October 2012

Kreitler Financial:

The world and the markets

It was a wonderful summer for investors.  Surprising most, stock markets rallied around the world, this despite the continuing onslaught of unpleasant headline news.  There is lots of lore on Wall Street about how summer months are dull; not this year.  It was probably the actions by the Federal Reserve and the European Bank to “do whatever it takes” to get the economies going that encouraged investors to buy (risk on) and drive markets higher.  As September draws to an end, most investors have excellent returns for the first nine months of this year.  Remember, markets are always trying to predict the future, and typically price in events before they happen.  “Buy on the rumor; sell on the news” is an old Wall Street saying.

Despite the huge global problems, we continue to be guardedly optimistic.  A lot of good things are happening, particularly in the US.  Much is still not generally recognized.  Our optimism comes from our general belief in the American entrepreneurial free spirit, to specific things that are happening such as increased natural gas supplies and major breakthroughs in technology and manufacturing. 

Still the global challenges remain and we have a ways to go before the many imbalances will be corrected.  In the US and Europe there are questions of how to bring income and expenses into alignment, as well as how to deal with the  debt that was issued to finance many promises.  Much of the debt (private and company) has now been shifted to and is assumed by governments. Governments’ actions to date (fiscal or monetary) were to prevent a depression and to try to stimulate the economy. They have been successful on the former and marginal on the second. Unfortunately, balancing income and spending and dealing with the overhanging debt, have merely pushed the basic problems into the future.

In the US many of the political issues revolve around what should be the role of government. Regardless of who wins the November elections, we think it will take years to come to grips with the issues we face.  Short term, on the “fiscal cliff” we think politicians will find a way “to kick the can down the road”.  We would love to be wrong on this and they will accomplish more.  A serious discussion seeking long term solutions would be wonderful.

Europe has major disparities between north and south.  Will the north pay for the life style of the south?  Preventing World War III was one of the primary motives for creating a European Union and most don’t want to break apart what has been accomplished.  We don’t think the many steps taken so far have yet addressed the bigger issues.  Like in the US, we don’t think there is yet enough of a consensus to do this.

China is going through growing pains as it transitions from an emerging market to one of the largest economies in the world.  Its leaders are struggling to deal with these changes as well as the impact from the offshore global turmoil.

The actions taken by the monetary authorities in the US and Europe are unprecedented.  We have no historical examples to help explain how this will play out or how we might return to “normal” interest rates and money levels.  One of our concerns is the distortions caused by driving interest rates to zero.  This is called “financial repression”.  Our entire economic system (capitalism) is based on having positive interest rates.  The whole function of bonds, which traditionally were used to conserve principle and provide regular income, has been undermined.  Conservative investors and particularly many retirees are severely affected by the extraordinarily low interest rates.  To deal with this problem we have designed most clients’ portfolios to look very different than they did two years ago.  We believe it is different this time and must respond accordingly.

Our mission at Kreitler Financial is to do the best we can to assist clients in achieving their goals. Ideally this means hedging against the unexpected and still being able to make money as opportunities arise.  Our practice has been successful so far but cannot guarantee continued success in the future.  We will promise that we will do the best we can.

Happenings at Kreitler Financial

Bob and Charlie spent two days attending a Vanguard investment symposium.  This is part of our ongoing efforts to intimately know the investment firms managing the portfolios we use in portfolios.  We saw a quality operation with a lot of dedicated people.  Much of Vanguard’s internal growth strategy targets using index or exchange traded funds.  We participated in many discussions about their use.  We came away still committed to primarily using active managers rather than index funds. We can elaborate on why when we see you next.

Our monthly luncheons restarted in September after the summer lull.  With full participation from all, the discussions are fabulous.  If you haven’t been to one recently, we encourage you to sign up.  Our next luncheon will be on October 18 at The Graduate Club and November 28 will be at Mory’s.

We continue to receive a steady flow of new clients.  Our reputation continues to spread. Virtually everybody who comes to see us is recommended by somebody from our wonderful network of clients, friends, and other advisors of our clients. This is very gratifying and we thank you.

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 Kreitler Financial and not necessarily those of RJFS or Raymond James. Past performance may not be indicative of future results. Investing involves risk and you could incur a profit or loss regardless of strategy selected. U.S. Government Bonds and Treasury Bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. 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.

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