2015 Second Quarter

Kreitler Financial:

After receiving our third snow storm since the official March 20 beginning of spring, we and many others in New Haven could have been justified in wondering if warm weather would ever arrive. Of course, it has and in glorious fashion. If only financial markets had such predictability.

In our second quarter newsletter for 2015 we will review some of the many things we have been working on for you at Kreitler Financial. We also include discussion on some of the major themes in the world, and why we are making a small shift in many portfolios from overweight U.S. positions to global.

Kreitler Financial Happenings

Our last newsletter was sent shortly after our move to new offices at 265 Church Street. Three months later, we're mostly accustomed to the new space and feel right at home. We greatly enjoyed celebrating with a large number of clients and friends at our Open House on March 26.

"Elevate" was the theme of this year's Raymond James national conference. In our first quarter newsletter, we wrote that a video crew spent a day with us to create a video profile of our office as an example of a team that has elevated itself. To recognize our team's accomplishment and to further invest in ourselves through ongoing training, the entire Kreitler Financial staff traveled to the conference in Las Vegas. The video was shown to an audience of several thousand on screens thirty feet high. It was a very rewarding recognition of everyone's efforts in helping our clients meet their personal goals. We are creating a version that can be shared with others in the near future.

In addition to the Raymond James conference, we continue to seek a diverse array of thought and opinions. Charlie recently attended a two day seminar hosted by the Yale School of Management and the EDHEC on commodity investing and evaluating hedge funds, reinforcing our belief that hedge funds are not an alternative asset class, but rather an expensive 'alternative fee structure'. Don't expect to see them in our portfolios anytime soon. Charlie and Bob also attended a New York seminar hosted by the GaveKal think tank. Bob will be attending another Yale/EDHEC seminar on multi-asset investing as this letter hits the mail.

Bernadette Huang, who joined our team in February as our new Associate Financial Planner, has passed her Series 7 and 66 exams. We congratulate her as she is now fully licensed.

Last but not least, we join our Operations Manager Sandy Blanchard and her entire family in celebration of the birth of her first grandchild, JT.


Major Global Economic Themes

The US economy continues to show gains, despite the apparent weakness in the first quarter. The Wall Street Journal reported in April that job openings were at a 14-year high. This is promising, but also illustrates a growing gap between worker skills and employer needs.

We've written in the past about the profound change that cheaper oil prices will have on the world. The Bank Credit Analyst recently estimated that the reduction in gasoline prices alone is the equivalent of a 1% increase in personal disposable income in the United States. Multiply that across 300 million Americans, and we believe it will have an impact. We think it is unlikely that prices will climb back soon to their levels of a couple years ago. In fact, the risk may be that prices surprise by falling again.

This may be the most hated equity rally in history. No one we talk with seems happy about it. Those who are invested in it have a sense a correction is due. Those who aren't invested have been hoping for a correction to get in, but have been frustrated since 2011, the last time we had a drop of -10% in the US large company market. We continue to control risk and we expect higher volatility, but we remain optimistic.

Another major theme is the continued rise of China as a global economic power. While the press gives coverage to China's military ambitions, China's economic deals are less appreciated.

Consider the "Silk Road" that China is negotiating with neighbors. This involves the construction of ports, railways and roads to make China the infrastructure hub of Eurasia. The plans are ambitious. China proposes to construct highways that would connect Europe with Southeast Asia. The impact of being able to ship bulky goods by land across Eurasia in 6 days, versus 45 days via container ship, will be profound. In addition, China is working toward the internationalization of the renminbi as a major currency, another of their strategic objectives. Witness the recent success of the Asian Infrastructure Investment Bank, to which China drew in 57 regional partners to in spite of US objections. Combined, these ambitious projects are the equivalent of the Marshall Plan, the creation of the World Bank and IMF, and Eisenhower's creation of US interstate system all in one!

Has the world become so accustomed to China's poorly timed investments in commodities and other wasted infrastructure projects that they don't take this seriously? We think investors need to embrace China's rise. There will be missteps along the way, so manage risk. This theme will take some years to play out, and it is one that we take seriously and are watching closely.

Investment Commentary – Global Equities Accelerate

Unusually low interest rates are distorting the economy and likely a cause for the long bull market in stocks. With the low rates has come growing volatility in the bond markets. It is very challenging in this environment to sort true market signals from the noise. Risks are high.

Stock markets continue to rise in 2015, albeit at a more moderate pace. Interestingly, we have thus far seen a switch in leadership from the U.S. (S&P500 +1.9% through April 30, 2015) to global equites (MSCI Developed EAFE +9.3%). Our globally diversified portfolios have benefited from this so far. They are constructed to help achieve client goals in spite of unpredictable returns in the US and elsewhere.

The U.S. rally has pushed valuations to levels that are on the high side, historically speaking. We think foreign markets in Europe and Asia have better opportunities in the near to intermediate term. A key question is whether the strong dollar trend will continue, with the consequent drag on foreign equity returns. Our sense is that the pace of increase should slow. In this type of environment, foreign equities can deliver good relative returns. This isn't the same as being bearish on the United States. Europe is unloved, with cheaper valuations than in the United States. Additionally, investors may be underestimating the impact of quantitative easing undertaken by the European Central Bank. Asia may also be more attractively priced.

In bonds, volatility has risen around the world. While bonds are generally positive (Barclays AggBond +1.2%) through April 30, volatility in the markets have risen. US Treasuries are viewed by many as some of the best value in the global market because they yield 2.12%% (as of April 30). That's pretty low by historical context, but when compared to European bonds it seems attractive. German 10-year Bonds have traded with yields from between 0.05% on April 17 to 0.78% on May 7. This is huge change on a relative basis! On April 8, Switzerland sold 10-year bonds that pay a negative interest rate (-0.055%). These are concerning events and reinforce to us the need to manage risk in portfolios.

Due to low yields, we are hearing some investors comment that they should push higher into stocks because There Is No Alternative. The advocates of this "TINA" strategy recognize that the probability of losing money in bonds increases when yields are very low. However, the outright amount of losses in bonds may be quite small relative to those of other asset classes, particularly stocks. We continue to encourage investors to manage risk in their portfolios by

  • Diversifying extensively in both equities and bonds.
  • Maintain global exposure to avoid shocks that affect any one economy.
  • Utilizing alternative bond strategies that reduce interest rate sensitivity until such a time that we are better compensated for that risk.
  • Using assets with low correlations to stocks and bonds like real estate to diversify sources of return.
  • Lengthen their time horizons in order to deal with potential higher volatility. Investors with immediate cash needs from portfolios should plan accordingly and keep liquid assets available.

Lastly, here's one for the record keepers. The NASDAQ reached 5,000 for the first time since the tech bubble on 3/2/15. A NASDAQ-only investor would have only broken even after 15 years, a very long time, which we think illustrates how important it is not to focus on any one index.

Planning Topics

April 15 and tax filing is now out of the way. We have been working with clients' accountants extensively through the months of March and April. We enjoy this collaboration, and we feel that it has a significant benefit to our clients.

Many investors found themselves in the position of paying taxes on their investments for the first time in several years, the result of rebalancing portfolios to control risk and other taxable events. Going forward, we expect this to be typical. This far into the six-year bull market, most investors' carried-forward tax losses have been used up. Our customized approach to managing client assets is designed to help mitigate the impact of portfolio taxes. This becomes more and more important the further into the bull market we get. It is complex but we believe this customized approach adds significant value to our clients. For more information, please refer to our 2015 First Quarter newsletter or contact us.

For our Yale clients, we were pleased to note that the University's transition to having TIAA-CREF as the sole record keeper for the school's 403b plan in April went very smoothly.

We hope that you and your loved ones enjoy this beautiful spring weather, and we look forward to serving your needs in the months ahead.

With warm regards,

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

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Charles and Robert Kreitler, CFP and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. Inclusion of any index is for illustrative purposes only. Individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Past performance does not guarantee future results. 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. RJFS does not provide tax advice. You should discuss any tax matters with the appropriate professional. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

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