January 2014

Kreitler Financial:

Happy New Year.

As 2014 begins, we like to reflect on the past year. We also like to use writing these newsletters as an exercise to challenge our thinking on global trends affecting the markets. Lastly, we discuss what may come to pass in the New Year. We hope that you continue to find these letters useful and informative.

2013 Markets in Review

2013 was a year in which we saw a wide disparity in returns. Stock investors were generally well rewarded for the risks they took. Bond investors had one of the more challenging years in a long time. Our clients invested in broadly diversified portfolios and participated in both the very good returns of some asset classes and the disappointing returns in others. As always, our mission is to design portfolios that are likely to accomplish our clients’ goals, whether the markets give us good returns or bad.

We’ve been generally pleased with how our expectations for the year played out. We have been viewing themes unfolding over several years. Two years ago, we wrote in our January 2012 newsletter that in spite of major uncertainty that existed, we were optimistic and encouraged clients who could afford the risk to put more into stocks. In our first 2013 newsletter, we echoed this theme, writing "As various [stock] indices flirt with or surpass previous highs, we will continue a course of cautious optimism."

Stocks in 2013 had an exceptional year. For US large caps, this was the best market since 1997 with the S&P 500 (TR) Index up +32.4%. This caught many hand-wringing investors by surprise, and now in with the perfect lens of 20-20 hindsight pundits are telling us all the reasons that things went well. Our challenge is to keep risk at a level where clients can remain invested over time and therefore benefit when we have periods of strong performance like this years, remembering that future returns are unknowable.

Around the world, stock performance varied broadly. Japan’s Nikkei led the major developed markets with renewed hope brought by Prime Minister Abe’s reform efforts, although the sharp drop in the yen blunted the benefits to US investors. The rest of the developed world generally saw very good returns. Emerging markets saw slight losses -5.0% as measured by the MSCI Emerging Market Index, although the returns varied widely by country. For example, Nigeria’s NGSE boasted a +47.2% return, but much larger nations like China’s SSEC -6.8% and Brazil’s IBOVESPA -17.7% brought the index down.

The ride certainly wasn’t smooth. The late spring and summer saw some volatility as investors became concerned the Fed might reduce bond buying or begin "tapering". Their apprehensions shook the bond markets and stocks sold off. Market participants were surprised as the yield on the 10-year Treasury moved from 1.6% in April to today’s rates flirting with 3%. As we stated in our October 2013 newsletter, "In the world of bond yields, this was the equivalent of an earthquake."

We had anticipated this for some time and cautioned that rates might rise faster than expected. Over two years ago, we had diversified client bond positions in preparation for the possibility of rising rates, including the use of non-traditional strategies.

In general, we are pleased with how these non-traditional strategies worked. The remarkable rise in interest rates caused unusual losses in the bond market, including municipals. Our alternative strategies to traditional bonds typically had smaller losses. High yield bonds, which are generally more volatile than traditional bonds, and guaranteed-return products (for those clients able to own them) benefited fixed income returns, as well. In summary, most bonds finished the year with negative returns, a very rare occurrence for an asset class that supposedly is relatively "safe".

On our positions in gold, we wrote in March 2013: "We are also beginning a gradual reduction of gold exposure from the more elevated levels held since 2008/2009 to more historical levels." We soon accelerated this policy and sold all gold positions as we felt the cost of holding it, even for hedging purposes, was too high. Gold continued to be very volatile, and by the end of the year ended off considerably more. Most of our long-term clients made money on the gold from the time they purchased to when they sold it. It was, however, off for the year by the time we sold, and therefore it was a drag on total performance for 2013.

Our clients invest in broadly diversified portfolios participated in both the very good returns of some asset classes and the disappointing returns in others. Generally speaking, we have been pleased that the portfolios, both aggressive and conservative, performed as they did. Our emphasis remains meeting every client’s individual goals and objectives rather than arbitrary benchmarks.

2013 Global Events and Trends

A lot happened in 2013. At times the stream of negative news felt wearying and even depressing. In reality, a lot of good things happened, and it’s important to recognize both. An extremely abbreviated summary might include the following:

  • Washington remained politicized, but by the end of the year a limited number of bills were finally making it through Congress. Importantly, recent budget deals in Washington have removed the near-term concern of a government shutdown or U.S. debt default.
  • The monetary authorities continued unprecedented actions to provide liquidity to the financial markets and keep short term interest rates close to zero. In December we saw the Fed beginning to cut back modestly on its program of bond buying to reduce long term interest rates. The confirmation of Janet Yellen as the Federal Reserve chairman more or less assures that the Fed’s easy money policies will continue for now, rather than a sudden course change and monetary tightening.
  • The Affordable Care Act/Obamacare saw its beginnings but was marred with multiple rollout problems.
  • Europe did not collapse. The strong stance taken by the European Central Bank and European officials has made it clear that they are committed to a united Europe.
  • World economic growth, although uneven, by the end of the year was accelerating from its very sluggish behavior since the end of the recession in 2009 according to the IMF.
  • China was able to maintain its 7 percent growth rate despite forecasts that it would flounder. Under new leadership it is moving toward economic reform, albeit with a reduction in political freedom and increased saber rattling.

The big story may in fact be that some of the major uncertainties in the world have been reduced. Meanwhile, the positive trends that we have commented on numerous times before continue. Technology is unleashing an energy revolution in the United States with world-wide implications. Robotics and cheap energy are bringing manufacturing back to the United States. Entrepreneurship remains a U.S. strength. The catalysts for continued growth are present.

Investing in 2014

For the coming year we remain positive for stocks but recognize we haven’t had a major correction in the stock market in a long time. Although positive, we believe the big returns in the US indices are unlikely to be repeated. The major rise in the markets last year was driven by investors bidding up shares (multiple expansion) rather than corporate growth. Stocks are no longer as cheap as they were, but we don’t think they are expensive yet.

It is important to remember that markets are anticipatory (forward looking) in nature. During the last several years while much of the population fretted about the negatives in the US economy, the stock market anticipated better growth ahead and rose. After the market rose, U.S. data growth appeared to be better and better, and both forecasts and reported GDP numbers were revised upward. With worldwide economic growth appearing to be accelerating, we don’t know how much expected growth is already included in the recent price increases.

We remain cautious on bonds and plan to maintain the highly diversified nature of fixed income portfolios. Fixed income, despite its challenges, still plays a role in reducing overall portfolio volatility as few investors can accept the risk of a portfolio that is primarily invested in riskier assets, such as stocks. The recent changes announced by the Fed indicate that the bond market should return to more traditional behavior sometime in the future but the timing of this remains highly uncertain.

We think a fair amount of the interest rate risk has already passed. The press is focusing on interest rate risk and investors are making radical changes to portfolios after long term rates almost doubled from 1.6% in April to 3.0% in December. This move has taken away a significant portion of the downside risk of further rate increases. If rates rise slowly from here, investors should be able to make money in bonds. A sharp rate rise, however, would result in additional losses. There remain risks. The Fed’s balance sheet has expanded to unprecedented size, and there is risk that the Fed’s policies may not work as planned. Unwinding the huge reserves that the Fed has taken on remains a great experiment.

In summary, we think that stocks have the potential to continue their upward rise, but at a slower pace. We also think a correction is overdue. Many investors are overly optimistic on stocks and overly pessimistic on bonds because of 2013’s performance. We continue to believe that for investors who are willing to deal with higher volatility, greater positions in stocks can yield better long term returns. This won’t be a smooth ride, however, and investors with near-term needs for cash or income from their portfolios should continue a more balanced approach. We invite our clients to discuss with us whether the level of risk in their portfolios remains appropriate to their long term objectives.

Other News from Kreitler Financial

2013 was a year of many improvements at Kreitler Financial. For much of the year the entire team worked to improve how we deliver wealth management to our clients with our goal of providing superior service. We increased the frequency of our consolidated portfolio reports and provided clients online access to our reporting system. We improved our portfolio management processes. We made a practice of turning our conference room into a "war room" for a day each month, during which we openly discuss how we can improve our services to our clients. Our efforts to improve will continue into 2014. Changes in office location and hiring of more support staff are likely. The passing of firm leadership from Bob to Charlie continues to move forward smoothly. Bob continues to have a very active role working with clients and providing thought leadership, and he has no immediate retirement plans.

In 2013 we started sending clients yearly, and later quarterly, consolidated statements. To our clients, we encourage you to permanently save the year end ones for your records. We hope you continue to find this part of our service valuable.

We wish all of you a happy, healthy and prosperous 2014.

Bob and Charlie

Robert P. Kreitler, CFP®
Registered Principal
Charles F. Kreitler, CFP®
Financial Advisor

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Robert and Charles Kreitler and not necessarily those of RJFS or Raymond James. Individuals cannot invest directly in any index. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing in emerging markets can be riskier than investing in well-established foreign markets. Past performance may not be indicative of future results. Please consult with a qualified professional regarding your particular situation before making any investment decision.

1 Membership is based mainly on assets under management, education, credentials and fiscal year production. Re-qualification is required annually.
2 Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Bottom Bar
Contact a Financial Advisor