may lose more than can be gained amid higher interest rates over the coming years. Our investments have significantly less correlation with equity market indices. We believe that the Funds have the wherewithal for outsized rewards while protecting against the inevitable headwinds caused by rising interest rates and high valuation levels.

Exchange-traded index funds (“ETFs”) are all the rage these days for their straightforward, low-cost replication of broad indexes. While it is a good idea to efficiently go long America, ETFs occasionally swing to illogical extremes when popularity leads to overpriced and overweighted constituents. When bubbles burst, it may take a decade or longer to recover what may be lost in a few months. Given the choice, we strongly prefer to focus on the unpopular, underpriced, and underweighted. We recall Charlie Munger (Trades, Portfolio)’s advice:

Students learn corporate finance at business schools. They are taught that the whole secret is diversification. But the rule is exactly the opposite. The ‘know-nothing’ investor should practice diversification, but it is crazy if you are an expert. The goal of investment is to find situations where it is safe not to diversify. If you only put 20% into the opportunity of a lifetime, you are not being rational. Very seldom do we get to buy as much of any good idea as we would like to.

Fannie Mae and Freddie Mac

Odds favor Fannie Mae (FNMA) or Freddie Mac (FMCC) helped your parents and you obtain a first home, and that the same will be true for your children and grandchildren. Fannie Mae and Freddie Mac guarantee the timely payment of principal and interest demanded by lenders. Investors just like you own and fund their operations. Yet, we fight an expropriation of our principal by the government. Here’s where we stand: prosperity exists in a capitalist society only when contracts are honored. The rule of law must be respected and cannot be eliminated by fiat. If you disagree, just see the despair in Venezuela. We look forward to a decision from the United States Court of Appeals for the District of Columbia Circuit that protects and preserves our investments in Fannie Mae and Freddie Mac. Signs indicate that we are nearing the end of our “Alice in Washington” journey.

Our three appellate court judges (Janice Brown, Doug Ginsburg, and Patricia Millett) published a separate decision (Heartland Plymouth Court MI, LLC v. National Labor Relations Board) that we believe is instructive to their eventual ruling in our case. Writing for the majority, Judge Brown stated:

As this case shows, what the [National Labor Relations Board (“NLRB”)] proffers as a sophisticated tool towards national uniformity can just as easily be an instrument of oppression, allowing the government to tell its citizens: “We don’t care what the law says, if you want to beat us, you will have to fight us” … We recognize the [NLRB’s] unimpeded access to the public fisc means these modest fees can be dismissed as chump change. But money does not explain the Board’s bad faith; “the pleasure of being above the rest” does. See C.S. Lewis, MERE CHRISTIANITY 122 (Harper Collins 2001). Let the word go forth: for however much the judiciary has emboldened the administrative state, we “say what the law is.” Marbury, 5 U.S. (1 Cranch) at 177. In other words, administrative hubris does not get the last word under our Constitution. And citizens can count on it.1

In another decision (DirecTV, Inc. v. National Labor Relations Board), Judge Brown was even more direct about the perils of unchecked executive action when she noted that: “Judicial review should mean more than batting cleanup for the administrative state.”2 If applied in equal measure, these sentiments bode well for our case.

Finding no clear reason in favor of extraordinary secrecy, U.S. Court of Federal Claims Judge Margaret Sweeney (Fairholme Fund (Trades, Portfolio)s v. United States, No. 1:13-cv-00465-MMS) recognized that the government’s attempt to hide thousands of documents is unjustifiable, for the work of our government must withstand public scrutiny. Judge Sweeney issued a court order directing the Obama Administration to produce scores of documents that were improperly withheld based on assertions of deliberative process privilege, bank examiner privilege, and presidential communications privilege. Her decision was largely upheld upon review by the U.S. Court of Appeals for the Federal Circuit. In due course, we expect further proof that Obama Administration officials violated laws established by our founding fathers to prevent such unfettered discretion. Alexander Hamilton said it best:

The nature of the contract in its origin is, that the public will pay the sum expected in the security, to the first holder, or his assignee. The intent, in making the security assignable, is, that the proprietor may be able to make use of his property, by selling it for as much as it may be worth in the market, and that the buyer may be safe in the purchase. Every buyer therefore stands exactly in the place of the seller, has the same right with him to the identical sum expressed in the security and having acquired the right, by fair purchase, and in conformity to the original agreement and intention of the government, his claim cannot be disputed, without manifest injustice.3

We are frequently asked (i) why we own the preferred stock of Fannie Mae and Freddie Mac instead of common shares, and (ii) how this story ends. Our answers are simple: the provisions of the preferred stock contracts that we own provide us with greater security and certainty than the common stock and, as you know, we are not speculators. In this instance, we have invested in two superb insurance companies with unparalleled brand recognition, talented human capital, proprietary information technology infrastructure, and robust industry relationships. Fannie Mae and Freddie Mac are quintessential examples of what Warren Buffett (Trades, Portfolios) would describe as “economic castles protected by unbreachable moats.” As interest rates rise, Fannie Mae’s and Freddie Mac’s portfolios become even more valuable – and we anticipate that Q4 2016 results will reflect this positive impact. Allow me to emphasize a few points that you may have heard before:

Any intellectually honest observer would proffer that the rational steps for resolution are: (i) halt the payment of any further monies to the United States Treasury; (ii) permit the companies to retain capital in order to protect taxpayers; (iii) transform the companies into low-risk, public utilities with regulated rates of return, just like your local electric company; and (iv) eventually release them from the shackles of a perpetual conservatorship so they can help more low- and moderate-income families move up the economic ladder. Only the disingenuous would assert that recapitalization of these companies would take decades and come at taxpayers’ expense, as if retaining earnings precluded the ability of each company to raise equity from private investors. Only those beholden to special interests would ignore the substantial reforms implemented at Fannie Mae and Freddie Mac over the last eight years and pretend the companies are somehow doomed to repeat the past upon release from conservatorship. And only those who oppose the dream of homeownership for America’s middle class would attempt to dismantle two publicly traded, shareholder-owned companies that have singlehandedly provided over $7 trillion in liquidity to support our mortgage market since 2009. We are optimistic that the indispensability of Fannie Mae and Freddie Mac to affordable homeownership eventually overpowers the taboo imposed upon them by the previous Washington establishment.

Sears Holdings Corporation

Focusing on tangible assets has served us over many years, but most believe Sears (NASDAQ: SHLD) to be the exception to the rule. Disruptive technologies; near-zero cost of capital; and few, if any, legacy obligations provide young competitors with great advantages over old-line operators. Today, Airbnb is the largest lodging company in the world without owning a single hotel room. Uber is the world’s largest taxi company without owning a car (and perhaps soon without utilizing a single driver). Intuit’s Rocket Mortgage lends only via the net. Amazon crushes competition without a physical retail footprint. Mega-tech companies are now trusted in all aspects of personal and corporate life. I’m reminded of this every day by my Fairholme team, our clients, fellow directors at Sears, and friends.

Bottom line: Sears has degraded net asset values, but there is still much left and the company is fixing its cash drain. Recent corporate announcements – including (i) the proposed sale of Craftsman to Stanley Black and Decker for a cumulative $775 million plus a 15-year royalty stream on all third-party Craftsman sales to new customers and the use of a perpetual license for the Craftsman brand by Sears (royalty free) for 15 years; (ii) shuttering 150 unprofitable stores in 2017 on top of the roughly 235 stores that were closed in 2016; and (iii) marketing certain properties within the company’s real estate portfolio to further unlock value – reflect an acceleration in the company’s transformation efforts consistent with Chairman Eddie Lampert’s recent public comments:

[In late September 2016], we announced a partnership between Shop Your Way, Sears Auto Centers and Uber. This is another example of how we are transforming Sears Holdings to focus on serving our Shop Your Way members … Expect additional partnerships over time emphasizing our Shop Your Way business … Kmart continues to operate over 700 stores … a significant number of these stores are profitable … we are intent on improving the performance of our unprofitable stores and, if we cannot, we will close them … We are acting more aggressively and continuing to evaluate stores as leases expire and as other opportunities present themselves that improve the economics of Sears Holdings. Our significant asset base gives us the wherewithal to fund our business, but we don’t intend to use our asset value to support losses.4

Seritage Growth Properties

Fortune Magazine notes that “there is still a lot of life in that American mainstay, the suburban mall,” but the tenant mix is shifting to accommodate new consumer preferences.5 Indeed, growing demand for “very un-mall-like grocery stores, spin-class fitness shops, and entertainment centers” presents attractive opportunities for landlords such as Seritage, who can convert existing retail square footage to “non-retail spaces that people want.”6 In 18 months, Seritage (NYSE:SRG) has re-leased 2.2 million square feet and commenced or completed 48 wholly owned redevelopment projects. Sears now represents 65% of signed lease revenue; down from 90%. Headlines overlook this renter diversification and ignore Seritage’s acceleration with large mixed-use redevelopments in Santa Monica (California), Aventura (Florida), Hicksville (New York), and Redmond (Washington).

The St. Joe Company

To outperform in sports, you must go to where the ball will be – not where it already is. The same is true of investing and our investment in St. Joe (NYSE:JOE). Northwest Florida Beaches International Airport, the newest U.S. international airport, is approaching 1,000,000 “travel legs” per year. Becca Hardin, President of the Bay Economic Development Alliance, which helps bring business to the airport and surrounding area, recently commented: “We’ve got a couple of really hot prospects that are looking at some sites in VentureCrossings … We think 2017 is going to be the year that some of these projects come into fruition and we will be able to announce them.”7 Joe is growing and has the assets and entitlements to meet multi-generational demand for affordable housing, commercial facilities, healthcare, education, and transportation. See for yourself at www.venturecrossings.com and www.watersound.com – you’ll get the idea. As St. Joe’s Chairman, I cordially invite you to visit the beginning of Florida’s newest metropolis.

Imperial Metals Corporation (TSX:III)

Depressed copper prices made for a challenging operating environment during much of 2016, and Imperial ended the year with a C$65 million equity offering to improve liquidity – diluting each share of common stock by approximately 15%. Nevertheless, Imperial managed to successfully launch Red Chris and mining operations are running at full capacity. On our most recent site visit, we observed large quantities of “rock” being moved to access concentrated mineralization and finish tailing dam embankments. We expect the company to spend 2017 fine tuning its recovery processes and widening the mining pit. Improved copper prices and higher recovery rates will enable profitable operations, a reduction of leverage, and execution of a plan to double or triple mining production at this world-class asset.

Chesapeake Energy Corporation

In early 2016, news on all things related to oil and natural gas devoted little coverage to how declining commodity prices were forcing energy companies to reduce supply, lower debt, and cut operating costs. Time and again, history shows that a commodity price forges its own anchor. Our credit investments in Chesapeake Energy (NYSE:CHK) performed exceptionally well in 2016 due to the combination of operational efficiencies driving down unit costs, higher natural gas prices, and success with debt buybacks and asset sales.

Atwood Oceanics, Inc.

Stressed energy markets led us to invest in senior bonds of offshore driller Atwood Oceanics (NYSE:ATW). The bonds were purchased at attractive prices relative to the backlog of future cash flow from drilling operations and the value of Atwood’s modernized fleet. Thus far, Atwood has weathered tough conditions as the industry slowly rebalances between rig supply and demand in a lower commodity price environment. Atwood’s management has reduced cash operating costs by 25% while extending contracts with customers and suppliers. Atwood also reduced the outstanding senior bond class by over 30% through debt repurchases and raised liquidity through an equity offering. All actions combine to give us comfort that Atwood is positioned to capitalize on the eventual upcycle.

A New Administration

America’s newly installed executive branch intends to rebuild a working class that forms the bedrock for economic and social progress. Reduced regulation and corporate tax cuts will lower hurdles and raise earnings. Fiscal stimulus will further advance both. We look forward to these initiatives, realize markets are not cheap, and understand that “a bird in the hand is worth two in the bush.” Irrespective of whether purchasing bonds or stocks, Fairholme is constantly evaluating how to optimize investment returns and minimize chances of permanent loss. That’s why we purchased securities of Fannie Mae, Freddie Mac, Sears, and others – after all, our job is to create sustainable wealth.

Respectfully submitted,

Bruce R. Berkowitz

Chief Investment Officer

1. Heartland Plymouth Court MI, LLC v. N.L.R.B., No. 15-1034 (D.C. Cir. Sept. 30, 2016).

2. DirecTV, Inc. v. N.L.R.B., No. 11-1273 (D.C. Cir. Sept. 16, 2016).

3. Alexander Hamilton, Writings (The Library of America) 538.

4. Eddie Lampert, “Committed to our Members, Kmart and our Transformation. http://blog.searsholdings.com/eddie-lampert/committed-to-our-members-kmart-and-our-transformation/

5. Phil Wahba, “Simon Property Group Fights to Reinvent the Shopping Mall,” Fortune Magazine, 2 December 2016.

6. Ibid.

7. Brauer, Carey, “Officials look to lure development to VentureCrossings,” Panama City News Herald, 26 January 2017.

Mutual fund investing involves risks, including possible loss of principal. Unless otherwise specified, all information is shown as of December 31, 2016. Past performance information quoted below does not guarantee future results. The investment return and principal value of an investment in The Fairholme Fund, The Fairholme Focused Income Fund (“The Income Fund”), and The Fairholme Allocation Fund (“The Allocation Fund”), (each being a “Fund” and collectively, the “Funds”), will fluctuate so that the value of an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted below. Performance figures reflect the deduction of expenses and assume reinvestment of dividends and capital gains but do not reflect a 2.00% redemption fee imposed by The Fairholme Fund and The Allocation Fund on shares redeemed or exchanged within 60 calendar days of their purchase. Most recent month-end performance and answers to any questions you may have can be obtained by calling Shareholder Services at (866) 202-2263. Each Fund maintains a focused portfolio of investments in a limited number of issuers and does not seek to diversify its investments. This exposes each Fund to the risk of unanticipated industry conditions and risks particular to a single company or the securities of a single company within its respective portfolio. The S&P 500 Index (the “S&P 500”) is a widely recognized, unmanaged index of 500 of the largest companies in the United States as measured by market capitalization and the performance of the S&P 500 assumes the reinvestment of all dividends and distributions. The Bloomberg Barclays U.S. Aggregate Bond Index (the “Bloomberg Barclays Bond Index”) is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, and includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). The S&P 500 and the Bloomberg Barclays Bond Index are used for comparative purposes only, and are not meant to be indicative of a Fund’s performance, asset composition, or volatility. A Fund’s performance may differ markedly from the performance of the S&P 500 or the Bloomberg Barclays Bond Index in either up or down market trends. Because indices cannot be invested in directly, these index returns do not reflect a deduction for fees, expenses, or taxes. The expense ratios for The Fairholme Fund, The Income Fund, and The Allocation Fund reflected in the current prospectus dated March 29, 2016, are 1.04%, 1.01%, and 1.01%, respectively, and may differ from the actual expenses incurred by the Funds for the period covered by the Funds’ Annual Report. The expense ratio includes any acquired fund fees and expenses which are incurred indirectly by each Fund as a result of investments in securities issued by one or more investment companies.

7 Childhood Lessons for Growing Adult Success

The following column from Phoebe Venable, CapWealth Advisors President & COO, appeared in The Tennessean on January 27, 2017.

Every year, my firm hosts “Money Camp” for our clients’ children and grandchildren. We believe that even young children can, and should, learn the basics of spending, saving, investing and charitable giving. But there are other critical lessons that only a parent can teach their children. Lessons in confidence, self-reliance, perseverance, inquisitiveness, kindness and hard work. Lessons that not only forge character, but could have a direct correlation one day to your adult child’s personal and professional success.

1. Master the handshake.

In the movie “My Life,” Michael Keaton’s character is dying of cancer and decides to film advice for his unborn child. One memorable scene is his demonstration of how to properly shake hands. It’s big, bold, funny — and spot-on. Our children, boys and girls, need the confidence to make and keep eye contact when they meet other people and to give a firm handshake. As social psychologist Amy Cuddy explains in one of the most popular TED Talks of all time, our body language can change not only other people’s perceptions of us but even our own brain’s testosterone and cortisol levels — which, too, can impact success.

2. Get a job.

Nothing teaches the value of hard work quite like — you got it — hard work. Whether it’s a part-time job, a summer job and/or responsibilities at home, children will learn essential life lessons through work. That monetary reward requires labor and with that labor also comes other rewards — a well-deserved sense of accomplishment, for instance. Additionally: time and project management, goal setting, teamwork, punctuality and more.

3. Hone communication skills.

We live in a world of powerful, omnipresent communication devices. Knowing how to use those is important. Knowing how to speak and write well are still indispensable to explaining, selling, inspiring and leading. Parents, make sure your children are learning to present their ideas and address groups in school. If your kid is selling candy or magazines to neighbors for a school fundraiser, or peddling their lawn-mowing services, help them concoct a polite, persuasive pitch. Make sure they can compose clear, cogent, complete sentences. Jargon, shorthand and emoticons don’t cut it in the business world. A sure-fire way to improve communication skills: read books.

4. Cultivate curiosity.

Encourage children to ask questions. When they ask questions about the world, they’ll learn, often by being compelled to go find answers for themselves. Hopefully they’ll also learn to listen, care more and understand what motivates people. That’s becoming smarter and more human, and people like that go far in life.

5. Know how to change a tire.

It’s not only a practically useful skill for the day your child has a flat, but it will help instill in your children self-sufficiency. To look for solutions when the unexpected arises. To feel equal to a challenge. To think and act under pressure. To understand that doing something yourself is often more effective, efficient and satisfactory than outsourcing it to others.

6. Volunteer.

There’s more to life than work and play. There are great causes for improving the world, as well as other people, often less fortunate, that need our help. “No man is an island,” wrote the poet John Donne. We’re all a piece of a larger continent — be it a family, a neighborhood, a community, a nation or the world. Get your children involved through Scouting, church or organizations such as Hands On Nashville or Second Harvest Food Bank. Helping others will expand your child’s mind and heart.

7. Acquire some financial grounding.

There is a financial component to nearly every endeavor, including any business, running a household and planning for retirement. Ensure your children understand the basics before they graduate high school: income, expenses, profits, interest, inflation, return, risk, liquidity and the time value of money, to name a few.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors, LLC. Her column on women, families and building wealth appears every other Saturday in The Tennessean.

Investing in a Changing World Requires Constant Study

The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on December 23, 2016.

Getty Images/iStockPhoto

I came across an online Buzzfeed article called “29 Things Millennials Killed This Year.” After rolling my eyes for what promised to be yet another piece of negative coverage regarding my generation, I scrolled on. It was a series of screenshots from various news sources with headlines such as “Blame Millennials for the Vanishing Bar of Soap.” “How Millennials Ended the Running Boom.” “Millennials Are Killing the Golf Industry.” “The Death Throes of Democracy: Murdered by Millennials.” The headlines were hilarious — and to a large extent, the news they conveyed was legitimate. Millennials are changing products, the market, the way we consume, oftentimes in dramatic ways.

Change is constant

But then, as a financial adviser, I remembered: Products, markets and consumption are always changing. Much of the change above isn’t just about millennial whims. It’s technological innovation, which millennials embrace. And though the speed of change has ramped up, change has always been a constant. In 1958, the average lifespan of an S&P 500 company was 61 years. In 1980, it was 25 years. Today, it’s 18 years. At the current churn rate, 75 percent of the S&P will be replaced by 2027! Which is why the person behind your investment portfolio — be that you, your adviser or the manager of the mutual fund you’re in — better be sharp, informed, a tireless learner and a part-time economist, accountant, world affairs expert and more.

Know your adviser

You should know your financial adviser. What kind of person they are, how they think and what their overall record is. We believe the same goes for the executives of the companies you invest in. Our firm certainly does. In fact, we endeavor to know all we can about the C-suite and their companies — both before we purchase their stock for our clients and for the lifetime of our clients’ positions in that stock. We study their financials, looking for hidden or unrealized value; we monitor changes in management and their competitive position; we watch for new product developments or technological advancements. Meanwhile, we’re just as vigilant about the macroeconomic factors beyond a company’s control: currency fluctuations, inflation, fiscal policy, regulation, trade agreements, cyclical correlations and much, much more.

How do we do this? Through Wall Street research, industry sources, conferences, personal meetings with management, personal meetings with customers, competitors and suppliers, SEC filings, news publications and news media, and constant and comprehensive data analysis.

Choose investments wisely

The challenge in investing, just like in everyday life, is aligning unreasonable expectations with reality. Our due diligence process helps us identify sustainable business models, trading at attractive valuations and governed by high-quality, shareholder-focused management teams. At the same time, it helps us avoid the high-flying stocks whose valuations are based on wildly overly optimistic expectations for the future. Searching for strong business models and strong management teams has another benefit. It leads us to companies that can not only weather but thrive in today’s world of technology-driven change and disruptive innovation.

The Greek philosopher Heraclitus, known for his doctrine that change is central to the universe, once said, “You never step twice into the same river.” Every day is a new day in the world of investing. Be sure you or your investment professional is up to the task.

Jennifer Pagliara is a financial adviser with CapWealth Advisors. Her column appears every other week in The Tennessean.

CapWealth Advisors’ John Lueken Selected to Nashville Zoo Board of Directors

The CapWealth Advisors team congratulates Chief Investment Strategist John Lueken for his appointment to the Nashville Zoo’s Board of Directors!

Chief Investment Strategist John Lueken

The Nashville Zoo is an amazing place and all of middle Tennessee is indeed fortunate to have such a fine zoo for delighting and educating our children and ourselves. We might say the same of John’s selection to the zoo’s board–they are fortunate to have such a dynamic and talented professional as John join their midst! John’s family loves the zoo (his young daughter and son in particular!), he’s volunteered his time to the capital campaign committee for the last couple of years and zoo involvement may even be a family tradition. Dr. Jeff Bonner, a relative of John’s, was a member of the prestigious Saint Louis Zoo board of directors for many years. Please join us in congratulating John the next time you see him!

A few facts that you might not know about the Nashville Zoo:

  • 2017 is the 20th anniversary of the Nashville Zoo at the Grassmere location.  The zoo will open four new animal exhibits (white rhino, spider monkey, Sumatran tiger and Andean bear) in 2017.  The zoo forecasts its  2016 end-of-year attendance to be 875,000 people and is hopeful to hit 1,000,000 visitors in 2017!
  • The Nashville Zoo received several awards and recognition in 2016.  One of the most notable is that the Nashville Zoo received a perfect score of 100 from Charity Navigator, an organization that ranks non-profits on their fiscal responsibility and donor relations, and is one of only 49 charities in the United States that received a perfect score of 100!
  • The Nashville Zoo is internationally known for our conservation efforts in Asia, Africa and South America.  The zoo has been awarded the AZA’s (Association of Zoos and Aquariums) highest international award for our conservation work with the GRACE project (working with gorillas) in the Congo.