1

The standard method of supporting our favored charities is to simply write a check and then take the income tax deduction on our tax return However a more tax-efficient approach for the donor is to donate appreciated investment holdings (usually stocks) where you can use the current fair-market value of the investment as an income tax deduction yet not have to pay capital gains taxes on the unrealized gain (the amount the investment has appreciated since you originally purchased it) Those capital gains taxes can be as high as 236

The illustration below assumes that a married couple filing jointly with an adjusted gross income in excess of $500000 (federal income tax bracket = 396) wants to make a significant charitable donation They plan to use $50000 of appreciated stock they own (that has a cost basis of $20000) to fund the donation The table below compares the results of the couple selling the stock in order to donate the cash proceeds to the charity versus donating the securities directly to the charity instead

DONOR ADVISED FUNDS A SOLUTION FOR TAX-EFFICIENT GIVINGVINCE MARSDEN Partner SVP of Financial Planning

Q2 2017

Your

PAGE 1 DONOR ADVISED FUNDS

PAGE 4 KEY INVESTMENT TAKEAWAYS

PAGE 5 FPCM KNOWLEGE CORNER WHAT ARE OPTION CONTRACTS

PAGE 6 FPCM CLOSE UP VODAFONE (VOD)

PAGE 8 IS THE EQUITY MARKET OVERLY CONCENTRATED AT THE TOP

PAGE 9 DOL FIDUCIARY RULE

PAGE 10 INVESTMENT BALANCE SHEET

2

BOTH THE CHARITY AND THE DONOR REAP BENEFITS WHEN THE DONATION IS MADE IN STOCK RATHER THAN IN CASH

However making direct donations of appreciated stock to a number of separate charities has significant practical drawbacks It is a time-consuming process to arrange for stock deliveries to each charityrsquos brokerage account and you have to create and keep detailed records of each and every transaction So this approach is often reserved only for very large donations to just a couple of entities meaning smaller donors or smaller donations have not benefited from this cost-effective giving strategy

The problem can be solved in several ways and here we examine two options both of which allow you to make a single lump-sum contribution of appreciated stock(s) to a donation lsquovehiclersquo and later sell the securities from within that charitable vehicle (without incurring capital gains tax) and disburse the proceeds to the various individual charities of your choice

The first approach is to establish your own private foundation However establishing and maintaining such a foundation involves substantial cost imposes significant administrative burdens is less tax efficient than a DAF (described below) and therefore

doesnrsquot make sense for most individuals

The second and a more suitable approach for most of us is to use a Donor Advised Fund (DAF)

A DAF is a charitable giving vehicle administered by a charitable sponsor that allows you to establish and fund your own Giving Account and make irrevocable tax deductible contributions to it Later you make grant recommendations to distribute the funds from the account to specific qualified charitable organizations often in amounts as low as $50 each

DAFs operate as a conduit allowing the donor to take a tax deduction for the full amount of their contribution to the Giving Account in the same tax year they make the donation At the same time the donor retains full discretion as to the timing of when the funds will eventually be granted to individual charities This can create opportunities for favorable income-tax planning especially when the donor has a high income-tax year The DAF makes it easy for the donor to make larger than normal charitable contributions at that time and then distribute the funds in a thoughtful measured way over a number of subsequent years

3

Another benefit of using a DAF is that it simplifies the donorrsquos income tax reporting The DAF sponsor provides detailed reports of the tax-deductible contribution(s) made to your Giving Account You can pass these on to your CPA eliminating the need for you to maintain detailed documentation on each individual donation you make during a year

HOW DOES A GIVING ACCOUNT IN THE FIDELITY CHARITABLE GIFT FUND WORK

Our main funds custodian Fidelity has established a DAF called the Fidelity Charitable Gift Fund and numerous FPCM clients have already taken advantage of the opportunity to open their own Giving Account

As our client after you make the decision to open a Giving Account (the initial minimum contribution is $5000 with a $1000 minimum for subsequent contributions) we work with Fidelity on your behalf to establish it We review your investment portfolio to select the most suitable holding(s) for you to donate and we prepare the paperwork for your signature to transfer the assets over to the Giving Account

Once itrsquos established you can access your Giving Account anytime online and start sending donations to the qualified charities you wish to support Whenever you want to add additional funds to the Account you just let us know and we will again select the holding(s) for you to donate and prepare the paperwork for your signature and processing

TO GIVE A SENSE OF THE RELATIVE ADVANTAGES AND DISADVANTAGES OF THESE GIVING APPROACHES HERE IS A SIMPLIFIED RECAP

WE HAVE BEEN HELPING CLIENTS FOR MANY YEARS TO MAKE CHARITABLE DONATIONS from their investment portfolios and because of its many benefits for you as a Donor we strongly advise you consider using a DAF for your future charitable giving Please contact us to discuss the process and its benefits and costs in more detail

4

We are still in the midst of a ldquocyclical bullrdquo market (start date Feb 2016) within a ldquosecular bullrdquo market in equities (start date March 2009)

The probability of a recession over the next year is relatively low

Political and geo-political risks are high and could have a meaningful impact on markets

Investorsrsquo post-election optimism regarding growth has subsided and over the past few months investors have rotated out of economically sensitive groups late cyclicals and financials in favor of defensive and interest-sensitive sectors and industries We remain optimistic on an eventual rebound of late-cyclical stocks in the later-part of this economic cycle However we would see this rotation as temporary given the stage of the economic cycle and foresee a less-cyclical less-risky positioning over the longer-term We continue to favor technology financials health care amp energy

The new US government agenda is an ambitious one that includes complex and politically charged situations such as tax reform deregulation infrastructure spending amp healthcare reform Investors might be overestimating the impact and likelihood of some of these policy changes

The premium of the US market versus international markets has narrowed over the course of year but we still find attractive opportunities in international and emerging markets as they face less interest rate pressure and more upside in earnings and operating margins in the short-term

Even though we are positive on equities in the short- and medium-term we have serious concerns about the economy and

markets over the longer-term Political ldquopopulismrdquo low productivity extreme expansionary global monetary policies and fiscal irresponsibility are dangerous headwinds for global economies and equity markets

We expect long-term interest rates to resume their uptrend due to inflationary pressures Fed tightening and demand-supply imbalances due to higher supply and less demand from the Fed and other Central Banks

Credit risk has increased with growing leverage at the corporate and consumer level but credit conditions remain favorable in the short-term We favor selective opportunities within the better-quality segment of high-yield bonds and lower-quality of investment grade

Contrary to investorsrsquo expectations at the beginning of the year the US Dollar has weakened over the past several months due to positives economic surprises in Europe amp Japan vs the US narrower interest rate spread and the reversal of an overcrowded long-position in the US currency at the beginning of the year We believe investor sentiment towards the US Dollar has become too bearish given fundamentals and would recommend keeping a long position in the US Dollar for the rest of 2017

The current low level of volatility is unsustainable in the long-term A jump in volatility in combination with the excess liquidity and ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

We continue to be opportunistic and patient and as always are keeping an eye on your long-term objectives

KEY INVESTMENT TAKEAWAYS

5

KNOWLEGE CORNER

WHAT ARE OPTION CONTRACTSAARON COHEN PhD Partner President Portfolio Manager

Over the years you have seen us execute different ldquohedgingrdquo transactions using options In this first part of a series we cover the basics of Option Contracts

WHAT IS AN OPTION CONTRACT

An Option Contract is an agreement that gives the buyer of the contract the right but not the obligation of purchasing or selling an asset at a specified price (ldquoExercise Pricerdquo) over a period of time (ldquoTime to Maturityrdquo) Notice that since the purchaser of the option has the ldquooptionrdquo to buy or sell the seller of the option contract has the ldquoobligationrdquo of delivering or purchasing the asset at the specified ldquoExercise Pricerdquo

WHAT IS A CALL OPTION

A Call Option gives the buyer the option but not the obligation of buying the underlying asset at the ldquoExercise Pricerdquo over a period of time (ldquoTime to Maturityrdquo) Since the purchaser of the call option has the ldquooptionrdquo to buy the seller of the call option contract has the ldquoobligationrdquo of delivering the asset at the specified price

Example assume you might need to buy euro100000 in 6 months The current exchange rate is 110 US$euro and you would like to guarantee the exchange rate

in case the Euros are needed Letrsquos assume you could purchase an option at $003 per Euro to buy the euro100000 in 6 months If at maturity you need the Euros and the exchange rate is above the exercise price you can ldquoexerciserdquo the option and complete purchase If you donrsquot need the Euros at maturity you can pocket the difference between the market price and the exercise price by either selling the option right before maturity or by exercising the option and immediately selling the Euros at the higher exchange rate If on the other hand the exchange rate at maturity is below the exercise level of 110 US$euro you would be better off letting the option expire worthless and purchasing the Euros in the open market Notice that in this particular example the buyer of the Call Option used the option market to ldquohedgerdquo the transaction protecting him against an unexpected appreciation of the Euro vs the Dollar A different buyer could have executed a similar transaction but with the pure objective of speculating on the potential appreciation of the Euro

Also notice that the transaction is somewhat different than purchasing a Forward or Future Contract With a Forward or Future the purchaser of the contract would have been obligated to purchase the Euros at maturity

BELOW WE SHOW THE NET PAYOUT OF BUYING AND SELLING A 1 YEAR CALL OPTION ON MICROSOFT STOCK

Example Payout for 1 contract (100 shares) of Microsoft June 2018 $75 CALL OPTION $3 80 Premium

In this section we share our thoughts about financial amp economic topics that may be of interest to you We welcome your questions as well as your suggestions for future subjects to cover

Call buyer has limited downside amp unlimited upsidehellip but it is the opposite for the seller limited upside amp unlimited downside

6

WHAT IS A PUT OPTION

A Put Option gives the buyer the option but not the obligation of selling the underlying asset at the (ldquoExercise Pricerdquo) over a period of time (ldquoTime to Maturityrdquo) Notice that since the purchaser of the Put Option has the ldquooptionrdquo to sell the seller of the Put Option contract will have the ldquoobligationrdquo to buy the asset at the specified price

Example You can think of buying a Put Option Contract as buying insurance When you purchase an insurance policy for your car you pay a premium

(the ldquoPutrdquo price) for the right the sell your damaged or stolen car to the insurance company for its insured amount (the ldquoExercise Pricerdquo) By insuring your car you limit your potential loss to the amount of the insurance premium On the other hand the insurance company can at best earn your premium and at worst be obligated to pay you the full insured value for an asset than might be worthless

THE FOLLOWING CHARTS SHOW THE NET PAYOUT FOR A BUYER AND SELLER OF A PUT OPTION CONTRACT ON MICROSOFT

Example Payout for 1 contract (100 shares) of Microsoft June 2018 $65 PUT OPTION $3 76 Premium

Put Buyer has limited upside amp limited downside the Put Seller has limited upside (the premium) amp a downside only limited by the value of the stock

CLOSE UP

VODAFONE (VOD)

AMIT FRIEDLANDER Research Analyst

Vodafone (VOD) is one of the worldrsquos largest telecom companies It provides mobile and broadband service in 26 countries including the UK Germany Spain Italy India South Africa Turkey Egypt Australia and Kenya The company endured years of fierce price competition and regulatory headwinds in its developed European markets and in 2016 completed its costly two-year Project Spring infrastructure investment program

More recently Vodafone turned a corner and is now growing revenues in most of its markets as price wars have subsided increasing margins due to cost cutting and operating leverage and improving free cash flow conversion as its capital expenditures have returned to more normal levels FPCM owned VOD stock in the recent past and in early 2017 once again purchased a position in the company

7

FREE CASH FLOW amp DIVIDEND

During and immediately following its Project Spring initiative Vodafone wasnrsquot generating enough free cash flow to cover its dividend which at 6 was quite attractive Their recent return to lower levels of capital spending has changed that situation

Vodafone traditionally generates ~euro13 billion in operating cash flow per year which it uses to pay for capital expenditures spectrum and dividends On average Vodafone spends ~euro15 billion per year to acquire spectrum and euro4 billion per year to cover its dividend This implies that in order for free cash flow to cover the dividend Vodafone cannot spend more than euro75 billion per year on capital expenditures In normal years this is not difficult However capital expenditures cost Vodafone euro105 billion per year during fiscal 2015-2016 (the VOD fiscal year ends March 30th) due to Project Spring Furthermore there have been ongoing concerns that intense price competition would return and that Vodafonersquos expenses could remain elevated

These factors have been a major overhang for the companyrsquos share price and a popular topic of investor debate has been whether VODrsquos free cash flow will be able to cover its dividend going forward After analyzing Vodafonersquos cost structure competitive trends and the longer-term historical capital expenditure levels for both Vodafone and its competitors we concluded that the company would be able to cover its dividend with free cash flow and so far this has turned out to be the case

EMERGING MARKETS GROWTH OPPORTUNITY

Emerging markets represent a sizeable growth opportunity for Vodafone Its emerging markets business accounts for 75 of total company subscribers but only 33 of total company revenues

This is because monthly average mobile revenue per user (ARPU) is euro15 in Europe but only (for example) euro25 in India and euro5 in South Africa As emerging economies grow we expect demand for data and ARPU to both increase accordingly

VALUATION amp RISKS

Based on our analysis assuming current trends continue we believe that Vodafonersquos American Depository Receipts have a fair value of $33 with greater upside if emerging market ARPUs come closer to European levels Naturally if price wars resume in enough of Vodafonersquos markets there is also potential for downside risk

Telecom carriers are a high fixed-cost businesses and are notorious for fierce price wars After all once a carrier has spent the large sums needed to build maintain and periodically upgrade a network the marginal cost of adding a new customer is very low In addition Vodafonersquos developed markets which account for the bulk of profits are mature and saturated making

competition for customers all the more vigorous However the higher-growth emerging markets arenrsquot immune to severe price competition either Indiarsquos richest person Mukesh Ambani invested $25 billion in creating upstart carrier Reliance JIO to help subsidize free service and build a subscriber base from scratch That was more money than the $21 billion market cap of Indiarsquos largest carrier Bharti Airtel It is very difficult to compete with such adversaries who are willing to operate at a loss for extended periods of time

VODrsquos presence in a variety of different geographic markets helps mitigate this risk by way of diversification but does not eliminate it

8

IS THE EQUITY MARKET OVERLY CONCENTRATED AT THE TOPAARON COHEN PhD Partner President Portfolio ManagerCHRISTOPHER CONWAY Por1113088tfolio Manager

The 13 and 20 levels for the Top 5 and Top 10 suggest that the average market cap of each stock

within those groups represents approximately 2-3 of the SampP 500 market capitalization This is

consistent with a previous FPCM study in which we showed that size becomes restrictive for valuation

when individual stocks reach concentration levels of 4-5 of the total US market capitalization

(as illustrated in the graph below)

At first glance it is difficult not to be taken aback by the sheer size of the largest market capitalization stocks in the SampP 500 The two largest stocks Apple and Google for example each have market capitalizations of approximately $700bn bigger than the combined market capitalizations of Wal-Mart Stores Coca-Cola and Procter amp Gamble In addition to Apple and Google there are an additional four companies (Microsoft Amazon Facebook and Berkshire Hathaway) that each have market capitalizations of greater than $400bn an accomplishment that only one company (Apple) could claim at the end of 2014 and no company could claim at the end of 2010 merely seven years ago

Over the past few months some of these large-capitalization companies in particular the technology related companies have outperformed the market by a significant margin raising concerns about too much concentration at the top and a market driven just by a few companies

However to our surprise (see graph below) we found that the market capitalizations of the top 5 amp 10 companies represented only 13 and 20 respectively of the SampP 500 total market capitalization These are levels of concentration that are clearly in-line with historical averages and well below peak levels

There has been significant talk in the media about a few stocks leading the market In this piece we examine the market concentration of the largest US firms relative to historical levels and explore the potential impact concentration could have on the valuations of leading companies

9

WHAT ARE THE INVESTMENT RAMIFICATIONS

According to financial theory the level of market concentration is irrelevant to valuation as supply is assumed to be ldquoelasticrdquo (ie market cap is independent of supply) Nevertheless in practice investors and especially professional investors want diversified portfolios They want to avoid being overly exposed to individual assets which at the margin can place a lid on valuation

Consider the case of Apple in 2011-2012 Why did the stock trade at a low multiple in spite of being a well-known company covered by many analysts with bullish outlooks a leader in its field and admired worldwide We dare to speculate that one of the reasons the stock became less sensitive to earnings and improving fundamentals resulting in a lower multiple was that all the ldquobullishrdquo investors had reached close to their maximum potential allocation to the stock (maybe 5-7) if they were to remain diversified and those who didnrsquot own the stock were unwilling to buy it at the level of the market price These two factors resulted in a peak market cap being reached at 4 of the SampP 500 as depicted in the above graph

Thus at the extreme market concentration could be an important barrier to higher valuations irrespective of short- and medium-term market fundamentals

DOL FIDUCIARY RULE VINCE MARSDEN Partner SVP of Financial Planning

The Department of Labor (DOL) Fiduciary Rule which has been featured extensively in the financial and mainstream media in recent months came into effect June 9 2017

The DOL Fiduciary Rule mandates that all financial professionals who advise retirement plans or provide retirement planning advice are legally and ethically bound to act as fiduciaries This means that such advisors must now always act in the rdquobest interestrdquo of their clients placing their clientsrsquo interests before their own and they must disclose any potential conflicts of interest including reporting to the client any and all fees or commissions they receive for the products and investments they recommend or sell

While this new rule will have some affect on all financial advisors it will be most impactful on those who generate income from commission such as brokers and insurance agents As a Registered

Investment Advisor (RIA) FPCM was already held to this fiduciary standard and we do not receive commissions of any type

In contrast to FPCM and other RIArsquos prior to the introduction of this new rule brokers and insurance professionals were held to a less-stringent ldquosuitabilityrdquo standard requiring only that they provide products and recommendations ldquosuitablerdquo to their clientsrsquo needs and objectives It is likely that many of the commision structures used by these professionals will be changed or eliminated as a result of the new Fiduciary Rule

10

INVESTMENT ldquoBALANCE SHEETrdquoINVESTMENT ldquoBALANCE SHEETrdquo

We are in the midst of a synchronized global recovery with Europe Japan amp emerging markets joining the US in a recovery mode

Central banks are unlikely to tighten monetary policy aggressively over the next 2 years

Global earnings are growing after almost 2 years of an ldquoearnings-recessionrdquo

Contrary to the post-recession years fiscal policy is likely to be tailwind for global growth over the next several years

Corporate tax reform amp lower regulatory pressure in the US could be an important catalyst for faster economic growth

US consumer spending should continue to be supported by increasing employment amp wages a recovery in household wealth and the end of consumer de-leveraging

The rate of inflation is expected to remain reasonably low in the short- and medium-term

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 housing credit) are not over-extended

Equity valuation is expensive in absolute terms relative to history but over-valuation is not extreme especially relative to free-cash flows and interest rates

The Federal Reserve is already in a ldquotighteningrdquo mode albeit at a moderate pace In addition the Fed is expected to start reducing its balance sheet this year and the ECB is expected to follow suit starting in 2018

Fiscal stimulus would be a tailwind for the global economy in the medium-term but the debt level is high and too much stimulus could end up being counter-productive in the long-term

An aggressive trade policy by the new US administration could be highly detrimental to global economic growth

The Chinese economy has stabilized over the past year but only after significant fiscal stimulus in 2016 that resulted in a higher debt level and capital outflows Global growth commodity prices and emerging economies would be seriously affected by negative developments in China

Lower productivity the aging of the population in the developed economies and low labor participation are important long-term headwinds for global economic growth

Inflationary expectations are extremely low Even a random increase in headline inflation figures could scare the markets and put significant pressure on monetary authorities

US Investors have high expectations regarding the potential for deregulation tax reform and fiscal stimulus This political agenda is ambitious and might be difficult to fulfill

The combination of excess liquidity low volatility ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

Geo-political amp political risks continue to increase across the globe

Political ldquoPopulismrdquo on the rise around the world could have major long-term economic consequences

Equity valuations are high in absolute terms versus historical standards

Tail Risks (1) Banking crises in China (2) Conflict with North Korea or Iran (3) Disintegration of the Eurozone

+ -

-

-

-

-

-

-

-

-

-

-

-

POSITIVES CONCERNS

+

+

+

+

+

+

+

+

11

Financial Partners Capital Management

150 East 52nd Street New York NY 10022

20900 NE 30th Avenue Suite 517Aventura FL 33180

t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm net | LinkedIn

We hope you have enjoyed this publication Please contact us with your questions and with your thoughts and ideas at contactfpcm net We look forward to hearing from you

Thank you for your continued confidence and support

Your FPCM Team

2

BOTH THE CHARITY AND THE DONOR REAP BENEFITS WHEN THE DONATION IS MADE IN STOCK RATHER THAN IN CASH

However making direct donations of appreciated stock to a number of separate charities has significant practical drawbacks It is a time-consuming process to arrange for stock deliveries to each charityrsquos brokerage account and you have to create and keep detailed records of each and every transaction So this approach is often reserved only for very large donations to just a couple of entities meaning smaller donors or smaller donations have not benefited from this cost-effective giving strategy

The problem can be solved in several ways and here we examine two options both of which allow you to make a single lump-sum contribution of appreciated stock(s) to a donation lsquovehiclersquo and later sell the securities from within that charitable vehicle (without incurring capital gains tax) and disburse the proceeds to the various individual charities of your choice

The first approach is to establish your own private foundation However establishing and maintaining such a foundation involves substantial cost imposes significant administrative burdens is less tax efficient than a DAF (described below) and therefore

doesnrsquot make sense for most individuals

The second and a more suitable approach for most of us is to use a Donor Advised Fund (DAF)

A DAF is a charitable giving vehicle administered by a charitable sponsor that allows you to establish and fund your own Giving Account and make irrevocable tax deductible contributions to it Later you make grant recommendations to distribute the funds from the account to specific qualified charitable organizations often in amounts as low as $50 each

DAFs operate as a conduit allowing the donor to take a tax deduction for the full amount of their contribution to the Giving Account in the same tax year they make the donation At the same time the donor retains full discretion as to the timing of when the funds will eventually be granted to individual charities This can create opportunities for favorable income-tax planning especially when the donor has a high income-tax year The DAF makes it easy for the donor to make larger than normal charitable contributions at that time and then distribute the funds in a thoughtful measured way over a number of subsequent years

3

Another benefit of using a DAF is that it simplifies the donorrsquos income tax reporting The DAF sponsor provides detailed reports of the tax-deductible contribution(s) made to your Giving Account You can pass these on to your CPA eliminating the need for you to maintain detailed documentation on each individual donation you make during a year

HOW DOES A GIVING ACCOUNT IN THE FIDELITY CHARITABLE GIFT FUND WORK

Our main funds custodian Fidelity has established a DAF called the Fidelity Charitable Gift Fund and numerous FPCM clients have already taken advantage of the opportunity to open their own Giving Account

As our client after you make the decision to open a Giving Account (the initial minimum contribution is $5000 with a $1000 minimum for subsequent contributions) we work with Fidelity on your behalf to establish it We review your investment portfolio to select the most suitable holding(s) for you to donate and we prepare the paperwork for your signature to transfer the assets over to the Giving Account

Once itrsquos established you can access your Giving Account anytime online and start sending donations to the qualified charities you wish to support Whenever you want to add additional funds to the Account you just let us know and we will again select the holding(s) for you to donate and prepare the paperwork for your signature and processing

TO GIVE A SENSE OF THE RELATIVE ADVANTAGES AND DISADVANTAGES OF THESE GIVING APPROACHES HERE IS A SIMPLIFIED RECAP

WE HAVE BEEN HELPING CLIENTS FOR MANY YEARS TO MAKE CHARITABLE DONATIONS from their investment portfolios and because of its many benefits for you as a Donor we strongly advise you consider using a DAF for your future charitable giving Please contact us to discuss the process and its benefits and costs in more detail

4

We are still in the midst of a ldquocyclical bullrdquo market (start date Feb 2016) within a ldquosecular bullrdquo market in equities (start date March 2009)

The probability of a recession over the next year is relatively low

Political and geo-political risks are high and could have a meaningful impact on markets

Investorsrsquo post-election optimism regarding growth has subsided and over the past few months investors have rotated out of economically sensitive groups late cyclicals and financials in favor of defensive and interest-sensitive sectors and industries We remain optimistic on an eventual rebound of late-cyclical stocks in the later-part of this economic cycle However we would see this rotation as temporary given the stage of the economic cycle and foresee a less-cyclical less-risky positioning over the longer-term We continue to favor technology financials health care amp energy

The new US government agenda is an ambitious one that includes complex and politically charged situations such as tax reform deregulation infrastructure spending amp healthcare reform Investors might be overestimating the impact and likelihood of some of these policy changes

The premium of the US market versus international markets has narrowed over the course of year but we still find attractive opportunities in international and emerging markets as they face less interest rate pressure and more upside in earnings and operating margins in the short-term

Even though we are positive on equities in the short- and medium-term we have serious concerns about the economy and

markets over the longer-term Political ldquopopulismrdquo low productivity extreme expansionary global monetary policies and fiscal irresponsibility are dangerous headwinds for global economies and equity markets

We expect long-term interest rates to resume their uptrend due to inflationary pressures Fed tightening and demand-supply imbalances due to higher supply and less demand from the Fed and other Central Banks

Credit risk has increased with growing leverage at the corporate and consumer level but credit conditions remain favorable in the short-term We favor selective opportunities within the better-quality segment of high-yield bonds and lower-quality of investment grade

Contrary to investorsrsquo expectations at the beginning of the year the US Dollar has weakened over the past several months due to positives economic surprises in Europe amp Japan vs the US narrower interest rate spread and the reversal of an overcrowded long-position in the US currency at the beginning of the year We believe investor sentiment towards the US Dollar has become too bearish given fundamentals and would recommend keeping a long position in the US Dollar for the rest of 2017

The current low level of volatility is unsustainable in the long-term A jump in volatility in combination with the excess liquidity and ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

We continue to be opportunistic and patient and as always are keeping an eye on your long-term objectives

KEY INVESTMENT TAKEAWAYS

5

KNOWLEGE CORNER

WHAT ARE OPTION CONTRACTSAARON COHEN PhD Partner President Portfolio Manager

Over the years you have seen us execute different ldquohedgingrdquo transactions using options In this first part of a series we cover the basics of Option Contracts

WHAT IS AN OPTION CONTRACT

An Option Contract is an agreement that gives the buyer of the contract the right but not the obligation of purchasing or selling an asset at a specified price (ldquoExercise Pricerdquo) over a period of time (ldquoTime to Maturityrdquo) Notice that since the purchaser of the option has the ldquooptionrdquo to buy or sell the seller of the option contract has the ldquoobligationrdquo of delivering or purchasing the asset at the specified ldquoExercise Pricerdquo

WHAT IS A CALL OPTION

A Call Option gives the buyer the option but not the obligation of buying the underlying asset at the ldquoExercise Pricerdquo over a period of time (ldquoTime to Maturityrdquo) Since the purchaser of the call option has the ldquooptionrdquo to buy the seller of the call option contract has the ldquoobligationrdquo of delivering the asset at the specified price

Example assume you might need to buy euro100000 in 6 months The current exchange rate is 110 US$euro and you would like to guarantee the exchange rate

in case the Euros are needed Letrsquos assume you could purchase an option at $003 per Euro to buy the euro100000 in 6 months If at maturity you need the Euros and the exchange rate is above the exercise price you can ldquoexerciserdquo the option and complete purchase If you donrsquot need the Euros at maturity you can pocket the difference between the market price and the exercise price by either selling the option right before maturity or by exercising the option and immediately selling the Euros at the higher exchange rate If on the other hand the exchange rate at maturity is below the exercise level of 110 US$euro you would be better off letting the option expire worthless and purchasing the Euros in the open market Notice that in this particular example the buyer of the Call Option used the option market to ldquohedgerdquo the transaction protecting him against an unexpected appreciation of the Euro vs the Dollar A different buyer could have executed a similar transaction but with the pure objective of speculating on the potential appreciation of the Euro

Also notice that the transaction is somewhat different than purchasing a Forward or Future Contract With a Forward or Future the purchaser of the contract would have been obligated to purchase the Euros at maturity

BELOW WE SHOW THE NET PAYOUT OF BUYING AND SELLING A 1 YEAR CALL OPTION ON MICROSOFT STOCK

Example Payout for 1 contract (100 shares) of Microsoft June 2018 $75 CALL OPTION $3 80 Premium

In this section we share our thoughts about financial amp economic topics that may be of interest to you We welcome your questions as well as your suggestions for future subjects to cover

Call buyer has limited downside amp unlimited upsidehellip but it is the opposite for the seller limited upside amp unlimited downside

6

WHAT IS A PUT OPTION

A Put Option gives the buyer the option but not the obligation of selling the underlying asset at the (ldquoExercise Pricerdquo) over a period of time (ldquoTime to Maturityrdquo) Notice that since the purchaser of the Put Option has the ldquooptionrdquo to sell the seller of the Put Option contract will have the ldquoobligationrdquo to buy the asset at the specified price

Example You can think of buying a Put Option Contract as buying insurance When you purchase an insurance policy for your car you pay a premium

(the ldquoPutrdquo price) for the right the sell your damaged or stolen car to the insurance company for its insured amount (the ldquoExercise Pricerdquo) By insuring your car you limit your potential loss to the amount of the insurance premium On the other hand the insurance company can at best earn your premium and at worst be obligated to pay you the full insured value for an asset than might be worthless

THE FOLLOWING CHARTS SHOW THE NET PAYOUT FOR A BUYER AND SELLER OF A PUT OPTION CONTRACT ON MICROSOFT

Example Payout for 1 contract (100 shares) of Microsoft June 2018 $65 PUT OPTION $3 76 Premium

Put Buyer has limited upside amp limited downside the Put Seller has limited upside (the premium) amp a downside only limited by the value of the stock

CLOSE UP

VODAFONE (VOD)

AMIT FRIEDLANDER Research Analyst

Vodafone (VOD) is one of the worldrsquos largest telecom companies It provides mobile and broadband service in 26 countries including the UK Germany Spain Italy India South Africa Turkey Egypt Australia and Kenya The company endured years of fierce price competition and regulatory headwinds in its developed European markets and in 2016 completed its costly two-year Project Spring infrastructure investment program

More recently Vodafone turned a corner and is now growing revenues in most of its markets as price wars have subsided increasing margins due to cost cutting and operating leverage and improving free cash flow conversion as its capital expenditures have returned to more normal levels FPCM owned VOD stock in the recent past and in early 2017 once again purchased a position in the company

7

FREE CASH FLOW amp DIVIDEND

During and immediately following its Project Spring initiative Vodafone wasnrsquot generating enough free cash flow to cover its dividend which at 6 was quite attractive Their recent return to lower levels of capital spending has changed that situation

Vodafone traditionally generates ~euro13 billion in operating cash flow per year which it uses to pay for capital expenditures spectrum and dividends On average Vodafone spends ~euro15 billion per year to acquire spectrum and euro4 billion per year to cover its dividend This implies that in order for free cash flow to cover the dividend Vodafone cannot spend more than euro75 billion per year on capital expenditures In normal years this is not difficult However capital expenditures cost Vodafone euro105 billion per year during fiscal 2015-2016 (the VOD fiscal year ends March 30th) due to Project Spring Furthermore there have been ongoing concerns that intense price competition would return and that Vodafonersquos expenses could remain elevated

These factors have been a major overhang for the companyrsquos share price and a popular topic of investor debate has been whether VODrsquos free cash flow will be able to cover its dividend going forward After analyzing Vodafonersquos cost structure competitive trends and the longer-term historical capital expenditure levels for both Vodafone and its competitors we concluded that the company would be able to cover its dividend with free cash flow and so far this has turned out to be the case

EMERGING MARKETS GROWTH OPPORTUNITY

Emerging markets represent a sizeable growth opportunity for Vodafone Its emerging markets business accounts for 75 of total company subscribers but only 33 of total company revenues

This is because monthly average mobile revenue per user (ARPU) is euro15 in Europe but only (for example) euro25 in India and euro5 in South Africa As emerging economies grow we expect demand for data and ARPU to both increase accordingly

VALUATION amp RISKS

Based on our analysis assuming current trends continue we believe that Vodafonersquos American Depository Receipts have a fair value of $33 with greater upside if emerging market ARPUs come closer to European levels Naturally if price wars resume in enough of Vodafonersquos markets there is also potential for downside risk

Telecom carriers are a high fixed-cost businesses and are notorious for fierce price wars After all once a carrier has spent the large sums needed to build maintain and periodically upgrade a network the marginal cost of adding a new customer is very low In addition Vodafonersquos developed markets which account for the bulk of profits are mature and saturated making

competition for customers all the more vigorous However the higher-growth emerging markets arenrsquot immune to severe price competition either Indiarsquos richest person Mukesh Ambani invested $25 billion in creating upstart carrier Reliance JIO to help subsidize free service and build a subscriber base from scratch That was more money than the $21 billion market cap of Indiarsquos largest carrier Bharti Airtel It is very difficult to compete with such adversaries who are willing to operate at a loss for extended periods of time

VODrsquos presence in a variety of different geographic markets helps mitigate this risk by way of diversification but does not eliminate it

8

IS THE EQUITY MARKET OVERLY CONCENTRATED AT THE TOPAARON COHEN PhD Partner President Portfolio ManagerCHRISTOPHER CONWAY Por1113088tfolio Manager

The 13 and 20 levels for the Top 5 and Top 10 suggest that the average market cap of each stock

within those groups represents approximately 2-3 of the SampP 500 market capitalization This is

consistent with a previous FPCM study in which we showed that size becomes restrictive for valuation

when individual stocks reach concentration levels of 4-5 of the total US market capitalization

(as illustrated in the graph below)

At first glance it is difficult not to be taken aback by the sheer size of the largest market capitalization stocks in the SampP 500 The two largest stocks Apple and Google for example each have market capitalizations of approximately $700bn bigger than the combined market capitalizations of Wal-Mart Stores Coca-Cola and Procter amp Gamble In addition to Apple and Google there are an additional four companies (Microsoft Amazon Facebook and Berkshire Hathaway) that each have market capitalizations of greater than $400bn an accomplishment that only one company (Apple) could claim at the end of 2014 and no company could claim at the end of 2010 merely seven years ago

Over the past few months some of these large-capitalization companies in particular the technology related companies have outperformed the market by a significant margin raising concerns about too much concentration at the top and a market driven just by a few companies

However to our surprise (see graph below) we found that the market capitalizations of the top 5 amp 10 companies represented only 13 and 20 respectively of the SampP 500 total market capitalization These are levels of concentration that are clearly in-line with historical averages and well below peak levels

There has been significant talk in the media about a few stocks leading the market In this piece we examine the market concentration of the largest US firms relative to historical levels and explore the potential impact concentration could have on the valuations of leading companies

9

WHAT ARE THE INVESTMENT RAMIFICATIONS

According to financial theory the level of market concentration is irrelevant to valuation as supply is assumed to be ldquoelasticrdquo (ie market cap is independent of supply) Nevertheless in practice investors and especially professional investors want diversified portfolios They want to avoid being overly exposed to individual assets which at the margin can place a lid on valuation

Consider the case of Apple in 2011-2012 Why did the stock trade at a low multiple in spite of being a well-known company covered by many analysts with bullish outlooks a leader in its field and admired worldwide We dare to speculate that one of the reasons the stock became less sensitive to earnings and improving fundamentals resulting in a lower multiple was that all the ldquobullishrdquo investors had reached close to their maximum potential allocation to the stock (maybe 5-7) if they were to remain diversified and those who didnrsquot own the stock were unwilling to buy it at the level of the market price These two factors resulted in a peak market cap being reached at 4 of the SampP 500 as depicted in the above graph

Thus at the extreme market concentration could be an important barrier to higher valuations irrespective of short- and medium-term market fundamentals

DOL FIDUCIARY RULE VINCE MARSDEN Partner SVP of Financial Planning

The Department of Labor (DOL) Fiduciary Rule which has been featured extensively in the financial and mainstream media in recent months came into effect June 9 2017

The DOL Fiduciary Rule mandates that all financial professionals who advise retirement plans or provide retirement planning advice are legally and ethically bound to act as fiduciaries This means that such advisors must now always act in the rdquobest interestrdquo of their clients placing their clientsrsquo interests before their own and they must disclose any potential conflicts of interest including reporting to the client any and all fees or commissions they receive for the products and investments they recommend or sell

While this new rule will have some affect on all financial advisors it will be most impactful on those who generate income from commission such as brokers and insurance agents As a Registered

Investment Advisor (RIA) FPCM was already held to this fiduciary standard and we do not receive commissions of any type

In contrast to FPCM and other RIArsquos prior to the introduction of this new rule brokers and insurance professionals were held to a less-stringent ldquosuitabilityrdquo standard requiring only that they provide products and recommendations ldquosuitablerdquo to their clientsrsquo needs and objectives It is likely that many of the commision structures used by these professionals will be changed or eliminated as a result of the new Fiduciary Rule

10

INVESTMENT ldquoBALANCE SHEETrdquoINVESTMENT ldquoBALANCE SHEETrdquo

We are in the midst of a synchronized global recovery with Europe Japan amp emerging markets joining the US in a recovery mode

Central banks are unlikely to tighten monetary policy aggressively over the next 2 years

Global earnings are growing after almost 2 years of an ldquoearnings-recessionrdquo

Contrary to the post-recession years fiscal policy is likely to be tailwind for global growth over the next several years

Corporate tax reform amp lower regulatory pressure in the US could be an important catalyst for faster economic growth

US consumer spending should continue to be supported by increasing employment amp wages a recovery in household wealth and the end of consumer de-leveraging

The rate of inflation is expected to remain reasonably low in the short- and medium-term

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 housing credit) are not over-extended

Equity valuation is expensive in absolute terms relative to history but over-valuation is not extreme especially relative to free-cash flows and interest rates

The Federal Reserve is already in a ldquotighteningrdquo mode albeit at a moderate pace In addition the Fed is expected to start reducing its balance sheet this year and the ECB is expected to follow suit starting in 2018

Fiscal stimulus would be a tailwind for the global economy in the medium-term but the debt level is high and too much stimulus could end up being counter-productive in the long-term

An aggressive trade policy by the new US administration could be highly detrimental to global economic growth

The Chinese economy has stabilized over the past year but only after significant fiscal stimulus in 2016 that resulted in a higher debt level and capital outflows Global growth commodity prices and emerging economies would be seriously affected by negative developments in China

Lower productivity the aging of the population in the developed economies and low labor participation are important long-term headwinds for global economic growth

Inflationary expectations are extremely low Even a random increase in headline inflation figures could scare the markets and put significant pressure on monetary authorities

US Investors have high expectations regarding the potential for deregulation tax reform and fiscal stimulus This political agenda is ambitious and might be difficult to fulfill

The combination of excess liquidity low volatility ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

Geo-political amp political risks continue to increase across the globe

Political ldquoPopulismrdquo on the rise around the world could have major long-term economic consequences

Equity valuations are high in absolute terms versus historical standards

Tail Risks (1) Banking crises in China (2) Conflict with North Korea or Iran (3) Disintegration of the Eurozone

+ -

-

-

-

-

-

-

-

-

-

-

-

POSITIVES CONCERNS

+

+

+

+

+

+

+

+

11

Financial Partners Capital Management

150 East 52nd Street New York NY 10022

20900 NE 30th Avenue Suite 517Aventura FL 33180

t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm net | LinkedIn

We hope you have enjoyed this publication Please contact us with your questions and with your thoughts and ideas at contactfpcm net We look forward to hearing from you

Thank you for your continued confidence and support

Your FPCM Team

3

Another benefit of using a DAF is that it simplifies the donorrsquos income tax reporting The DAF sponsor provides detailed reports of the tax-deductible contribution(s) made to your Giving Account You can pass these on to your CPA eliminating the need for you to maintain detailed documentation on each individual donation you make during a year

HOW DOES A GIVING ACCOUNT IN THE FIDELITY CHARITABLE GIFT FUND WORK

Our main funds custodian Fidelity has established a DAF called the Fidelity Charitable Gift Fund and numerous FPCM clients have already taken advantage of the opportunity to open their own Giving Account

As our client after you make the decision to open a Giving Account (the initial minimum contribution is $5000 with a $1000 minimum for subsequent contributions) we work with Fidelity on your behalf to establish it We review your investment portfolio to select the most suitable holding(s) for you to donate and we prepare the paperwork for your signature to transfer the assets over to the Giving Account

Once itrsquos established you can access your Giving Account anytime online and start sending donations to the qualified charities you wish to support Whenever you want to add additional funds to the Account you just let us know and we will again select the holding(s) for you to donate and prepare the paperwork for your signature and processing

TO GIVE A SENSE OF THE RELATIVE ADVANTAGES AND DISADVANTAGES OF THESE GIVING APPROACHES HERE IS A SIMPLIFIED RECAP

WE HAVE BEEN HELPING CLIENTS FOR MANY YEARS TO MAKE CHARITABLE DONATIONS from their investment portfolios and because of its many benefits for you as a Donor we strongly advise you consider using a DAF for your future charitable giving Please contact us to discuss the process and its benefits and costs in more detail

4

We are still in the midst of a ldquocyclical bullrdquo market (start date Feb 2016) within a ldquosecular bullrdquo market in equities (start date March 2009)

The probability of a recession over the next year is relatively low

Political and geo-political risks are high and could have a meaningful impact on markets

Investorsrsquo post-election optimism regarding growth has subsided and over the past few months investors have rotated out of economically sensitive groups late cyclicals and financials in favor of defensive and interest-sensitive sectors and industries We remain optimistic on an eventual rebound of late-cyclical stocks in the later-part of this economic cycle However we would see this rotation as temporary given the stage of the economic cycle and foresee a less-cyclical less-risky positioning over the longer-term We continue to favor technology financials health care amp energy

The new US government agenda is an ambitious one that includes complex and politically charged situations such as tax reform deregulation infrastructure spending amp healthcare reform Investors might be overestimating the impact and likelihood of some of these policy changes

The premium of the US market versus international markets has narrowed over the course of year but we still find attractive opportunities in international and emerging markets as they face less interest rate pressure and more upside in earnings and operating margins in the short-term

Even though we are positive on equities in the short- and medium-term we have serious concerns about the economy and

markets over the longer-term Political ldquopopulismrdquo low productivity extreme expansionary global monetary policies and fiscal irresponsibility are dangerous headwinds for global economies and equity markets

We expect long-term interest rates to resume their uptrend due to inflationary pressures Fed tightening and demand-supply imbalances due to higher supply and less demand from the Fed and other Central Banks

Credit risk has increased with growing leverage at the corporate and consumer level but credit conditions remain favorable in the short-term We favor selective opportunities within the better-quality segment of high-yield bonds and lower-quality of investment grade

Contrary to investorsrsquo expectations at the beginning of the year the US Dollar has weakened over the past several months due to positives economic surprises in Europe amp Japan vs the US narrower interest rate spread and the reversal of an overcrowded long-position in the US currency at the beginning of the year We believe investor sentiment towards the US Dollar has become too bearish given fundamentals and would recommend keeping a long position in the US Dollar for the rest of 2017

The current low level of volatility is unsustainable in the long-term A jump in volatility in combination with the excess liquidity and ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

We continue to be opportunistic and patient and as always are keeping an eye on your long-term objectives

KEY INVESTMENT TAKEAWAYS

5

KNOWLEGE CORNER

WHAT ARE OPTION CONTRACTSAARON COHEN PhD Partner President Portfolio Manager

Over the years you have seen us execute different ldquohedgingrdquo transactions using options In this first part of a series we cover the basics of Option Contracts

WHAT IS AN OPTION CONTRACT

An Option Contract is an agreement that gives the buyer of the contract the right but not the obligation of purchasing or selling an asset at a specified price (ldquoExercise Pricerdquo) over a period of time (ldquoTime to Maturityrdquo) Notice that since the purchaser of the option has the ldquooptionrdquo to buy or sell the seller of the option contract has the ldquoobligationrdquo of delivering or purchasing the asset at the specified ldquoExercise Pricerdquo

WHAT IS A CALL OPTION

A Call Option gives the buyer the option but not the obligation of buying the underlying asset at the ldquoExercise Pricerdquo over a period of time (ldquoTime to Maturityrdquo) Since the purchaser of the call option has the ldquooptionrdquo to buy the seller of the call option contract has the ldquoobligationrdquo of delivering the asset at the specified price

Example assume you might need to buy euro100000 in 6 months The current exchange rate is 110 US$euro and you would like to guarantee the exchange rate

in case the Euros are needed Letrsquos assume you could purchase an option at $003 per Euro to buy the euro100000 in 6 months If at maturity you need the Euros and the exchange rate is above the exercise price you can ldquoexerciserdquo the option and complete purchase If you donrsquot need the Euros at maturity you can pocket the difference between the market price and the exercise price by either selling the option right before maturity or by exercising the option and immediately selling the Euros at the higher exchange rate If on the other hand the exchange rate at maturity is below the exercise level of 110 US$euro you would be better off letting the option expire worthless and purchasing the Euros in the open market Notice that in this particular example the buyer of the Call Option used the option market to ldquohedgerdquo the transaction protecting him against an unexpected appreciation of the Euro vs the Dollar A different buyer could have executed a similar transaction but with the pure objective of speculating on the potential appreciation of the Euro

Also notice that the transaction is somewhat different than purchasing a Forward or Future Contract With a Forward or Future the purchaser of the contract would have been obligated to purchase the Euros at maturity

BELOW WE SHOW THE NET PAYOUT OF BUYING AND SELLING A 1 YEAR CALL OPTION ON MICROSOFT STOCK

Example Payout for 1 contract (100 shares) of Microsoft June 2018 $75 CALL OPTION $3 80 Premium

In this section we share our thoughts about financial amp economic topics that may be of interest to you We welcome your questions as well as your suggestions for future subjects to cover

Call buyer has limited downside amp unlimited upsidehellip but it is the opposite for the seller limited upside amp unlimited downside

6

WHAT IS A PUT OPTION

A Put Option gives the buyer the option but not the obligation of selling the underlying asset at the (ldquoExercise Pricerdquo) over a period of time (ldquoTime to Maturityrdquo) Notice that since the purchaser of the Put Option has the ldquooptionrdquo to sell the seller of the Put Option contract will have the ldquoobligationrdquo to buy the asset at the specified price

Example You can think of buying a Put Option Contract as buying insurance When you purchase an insurance policy for your car you pay a premium

(the ldquoPutrdquo price) for the right the sell your damaged or stolen car to the insurance company for its insured amount (the ldquoExercise Pricerdquo) By insuring your car you limit your potential loss to the amount of the insurance premium On the other hand the insurance company can at best earn your premium and at worst be obligated to pay you the full insured value for an asset than might be worthless

THE FOLLOWING CHARTS SHOW THE NET PAYOUT FOR A BUYER AND SELLER OF A PUT OPTION CONTRACT ON MICROSOFT

Example Payout for 1 contract (100 shares) of Microsoft June 2018 $65 PUT OPTION $3 76 Premium

Put Buyer has limited upside amp limited downside the Put Seller has limited upside (the premium) amp a downside only limited by the value of the stock

CLOSE UP

VODAFONE (VOD)

AMIT FRIEDLANDER Research Analyst

Vodafone (VOD) is one of the worldrsquos largest telecom companies It provides mobile and broadband service in 26 countries including the UK Germany Spain Italy India South Africa Turkey Egypt Australia and Kenya The company endured years of fierce price competition and regulatory headwinds in its developed European markets and in 2016 completed its costly two-year Project Spring infrastructure investment program

More recently Vodafone turned a corner and is now growing revenues in most of its markets as price wars have subsided increasing margins due to cost cutting and operating leverage and improving free cash flow conversion as its capital expenditures have returned to more normal levels FPCM owned VOD stock in the recent past and in early 2017 once again purchased a position in the company

7

FREE CASH FLOW amp DIVIDEND

During and immediately following its Project Spring initiative Vodafone wasnrsquot generating enough free cash flow to cover its dividend which at 6 was quite attractive Their recent return to lower levels of capital spending has changed that situation

Vodafone traditionally generates ~euro13 billion in operating cash flow per year which it uses to pay for capital expenditures spectrum and dividends On average Vodafone spends ~euro15 billion per year to acquire spectrum and euro4 billion per year to cover its dividend This implies that in order for free cash flow to cover the dividend Vodafone cannot spend more than euro75 billion per year on capital expenditures In normal years this is not difficult However capital expenditures cost Vodafone euro105 billion per year during fiscal 2015-2016 (the VOD fiscal year ends March 30th) due to Project Spring Furthermore there have been ongoing concerns that intense price competition would return and that Vodafonersquos expenses could remain elevated

These factors have been a major overhang for the companyrsquos share price and a popular topic of investor debate has been whether VODrsquos free cash flow will be able to cover its dividend going forward After analyzing Vodafonersquos cost structure competitive trends and the longer-term historical capital expenditure levels for both Vodafone and its competitors we concluded that the company would be able to cover its dividend with free cash flow and so far this has turned out to be the case

EMERGING MARKETS GROWTH OPPORTUNITY

Emerging markets represent a sizeable growth opportunity for Vodafone Its emerging markets business accounts for 75 of total company subscribers but only 33 of total company revenues

This is because monthly average mobile revenue per user (ARPU) is euro15 in Europe but only (for example) euro25 in India and euro5 in South Africa As emerging economies grow we expect demand for data and ARPU to both increase accordingly

VALUATION amp RISKS

Based on our analysis assuming current trends continue we believe that Vodafonersquos American Depository Receipts have a fair value of $33 with greater upside if emerging market ARPUs come closer to European levels Naturally if price wars resume in enough of Vodafonersquos markets there is also potential for downside risk

Telecom carriers are a high fixed-cost businesses and are notorious for fierce price wars After all once a carrier has spent the large sums needed to build maintain and periodically upgrade a network the marginal cost of adding a new customer is very low In addition Vodafonersquos developed markets which account for the bulk of profits are mature and saturated making

competition for customers all the more vigorous However the higher-growth emerging markets arenrsquot immune to severe price competition either Indiarsquos richest person Mukesh Ambani invested $25 billion in creating upstart carrier Reliance JIO to help subsidize free service and build a subscriber base from scratch That was more money than the $21 billion market cap of Indiarsquos largest carrier Bharti Airtel It is very difficult to compete with such adversaries who are willing to operate at a loss for extended periods of time

VODrsquos presence in a variety of different geographic markets helps mitigate this risk by way of diversification but does not eliminate it

8

IS THE EQUITY MARKET OVERLY CONCENTRATED AT THE TOPAARON COHEN PhD Partner President Portfolio ManagerCHRISTOPHER CONWAY Por1113088tfolio Manager

The 13 and 20 levels for the Top 5 and Top 10 suggest that the average market cap of each stock

within those groups represents approximately 2-3 of the SampP 500 market capitalization This is

consistent with a previous FPCM study in which we showed that size becomes restrictive for valuation

when individual stocks reach concentration levels of 4-5 of the total US market capitalization

(as illustrated in the graph below)

At first glance it is difficult not to be taken aback by the sheer size of the largest market capitalization stocks in the SampP 500 The two largest stocks Apple and Google for example each have market capitalizations of approximately $700bn bigger than the combined market capitalizations of Wal-Mart Stores Coca-Cola and Procter amp Gamble In addition to Apple and Google there are an additional four companies (Microsoft Amazon Facebook and Berkshire Hathaway) that each have market capitalizations of greater than $400bn an accomplishment that only one company (Apple) could claim at the end of 2014 and no company could claim at the end of 2010 merely seven years ago

Over the past few months some of these large-capitalization companies in particular the technology related companies have outperformed the market by a significant margin raising concerns about too much concentration at the top and a market driven just by a few companies

However to our surprise (see graph below) we found that the market capitalizations of the top 5 amp 10 companies represented only 13 and 20 respectively of the SampP 500 total market capitalization These are levels of concentration that are clearly in-line with historical averages and well below peak levels

There has been significant talk in the media about a few stocks leading the market In this piece we examine the market concentration of the largest US firms relative to historical levels and explore the potential impact concentration could have on the valuations of leading companies

9

WHAT ARE THE INVESTMENT RAMIFICATIONS

According to financial theory the level of market concentration is irrelevant to valuation as supply is assumed to be ldquoelasticrdquo (ie market cap is independent of supply) Nevertheless in practice investors and especially professional investors want diversified portfolios They want to avoid being overly exposed to individual assets which at the margin can place a lid on valuation

Consider the case of Apple in 2011-2012 Why did the stock trade at a low multiple in spite of being a well-known company covered by many analysts with bullish outlooks a leader in its field and admired worldwide We dare to speculate that one of the reasons the stock became less sensitive to earnings and improving fundamentals resulting in a lower multiple was that all the ldquobullishrdquo investors had reached close to their maximum potential allocation to the stock (maybe 5-7) if they were to remain diversified and those who didnrsquot own the stock were unwilling to buy it at the level of the market price These two factors resulted in a peak market cap being reached at 4 of the SampP 500 as depicted in the above graph

Thus at the extreme market concentration could be an important barrier to higher valuations irrespective of short- and medium-term market fundamentals

DOL FIDUCIARY RULE VINCE MARSDEN Partner SVP of Financial Planning

The Department of Labor (DOL) Fiduciary Rule which has been featured extensively in the financial and mainstream media in recent months came into effect June 9 2017

The DOL Fiduciary Rule mandates that all financial professionals who advise retirement plans or provide retirement planning advice are legally and ethically bound to act as fiduciaries This means that such advisors must now always act in the rdquobest interestrdquo of their clients placing their clientsrsquo interests before their own and they must disclose any potential conflicts of interest including reporting to the client any and all fees or commissions they receive for the products and investments they recommend or sell

While this new rule will have some affect on all financial advisors it will be most impactful on those who generate income from commission such as brokers and insurance agents As a Registered

Investment Advisor (RIA) FPCM was already held to this fiduciary standard and we do not receive commissions of any type

In contrast to FPCM and other RIArsquos prior to the introduction of this new rule brokers and insurance professionals were held to a less-stringent ldquosuitabilityrdquo standard requiring only that they provide products and recommendations ldquosuitablerdquo to their clientsrsquo needs and objectives It is likely that many of the commision structures used by these professionals will be changed or eliminated as a result of the new Fiduciary Rule

10

INVESTMENT ldquoBALANCE SHEETrdquoINVESTMENT ldquoBALANCE SHEETrdquo

We are in the midst of a synchronized global recovery with Europe Japan amp emerging markets joining the US in a recovery mode

Central banks are unlikely to tighten monetary policy aggressively over the next 2 years

Global earnings are growing after almost 2 years of an ldquoearnings-recessionrdquo

Contrary to the post-recession years fiscal policy is likely to be tailwind for global growth over the next several years

Corporate tax reform amp lower regulatory pressure in the US could be an important catalyst for faster economic growth

US consumer spending should continue to be supported by increasing employment amp wages a recovery in household wealth and the end of consumer de-leveraging

The rate of inflation is expected to remain reasonably low in the short- and medium-term

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 housing credit) are not over-extended

Equity valuation is expensive in absolute terms relative to history but over-valuation is not extreme especially relative to free-cash flows and interest rates

The Federal Reserve is already in a ldquotighteningrdquo mode albeit at a moderate pace In addition the Fed is expected to start reducing its balance sheet this year and the ECB is expected to follow suit starting in 2018

Fiscal stimulus would be a tailwind for the global economy in the medium-term but the debt level is high and too much stimulus could end up being counter-productive in the long-term

An aggressive trade policy by the new US administration could be highly detrimental to global economic growth

The Chinese economy has stabilized over the past year but only after significant fiscal stimulus in 2016 that resulted in a higher debt level and capital outflows Global growth commodity prices and emerging economies would be seriously affected by negative developments in China

Lower productivity the aging of the population in the developed economies and low labor participation are important long-term headwinds for global economic growth

Inflationary expectations are extremely low Even a random increase in headline inflation figures could scare the markets and put significant pressure on monetary authorities

US Investors have high expectations regarding the potential for deregulation tax reform and fiscal stimulus This political agenda is ambitious and might be difficult to fulfill

The combination of excess liquidity low volatility ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

Geo-political amp political risks continue to increase across the globe

Political ldquoPopulismrdquo on the rise around the world could have major long-term economic consequences

Equity valuations are high in absolute terms versus historical standards

Tail Risks (1) Banking crises in China (2) Conflict with North Korea or Iran (3) Disintegration of the Eurozone

+ -

-

-

-

-

-

-

-

-

-

-

-

POSITIVES CONCERNS

+

+

+

+

+

+

+

+

11

Financial Partners Capital Management

150 East 52nd Street New York NY 10022

20900 NE 30th Avenue Suite 517Aventura FL 33180

t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm net | LinkedIn

We hope you have enjoyed this publication Please contact us with your questions and with your thoughts and ideas at contactfpcm net We look forward to hearing from you

Thank you for your continued confidence and support

Your FPCM Team

4

We are still in the midst of a ldquocyclical bullrdquo market (start date Feb 2016) within a ldquosecular bullrdquo market in equities (start date March 2009)

The probability of a recession over the next year is relatively low

Political and geo-political risks are high and could have a meaningful impact on markets

Investorsrsquo post-election optimism regarding growth has subsided and over the past few months investors have rotated out of economically sensitive groups late cyclicals and financials in favor of defensive and interest-sensitive sectors and industries We remain optimistic on an eventual rebound of late-cyclical stocks in the later-part of this economic cycle However we would see this rotation as temporary given the stage of the economic cycle and foresee a less-cyclical less-risky positioning over the longer-term We continue to favor technology financials health care amp energy

The new US government agenda is an ambitious one that includes complex and politically charged situations such as tax reform deregulation infrastructure spending amp healthcare reform Investors might be overestimating the impact and likelihood of some of these policy changes

The premium of the US market versus international markets has narrowed over the course of year but we still find attractive opportunities in international and emerging markets as they face less interest rate pressure and more upside in earnings and operating margins in the short-term

Even though we are positive on equities in the short- and medium-term we have serious concerns about the economy and

markets over the longer-term Political ldquopopulismrdquo low productivity extreme expansionary global monetary policies and fiscal irresponsibility are dangerous headwinds for global economies and equity markets

We expect long-term interest rates to resume their uptrend due to inflationary pressures Fed tightening and demand-supply imbalances due to higher supply and less demand from the Fed and other Central Banks

Credit risk has increased with growing leverage at the corporate and consumer level but credit conditions remain favorable in the short-term We favor selective opportunities within the better-quality segment of high-yield bonds and lower-quality of investment grade

Contrary to investorsrsquo expectations at the beginning of the year the US Dollar has weakened over the past several months due to positives economic surprises in Europe amp Japan vs the US narrower interest rate spread and the reversal of an overcrowded long-position in the US currency at the beginning of the year We believe investor sentiment towards the US Dollar has become too bearish given fundamentals and would recommend keeping a long position in the US Dollar for the rest of 2017

The current low level of volatility is unsustainable in the long-term A jump in volatility in combination with the excess liquidity and ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

We continue to be opportunistic and patient and as always are keeping an eye on your long-term objectives

KEY INVESTMENT TAKEAWAYS

5

KNOWLEGE CORNER

WHAT ARE OPTION CONTRACTSAARON COHEN PhD Partner President Portfolio Manager

Over the years you have seen us execute different ldquohedgingrdquo transactions using options In this first part of a series we cover the basics of Option Contracts

WHAT IS AN OPTION CONTRACT

An Option Contract is an agreement that gives the buyer of the contract the right but not the obligation of purchasing or selling an asset at a specified price (ldquoExercise Pricerdquo) over a period of time (ldquoTime to Maturityrdquo) Notice that since the purchaser of the option has the ldquooptionrdquo to buy or sell the seller of the option contract has the ldquoobligationrdquo of delivering or purchasing the asset at the specified ldquoExercise Pricerdquo

WHAT IS A CALL OPTION

A Call Option gives the buyer the option but not the obligation of buying the underlying asset at the ldquoExercise Pricerdquo over a period of time (ldquoTime to Maturityrdquo) Since the purchaser of the call option has the ldquooptionrdquo to buy the seller of the call option contract has the ldquoobligationrdquo of delivering the asset at the specified price

Example assume you might need to buy euro100000 in 6 months The current exchange rate is 110 US$euro and you would like to guarantee the exchange rate

in case the Euros are needed Letrsquos assume you could purchase an option at $003 per Euro to buy the euro100000 in 6 months If at maturity you need the Euros and the exchange rate is above the exercise price you can ldquoexerciserdquo the option and complete purchase If you donrsquot need the Euros at maturity you can pocket the difference between the market price and the exercise price by either selling the option right before maturity or by exercising the option and immediately selling the Euros at the higher exchange rate If on the other hand the exchange rate at maturity is below the exercise level of 110 US$euro you would be better off letting the option expire worthless and purchasing the Euros in the open market Notice that in this particular example the buyer of the Call Option used the option market to ldquohedgerdquo the transaction protecting him against an unexpected appreciation of the Euro vs the Dollar A different buyer could have executed a similar transaction but with the pure objective of speculating on the potential appreciation of the Euro

Also notice that the transaction is somewhat different than purchasing a Forward or Future Contract With a Forward or Future the purchaser of the contract would have been obligated to purchase the Euros at maturity

BELOW WE SHOW THE NET PAYOUT OF BUYING AND SELLING A 1 YEAR CALL OPTION ON MICROSOFT STOCK

Example Payout for 1 contract (100 shares) of Microsoft June 2018 $75 CALL OPTION $3 80 Premium

In this section we share our thoughts about financial amp economic topics that may be of interest to you We welcome your questions as well as your suggestions for future subjects to cover

Call buyer has limited downside amp unlimited upsidehellip but it is the opposite for the seller limited upside amp unlimited downside

6

WHAT IS A PUT OPTION

A Put Option gives the buyer the option but not the obligation of selling the underlying asset at the (ldquoExercise Pricerdquo) over a period of time (ldquoTime to Maturityrdquo) Notice that since the purchaser of the Put Option has the ldquooptionrdquo to sell the seller of the Put Option contract will have the ldquoobligationrdquo to buy the asset at the specified price

Example You can think of buying a Put Option Contract as buying insurance When you purchase an insurance policy for your car you pay a premium

(the ldquoPutrdquo price) for the right the sell your damaged or stolen car to the insurance company for its insured amount (the ldquoExercise Pricerdquo) By insuring your car you limit your potential loss to the amount of the insurance premium On the other hand the insurance company can at best earn your premium and at worst be obligated to pay you the full insured value for an asset than might be worthless

THE FOLLOWING CHARTS SHOW THE NET PAYOUT FOR A BUYER AND SELLER OF A PUT OPTION CONTRACT ON MICROSOFT

Example Payout for 1 contract (100 shares) of Microsoft June 2018 $65 PUT OPTION $3 76 Premium

Put Buyer has limited upside amp limited downside the Put Seller has limited upside (the premium) amp a downside only limited by the value of the stock

CLOSE UP

VODAFONE (VOD)

AMIT FRIEDLANDER Research Analyst

Vodafone (VOD) is one of the worldrsquos largest telecom companies It provides mobile and broadband service in 26 countries including the UK Germany Spain Italy India South Africa Turkey Egypt Australia and Kenya The company endured years of fierce price competition and regulatory headwinds in its developed European markets and in 2016 completed its costly two-year Project Spring infrastructure investment program

More recently Vodafone turned a corner and is now growing revenues in most of its markets as price wars have subsided increasing margins due to cost cutting and operating leverage and improving free cash flow conversion as its capital expenditures have returned to more normal levels FPCM owned VOD stock in the recent past and in early 2017 once again purchased a position in the company

7

FREE CASH FLOW amp DIVIDEND

During and immediately following its Project Spring initiative Vodafone wasnrsquot generating enough free cash flow to cover its dividend which at 6 was quite attractive Their recent return to lower levels of capital spending has changed that situation

Vodafone traditionally generates ~euro13 billion in operating cash flow per year which it uses to pay for capital expenditures spectrum and dividends On average Vodafone spends ~euro15 billion per year to acquire spectrum and euro4 billion per year to cover its dividend This implies that in order for free cash flow to cover the dividend Vodafone cannot spend more than euro75 billion per year on capital expenditures In normal years this is not difficult However capital expenditures cost Vodafone euro105 billion per year during fiscal 2015-2016 (the VOD fiscal year ends March 30th) due to Project Spring Furthermore there have been ongoing concerns that intense price competition would return and that Vodafonersquos expenses could remain elevated

These factors have been a major overhang for the companyrsquos share price and a popular topic of investor debate has been whether VODrsquos free cash flow will be able to cover its dividend going forward After analyzing Vodafonersquos cost structure competitive trends and the longer-term historical capital expenditure levels for both Vodafone and its competitors we concluded that the company would be able to cover its dividend with free cash flow and so far this has turned out to be the case

EMERGING MARKETS GROWTH OPPORTUNITY

Emerging markets represent a sizeable growth opportunity for Vodafone Its emerging markets business accounts for 75 of total company subscribers but only 33 of total company revenues

This is because monthly average mobile revenue per user (ARPU) is euro15 in Europe but only (for example) euro25 in India and euro5 in South Africa As emerging economies grow we expect demand for data and ARPU to both increase accordingly

VALUATION amp RISKS

Based on our analysis assuming current trends continue we believe that Vodafonersquos American Depository Receipts have a fair value of $33 with greater upside if emerging market ARPUs come closer to European levels Naturally if price wars resume in enough of Vodafonersquos markets there is also potential for downside risk

Telecom carriers are a high fixed-cost businesses and are notorious for fierce price wars After all once a carrier has spent the large sums needed to build maintain and periodically upgrade a network the marginal cost of adding a new customer is very low In addition Vodafonersquos developed markets which account for the bulk of profits are mature and saturated making

competition for customers all the more vigorous However the higher-growth emerging markets arenrsquot immune to severe price competition either Indiarsquos richest person Mukesh Ambani invested $25 billion in creating upstart carrier Reliance JIO to help subsidize free service and build a subscriber base from scratch That was more money than the $21 billion market cap of Indiarsquos largest carrier Bharti Airtel It is very difficult to compete with such adversaries who are willing to operate at a loss for extended periods of time

VODrsquos presence in a variety of different geographic markets helps mitigate this risk by way of diversification but does not eliminate it

8

IS THE EQUITY MARKET OVERLY CONCENTRATED AT THE TOPAARON COHEN PhD Partner President Portfolio ManagerCHRISTOPHER CONWAY Por1113088tfolio Manager

The 13 and 20 levels for the Top 5 and Top 10 suggest that the average market cap of each stock

within those groups represents approximately 2-3 of the SampP 500 market capitalization This is

consistent with a previous FPCM study in which we showed that size becomes restrictive for valuation

when individual stocks reach concentration levels of 4-5 of the total US market capitalization

(as illustrated in the graph below)

At first glance it is difficult not to be taken aback by the sheer size of the largest market capitalization stocks in the SampP 500 The two largest stocks Apple and Google for example each have market capitalizations of approximately $700bn bigger than the combined market capitalizations of Wal-Mart Stores Coca-Cola and Procter amp Gamble In addition to Apple and Google there are an additional four companies (Microsoft Amazon Facebook and Berkshire Hathaway) that each have market capitalizations of greater than $400bn an accomplishment that only one company (Apple) could claim at the end of 2014 and no company could claim at the end of 2010 merely seven years ago

Over the past few months some of these large-capitalization companies in particular the technology related companies have outperformed the market by a significant margin raising concerns about too much concentration at the top and a market driven just by a few companies

However to our surprise (see graph below) we found that the market capitalizations of the top 5 amp 10 companies represented only 13 and 20 respectively of the SampP 500 total market capitalization These are levels of concentration that are clearly in-line with historical averages and well below peak levels

There has been significant talk in the media about a few stocks leading the market In this piece we examine the market concentration of the largest US firms relative to historical levels and explore the potential impact concentration could have on the valuations of leading companies

9

WHAT ARE THE INVESTMENT RAMIFICATIONS

According to financial theory the level of market concentration is irrelevant to valuation as supply is assumed to be ldquoelasticrdquo (ie market cap is independent of supply) Nevertheless in practice investors and especially professional investors want diversified portfolios They want to avoid being overly exposed to individual assets which at the margin can place a lid on valuation

Consider the case of Apple in 2011-2012 Why did the stock trade at a low multiple in spite of being a well-known company covered by many analysts with bullish outlooks a leader in its field and admired worldwide We dare to speculate that one of the reasons the stock became less sensitive to earnings and improving fundamentals resulting in a lower multiple was that all the ldquobullishrdquo investors had reached close to their maximum potential allocation to the stock (maybe 5-7) if they were to remain diversified and those who didnrsquot own the stock were unwilling to buy it at the level of the market price These two factors resulted in a peak market cap being reached at 4 of the SampP 500 as depicted in the above graph

Thus at the extreme market concentration could be an important barrier to higher valuations irrespective of short- and medium-term market fundamentals

DOL FIDUCIARY RULE VINCE MARSDEN Partner SVP of Financial Planning

The Department of Labor (DOL) Fiduciary Rule which has been featured extensively in the financial and mainstream media in recent months came into effect June 9 2017

The DOL Fiduciary Rule mandates that all financial professionals who advise retirement plans or provide retirement planning advice are legally and ethically bound to act as fiduciaries This means that such advisors must now always act in the rdquobest interestrdquo of their clients placing their clientsrsquo interests before their own and they must disclose any potential conflicts of interest including reporting to the client any and all fees or commissions they receive for the products and investments they recommend or sell

While this new rule will have some affect on all financial advisors it will be most impactful on those who generate income from commission such as brokers and insurance agents As a Registered

Investment Advisor (RIA) FPCM was already held to this fiduciary standard and we do not receive commissions of any type

In contrast to FPCM and other RIArsquos prior to the introduction of this new rule brokers and insurance professionals were held to a less-stringent ldquosuitabilityrdquo standard requiring only that they provide products and recommendations ldquosuitablerdquo to their clientsrsquo needs and objectives It is likely that many of the commision structures used by these professionals will be changed or eliminated as a result of the new Fiduciary Rule

10

INVESTMENT ldquoBALANCE SHEETrdquoINVESTMENT ldquoBALANCE SHEETrdquo

We are in the midst of a synchronized global recovery with Europe Japan amp emerging markets joining the US in a recovery mode

Central banks are unlikely to tighten monetary policy aggressively over the next 2 years

Global earnings are growing after almost 2 years of an ldquoearnings-recessionrdquo

Contrary to the post-recession years fiscal policy is likely to be tailwind for global growth over the next several years

Corporate tax reform amp lower regulatory pressure in the US could be an important catalyst for faster economic growth

US consumer spending should continue to be supported by increasing employment amp wages a recovery in household wealth and the end of consumer de-leveraging

The rate of inflation is expected to remain reasonably low in the short- and medium-term

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 housing credit) are not over-extended

Equity valuation is expensive in absolute terms relative to history but over-valuation is not extreme especially relative to free-cash flows and interest rates

The Federal Reserve is already in a ldquotighteningrdquo mode albeit at a moderate pace In addition the Fed is expected to start reducing its balance sheet this year and the ECB is expected to follow suit starting in 2018

Fiscal stimulus would be a tailwind for the global economy in the medium-term but the debt level is high and too much stimulus could end up being counter-productive in the long-term

An aggressive trade policy by the new US administration could be highly detrimental to global economic growth

The Chinese economy has stabilized over the past year but only after significant fiscal stimulus in 2016 that resulted in a higher debt level and capital outflows Global growth commodity prices and emerging economies would be seriously affected by negative developments in China

Lower productivity the aging of the population in the developed economies and low labor participation are important long-term headwinds for global economic growth

Inflationary expectations are extremely low Even a random increase in headline inflation figures could scare the markets and put significant pressure on monetary authorities

US Investors have high expectations regarding the potential for deregulation tax reform and fiscal stimulus This political agenda is ambitious and might be difficult to fulfill

The combination of excess liquidity low volatility ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

Geo-political amp political risks continue to increase across the globe

Political ldquoPopulismrdquo on the rise around the world could have major long-term economic consequences

Equity valuations are high in absolute terms versus historical standards

Tail Risks (1) Banking crises in China (2) Conflict with North Korea or Iran (3) Disintegration of the Eurozone

+ -

-

-

-

-

-

-

-

-

-

-

-

POSITIVES CONCERNS

+

+

+

+

+

+

+

+

11

Financial Partners Capital Management

150 East 52nd Street New York NY 10022

20900 NE 30th Avenue Suite 517Aventura FL 33180

t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm net | LinkedIn

We hope you have enjoyed this publication Please contact us with your questions and with your thoughts and ideas at contactfpcm net We look forward to hearing from you

Thank you for your continued confidence and support

Your FPCM Team

5

KNOWLEGE CORNER

WHAT ARE OPTION CONTRACTSAARON COHEN PhD Partner President Portfolio Manager

Over the years you have seen us execute different ldquohedgingrdquo transactions using options In this first part of a series we cover the basics of Option Contracts

WHAT IS AN OPTION CONTRACT

An Option Contract is an agreement that gives the buyer of the contract the right but not the obligation of purchasing or selling an asset at a specified price (ldquoExercise Pricerdquo) over a period of time (ldquoTime to Maturityrdquo) Notice that since the purchaser of the option has the ldquooptionrdquo to buy or sell the seller of the option contract has the ldquoobligationrdquo of delivering or purchasing the asset at the specified ldquoExercise Pricerdquo

WHAT IS A CALL OPTION

A Call Option gives the buyer the option but not the obligation of buying the underlying asset at the ldquoExercise Pricerdquo over a period of time (ldquoTime to Maturityrdquo) Since the purchaser of the call option has the ldquooptionrdquo to buy the seller of the call option contract has the ldquoobligationrdquo of delivering the asset at the specified price

Example assume you might need to buy euro100000 in 6 months The current exchange rate is 110 US$euro and you would like to guarantee the exchange rate

in case the Euros are needed Letrsquos assume you could purchase an option at $003 per Euro to buy the euro100000 in 6 months If at maturity you need the Euros and the exchange rate is above the exercise price you can ldquoexerciserdquo the option and complete purchase If you donrsquot need the Euros at maturity you can pocket the difference between the market price and the exercise price by either selling the option right before maturity or by exercising the option and immediately selling the Euros at the higher exchange rate If on the other hand the exchange rate at maturity is below the exercise level of 110 US$euro you would be better off letting the option expire worthless and purchasing the Euros in the open market Notice that in this particular example the buyer of the Call Option used the option market to ldquohedgerdquo the transaction protecting him against an unexpected appreciation of the Euro vs the Dollar A different buyer could have executed a similar transaction but with the pure objective of speculating on the potential appreciation of the Euro

Also notice that the transaction is somewhat different than purchasing a Forward or Future Contract With a Forward or Future the purchaser of the contract would have been obligated to purchase the Euros at maturity

BELOW WE SHOW THE NET PAYOUT OF BUYING AND SELLING A 1 YEAR CALL OPTION ON MICROSOFT STOCK

Example Payout for 1 contract (100 shares) of Microsoft June 2018 $75 CALL OPTION $3 80 Premium

In this section we share our thoughts about financial amp economic topics that may be of interest to you We welcome your questions as well as your suggestions for future subjects to cover

Call buyer has limited downside amp unlimited upsidehellip but it is the opposite for the seller limited upside amp unlimited downside

6

WHAT IS A PUT OPTION

A Put Option gives the buyer the option but not the obligation of selling the underlying asset at the (ldquoExercise Pricerdquo) over a period of time (ldquoTime to Maturityrdquo) Notice that since the purchaser of the Put Option has the ldquooptionrdquo to sell the seller of the Put Option contract will have the ldquoobligationrdquo to buy the asset at the specified price

Example You can think of buying a Put Option Contract as buying insurance When you purchase an insurance policy for your car you pay a premium

(the ldquoPutrdquo price) for the right the sell your damaged or stolen car to the insurance company for its insured amount (the ldquoExercise Pricerdquo) By insuring your car you limit your potential loss to the amount of the insurance premium On the other hand the insurance company can at best earn your premium and at worst be obligated to pay you the full insured value for an asset than might be worthless

THE FOLLOWING CHARTS SHOW THE NET PAYOUT FOR A BUYER AND SELLER OF A PUT OPTION CONTRACT ON MICROSOFT

Example Payout for 1 contract (100 shares) of Microsoft June 2018 $65 PUT OPTION $3 76 Premium

Put Buyer has limited upside amp limited downside the Put Seller has limited upside (the premium) amp a downside only limited by the value of the stock

CLOSE UP

VODAFONE (VOD)

AMIT FRIEDLANDER Research Analyst

Vodafone (VOD) is one of the worldrsquos largest telecom companies It provides mobile and broadband service in 26 countries including the UK Germany Spain Italy India South Africa Turkey Egypt Australia and Kenya The company endured years of fierce price competition and regulatory headwinds in its developed European markets and in 2016 completed its costly two-year Project Spring infrastructure investment program

More recently Vodafone turned a corner and is now growing revenues in most of its markets as price wars have subsided increasing margins due to cost cutting and operating leverage and improving free cash flow conversion as its capital expenditures have returned to more normal levels FPCM owned VOD stock in the recent past and in early 2017 once again purchased a position in the company

7

FREE CASH FLOW amp DIVIDEND

During and immediately following its Project Spring initiative Vodafone wasnrsquot generating enough free cash flow to cover its dividend which at 6 was quite attractive Their recent return to lower levels of capital spending has changed that situation

Vodafone traditionally generates ~euro13 billion in operating cash flow per year which it uses to pay for capital expenditures spectrum and dividends On average Vodafone spends ~euro15 billion per year to acquire spectrum and euro4 billion per year to cover its dividend This implies that in order for free cash flow to cover the dividend Vodafone cannot spend more than euro75 billion per year on capital expenditures In normal years this is not difficult However capital expenditures cost Vodafone euro105 billion per year during fiscal 2015-2016 (the VOD fiscal year ends March 30th) due to Project Spring Furthermore there have been ongoing concerns that intense price competition would return and that Vodafonersquos expenses could remain elevated

These factors have been a major overhang for the companyrsquos share price and a popular topic of investor debate has been whether VODrsquos free cash flow will be able to cover its dividend going forward After analyzing Vodafonersquos cost structure competitive trends and the longer-term historical capital expenditure levels for both Vodafone and its competitors we concluded that the company would be able to cover its dividend with free cash flow and so far this has turned out to be the case

EMERGING MARKETS GROWTH OPPORTUNITY

Emerging markets represent a sizeable growth opportunity for Vodafone Its emerging markets business accounts for 75 of total company subscribers but only 33 of total company revenues

This is because monthly average mobile revenue per user (ARPU) is euro15 in Europe but only (for example) euro25 in India and euro5 in South Africa As emerging economies grow we expect demand for data and ARPU to both increase accordingly

VALUATION amp RISKS

Based on our analysis assuming current trends continue we believe that Vodafonersquos American Depository Receipts have a fair value of $33 with greater upside if emerging market ARPUs come closer to European levels Naturally if price wars resume in enough of Vodafonersquos markets there is also potential for downside risk

Telecom carriers are a high fixed-cost businesses and are notorious for fierce price wars After all once a carrier has spent the large sums needed to build maintain and periodically upgrade a network the marginal cost of adding a new customer is very low In addition Vodafonersquos developed markets which account for the bulk of profits are mature and saturated making

competition for customers all the more vigorous However the higher-growth emerging markets arenrsquot immune to severe price competition either Indiarsquos richest person Mukesh Ambani invested $25 billion in creating upstart carrier Reliance JIO to help subsidize free service and build a subscriber base from scratch That was more money than the $21 billion market cap of Indiarsquos largest carrier Bharti Airtel It is very difficult to compete with such adversaries who are willing to operate at a loss for extended periods of time

VODrsquos presence in a variety of different geographic markets helps mitigate this risk by way of diversification but does not eliminate it

8

IS THE EQUITY MARKET OVERLY CONCENTRATED AT THE TOPAARON COHEN PhD Partner President Portfolio ManagerCHRISTOPHER CONWAY Por1113088tfolio Manager

The 13 and 20 levels for the Top 5 and Top 10 suggest that the average market cap of each stock

within those groups represents approximately 2-3 of the SampP 500 market capitalization This is

consistent with a previous FPCM study in which we showed that size becomes restrictive for valuation

when individual stocks reach concentration levels of 4-5 of the total US market capitalization

(as illustrated in the graph below)

At first glance it is difficult not to be taken aback by the sheer size of the largest market capitalization stocks in the SampP 500 The two largest stocks Apple and Google for example each have market capitalizations of approximately $700bn bigger than the combined market capitalizations of Wal-Mart Stores Coca-Cola and Procter amp Gamble In addition to Apple and Google there are an additional four companies (Microsoft Amazon Facebook and Berkshire Hathaway) that each have market capitalizations of greater than $400bn an accomplishment that only one company (Apple) could claim at the end of 2014 and no company could claim at the end of 2010 merely seven years ago

Over the past few months some of these large-capitalization companies in particular the technology related companies have outperformed the market by a significant margin raising concerns about too much concentration at the top and a market driven just by a few companies

However to our surprise (see graph below) we found that the market capitalizations of the top 5 amp 10 companies represented only 13 and 20 respectively of the SampP 500 total market capitalization These are levels of concentration that are clearly in-line with historical averages and well below peak levels

There has been significant talk in the media about a few stocks leading the market In this piece we examine the market concentration of the largest US firms relative to historical levels and explore the potential impact concentration could have on the valuations of leading companies

9

WHAT ARE THE INVESTMENT RAMIFICATIONS

According to financial theory the level of market concentration is irrelevant to valuation as supply is assumed to be ldquoelasticrdquo (ie market cap is independent of supply) Nevertheless in practice investors and especially professional investors want diversified portfolios They want to avoid being overly exposed to individual assets which at the margin can place a lid on valuation

Consider the case of Apple in 2011-2012 Why did the stock trade at a low multiple in spite of being a well-known company covered by many analysts with bullish outlooks a leader in its field and admired worldwide We dare to speculate that one of the reasons the stock became less sensitive to earnings and improving fundamentals resulting in a lower multiple was that all the ldquobullishrdquo investors had reached close to their maximum potential allocation to the stock (maybe 5-7) if they were to remain diversified and those who didnrsquot own the stock were unwilling to buy it at the level of the market price These two factors resulted in a peak market cap being reached at 4 of the SampP 500 as depicted in the above graph

Thus at the extreme market concentration could be an important barrier to higher valuations irrespective of short- and medium-term market fundamentals

DOL FIDUCIARY RULE VINCE MARSDEN Partner SVP of Financial Planning

The Department of Labor (DOL) Fiduciary Rule which has been featured extensively in the financial and mainstream media in recent months came into effect June 9 2017

The DOL Fiduciary Rule mandates that all financial professionals who advise retirement plans or provide retirement planning advice are legally and ethically bound to act as fiduciaries This means that such advisors must now always act in the rdquobest interestrdquo of their clients placing their clientsrsquo interests before their own and they must disclose any potential conflicts of interest including reporting to the client any and all fees or commissions they receive for the products and investments they recommend or sell

While this new rule will have some affect on all financial advisors it will be most impactful on those who generate income from commission such as brokers and insurance agents As a Registered

Investment Advisor (RIA) FPCM was already held to this fiduciary standard and we do not receive commissions of any type

In contrast to FPCM and other RIArsquos prior to the introduction of this new rule brokers and insurance professionals were held to a less-stringent ldquosuitabilityrdquo standard requiring only that they provide products and recommendations ldquosuitablerdquo to their clientsrsquo needs and objectives It is likely that many of the commision structures used by these professionals will be changed or eliminated as a result of the new Fiduciary Rule

10

INVESTMENT ldquoBALANCE SHEETrdquoINVESTMENT ldquoBALANCE SHEETrdquo

We are in the midst of a synchronized global recovery with Europe Japan amp emerging markets joining the US in a recovery mode

Central banks are unlikely to tighten monetary policy aggressively over the next 2 years

Global earnings are growing after almost 2 years of an ldquoearnings-recessionrdquo

Contrary to the post-recession years fiscal policy is likely to be tailwind for global growth over the next several years

Corporate tax reform amp lower regulatory pressure in the US could be an important catalyst for faster economic growth

US consumer spending should continue to be supported by increasing employment amp wages a recovery in household wealth and the end of consumer de-leveraging

The rate of inflation is expected to remain reasonably low in the short- and medium-term

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 housing credit) are not over-extended

Equity valuation is expensive in absolute terms relative to history but over-valuation is not extreme especially relative to free-cash flows and interest rates

The Federal Reserve is already in a ldquotighteningrdquo mode albeit at a moderate pace In addition the Fed is expected to start reducing its balance sheet this year and the ECB is expected to follow suit starting in 2018

Fiscal stimulus would be a tailwind for the global economy in the medium-term but the debt level is high and too much stimulus could end up being counter-productive in the long-term

An aggressive trade policy by the new US administration could be highly detrimental to global economic growth

The Chinese economy has stabilized over the past year but only after significant fiscal stimulus in 2016 that resulted in a higher debt level and capital outflows Global growth commodity prices and emerging economies would be seriously affected by negative developments in China

Lower productivity the aging of the population in the developed economies and low labor participation are important long-term headwinds for global economic growth

Inflationary expectations are extremely low Even a random increase in headline inflation figures could scare the markets and put significant pressure on monetary authorities

US Investors have high expectations regarding the potential for deregulation tax reform and fiscal stimulus This political agenda is ambitious and might be difficult to fulfill

The combination of excess liquidity low volatility ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

Geo-political amp political risks continue to increase across the globe

Political ldquoPopulismrdquo on the rise around the world could have major long-term economic consequences

Equity valuations are high in absolute terms versus historical standards

Tail Risks (1) Banking crises in China (2) Conflict with North Korea or Iran (3) Disintegration of the Eurozone

+ -

-

-

-

-

-

-

-

-

-

-

-

POSITIVES CONCERNS

+

+

+

+

+

+

+

+

11

Financial Partners Capital Management

150 East 52nd Street New York NY 10022

20900 NE 30th Avenue Suite 517Aventura FL 33180

t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm net | LinkedIn

We hope you have enjoyed this publication Please contact us with your questions and with your thoughts and ideas at contactfpcm net We look forward to hearing from you

Thank you for your continued confidence and support

Your FPCM Team

6

WHAT IS A PUT OPTION

A Put Option gives the buyer the option but not the obligation of selling the underlying asset at the (ldquoExercise Pricerdquo) over a period of time (ldquoTime to Maturityrdquo) Notice that since the purchaser of the Put Option has the ldquooptionrdquo to sell the seller of the Put Option contract will have the ldquoobligationrdquo to buy the asset at the specified price

Example You can think of buying a Put Option Contract as buying insurance When you purchase an insurance policy for your car you pay a premium

(the ldquoPutrdquo price) for the right the sell your damaged or stolen car to the insurance company for its insured amount (the ldquoExercise Pricerdquo) By insuring your car you limit your potential loss to the amount of the insurance premium On the other hand the insurance company can at best earn your premium and at worst be obligated to pay you the full insured value for an asset than might be worthless

THE FOLLOWING CHARTS SHOW THE NET PAYOUT FOR A BUYER AND SELLER OF A PUT OPTION CONTRACT ON MICROSOFT

Example Payout for 1 contract (100 shares) of Microsoft June 2018 $65 PUT OPTION $3 76 Premium

Put Buyer has limited upside amp limited downside the Put Seller has limited upside (the premium) amp a downside only limited by the value of the stock

CLOSE UP

VODAFONE (VOD)

AMIT FRIEDLANDER Research Analyst

Vodafone (VOD) is one of the worldrsquos largest telecom companies It provides mobile and broadband service in 26 countries including the UK Germany Spain Italy India South Africa Turkey Egypt Australia and Kenya The company endured years of fierce price competition and regulatory headwinds in its developed European markets and in 2016 completed its costly two-year Project Spring infrastructure investment program

More recently Vodafone turned a corner and is now growing revenues in most of its markets as price wars have subsided increasing margins due to cost cutting and operating leverage and improving free cash flow conversion as its capital expenditures have returned to more normal levels FPCM owned VOD stock in the recent past and in early 2017 once again purchased a position in the company

7

FREE CASH FLOW amp DIVIDEND

During and immediately following its Project Spring initiative Vodafone wasnrsquot generating enough free cash flow to cover its dividend which at 6 was quite attractive Their recent return to lower levels of capital spending has changed that situation

Vodafone traditionally generates ~euro13 billion in operating cash flow per year which it uses to pay for capital expenditures spectrum and dividends On average Vodafone spends ~euro15 billion per year to acquire spectrum and euro4 billion per year to cover its dividend This implies that in order for free cash flow to cover the dividend Vodafone cannot spend more than euro75 billion per year on capital expenditures In normal years this is not difficult However capital expenditures cost Vodafone euro105 billion per year during fiscal 2015-2016 (the VOD fiscal year ends March 30th) due to Project Spring Furthermore there have been ongoing concerns that intense price competition would return and that Vodafonersquos expenses could remain elevated

These factors have been a major overhang for the companyrsquos share price and a popular topic of investor debate has been whether VODrsquos free cash flow will be able to cover its dividend going forward After analyzing Vodafonersquos cost structure competitive trends and the longer-term historical capital expenditure levels for both Vodafone and its competitors we concluded that the company would be able to cover its dividend with free cash flow and so far this has turned out to be the case

EMERGING MARKETS GROWTH OPPORTUNITY

Emerging markets represent a sizeable growth opportunity for Vodafone Its emerging markets business accounts for 75 of total company subscribers but only 33 of total company revenues

This is because monthly average mobile revenue per user (ARPU) is euro15 in Europe but only (for example) euro25 in India and euro5 in South Africa As emerging economies grow we expect demand for data and ARPU to both increase accordingly

VALUATION amp RISKS

Based on our analysis assuming current trends continue we believe that Vodafonersquos American Depository Receipts have a fair value of $33 with greater upside if emerging market ARPUs come closer to European levels Naturally if price wars resume in enough of Vodafonersquos markets there is also potential for downside risk

Telecom carriers are a high fixed-cost businesses and are notorious for fierce price wars After all once a carrier has spent the large sums needed to build maintain and periodically upgrade a network the marginal cost of adding a new customer is very low In addition Vodafonersquos developed markets which account for the bulk of profits are mature and saturated making

competition for customers all the more vigorous However the higher-growth emerging markets arenrsquot immune to severe price competition either Indiarsquos richest person Mukesh Ambani invested $25 billion in creating upstart carrier Reliance JIO to help subsidize free service and build a subscriber base from scratch That was more money than the $21 billion market cap of Indiarsquos largest carrier Bharti Airtel It is very difficult to compete with such adversaries who are willing to operate at a loss for extended periods of time

VODrsquos presence in a variety of different geographic markets helps mitigate this risk by way of diversification but does not eliminate it

8

IS THE EQUITY MARKET OVERLY CONCENTRATED AT THE TOPAARON COHEN PhD Partner President Portfolio ManagerCHRISTOPHER CONWAY Por1113088tfolio Manager

The 13 and 20 levels for the Top 5 and Top 10 suggest that the average market cap of each stock

within those groups represents approximately 2-3 of the SampP 500 market capitalization This is

consistent with a previous FPCM study in which we showed that size becomes restrictive for valuation

when individual stocks reach concentration levels of 4-5 of the total US market capitalization

(as illustrated in the graph below)

At first glance it is difficult not to be taken aback by the sheer size of the largest market capitalization stocks in the SampP 500 The two largest stocks Apple and Google for example each have market capitalizations of approximately $700bn bigger than the combined market capitalizations of Wal-Mart Stores Coca-Cola and Procter amp Gamble In addition to Apple and Google there are an additional four companies (Microsoft Amazon Facebook and Berkshire Hathaway) that each have market capitalizations of greater than $400bn an accomplishment that only one company (Apple) could claim at the end of 2014 and no company could claim at the end of 2010 merely seven years ago

Over the past few months some of these large-capitalization companies in particular the technology related companies have outperformed the market by a significant margin raising concerns about too much concentration at the top and a market driven just by a few companies

However to our surprise (see graph below) we found that the market capitalizations of the top 5 amp 10 companies represented only 13 and 20 respectively of the SampP 500 total market capitalization These are levels of concentration that are clearly in-line with historical averages and well below peak levels

There has been significant talk in the media about a few stocks leading the market In this piece we examine the market concentration of the largest US firms relative to historical levels and explore the potential impact concentration could have on the valuations of leading companies

9

WHAT ARE THE INVESTMENT RAMIFICATIONS

According to financial theory the level of market concentration is irrelevant to valuation as supply is assumed to be ldquoelasticrdquo (ie market cap is independent of supply) Nevertheless in practice investors and especially professional investors want diversified portfolios They want to avoid being overly exposed to individual assets which at the margin can place a lid on valuation

Consider the case of Apple in 2011-2012 Why did the stock trade at a low multiple in spite of being a well-known company covered by many analysts with bullish outlooks a leader in its field and admired worldwide We dare to speculate that one of the reasons the stock became less sensitive to earnings and improving fundamentals resulting in a lower multiple was that all the ldquobullishrdquo investors had reached close to their maximum potential allocation to the stock (maybe 5-7) if they were to remain diversified and those who didnrsquot own the stock were unwilling to buy it at the level of the market price These two factors resulted in a peak market cap being reached at 4 of the SampP 500 as depicted in the above graph

Thus at the extreme market concentration could be an important barrier to higher valuations irrespective of short- and medium-term market fundamentals

DOL FIDUCIARY RULE VINCE MARSDEN Partner SVP of Financial Planning

The Department of Labor (DOL) Fiduciary Rule which has been featured extensively in the financial and mainstream media in recent months came into effect June 9 2017

The DOL Fiduciary Rule mandates that all financial professionals who advise retirement plans or provide retirement planning advice are legally and ethically bound to act as fiduciaries This means that such advisors must now always act in the rdquobest interestrdquo of their clients placing their clientsrsquo interests before their own and they must disclose any potential conflicts of interest including reporting to the client any and all fees or commissions they receive for the products and investments they recommend or sell

While this new rule will have some affect on all financial advisors it will be most impactful on those who generate income from commission such as brokers and insurance agents As a Registered

Investment Advisor (RIA) FPCM was already held to this fiduciary standard and we do not receive commissions of any type

In contrast to FPCM and other RIArsquos prior to the introduction of this new rule brokers and insurance professionals were held to a less-stringent ldquosuitabilityrdquo standard requiring only that they provide products and recommendations ldquosuitablerdquo to their clientsrsquo needs and objectives It is likely that many of the commision structures used by these professionals will be changed or eliminated as a result of the new Fiduciary Rule

10

INVESTMENT ldquoBALANCE SHEETrdquoINVESTMENT ldquoBALANCE SHEETrdquo

We are in the midst of a synchronized global recovery with Europe Japan amp emerging markets joining the US in a recovery mode

Central banks are unlikely to tighten monetary policy aggressively over the next 2 years

Global earnings are growing after almost 2 years of an ldquoearnings-recessionrdquo

Contrary to the post-recession years fiscal policy is likely to be tailwind for global growth over the next several years

Corporate tax reform amp lower regulatory pressure in the US could be an important catalyst for faster economic growth

US consumer spending should continue to be supported by increasing employment amp wages a recovery in household wealth and the end of consumer de-leveraging

The rate of inflation is expected to remain reasonably low in the short- and medium-term

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 housing credit) are not over-extended

Equity valuation is expensive in absolute terms relative to history but over-valuation is not extreme especially relative to free-cash flows and interest rates

The Federal Reserve is already in a ldquotighteningrdquo mode albeit at a moderate pace In addition the Fed is expected to start reducing its balance sheet this year and the ECB is expected to follow suit starting in 2018

Fiscal stimulus would be a tailwind for the global economy in the medium-term but the debt level is high and too much stimulus could end up being counter-productive in the long-term

An aggressive trade policy by the new US administration could be highly detrimental to global economic growth

The Chinese economy has stabilized over the past year but only after significant fiscal stimulus in 2016 that resulted in a higher debt level and capital outflows Global growth commodity prices and emerging economies would be seriously affected by negative developments in China

Lower productivity the aging of the population in the developed economies and low labor participation are important long-term headwinds for global economic growth

Inflationary expectations are extremely low Even a random increase in headline inflation figures could scare the markets and put significant pressure on monetary authorities

US Investors have high expectations regarding the potential for deregulation tax reform and fiscal stimulus This political agenda is ambitious and might be difficult to fulfill

The combination of excess liquidity low volatility ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

Geo-political amp political risks continue to increase across the globe

Political ldquoPopulismrdquo on the rise around the world could have major long-term economic consequences

Equity valuations are high in absolute terms versus historical standards

Tail Risks (1) Banking crises in China (2) Conflict with North Korea or Iran (3) Disintegration of the Eurozone

+ -

-

-

-

-

-

-

-

-

-

-

-

POSITIVES CONCERNS

+

+

+

+

+

+

+

+

11

Financial Partners Capital Management

150 East 52nd Street New York NY 10022

20900 NE 30th Avenue Suite 517Aventura FL 33180

t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm net | LinkedIn

We hope you have enjoyed this publication Please contact us with your questions and with your thoughts and ideas at contactfpcm net We look forward to hearing from you

Thank you for your continued confidence and support

Your FPCM Team

7

FREE CASH FLOW amp DIVIDEND

During and immediately following its Project Spring initiative Vodafone wasnrsquot generating enough free cash flow to cover its dividend which at 6 was quite attractive Their recent return to lower levels of capital spending has changed that situation

Vodafone traditionally generates ~euro13 billion in operating cash flow per year which it uses to pay for capital expenditures spectrum and dividends On average Vodafone spends ~euro15 billion per year to acquire spectrum and euro4 billion per year to cover its dividend This implies that in order for free cash flow to cover the dividend Vodafone cannot spend more than euro75 billion per year on capital expenditures In normal years this is not difficult However capital expenditures cost Vodafone euro105 billion per year during fiscal 2015-2016 (the VOD fiscal year ends March 30th) due to Project Spring Furthermore there have been ongoing concerns that intense price competition would return and that Vodafonersquos expenses could remain elevated

These factors have been a major overhang for the companyrsquos share price and a popular topic of investor debate has been whether VODrsquos free cash flow will be able to cover its dividend going forward After analyzing Vodafonersquos cost structure competitive trends and the longer-term historical capital expenditure levels for both Vodafone and its competitors we concluded that the company would be able to cover its dividend with free cash flow and so far this has turned out to be the case

EMERGING MARKETS GROWTH OPPORTUNITY

Emerging markets represent a sizeable growth opportunity for Vodafone Its emerging markets business accounts for 75 of total company subscribers but only 33 of total company revenues

This is because monthly average mobile revenue per user (ARPU) is euro15 in Europe but only (for example) euro25 in India and euro5 in South Africa As emerging economies grow we expect demand for data and ARPU to both increase accordingly

VALUATION amp RISKS

Based on our analysis assuming current trends continue we believe that Vodafonersquos American Depository Receipts have a fair value of $33 with greater upside if emerging market ARPUs come closer to European levels Naturally if price wars resume in enough of Vodafonersquos markets there is also potential for downside risk

Telecom carriers are a high fixed-cost businesses and are notorious for fierce price wars After all once a carrier has spent the large sums needed to build maintain and periodically upgrade a network the marginal cost of adding a new customer is very low In addition Vodafonersquos developed markets which account for the bulk of profits are mature and saturated making

competition for customers all the more vigorous However the higher-growth emerging markets arenrsquot immune to severe price competition either Indiarsquos richest person Mukesh Ambani invested $25 billion in creating upstart carrier Reliance JIO to help subsidize free service and build a subscriber base from scratch That was more money than the $21 billion market cap of Indiarsquos largest carrier Bharti Airtel It is very difficult to compete with such adversaries who are willing to operate at a loss for extended periods of time

VODrsquos presence in a variety of different geographic markets helps mitigate this risk by way of diversification but does not eliminate it

8

IS THE EQUITY MARKET OVERLY CONCENTRATED AT THE TOPAARON COHEN PhD Partner President Portfolio ManagerCHRISTOPHER CONWAY Por1113088tfolio Manager

The 13 and 20 levels for the Top 5 and Top 10 suggest that the average market cap of each stock

within those groups represents approximately 2-3 of the SampP 500 market capitalization This is

consistent with a previous FPCM study in which we showed that size becomes restrictive for valuation

when individual stocks reach concentration levels of 4-5 of the total US market capitalization

(as illustrated in the graph below)

At first glance it is difficult not to be taken aback by the sheer size of the largest market capitalization stocks in the SampP 500 The two largest stocks Apple and Google for example each have market capitalizations of approximately $700bn bigger than the combined market capitalizations of Wal-Mart Stores Coca-Cola and Procter amp Gamble In addition to Apple and Google there are an additional four companies (Microsoft Amazon Facebook and Berkshire Hathaway) that each have market capitalizations of greater than $400bn an accomplishment that only one company (Apple) could claim at the end of 2014 and no company could claim at the end of 2010 merely seven years ago

Over the past few months some of these large-capitalization companies in particular the technology related companies have outperformed the market by a significant margin raising concerns about too much concentration at the top and a market driven just by a few companies

However to our surprise (see graph below) we found that the market capitalizations of the top 5 amp 10 companies represented only 13 and 20 respectively of the SampP 500 total market capitalization These are levels of concentration that are clearly in-line with historical averages and well below peak levels

There has been significant talk in the media about a few stocks leading the market In this piece we examine the market concentration of the largest US firms relative to historical levels and explore the potential impact concentration could have on the valuations of leading companies

9

WHAT ARE THE INVESTMENT RAMIFICATIONS

According to financial theory the level of market concentration is irrelevant to valuation as supply is assumed to be ldquoelasticrdquo (ie market cap is independent of supply) Nevertheless in practice investors and especially professional investors want diversified portfolios They want to avoid being overly exposed to individual assets which at the margin can place a lid on valuation

Consider the case of Apple in 2011-2012 Why did the stock trade at a low multiple in spite of being a well-known company covered by many analysts with bullish outlooks a leader in its field and admired worldwide We dare to speculate that one of the reasons the stock became less sensitive to earnings and improving fundamentals resulting in a lower multiple was that all the ldquobullishrdquo investors had reached close to their maximum potential allocation to the stock (maybe 5-7) if they were to remain diversified and those who didnrsquot own the stock were unwilling to buy it at the level of the market price These two factors resulted in a peak market cap being reached at 4 of the SampP 500 as depicted in the above graph

Thus at the extreme market concentration could be an important barrier to higher valuations irrespective of short- and medium-term market fundamentals

DOL FIDUCIARY RULE VINCE MARSDEN Partner SVP of Financial Planning

The Department of Labor (DOL) Fiduciary Rule which has been featured extensively in the financial and mainstream media in recent months came into effect June 9 2017

The DOL Fiduciary Rule mandates that all financial professionals who advise retirement plans or provide retirement planning advice are legally and ethically bound to act as fiduciaries This means that such advisors must now always act in the rdquobest interestrdquo of their clients placing their clientsrsquo interests before their own and they must disclose any potential conflicts of interest including reporting to the client any and all fees or commissions they receive for the products and investments they recommend or sell

While this new rule will have some affect on all financial advisors it will be most impactful on those who generate income from commission such as brokers and insurance agents As a Registered

Investment Advisor (RIA) FPCM was already held to this fiduciary standard and we do not receive commissions of any type

In contrast to FPCM and other RIArsquos prior to the introduction of this new rule brokers and insurance professionals were held to a less-stringent ldquosuitabilityrdquo standard requiring only that they provide products and recommendations ldquosuitablerdquo to their clientsrsquo needs and objectives It is likely that many of the commision structures used by these professionals will be changed or eliminated as a result of the new Fiduciary Rule

10

INVESTMENT ldquoBALANCE SHEETrdquoINVESTMENT ldquoBALANCE SHEETrdquo

We are in the midst of a synchronized global recovery with Europe Japan amp emerging markets joining the US in a recovery mode

Central banks are unlikely to tighten monetary policy aggressively over the next 2 years

Global earnings are growing after almost 2 years of an ldquoearnings-recessionrdquo

Contrary to the post-recession years fiscal policy is likely to be tailwind for global growth over the next several years

Corporate tax reform amp lower regulatory pressure in the US could be an important catalyst for faster economic growth

US consumer spending should continue to be supported by increasing employment amp wages a recovery in household wealth and the end of consumer de-leveraging

The rate of inflation is expected to remain reasonably low in the short- and medium-term

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 housing credit) are not over-extended

Equity valuation is expensive in absolute terms relative to history but over-valuation is not extreme especially relative to free-cash flows and interest rates

The Federal Reserve is already in a ldquotighteningrdquo mode albeit at a moderate pace In addition the Fed is expected to start reducing its balance sheet this year and the ECB is expected to follow suit starting in 2018

Fiscal stimulus would be a tailwind for the global economy in the medium-term but the debt level is high and too much stimulus could end up being counter-productive in the long-term

An aggressive trade policy by the new US administration could be highly detrimental to global economic growth

The Chinese economy has stabilized over the past year but only after significant fiscal stimulus in 2016 that resulted in a higher debt level and capital outflows Global growth commodity prices and emerging economies would be seriously affected by negative developments in China

Lower productivity the aging of the population in the developed economies and low labor participation are important long-term headwinds for global economic growth

Inflationary expectations are extremely low Even a random increase in headline inflation figures could scare the markets and put significant pressure on monetary authorities

US Investors have high expectations regarding the potential for deregulation tax reform and fiscal stimulus This political agenda is ambitious and might be difficult to fulfill

The combination of excess liquidity low volatility ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

Geo-political amp political risks continue to increase across the globe

Political ldquoPopulismrdquo on the rise around the world could have major long-term economic consequences

Equity valuations are high in absolute terms versus historical standards

Tail Risks (1) Banking crises in China (2) Conflict with North Korea or Iran (3) Disintegration of the Eurozone

+ -

-

-

-

-

-

-

-

-

-

-

-

POSITIVES CONCERNS

+

+

+

+

+

+

+

+

11

Financial Partners Capital Management

150 East 52nd Street New York NY 10022

20900 NE 30th Avenue Suite 517Aventura FL 33180

t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm net | LinkedIn

We hope you have enjoyed this publication Please contact us with your questions and with your thoughts and ideas at contactfpcm net We look forward to hearing from you

Thank you for your continued confidence and support

Your FPCM Team

8

IS THE EQUITY MARKET OVERLY CONCENTRATED AT THE TOPAARON COHEN PhD Partner President Portfolio ManagerCHRISTOPHER CONWAY Por1113088tfolio Manager

The 13 and 20 levels for the Top 5 and Top 10 suggest that the average market cap of each stock

within those groups represents approximately 2-3 of the SampP 500 market capitalization This is

consistent with a previous FPCM study in which we showed that size becomes restrictive for valuation

when individual stocks reach concentration levels of 4-5 of the total US market capitalization

(as illustrated in the graph below)

At first glance it is difficult not to be taken aback by the sheer size of the largest market capitalization stocks in the SampP 500 The two largest stocks Apple and Google for example each have market capitalizations of approximately $700bn bigger than the combined market capitalizations of Wal-Mart Stores Coca-Cola and Procter amp Gamble In addition to Apple and Google there are an additional four companies (Microsoft Amazon Facebook and Berkshire Hathaway) that each have market capitalizations of greater than $400bn an accomplishment that only one company (Apple) could claim at the end of 2014 and no company could claim at the end of 2010 merely seven years ago

Over the past few months some of these large-capitalization companies in particular the technology related companies have outperformed the market by a significant margin raising concerns about too much concentration at the top and a market driven just by a few companies

However to our surprise (see graph below) we found that the market capitalizations of the top 5 amp 10 companies represented only 13 and 20 respectively of the SampP 500 total market capitalization These are levels of concentration that are clearly in-line with historical averages and well below peak levels

There has been significant talk in the media about a few stocks leading the market In this piece we examine the market concentration of the largest US firms relative to historical levels and explore the potential impact concentration could have on the valuations of leading companies

9

WHAT ARE THE INVESTMENT RAMIFICATIONS

According to financial theory the level of market concentration is irrelevant to valuation as supply is assumed to be ldquoelasticrdquo (ie market cap is independent of supply) Nevertheless in practice investors and especially professional investors want diversified portfolios They want to avoid being overly exposed to individual assets which at the margin can place a lid on valuation

Consider the case of Apple in 2011-2012 Why did the stock trade at a low multiple in spite of being a well-known company covered by many analysts with bullish outlooks a leader in its field and admired worldwide We dare to speculate that one of the reasons the stock became less sensitive to earnings and improving fundamentals resulting in a lower multiple was that all the ldquobullishrdquo investors had reached close to their maximum potential allocation to the stock (maybe 5-7) if they were to remain diversified and those who didnrsquot own the stock were unwilling to buy it at the level of the market price These two factors resulted in a peak market cap being reached at 4 of the SampP 500 as depicted in the above graph

Thus at the extreme market concentration could be an important barrier to higher valuations irrespective of short- and medium-term market fundamentals

DOL FIDUCIARY RULE VINCE MARSDEN Partner SVP of Financial Planning

The Department of Labor (DOL) Fiduciary Rule which has been featured extensively in the financial and mainstream media in recent months came into effect June 9 2017

The DOL Fiduciary Rule mandates that all financial professionals who advise retirement plans or provide retirement planning advice are legally and ethically bound to act as fiduciaries This means that such advisors must now always act in the rdquobest interestrdquo of their clients placing their clientsrsquo interests before their own and they must disclose any potential conflicts of interest including reporting to the client any and all fees or commissions they receive for the products and investments they recommend or sell

While this new rule will have some affect on all financial advisors it will be most impactful on those who generate income from commission such as brokers and insurance agents As a Registered

Investment Advisor (RIA) FPCM was already held to this fiduciary standard and we do not receive commissions of any type

In contrast to FPCM and other RIArsquos prior to the introduction of this new rule brokers and insurance professionals were held to a less-stringent ldquosuitabilityrdquo standard requiring only that they provide products and recommendations ldquosuitablerdquo to their clientsrsquo needs and objectives It is likely that many of the commision structures used by these professionals will be changed or eliminated as a result of the new Fiduciary Rule

10

INVESTMENT ldquoBALANCE SHEETrdquoINVESTMENT ldquoBALANCE SHEETrdquo

We are in the midst of a synchronized global recovery with Europe Japan amp emerging markets joining the US in a recovery mode

Central banks are unlikely to tighten monetary policy aggressively over the next 2 years

Global earnings are growing after almost 2 years of an ldquoearnings-recessionrdquo

Contrary to the post-recession years fiscal policy is likely to be tailwind for global growth over the next several years

Corporate tax reform amp lower regulatory pressure in the US could be an important catalyst for faster economic growth

US consumer spending should continue to be supported by increasing employment amp wages a recovery in household wealth and the end of consumer de-leveraging

The rate of inflation is expected to remain reasonably low in the short- and medium-term

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 housing credit) are not over-extended

Equity valuation is expensive in absolute terms relative to history but over-valuation is not extreme especially relative to free-cash flows and interest rates

The Federal Reserve is already in a ldquotighteningrdquo mode albeit at a moderate pace In addition the Fed is expected to start reducing its balance sheet this year and the ECB is expected to follow suit starting in 2018

Fiscal stimulus would be a tailwind for the global economy in the medium-term but the debt level is high and too much stimulus could end up being counter-productive in the long-term

An aggressive trade policy by the new US administration could be highly detrimental to global economic growth

The Chinese economy has stabilized over the past year but only after significant fiscal stimulus in 2016 that resulted in a higher debt level and capital outflows Global growth commodity prices and emerging economies would be seriously affected by negative developments in China

Lower productivity the aging of the population in the developed economies and low labor participation are important long-term headwinds for global economic growth

Inflationary expectations are extremely low Even a random increase in headline inflation figures could scare the markets and put significant pressure on monetary authorities

US Investors have high expectations regarding the potential for deregulation tax reform and fiscal stimulus This political agenda is ambitious and might be difficult to fulfill

The combination of excess liquidity low volatility ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

Geo-political amp political risks continue to increase across the globe

Political ldquoPopulismrdquo on the rise around the world could have major long-term economic consequences

Equity valuations are high in absolute terms versus historical standards

Tail Risks (1) Banking crises in China (2) Conflict with North Korea or Iran (3) Disintegration of the Eurozone

+ -

-

-

-

-

-

-

-

-

-

-

-

POSITIVES CONCERNS

+

+

+

+

+

+

+

+

11

Financial Partners Capital Management

150 East 52nd Street New York NY 10022

20900 NE 30th Avenue Suite 517Aventura FL 33180

t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm net | LinkedIn

We hope you have enjoyed this publication Please contact us with your questions and with your thoughts and ideas at contactfpcm net We look forward to hearing from you

Thank you for your continued confidence and support

Your FPCM Team

9

WHAT ARE THE INVESTMENT RAMIFICATIONS

According to financial theory the level of market concentration is irrelevant to valuation as supply is assumed to be ldquoelasticrdquo (ie market cap is independent of supply) Nevertheless in practice investors and especially professional investors want diversified portfolios They want to avoid being overly exposed to individual assets which at the margin can place a lid on valuation

Consider the case of Apple in 2011-2012 Why did the stock trade at a low multiple in spite of being a well-known company covered by many analysts with bullish outlooks a leader in its field and admired worldwide We dare to speculate that one of the reasons the stock became less sensitive to earnings and improving fundamentals resulting in a lower multiple was that all the ldquobullishrdquo investors had reached close to their maximum potential allocation to the stock (maybe 5-7) if they were to remain diversified and those who didnrsquot own the stock were unwilling to buy it at the level of the market price These two factors resulted in a peak market cap being reached at 4 of the SampP 500 as depicted in the above graph

Thus at the extreme market concentration could be an important barrier to higher valuations irrespective of short- and medium-term market fundamentals

DOL FIDUCIARY RULE VINCE MARSDEN Partner SVP of Financial Planning

The Department of Labor (DOL) Fiduciary Rule which has been featured extensively in the financial and mainstream media in recent months came into effect June 9 2017

The DOL Fiduciary Rule mandates that all financial professionals who advise retirement plans or provide retirement planning advice are legally and ethically bound to act as fiduciaries This means that such advisors must now always act in the rdquobest interestrdquo of their clients placing their clientsrsquo interests before their own and they must disclose any potential conflicts of interest including reporting to the client any and all fees or commissions they receive for the products and investments they recommend or sell

While this new rule will have some affect on all financial advisors it will be most impactful on those who generate income from commission such as brokers and insurance agents As a Registered

Investment Advisor (RIA) FPCM was already held to this fiduciary standard and we do not receive commissions of any type

In contrast to FPCM and other RIArsquos prior to the introduction of this new rule brokers and insurance professionals were held to a less-stringent ldquosuitabilityrdquo standard requiring only that they provide products and recommendations ldquosuitablerdquo to their clientsrsquo needs and objectives It is likely that many of the commision structures used by these professionals will be changed or eliminated as a result of the new Fiduciary Rule

10

INVESTMENT ldquoBALANCE SHEETrdquoINVESTMENT ldquoBALANCE SHEETrdquo

We are in the midst of a synchronized global recovery with Europe Japan amp emerging markets joining the US in a recovery mode

Central banks are unlikely to tighten monetary policy aggressively over the next 2 years

Global earnings are growing after almost 2 years of an ldquoearnings-recessionrdquo

Contrary to the post-recession years fiscal policy is likely to be tailwind for global growth over the next several years

Corporate tax reform amp lower regulatory pressure in the US could be an important catalyst for faster economic growth

US consumer spending should continue to be supported by increasing employment amp wages a recovery in household wealth and the end of consumer de-leveraging

The rate of inflation is expected to remain reasonably low in the short- and medium-term

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 housing credit) are not over-extended

Equity valuation is expensive in absolute terms relative to history but over-valuation is not extreme especially relative to free-cash flows and interest rates

The Federal Reserve is already in a ldquotighteningrdquo mode albeit at a moderate pace In addition the Fed is expected to start reducing its balance sheet this year and the ECB is expected to follow suit starting in 2018

Fiscal stimulus would be a tailwind for the global economy in the medium-term but the debt level is high and too much stimulus could end up being counter-productive in the long-term

An aggressive trade policy by the new US administration could be highly detrimental to global economic growth

The Chinese economy has stabilized over the past year but only after significant fiscal stimulus in 2016 that resulted in a higher debt level and capital outflows Global growth commodity prices and emerging economies would be seriously affected by negative developments in China

Lower productivity the aging of the population in the developed economies and low labor participation are important long-term headwinds for global economic growth

Inflationary expectations are extremely low Even a random increase in headline inflation figures could scare the markets and put significant pressure on monetary authorities

US Investors have high expectations regarding the potential for deregulation tax reform and fiscal stimulus This political agenda is ambitious and might be difficult to fulfill

The combination of excess liquidity low volatility ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

Geo-political amp political risks continue to increase across the globe

Political ldquoPopulismrdquo on the rise around the world could have major long-term economic consequences

Equity valuations are high in absolute terms versus historical standards

Tail Risks (1) Banking crises in China (2) Conflict with North Korea or Iran (3) Disintegration of the Eurozone

+ -

-

-

-

-

-

-

-

-

-

-

-

POSITIVES CONCERNS

+

+

+

+

+

+

+

+

11

Financial Partners Capital Management

150 East 52nd Street New York NY 10022

20900 NE 30th Avenue Suite 517Aventura FL 33180

t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm net | LinkedIn

We hope you have enjoyed this publication Please contact us with your questions and with your thoughts and ideas at contactfpcm net We look forward to hearing from you

Thank you for your continued confidence and support

Your FPCM Team

10

INVESTMENT ldquoBALANCE SHEETrdquoINVESTMENT ldquoBALANCE SHEETrdquo

We are in the midst of a synchronized global recovery with Europe Japan amp emerging markets joining the US in a recovery mode

Central banks are unlikely to tighten monetary policy aggressively over the next 2 years

Global earnings are growing after almost 2 years of an ldquoearnings-recessionrdquo

Contrary to the post-recession years fiscal policy is likely to be tailwind for global growth over the next several years

Corporate tax reform amp lower regulatory pressure in the US could be an important catalyst for faster economic growth

US consumer spending should continue to be supported by increasing employment amp wages a recovery in household wealth and the end of consumer de-leveraging

The rate of inflation is expected to remain reasonably low in the short- and medium-term

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 housing credit) are not over-extended

Equity valuation is expensive in absolute terms relative to history but over-valuation is not extreme especially relative to free-cash flows and interest rates

The Federal Reserve is already in a ldquotighteningrdquo mode albeit at a moderate pace In addition the Fed is expected to start reducing its balance sheet this year and the ECB is expected to follow suit starting in 2018

Fiscal stimulus would be a tailwind for the global economy in the medium-term but the debt level is high and too much stimulus could end up being counter-productive in the long-term

An aggressive trade policy by the new US administration could be highly detrimental to global economic growth

The Chinese economy has stabilized over the past year but only after significant fiscal stimulus in 2016 that resulted in a higher debt level and capital outflows Global growth commodity prices and emerging economies would be seriously affected by negative developments in China

Lower productivity the aging of the population in the developed economies and low labor participation are important long-term headwinds for global economic growth

Inflationary expectations are extremely low Even a random increase in headline inflation figures could scare the markets and put significant pressure on monetary authorities

US Investors have high expectations regarding the potential for deregulation tax reform and fiscal stimulus This political agenda is ambitious and might be difficult to fulfill

The combination of excess liquidity low volatility ldquopassiverdquo and quant strategies could cause major market disruptions in a down market

Geo-political amp political risks continue to increase across the globe

Political ldquoPopulismrdquo on the rise around the world could have major long-term economic consequences

Equity valuations are high in absolute terms versus historical standards

Tail Risks (1) Banking crises in China (2) Conflict with North Korea or Iran (3) Disintegration of the Eurozone

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POSITIVES CONCERNS

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11

Financial Partners Capital Management

150 East 52nd Street New York NY 10022

20900 NE 30th Avenue Suite 517Aventura FL 33180

t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm net | LinkedIn

We hope you have enjoyed this publication Please contact us with your questions and with your thoughts and ideas at contactfpcm net We look forward to hearing from you

Thank you for your continued confidence and support

Your FPCM Team

11

Financial Partners Capital Management

150 East 52nd Street New York NY 10022

20900 NE 30th Avenue Suite 517Aventura FL 33180

t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm net | LinkedIn

We hope you have enjoyed this publication Please contact us with your questions and with your thoughts and ideas at contactfpcm net We look forward to hearing from you

Thank you for your continued confidence and support

Your FPCM Team