March 2013

Kreitler Financial:

As we write, U.S. stock markets continue to flirt with new highs. Many investors seem to be caught by surprise that the markets can continue to move higher despite all the negative press and uncertainty in the world. There is an old saying that "Wall Street climbs a wall of worry" that has described many of the historical bull markets. The intense rally since 2009 seems to be one of these.

Market and Portfolio Update

We wrote in our January 2012 newsletter:

As we look into 2012 we remain in a high risk environment: major financial accidents can happen. Fortunately, many investors may already be anticipating the worst (such as problems in Europe) and bad news may already be priced into many valuations. Economic news in the US and emerging markets could surprise on the upside.

Notwithstanding this tremendous uncertainty, we see much that is hopeful. For several months we have been arguing that things are more positive than reported. This is particularly true for the US where there is a two speed economy. The aggregate numbers of US growth continue to look weak. However, once you strip out housing and government expenditures (areas that are still retrenching), the rest of the economy is growing quite respectably. We think this partially explains the excellent earnings by many companies. We have been encouraging clients who can afford risk in their portfolios to consider increasing their stock allocations. There are many who argue that the US has lost its competitive position in the world. We disagree. We think the American competitiveness is still strong and, coupled with a market economy, the US in the future will remain the clear choice where entrepreneurs and others of free spirit will thrive.

The markets have rewarded our optimism and client portfolios benefited. Most importantly, we think the above view still stands. As various indices flirt with or surpass previous highs, we will continue a course of cautious optimism. A pullback after such a strong up-leg wouldn’t be a surprise. In 2013 we expect volatility as the world will continue to address challenges in the U.S., Europe, China and other places. Nonetheless, we remain very positive on stock markets. We will continue to try to manage risk so our clients can comfortably benefit from the positive things we see.

A long 30-year bond market rally as interest rates have moved ever lower has provided investors excellent returns. With interest rates now close to zero we believe bonds have limited upside and could actually provide negative returns. Over the past decade bonds contributed income significantly to portfolio returns. Investors need to reduce expectations of what they have experienced in the past. Traditionally investors held bonds both for preservation of principal and for income. Today, with such low interest rates, getting both from a bond portfolio is nearly impossible, creating some challenging choices. Bonds can lose value in a rising rate environment, a particular concern to those with heavy bond positions. As we have for the past two years, we continue to diversify client bond positions in preparation for the possibility of rising rates, including the use of nontraditional strategies. We don’t know when or how fast rates will rise, but we want to make sure our bond investors are ‘paid while we wait’ without taking undue risk.

We continue our practice of modifying portfolios to reflect the changing environment. For example, we are modifying our inflation-hedged bond strategies to shift away from U.S. Government securities under the belief the downside risks from increasing interest rates outweigh the potential returns from the inflation hedges.

We are also beginning a gradual reduction of gold exposure from the more elevated levels held since 2008/2009 to more historical levels. This is good news as we believe the likelihood of a major tail risk event in the near term is receding to more normal levels. Our view is that gold remains an important hedge in portfolios. We do not hold it because we think it will go up, but hope that it may mitigate the impact of some unforeseen risks.

Longer term, we expect other major changes in the future due to demographics and fiscal pressures to pay for medical programs. We do not believe these are crises today, but they are likely to become so by the end of the decade when the bulk of the Baby Boomer generation has reached retirement age. Washington is beginning to address these issues, but just as a great ship takes time to adjust course, change is happening slowly. The good news is we believe we are moving out of the "great recession". People and businesses are moving on with their lives and ignoring the gridlock in Washington. The result is the economy continues to improve. We will continue to invest with our eyes open to both the risks and opportunities presented.

News at Kreitler Financial

Kreitler Financial continues to grow. Over the last few years we introduced major enhancements such as the new consolidated portfolio reporting system. In 2013 we will continue to introduce improvements to better serve our clients. Some of these follow:

  • In January, clients received by mail a consolidated portfolio report for the first time. This provided a year end summary of all the accounts we manage, whether they are held at Raymond James, TIAA-CREF, Vanguard, or any other custodian.1 We encourage you to save these.
    1These reports are not a replacement for the client account statements from Raymond James or other custodians. Investors are reminded to compare the findings in these reports to their account statements.
  • Later this year we plan to give clients web access to the consolidated reporting system. They will be able to view investments across institutions in between regular meetings. This is currently being tested with a small group of clients, and we expect to introduce it to all interested clients by summer.

  • We have formed and met with an informal Advisory Board comprised of our clients. Their feedback was invaluable, and we plan to continue to do this. We value all our clients’ ideas, and we want to continue to hear them.

  • We are beginning the process of hiring an additional associate. Our number of clients continues to grow, and the level of service we provide to our clients has increased. This expansion will help us meet our future needs.

  • We will be working with an industry consultant to help us prioritize and streamline our services and operations. Our goal is to ensure that our level of service, our expertise, and client experience improve as we grow.

We think these changes will bring some impressive improvements to the service that our clients receive, and we hope you agree.

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. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that 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. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. Dividends are not guaranteed and must be authorized by a company's board of directors. 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. Please consult with a qualified professional regarding your particular situation before making any investment decision.

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