Trump changes everything.

This is not just a conclusion on how to run a political

campaign. We believe that Trump and the Republican Congress will try to change the
corporate tax structure as well as the economy. We examine the possible impacts of
Trump on the economy and the stock market.

Trumps slogan was Make America great again. It is one of those political slogans that
allows a person to make of it what they want. So what does it mean in the way of policy
changes? On the campaign trail, Trump bashed China for stealing our manufacturing
jobs. He picked up a lot of support in the Rust Belt by promising the return of those jobs.
He has named Peter Navarro to a new White House office overseeing American trade and
industrial policy. Navarro has called for a 45% tariff on Chinese imports. Trump also
chose Wilbur Ross for Commerce secretary. Navarro and Ross penned a white paper
saying that Trump should label China a currency manipulator and should renegotiate most
of the trade deals the US has entered into. Trump advisor, Steve Bannon, said that if they
are successful, he would see Republican majorities for 50 years. Taken together, it
appears to us that the strategy is to incentivize companies to manufacture in the US by
increasing border adjustment import taxes (tariffs) and cutting corporate taxes to
increase jobs in the US to the benefit of Midwestern state employees, who VOTE. (This is
not meant to be a political piece, but the two seem to be so intertwined, and since it drives
the economic agenda, we felt it necessary to include.)

According to the Bureau of Economic Analysis, manufacturing is about 12% of the

economy. However, this is only the value added portion, that is, sales to final users.
Sales to other industries (not final users) are referred to as intermediate inputs.
Manufacturing gross output, which are the net manufacturing shipments, is 35% of the
economy. In 1997, value added was 16% while gross output was nearly 45%. The Trump
people believe that there is at least 10% of GDP that could be brought back to the US with
the proper use of the tariffs and the tax code. If done correctly, they would increase GDP,
bring back jobs and add majority voting blocks in the Midwest. Will they be successful?
Who knows, but this seems to be the game plan.
Forester Value Fund January 1, 2017

Valuation context

In order to assess the market impact of the Trump agenda, it is important to understand
the valuation context of the current market. Some are comparing Trumps call for a tax cut
to the Reagan tax cut years, and assuming that the market will likewise take off like it did
then. After Reagan was elected, stocks rose by about 10%. However, the rally did not
hold and stocks were down nearly 40% from the peak over the next couple of years. Like
the Reagan years, the market rallied nearly 10% after Trump won the election. Will the
drop happen next?

The context of these two rallies could not be more different. When Reagan was elected,
S&P 500 P/E was below 10 and the 10 year UST rate was nearly 12%. Currently, the S&P
500 P/E is nearly 24 (trailing 12 months) and the 10 year UST is 2.5%. When Reagan was
elected, P/Es had nowhere to go but up and long interest rates had nowhere to go but
down. The bar was very low for significant stock returns with beginning low valuations and
high historic interest rates.

The opposite is true now. An S&P P/E of 24 is very high, especially as it is based on
historically high profit margins. So if profit margins return to their historic average and the
market stayed the same, the P/E would be much higher still. Also, 10 year UST rates are
historically at the lower end of their range. Higher long rates usually lead to lower stock
values. They also increase mortgage costs which lead to lower home prices, all else
equal. So Trumps starting place of high valuations and low interest rates is a very high
bar from which to see strong stock returns. (Note: chart below shows Cyclically Adjusted
P/Es (CAPE)). CAPE P/Es are currently 28 and were only higher in 1929 and the 2000
bubbles.

Forester Funds 224-544-5123 www.forestervalue.com invest@forestervalue.com

Forester Value Fund January 1, 2017

Source: Robert Shiller, Yale University

Underlying drivers

The two main drivers of market performance the past few years have been the Fed
keeping interest rates exceptionally low, and corporations buying back their stock. (stock
buyback chart). With product demand growth slow and interest rates low corporations
have used their cash flow and issued debt to buy back stock at unprecendented levels.
This has kept GDP growth low as CEOs have limited capital expenditures due to low
demand growth. Several things are happening that may curtail these buy backs.

Forester Funds 224-544-5123 www.forestervalue.com invest@forestervalue.com

Forester Value Fund January 1, 2017

Profit margins have been at historically high levels for some time. Much of what Trump is
proposing could boost wages which would hurt profit margins. Globalization has eroded
labors share revenues (chart). While globalization makes the world economy more
efficient, those gains are not shared evenly. Trump realizes that corporations dont vote.
His call to bring jobs back to the US is politically savvy even if it is less efficient.
Corporations have outsourced jobs because it was much cheaper to do so. As some of
those jobs are brought back to the US, expect costs to increase and profit margins to go
down. This will limit earnings growth and the cash flow to buy back stock.

As more products are produced in the US, expect prices to increase due to the higher
costs. Expect more tariffs, like the current one on steel imports to allow corporations to
sell the higher priced product here in the US. While this is less efficient, it is better for
those who now have better jobs even if they have to pay more for what they consume.
Remember corporations dont vote, but the people with the better jobs do. That is the root
of populism.

Limiting immigration has a similar impact. It is like a tariff on cheap labor. Hotels,
restaurants and construction companies will complain, but if it lifts wages, those that vote
will be happy.

These increasing costs will also increase inflation. If this happens quickly, the Fed is
greatly behing the curve. Not only do they need to raise rates, but they also have a few
trillion dollars of excess liquidity they will need to take off. Deutsche Bank has modeled
the impact of Trump plans, ECB taper and Fed rolloff and projects 3.5% 10 year rates by
the end 2017. This would imply mortgage rates of around 5.25%. That is quite a jump
from 3% mortgage rates earlier in 2016. The average home buyer could only afford to pay
25% less for a home at the higher rates. That would be very negative to the collateral
backing all of the mortgages written over the past few years. It also dries up the fees that
come from buying or refinancing homes. It also pinches home flippers and remodellers, as
well as the Home Depots of the world. That is a bad scenario for corporate buy backs and
stock valuations as well.

Forester Funds 224-544-5123 www.forestervalue.com invest@forestervalue.com

Forester Value Fund January 1, 2017

Trump has proposed lower corporate tax rates to soften the blow to income statements.
However, both McConnell, the Senate majority leader, and Ryan, the Speaker of the
House, have said that any tax cuts need to be revenue neutral. It is unclear which
deductions will be eliminated or cut, but the impact may be more neutral to earnings than
the market is assuming.

Annual Change US Debt ($bn)

Annual Change US Debt ($bn)

1800
1600
1400
1200
1000
800
600
400
200
0

Source: Bloomberg, Forester Capital

Forester Funds 224-544-5123 www.forestervalue.com invest@forestervalue.com

Forester Value Fund January 1, 2017

Currently, the US is borrowing about a $1 trillion per year. That is about 5% of GDP.
There isnt a lot of room for more deficit spending, so expect a lot of deduction cuts. One
possible of revenue increases are so called border adjustment taxes. These tariffs
should shift the corporate tax burden towards importers and away from exporters at the
margin. It should quickly increase the prices of imported goods. This is similar to the VAT
system in European countries.

We think that corporate tax cuts are great. However, ageing demographics, slowing
population growth and large debt levels will mute demand growth. All in all, expect profits
margins to drop, but wages and prices to increase. Voters may be happy, but stocks may
not be.

Trump has proposed spending $1 trillion on rebuilding the nations bridges and
infrastructure. This sounds like a huge number, but it depends on what time period this is
spent over. Usually these projects are spread over 10 years. If so, this would amount to
$100 billion per year, or 0.5% of GDP. It is additive to GDP growth but not as much as the
$1 trillion sounds like.

We think that these moves will be beneficial to US workers which will, over time, benefit
the economy and stocks. However, much of the stock benefit may be offset by higher
inflation and interest rates. All in all, Trumps impact may be more political than financial.

China

Some have noted that many commodities turned around in December based on rumors of
China slowing. If our thesis is correct, it could also be that the market is understanding
that China may be hurt by the current changes. China is very highly leveraged in both a
financial and operating sense. Because they continue to add to capacity, they need
exports to operate profitably or to breakeven. Trump is trying to move some of that
capacity back to the US. If you are a steel producer running at 70% capacity and breaking
even and you lose 10% of your market, you dont just lose a little bit, you lose a lot
because of how operationally leveraged you are. You make a lot when you are running
near full capacity, but lose a lot when your capacity utilization drops too much. Those
extreme profit and loss swings are further exacerbated when financial leverage is added.
Countries also find that growth slows dramatically when debt levels grow too large.

Also, China was a developing country when most of the treaties were written. Developed
countries wanted to see China grow as a way of growing global GDP and hence demand
for their products. China is now the second largest economy in the world. They are a
major competitor. Other developed countries are starting to treat them as an equal and
not just trying to foster a developing country.

While, globally, society is better off with free trade, there are still winners and losers, which
are not equally distributed within country or trade-bloc borders. US manufacturing
employees were losers.

Forester Funds 224-544-5123 www.forestervalue.com invest@forestervalue.com

Forester Value Fund January 1, 2017

During WWII US manufacturing was around 40% of GDP, while today it is closer to 12%.
We won WWII in no small part due to our manufacturing ability. Today, China is the
worlds largest manufacturer. From a strategic standpoint, is the US, under Trump (and
his advisor generals), okay with that? If not, then one would expect the administration
pressure to move manufacturing back to the US sooner rather than later.

US Economy - We think that two large drivers of the economy are peaking and rolling
over, autos and housing. Housing we mentioned earlier that due to increasing 30 year
mortgage rates, home prices are dropping and will be a headwind for the rest of the year
for builders and banks.

Generational low interest rates have been very helpful to auto makers. However, pent up
demand is largely satiated and with the huge number of leases expiring in 2017, expect
used car prices to be under pressure and write offs from leases to increase.

Forester Funds 224-544-5123 www.forestervalue.com invest@forestervalue.com

Forester Value Fund January 1, 2017

FUND INFORMATION

The funds largest equity positions as of 12/31/2016 were Pfizer, Aon and Microsoft.

Pfizers revenues have been pressured the past few years as they lost patent protection
on some of their large profitable drugs, such as Celebrex and Lyrica. But those headwinds
are subsiding just as some of their newer drugs are experiencing attractive growth (Eliquis,
Xeljanz, Ibrance). In addition, the company recently acquired Medivation, which has
Xtandi, a fast-growing drug for prostate cancer (and seeing positive trial results for breast
cancer). Pfizer expects the deal to be $0.05 accretive in the first year, which we view as
conservative. Pfizers 2016 return was +13.1%.

Aon (+16.3% in 2016) provides Risk Management and Human Resources solutions to
companies around the globe. The company has attractive organic revenue growth and
margin expansion opportunities as they reap benefits from prior investments in the
businesses. In addition, the company generates significant free cash flow, which will be
used for share buybacks, further investment in the business, dividends and acquisitions.

Microsoft (+20.8% in 2016) is emerging as one of the key winners in cloud computing
(storing and accessing data and programs over the Internet instead of from the computers
hard drive). The companys rapid growth in cloud computing is offsetting declines/slow
growth in the companys legacy businesses. In 2017 cloud margins should materially
improve as massive 2016 investments are leveraged and capex slows.

LOOKING FORWARD

We try to produce the best risk-adjusted returns available. As risks have increased, we
have increased our protection. If risks subside or are priced in, we will gladly reduce our
protection. But until the market more fully reflects these risks, we will remain cautious.

Best regards,

Thomas H. Forester
CIO and Portfolio Manager

For more complete information on the Forester Funds, including charges and expenses, obtain a
prospectus by calling 1-800-388-0365 or visiting www.ForesterValue.com. The prospectus should
be read carefully before investing.
The foregoing does not constitute an offer or recommendation of any securities for sale. Past performance is not indicative of future
results. The views expressed herein are those of Thomas Forester and are not intended as investment advice.

Copyright 2017. All rights reserved.

Forester Funds 224-544-5123 www.forestervalue.com invest@forestervalue.com