US Election Commentary Focuses on Staying True to Value Process

¹Comments and opinions expressed reflect solely the personal views of Anthony Lombardi as of 12/31/16, and not any other individual or firm. Such views
are not a recommendation to buy or sell any security, fund or portfolio. Any investment decision should be made in consultation with a financial advisor.
DECEMBER 2016 INVESTMENT COMMENTARY
“You’re F Hired!”…now, get to work
As previewed in our September quarterly Investment Commentary, barring the unforeseen, the sun would not
only rise on November 9th
, 2016, but America would waken to a President-elect and new Congressional dynamic.
And, despite two major candidates with high unfavorable ratings, either a seasoned insider or unseasoned
outsider would serve as America’s leader for the next four years. As with many election cycles before it, we
stated the country would (ultimately) march forward despite a bifurcated electorate, with the voice of its people
heard, and all newly elected leaders held accountable. We further noted, the cycle would repeat again sometime
early 2019, with the unofficial start of the 2020 Presidential election season, but not before the UK officially exits
the EU, fiscal and central bank policies fluctuate, and economies around the world react. Perceptions of shock
and awe aside, the market’s voting machine would run continuously, greased by the drumbeat of market
participants debating fundamentals, and causing valuations of companies across the globe to rise and fall
accordingly. The election did occur, there is a president-elect and new congress, the Federal Reserve delivered
another installment of central bank monetary policy change with more likely, fiscal policy is on-deck and capital
markets are open. In hindsight, perhaps a slight error we made regarding the election was an assumption most
of the nation would awaken to the outcome the next morning, when in fact many did not even sleep, instead
preferring to pull an all-nighter.

While the tallying of election votes may have occurred in less than a 24-
hour period, certainly the investment backdrop did not formulate
overnight; quite simply, it never does. Similarly, we believe a disciplined
investment process and philosophy should not radically alter portfolio
stock selection and sector allocation as positioning should reflect long-
term assumptions in advance. Given our high conviction, contrarian,
value-based process, we see no need to scramble adjusting our long-
standing views, or portfolio positioning, due to a new president and
administration. That is not to say we will now disengage from prudently
honoring our process. Quite the contrary, it is our value process and
convictions that serve as a constant in the foundation for positioning
against all backdrops. Last we checked, a large percentage of investable
companies in our opportunity set have been around for a period much
longer than a couple presidential administrations. With an initial
expected investment horizon of 3-5 years for typical holding, implicit in
the tail is a duration longer than a 1-term president, and two-fold a 1-term congressional representative. We
have made repeated comments regarding “Bifurcation” as a key, and broad underlying theme during the past
year, and one that has very much played into our thinking, serving as a contextual guide as we implemented our
philosophy and process. During 2016, we pointed to illustrative examples of how multiple lenses can serve to
foster material swings in investor psychology and emotions; Brexit and the US election perhaps the two most
notable. We find tremendous irony in commentary discounting the degree of importance of the extended
political period preceding a presidential election, only to then witness a deluge of opinions and comments,
shortly thereafter, placing a premium on the importance of investment positioning. The volume of
recommendations proffered is a menu complete with recommended portfolio changes best suited for the (now
widely-known) outcome, and potential implementation of a new administrative policy agenda. This practitioner
grew up participating and competing in multiple sports, from an early age through college, and then long stints
serving as a volunteer coach and administrator in organized youth sports. There are many similarities and
comparisons in sports that are analogous to the investment profession and elections. Chief among these are a
scoreboard—at the end of the day, everyone knows the result. Congratulations President-elect Trump…You’re
Hired! Now, let’s all get to work.
Whether a function of near- or intermediate-term fundamentals, and/or investor psychology, our focus remains
on recognizing, assessing and seizing upon valuations that potentially present opportunities, be they BUY or
SELL. As contrarian, high conviction, long-term investors, employing an active concentrated large cap value
strategy, such swings serve as a building block in our constant assault seeking out opportunities for entry into,
and exit from, targeted investment positions. In implementing our disciplined process, we overlay our longer-
term secular view as it pertains to the broader macroeconomic and market backdrop, which results in active
sector and stock exposures. Due to several of these factors, we have maintained a notably contrarian view in
our LCV portfolio, with a heavy dose of cheapness, free cash flow and MOS (margin of safety). During the latter
part of 2016, our contrarian view became more main stream.

Portfolio Positioning & Review
Since inception, our portfolio positioning has been very mindful of what we viewed as numerous opportunities
in both cheapness (in valuation) and favorable corporate operating leverage—quite simply, we did not concur
with a consensus view that the economic or market backdrop were as unfavorable as generally perceived.
Through our lense, we have seen things quite differently, and our LCV portfolio positioning has reflected the
same. We have remained contrarian for compelling reasons, have stayed true to our process, and are steadfast
in our convictions.
Throughout 2016, despite headline valuation of broader indices, we believed numerous individual security
opportunities existed across several sectors of the domestic US stock market, boding particularly well for a more
concentrated, contrarian strategy. While our LCV portfolio remains fully exposed to all 11 sectors of the market,
our focus has been steadfast regarding a favorable disposition to traditionally cyclical areas where we believe a
combination of compelling valuations, financial statement strength, and near-term psychology have served to
compensate for risk, providing the inherent MOS we seek when investing over a 3-5-year time horizon. While
conscious of risk factors, we are investors viewing through a risk/reward prism, in active pursuit of opportunities
providing the right balance. Our conviction has been anchored in a belief that conditions, while not optimal,
have been attractive for generating returns over our stated time-horizon, a view that has been contrarian to
prevailing perceptions—but now appears market consensus has moved closer post the November US elections.
We have been of the opinion a combination of cheapness, maintaining a contrarian view, and seeking companies
possessing stable balance sheets and attractive FCF characteristics, provides a more compelling alternative to
portfolio positioned in a traditionally defensive manor (i.e. high allocations to sectors such as Staples,
Healthcare, Utilities, & Telecom). As regular readers of our commentary know, we have found such areas of the
large-cap market simply too rich, with many individual equities having valuation levels well above the broader
market. Most notable in this context had been the lofty valuations in Consumer Staples and Healthcare that
existed during the course of 2016, and which comprised a combined ~23% of the S&P 500 at year-end; materially
higher than our 13% combined target allocation to these two sectors. Notably, Healthcare has witnessed
valuation compression during the course of 2016. While other investors may choose to stray to own safety, our
value conscious simply will not allow us to pay any multiple for quality. With the broader S&P 500 trading at
~17x forward EPS, many traditionally defensive areas of the market commanded multiples at or above this level
entering 2016, particularly when viewed on a purely GAAP basis. We continue readily finding quality, balance
sheet strength, and cash flows much cheaper elsewhere. Not only has this been more acceptable to our
investment discipline, but also in recognition that forward long-term returns are typically correlated to point-of-
entry valuation multiples.
We don't see any need to change our investment views post-election, or post-rally. For us, it’s just about staying
true to our process and convictions. Thus, our portfolio positioning, sector allocations and stock positions are
largely unchanged exiting 2016, except for actions we took to monetize winners following corporate actions; or
where we underscored convictions in existing holdings; or to remain true to process constraints. Where we think
it prudent to rebalance, we continue to make active decisions, but without change to our conviction in the large
cap value opportunity set. We are still finding, buying and remaining owners of cheapness, MOS and compelling
FCF. When juxtaposed against our belief that favorable operating leverage opportunities exist in the economy,
and amongst the companies we target, we remain steadfast in how we desire to position our LCV portfolio.

Energy remains our most pronounced exception to our favorable cyclical bias. Our portfolio allocation continues
to emphasize a strategic decision to be prudent and mindful of our concerns. Notably, Energy remains a key
targeted underweight, 6% at quarter-end, ~155bps and 760bps below S&P 500 and R1KV, respectively. Despite
a rally off its lows earlier this year, WTI remains ~50% below its 2014 highs, and many energy-related share prices
are still well below comparable levels too. Our fundamental concerns are the same, and we think this is a story
that will take several years to fully play out. Many large cap Energy valuation multiples (Book Value, EBITDA, EPS,
FCF yield, etc.) on a trailing and forward basis are not compelling, indeed they are quite expensive or non-
existent (due to limited or nominal level of earnings), leverage is high and FCF is negative-to-modest during the
next 2 years, particularly should capital expenditures be ramped back up. With the S&P 500 weighting at ~7.5%,
from a shear process standpoint the maximum we could allocate to the sector would be ~11%. Concerns
regarding the ability of a large number of companies to generate meaningful and requisite FCF over our typical
investment horizon, unfavorable balance sheet developments (write-downs, dilutive capital raises, fire sale
prices of assets, etc.) and constrained capital management owing to multiple stress points in the end-market
keep us at bay. While cognizant of the rally in shares off their lows, for us the sector appears to be a
quintessential “value trap”, given a multitude of macro, secular and company specific issues, ranging from
demand/supply imbalance, record inventories, technological change, a less influential OPEC in the context of
history, corporate restructurings, balance sheet repair and various short/long-term macro factors across
developed and emerging market countries. While not all inclusive, these are among just several issues we have
previously noted, and we remain very cautious given near-record inventories, a technically-driven market and
itchy fingers on production triggers with any sustained price appreciation in the commodity. Against the Energy
sector’s current near-term fundamentals, and unfavorable secular backdrop, we remain of the opinion a
bifurcated, underweight allocation is most appropriate given our low level of conviction. Setting out to be a hero
against major secular changes, heightened visibility challenges for management, and a technically-driven sector,
is not an appetizing proposition looking out the next few years. In our opinion, it’s best to pursue less direct,
alternative opportunities to gain commodity-related exposure, with situations possessing better MOS and/or
more compelling risk/reward, while maintaining an underweight allocation vs the Energy sector directly. In the
event of lower for longer energy prices, other potential beneficiaries are more compelling. We believe long-term
secular trends and dynamics will ultimately prove more meaningful than any meeting of OPEC or its members.
2017 should prove interesting to watch as to whether end-market prices and production levels hold, and the
degree to which management teams stay true to the required financial discipline to justify share prices.
With respect to monetary policy, given the Fed moved to raise interest rates so late in 2016, one could simply
call their December action a “2017 event”, thereby putting the “actual” number of moves for 2017 at 4 for
rounding purposes (including the potential 3 on the Fed’s menu). With the first two moves out of the way, and
the election season over, we would not be surprised to see a more fluid pace of change regarding monetary
policy should situations warrant. This would include the possibility of at least one 50bp change amongst the
current unit count of rate change decisions anticipated, and/or more action steps than currently discounted by
the market. We believe data dependency will remain the foundation for policy, and any changes will have to be
justified by the backdrop.
Given potential for more favorable corporate tax code, deregulation, improving economic activity and executive
management confidence, along with a corresponding increase in capital and human resource investment, we

would not be surprised to witness actions that might lead to a re-ranking of capital management priorities. Such
changes could have negative implications for the level and/or pace of share repurchases and dividend increases
witnessed during the recovery period since the financial crisis, and would likely vary by sector. Given the saber
rattling regarding manufacturing and trade, supply chain issues could become quite noteworthy. With exposure
to a number of such factors, we note the Tech sector is squarely in several of these cross hairs, positive and
negative.
Key Trades & Attribution
We seeded a concentrated LCV strategy during the first quarter 2016, immediately taking the portfolio to a ~97%
invested position. Since inception, as opportunities have been presented, we have made several active decisions,
at both the stock and sector level. During 4Q16, the most notable included a 150bp INCREASE in our Industrial
Sector target, a 150bp DECREASE in our Consumer Discretionary sector target, selective rebalance trades in
individual holdings within CD, TECH, FIN, TEL & UTE sectors, and the exit of a corporate spinoff. For the third
consecutive quarter, fundamentals warranted one full position SALE during 4Q16 which was included in the
aforementioned sector allocation changes. As noted in prior commentaries, target sector weightings are
influenced by our top-down and bottom-up views. Year-end 2016 target and market value weights for our LCV
portfolio are detailed below.
On a market value basis, we ended 4Q16 with relatively unchanged cash ~0.6% (vs 0.5% prior qtr), below our
interim model target of 1.5%. Since inception, we continue to be methodical in deploying available cash, having
purposefully set aside some initial dry powder earlier in the year. From a process perspective, our targeted cash
range is designed to provide flexibility, allowing for repositioning within a highly concentrated, yet diversified
portfolio. We have a stated preference to monetize winners and/or sell-down based on process discipline, in so
doing avoid placing capital at risk by simply holding positions as place-markers. MOS is paramount for us and is
critical in limiting potential downside. Protection of capital is a covenant we are unwilling to break and we firmly
believe in utilizing our process-permitted cash level when situations dictate, to adhere to this core investment

principle. The full sale of Time Warner (TWX) in the December quarter following the announced acquisition by
AT&T (T), and the full sale of St. Jude Medical (STJ) during the June quarter following the announced acquisition
by Abbott Labs (ABT), serve as prime examples of our cash/MOS discipline, and to a lesser degree so do the more
significant rebalancing trades we executed during 2016.
Investment Performance. For the December quarter, our LCV portfolio generated total return of 7.36% vs the
Russell 1000 Value (R1KV) return of 6.66%, and broader S&P 500 return of 3.82%. Inception-to-date, our LCV
portfolio has generated total return of 26.79% vs R1KV return of 24.19% and broader S&P 500 return of 18.16%.
Our portfolio’s outperformance of 70bps vs R1KV in the December quarter reflected our continued high
convictions, underscored by several portfolio actions in the 2nd
, 3rd
, and 4th
quarters, as well as opportunistically
managing available cash throughout the year. Our LCV portfolio’s characteristics reflect a disciplined, contrarian,
value-oriented process. Despite strong outperformance in 2016, across nearly every valuation metric the
portfolio is materially cheaper, boasting higher yields (dividend & FCF) when compared to the broader S&P 500,
and R1KV, our primary value benchmark.
From a performance attribution standpoint, versus the R1KV, Allocation was a negative headwind while Security
Selection was a positive contributor during the December quarter, amounting to ~-65bps and ~+130bps,
respectively. Real Estate, Healthcare and Industrials were the 3 most significant contributors in total attribution,
while Technology, Financials and Energy were the most significant detractors. By Allocation, the Financial sector
had the largest negative attribution, while Consumer Staples was the largest positive contributor. By Stock
Selection, Financials was the single largest contributor, while Energy was the single largest drag. On an absolute
basis, our portfolio had three sectors decline quarter/quarter; Staples, Healthcare and Technology. Both Staples
and Healthcare declined in the R1KV. Since inception, no sectors in our portfolio, or the R1KV, declined on an
absolute basis. During 4Q16, we made several active decisions to both increase certain stock and sector level
weightings while reducing others, reflective of both our conviction level, process and targeted opportunities.
Included in these actions were decisions to exit one full position, while correspondingly establishing one new
full position. While there was little change in portfolio liquidity during the quarter, cash position was a headwind
of ~15bps due primarily to the strength in the overall market and our portfolio.
Consumer Discretionary target weighting reduced 150bps: 18.0% to 16.5%
While we reduced our CD weighting during the quarter, it was not reflective of a less bullish stance regarding
cyclical opportunities. When viewed holistically, in the context of both the drivers and other portfolio actions
during the quarter, we believe our cyclical bias to be very much intact. The 150bp reduction in CD sector weight
was multifold, and included a full sale of a 4.00% target position, a reclassification of another 3.00% position to
the Industrial Sector, a new full position purchase targeted at 4.00%, and one existing position target increased
to 4.50% from 3.00%. During the quarter we also sold a residual position in shares issued in a corporate spinoff
from one of our existing CD holdings. While we had interest in this newly formed entity, and considered
ownership, ultimately multiple factors, including market capitalization and more compelling opportunities
elsewhere provided the requisite justification to exit. The resulting spin also led to a reclassification of the parent
company to IND from CD, which further expanded the opportunity set to deploy capital in the CD sector,
including a new position purchase. The net result of these actions was a 150bp reduction in our aggregate CD
sector target weight.

Within CD, among the most significant actions was our full sale of Time Warner (TWX), which was an initial 4%
target position at inception. During the quarter, AT&T (T) announced the acquisition of TWX, at a significant
premium to our original purchase price, as well as TWX’s then market valuation prior to the news of merger
discussions. Our original purchase in TWX was based on multiple factors, including valuation, free cash flow
generation, a low capital intensity business model, franchise leadership positions within its addressable markets
and a contrarian play against dire assumptions in media. Having had long history of fundamental experience
with both AT&T and TWX, as well as the process involved in the acquisition approval, consummation and
ultimate integration of such a deal, we believed monetization of our TWX position, post-deal announcement,
was the best course of action given valuation, pro-forma financials and our focus on MOS. Notably, we were not
owners of AT&T prior to the deal announcement, nor any time since inception of our LCV portfolio. Despite a
significant arbitrage spread based upon announced deal terms, our focus remains on monetizing winners and
not placing capital at undue risk. The case was similar to our position in STJ last quarter when we sold following
ABT’s announced acquisition of the medical device company at a significant premium. With the TWX proceeds,
we readily found a home for portfolio capital in two areas of CD, including the funding of one new 4% position,
while increasing another existing position by 150bps; both presented attractive valuations as well as a contrarian
bent, helping to cheapen our LCV portfolio upon the sale of TWX. Our remaining action in the CD sector during
the quarter was the rebalance of one additional position back to an initial target of 3.00%, resulting in nearly
100bps of portfolio liquidity utilized in funding similar rebalancing within Telecom and Utility sectors.
Industrial sector target weighting increased 150bps: 13.0% to 14.5%
As was the case with our reduction in CD sector weighting, the corresponding increase in our targeted IND sector
weighting was multifold, and related to CD change. The combination of these two sector actions kept intact our
cyclical positioning at the aggregate level. Within IND specifically, we had a process-driven change in conjunction
with a reclassification of an existing holding from CD to IND, post a corporate action impacting one of our security
positions. In conjunction with the reclassification, we modestly reduced our existing target position by 50bps, to
2.50% from 3.00%. Additionally, we made an active decision to reduce a separate IND holding target position by
100bps, to 3.00%. In isolation, the reclassification would have added 300bps to our overall IND allocation, a
sector where the maximum allowed process weighting was ~15.3% at year-end. The net result of these actions
was a 150bp increase in IND sector weighting, while maintaining our conviction in individual security holdings.
Information Technology: No sector weight change; 3 rebalance trades to initial target
Within TECH we trimmed back one position while adding to two others, bringing all three position weights back
to initial targets. Cumulatively, these transactions comprised nearly 150bps of portfolio market value, however
our TECH sector target remained unchanged at 21%, parity versus the S&P 500 at year-end. Compared to the
R1KV, our targeted TECH sector weighting represented nearly 1200bps of overweight. During the prior quarter,
we had increased our target sector weight within TECH by 100bps.
Financials: No sector weight change; 3 rebalance trades to initial target
Within FIN we targeted three positions for rebalance to initial target weights, trimming two holdings following
material increases while adding to a third. Both positions which were sold down to initial targets were executed
toward year-end. Cumulatively, transactions in the FIN sector comprised slightly more than 150bps of portfolio
market value, however the aggregate sector target weighting remained unchanged at 16%, ~130bps above the

S&P 500 at year-end. Compared to the R1KV, our targeted FIN sector weighting represented ~1060 bps of
underweight at year-end. During the prior quarter, we had increased our target sector weight in FIN by 100bps,
exclusive of an incremental 150bps allocated to the newly segregated Real Estate sector.
Utility and Telecom rebalanced with no corresponding target weighting change
Given the outperformance of several cyclically exposed holdings in the portfolio, we believed it prudent toward
year-end to rebalance several positions, including funding increases of select holdings back to initial target
weights. Among sectors previously not discussed, both the Utility and Telecom sectors were actively rebalanced
through purchases of existing positions, funded by reductions elsewhere in the portfolio. While there were no
changes in either sector’s target weighting, cumulatively the related trades reallocated more than 100bps of
portfolio capital on a market value basis.
Cash level unchanged
While our portfolio target cash level of 1.50% remain unchanged at year-end, we made active use of process
cash levels during the quarter through the execution of various actions noted above.
Market and Economic backdrop
We have highlighted with each commentary key underlying themes in the backdrop, and at the top of the list
each quarter has been the constant, and unfortunate events of terrorism. This past quarter was no different.
Throughout 2016 the world witnessed numerous such attacks, devastation and personal tragedies as thousands
of innocents were injured, or lives lost. Each time, first responders and the collaborative efforts by all areas of
law enforcement are to be commended. However, with each such event, we are also reminded of a world
dynamic which has changed, is ever present, and requires continued global attention for such cowardly acts. The
world cannot not afford to be bifurcated in its stance against this enemy, nor can it ever succumb.
After powering out of the gates in early 2016, market volatility, as measured by the CBOE Volatility Index (VIX)
remained at relatively subdued levels. The exceptions were an immediate, post-UK “Brexit” vote increase in late
June, a less prominent increase in late September, and the early November spike related to U.S presidential
election. Notably, each of the three most prominent spikes during 2016 was successively less than prior moves.
At quarter-end, the VIX rested at 14.0, still near YTD and 5-year lows. An FOMC decision to raise interest rates
for only the second time in two years had less of an impact than either Brexit, or the U.S. presidential election.
Given the confluence of global events, relative strength of the U.S. economic backdrop, and perceived safety of
U.S. capital markets, we have been of the view that a dire outcome for the U.S. Dollar will prove an unlikely
scenario in the near-to-intermediate term. The Dollar index, not only held its post-Brexit increase, but rallied to
a 5-year high during 4Q16. Any potential favorable tax changes allowing for repatriation, as well as FX translation
tailwinds from internationally exposed businesses could prove beneficial given the Dollar’s strength. Capital
investment utilizing a stronger currency is still yet another potential benefit. Oil prices recovered further during
the quarter, due mostly due to OPEC members formalizing previously discussed production cuts. While up
sharply from a February low of $26, WTI remains ~50% below its 2014 high, underscoring a basic, yet painful
investment fact: a 50% loss requires a 100% recovery. We remain quite cognizant of the potential for economic
growth headwinds, notably with respect to consumer expenditures, that could metastasize with any further
material rise in WTI, and assuming no production triggers are pulled.

The broader market finished the year strong, though not without experiencing weakness leading into the U.S.
elections. In 4Q16’s first five weeks, the S&P 500 experienced a 4% decline, only to witness a near 7.5% rally off
the lows to close out the quarter +3.3%, on a price basis. For the year, the S&P 500 posted a near 12% total
return, with notably wide variance by sector and industry group. U.S. interest rates, and spreads, which had
been on a continued path lower for some time, appear to have bottomed given broad expectations for improved
growth, higher inflation, and changes in monetary and fiscal policy. As measured by the 10-year US Treasury
yield, the benchmark rate began 2016 at 2.27%, dropped to 1.78% by 1Q16-end, declined further to 1.47% at
end of 2Q16, 1.59% in 3Q16, and closed out the year at 2.45%. Yield curve slope, using 1yr-10yr, expanded to ~
165bps vs ~100bps in 3Q16, about flat vs 1-year ago and down vs ~180bps 5-years ago. The range of performance
in global markets (total returns, U.S. Dollars) remained equally bifurcated and volatile, with several pockets of
weakness: Mexico -8.9%, Hong Kong -5.2%, China -5.2%, Australia -1.4%, UK -0.7%, Japan +1.2%, Brazil +3.0%
and France +3.0%. For the year, the S&P 500 ended +9.5% on a price basis. Comparatively, the R1KV was
meaningfully ahead of the broader market, +14.3%. These levels were far better than other developed markets,
notably France, UK and Swiss Market, +1.8%, -4.1% and -9.3% in U.S. Dollar terms, respectively.
Confidence of management and boards to take on risk, evidenced by appetite to do deals, helped bring some
larger drums into the merger parade, spanning various sectors. Among some notable announcements in 4Q:
AT&T/Time Warner ($107 bil), BAT/Reynolds American ($58 bil), Qualcomm/NXP ($46 bil, all Cash), Praxair/Linde
AG ($40 bil), Century Link/Level 3 ($34 bil), and 21st
Century Fox/Sky PLC ($15 bil Cash for remaining interest).
Other deals discussed last quarter fell apart, including the potential sale of Twitter, and a recombination of
CBS/Viacom.
From an economic perspective, 3Q16 Real GDP most recent revision was +1.7%, with 4Q16 estimated at +2.2%,
and FY16 estimated at 1.6%. Forward estimates for 2017 and 2018 are currently +2.2% and +2.3%, respectively.
The labor market has witnessed continued improvement, generally posting nonfarm payroll gains of ~150k-
300k/month since 2013, versus crisis level losses of ~ 900k/month in 2008-09. The unemployment rate remains
relatively steady, having declined ~ 500 bps from its peak, with estimates tracking at 4.7% and 4.5% for 2017
and 2018, respectively. As we noted in our prior commentaries, despite the labor market backdrop, aggregate
economic growth has yet to accelerate. Fed commentary has continually underscored policy maker’s data
dependency, with a bias to more than just U.S. economic conditions. Most notable at year-end was a move from
it’s holding pattern to a much-anticipated rate increase. In our prior commentaries, we had noted increased
hawkishness appeared to be stirring in FOMC statements, despite longer-term projections of growth and rate
levels (the dots) in the Fed forecasts having declined. Given global monetary stimulants that have existed for
some time, and with the prospect of added Fiscal accelerants, monitoring of price and wage inflation metrics
remain at the forefront. We have repeatedly underscored our belief that there is a good amount of operating
leverage in the system, that can be readily monetized for the benefit of shareholders/consumers should top-line
revenue (& GDP) growth move sustainably higher. We have also been cognizant of the amount of monetary
stimulus that has occurred without a meaningful ramp in GDP, but in the context of the magnitude of the
deepness of the economic hole, a longer ladder was required. Our comfort level in having positioned with a
more cyclical bias remains founded upon valuation multiples and balance sheet/cash flow conditions of the
company’s we both seek, and own, as well as the corporate actions and broader economic conditions we
continue to witness, and expect.

Heading into 4Q16 earnings season, based on FactSet data, aggregate S&P 500 EPS on a reported basis are
estimated at ~ $30.86, representing a year/year increase of ~ 3%. Compared to September 30, the estimated
4Q16 earnings growth for the S&P 500 has dropped ~ 2%, which is less than average due to a combination of
lower cuts by analysts and a reduced level of negative guidance by companies. Top-line revenue growth forecast
of 4.8% has declined modestly vs September 30, with implied margin stability in the aggregate. Should earnings
growth increase in 4Q16 as expected, it will represent the 2nd
consecutive, quarterly y/y increase, following 6
quarters of decline prior. A large part of the earnings turn has been an improving picture for Financials and the
lapping of poor comparisons within the commodity complex, the latter most visible in the Energy sector. Despite
a slowing in the rate of degradation, Energy remains at the precipice of negative sector comparisons, currently
estimated to decline ~ 3% (vs ~ 63% in 3Q16), on the back of a 4% revenue increase (vs 15% 3Q16 decline). FY16
earnings and revenue for the Energy sector are estimated to decline ~ 76% and ~ 18% y/y, respectively. On a
reported basis, 7 of 11 sectors are expected to be in positive territory for the quarter: Consumer Discretionary,
Staples, Healthcare, Financials, Technology, Materials and Utilities. Utilities and Financials possess the highest
expected growth. Along with Energy, Telecom and Industrials are the most negative sectors.
More relevant this earnings season will be management commentary and guidance for 2017, particularly given
a strong post-election rally in the market and the turn in aggregate earnings during the last two quarters.
Currently, the outlook for 2017 is for estimated top-line growth of ~ 6% y/y and earnings growth of ~ 12%. If we
shave expectations for a typical decline that might occur during course of the year, we are essentially looking at
a “Five & Dime” picture for the market backdrop (5% top and 10% bottom-line growth) in 2017. By sector, the
picture is quite different, with bifurcation in earnings led by Energy and Real Estate at the extreme tails of
expectations (+340% and -21%, respectively). With respect to revenue expectations, the one extreme dot
remains the Energy sector, currently estimated to post a near 30% y/y increase and a near 350% earnings
improvement. As both these sectors are materially smaller in market capitalization, we believe the more relevant
story to monitor during the course of the year will be those sectors within the tails. All else constant, the basic
math of the market’s forward P/E would suggest it may not be as rich as generally perceived when viewed in the
context of the Financial sector trading at less than 15x and the Energy sector trading at nearly 35x.
Bottom line: As contrarians, we are attracted to many facets in the backdrop noted above, particularly those
that underscore the fundamental and emotional swings part of any natural market environment. It is the short-
to-intermediate term fluctuations which provide the right backdrop for us to position our portfolio for the long-
term at both the sector and security level. While we have noted selective areas of the market as expensive
(namely traditionally defensive, higher quality sectors and a fundamentally challenged commodity complex),
many of the cyclical areas remain compelling to us. If one simply focuses on the aggregate level of the market,
to include broader market earnings growth, valuation metrics, GDP growth, and nominal debt levels the
backdrop can be seen as challenging. We prefer to go deeper, into sectors and individual stocks, assess related
fundamentals and metrics, place broader macroeconomic measures such as GDP growth into context, and break
apart aggregate metrics such as debt into more relevant measures such as net debt, interest costs and coverage
ratios, etc. In so doing, we have been quite bullish as to the opportunity set in our concentrated, yet diversified
large cap value strategy. That is not to say the opportunity set would be the same for other investors in different
or less-concentrated strategies. As long-term investors, we remain focused on executing a consistent process,
buying cheapness and not over-paying for quality. As disciplined contrarians mindful of capital protection, we

continue to find the cyclical sectors, ex-energy/commodities, home to stocks with the most compelling
valuations relative to the broader market. Given our contrarian nature, we are also cognizant of consensus
having moved in our direction during the course of 2016, although much of the change was back-end loaded,
and not universal across the macroeconomic, sector or individual stock landscape. Nevertheless, we are sensitive
to shifts that have occurred, and our radar is certainly dialed up for potential changes that cause swings in the
pendulum too far in any one direction. Conviction is key for us, and is reflected in our portfolio actions. Most
importantly, with any company, it is those possessing characteristics strong in balance sheet and free-cash flow,
combined with compelling equity valuation, that garner our attention--these remain the type of roommates we
prefer when seeking opportunity and MOS.
AAL
Document is meant to be used in its entirety.
Views expressed represent personal assessment of privately managed separate account and market environment as of the date indicated, and should not
be considered a recommendation to buy, hold or sell any security, and should not be relied on as research or investment advice. Information is as of the
date indicated and subject to change. All market and other related information relied upon and mentioned is from market data sources viewed as reliable.
No guarantees are made regarding accuracy.
Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes
are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of
the U.S. Stock market.
The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000
companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000 Growth Index measures the performance of the large-
cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth
values. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a
trademark of the Russell Investment Group.
iShares® Funds are distributed by BlackRock Investments, LLC. The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Russell
Investment Group. Nor does this company make any representation regarding the advisability of investing in iShares Funds. BlackRock is not affiliated with
the company listed above. iShares® and BlackRock® are registered trademarks of BlackRock, Inc., or its subsidiaries.
MSCI Emerging Market index is an index created by Morgan Stanley Capital International (MSCI), designed to measure equity market performance in
global emerging markets. The Emerging Markets Index is a float-adjusted market capitalization index. MSCI®, and the MSCI index names are registered
trademarks of MSCI Inc. or its affiliates.
Where noted, S&P 500® Index, Russell 1000® Value Index, Russell 1000® Growth Index, iShares® Russell 1000 Value ETF and MSCI® Emerging Market Index
are referenced with abbreviations and respective footnotes. Abbreviations include S&P 500, R1KV, R1KG and MSCI EM. Use of iShares ETF for a respective
index is footnoted accordingly and/or mentioned as such. Performance commentary comparisons are made in reference to iShares, unless otherwise
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fluctuate, and when sold, may be worth more or less than original cost.
Returns for less than one year are not annualized.

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US Election Commentary Focuses on Staying True to Value Process