2015 Fourth Quarter

Kreitler Financial:

The November 3 headline in the Wall Street Journal touted “Dow Industrials Move Back Into the Black for 2015”. Our last newsletter for the third quarter summed up year to date performance of the Dow Jones Industrial Average through June 30 at 0.0%. If anyone missed the last few months, they’d be forgiven for thinking that nothing has happened because it was back to this level in November, but after a wild ride. In this Fourth Quarter newsletter, we discuss the return of volatility, significant changes to Social Security, and more.

Markets and Investing


At the end of June, US markets were flat. As mentioned above, the Dow was flat for the year. Global markets had done better at +5.9% as of that date (MSCI Developed EAFE), and the emerging markets were also modestly positive at +3.1%. In our Third Quarter Newsletter, we commented that it has been quite some time since we had a correction.

Be careful what you wish for. Global markets started to rumble as the selloff already underway in China gained steam. On August 24 the Chinese stock market dropped -8.5% in what the press dubbed “Black Monday” with another -7% decline the next day. That Monday was the same day that the DJIA dropped over 1,000, sending the financial press into a tizzy. On August 26, we wrote to our clients with the following message:

This serves as a reminder of why we take such great steps to control risk in portfolios—we cannot predict when a sharp drop in stocks will happen. We make investments hoping to make respectable returns over the long term and getting better returns than stashing everything in low returning bank accounts. We have generally been taking profits from stocks throughout the equity rally of the last several years. We heavily diversify portfolios into many different asset classes such as various types of bonds, real estate, and others to reduce big portfolio swings. While diversification cannot protect against all losses, we have been generally pleased with how portfolios weathered this volatility. Certainly, the movements in our portfolios have not been anywhere as significant as what the dire news headlines would suggest.

By end of September, the Dow dropped -12% from its highs for the year, bringing the US large cap index solidly into negative territory at -7.0% for the year to date. Emerging markets (MSCI Emerging Markets) ended the quarter down -15.2% YTD and developed markets (MSCI Developed EAFE) ended down -4.9% YTD. These kind of numbers can raise eyebrows, and they illustrate why we always strive to control risk at all times. The future is uncertain.

October defied its history of being one of the worst months for investors. Instead, a strong market reversal occurred, and the S&P 500 experienced its best monthly performance in four years at +8.4% and the Dow +8.6%, reversing the losses of the prior few months. Investors who were able to stick with their strategies were rewarded. Frequently, the stock market enjoys an end-of-year “Santa Claus rally.” We'll see whether it delivers its usual Christmas cheer.

Events and analysis

So if the market drops and returns to the place it started, did it matter? For long term investors, the answer may be either ‘no’, or on the positive it represents an opportunity to put cash to work. For investors that needed cash during the selloff, it creates liquidity problems.

The potential liquidity problems were in full display in August. In times of market stress, there can be many more sellers than buyers, leading to large irrational price dislocations. Many investments traded on the exchanges dropped far more than the overall markets, even though their underlying securities were constructed of highly traded US large company stocks. While the S&P mid-day low was -7-7% (a big number), a number of popular investments briefly dropped -30 to -40% before recovering somewhat. Some investors presumably sold at these depressed prices.

At times, finding accurate pricing for securities may be impossible. We suspect we will see more events like this. Investors need to be prepared to ride these events out to avoid doing permanent harm to portfolios. Those that can are likely to benefit.

Three conclusions can be reached.

  1. Portfolios should be structured to permit investors to comfortably live through periods of market stress.
  2. Portfolio liquidity must be sufficient to let investors ride out market declines without being forced to sell at the wrong time.
  3. Investors should understand the assets in their portfolio and be willing to hold onto less liquid investments during periods of market stress.

These principals are critical to effective portfolio management in the overall wealth management process and are why we study the liquidity of our portfolios and investments.

The financial world continues to navigate uncharted territory since 2008. Monetary authorities provided an unprecedented amount of money to stimulate economies. In past newsletters we've discussed the distortions that ultra-low interest rates can cause. Today the market expects the Fed to start raising rates in December, albeit very slowly. In other parts of the world, central banks are continuing to ease their policy. These market expectations have driven a strong dollar. In the short term, this has been a headwind to international investments. Longer term, cheaper foreign currencies provide a tailwind to foreign companies, and valuations are better there.

Markets aren’t the only instability it seems. The crisis in the Middle East continues to evolve with war with the Islamic State, the US disengaging from the region, and Iran and Russia stepping into the power vacuum. To this complex situation, we sadly add the attacks in Paris. The long term implications are not known, but history suggests that investors should not overreact to these events as they unfold. The migration crisis of Syrian refugees may be Europe’s next big test. Can they continue open borders? Who will pay? Germany is providing an interesting case study as the economy needs younger workers, but will its society accept the refugees?

On more positive notes, we think the market overreacted to China this summer. China’s modernization and development will not be a steady path, so investors should expect volatility which could impact global markets. Foreign markets in general remain cheap, but longer term we continue to expect better returns in emerging markets than in the developed ones. We also believe that to get these returns investors must be willing to stomach significantly higher volatility.

Cheap oil continues. This is bad for producers and possibly for GDP, good for consumers. Since the big oil price declines are now a year behind us, going forward they will not be a drag on GDP and we may start to see mild inflation again.

There is a lively debate right now on whether productivity numbers are misleading. For those interested in more on this, a reasonable summary can be found in the July 16, 2015 article in the Wall Street Journal article “Silicon Valley Doesn’t Believe U.S. Productivity Is Down: Contrarian economists at Google and Stanford say the U.S. doesn’t have a productivity problem, it has a measurement problem”.

A final significant factor is the continued innovation in the United States. How do long-term disrupters affect the economy and wealth? A current example is 3d printing. Driverless trucks are operating in Nevada and driverless cars are in testing. The long term implications of these and other innovations will be profound.

Wealth Management Topics

Medicare Premium Increases

There are some significant changes with Medicare and Social Security. Medicare was in the headlines due to a premium increase, but not for everyone. Because of falling oil and other prices, there will not be a social security cost of living adjustment in 2016. A 1987 ‘hold harmless’ clause prevents Medicare from increasing premiums on an individual if the increase would decrease their social security benefit. Therefore, the entire increase is being passed to the unlucky Medicare beneficiaries who haven’t filed for social security yet and will see their premiums rise 16%. Of course, all the other Medicare beneficiaries will pay it eventually when social security benefits get a cost of living adjustment in the future, so the cost difference is temporary.

For our clients, we completed a cost-benefit analysis for everyone who hasn’t filed for social security yet, but could, to determine if filing earlier than planned to avoid the temporary premium increase. For these individual clients, we concluded that the long term benefit of maximizing lifetime social security benefits outweighs the short term benefit of avoiding the premium increase. To avoid the premium increase, individuals needed to file in a very brief window in October, before the new rule was even finalized.

Social Security: Big Changes to Claiming Strategies

A more significant change for retirement planning occurred to Social Security. The recent budget deal is ending two popular strategies, the “File and Suspend” and the “Restricted Application”. For those already claiming social security benefits there should not be an impact. For those who have not yet filed, a rethink of retirement income planning may be in order.

There are two important deadlines. File and suspend will still be available for those who reach Full Retirement Age (typically age 66) and file on or before April 29, 2016. The restricted application will still be available to those born on or before January 1, 1954.

"Big Changes to Claiming Strategies for Social Security Benefits." We encourage you to share this with anyone who may be affected. We will be discussing this with affected clients in the coming months. This area is very complicated, and we welcome your questions. If you know others who may benefit from more advanced benefit claiming strategies, we would be happy to talk with them. Click here for an overview of the changes.

Happenings at Kreitler Financial

We are celebrating a number of important anniversaries at the firm. Amy Alfano and Jake Ness celebrated 5 years with us. Charlie Kreitler passed the 10-year mark early in the year. Kim DiRaffaele, our Chief Operating Officer, is finishing her 20th year. Finally, by our math this marks Robert Kreitler’s 30th year, and the 30th anniversary of Kreitler Financial. We couldn’t be prouder of our team and their commitment to providing outstanding service to you, our clients and friends.

You may have heard that our team was featured in a video presentation to a large audience at the Raymond James 2015 National Conference for Professional Development. We’re very pleased to announce that a version is on our web site. You can experience it for yourself at We’re very proud of the entire team’s efforts in creating this.

Thank you to our clients and friends who joined us on October 27 to hear Daniel Hyman, Executive Vice President and co-head of the agency mortgage portfolio management team for PIMCO. He joined Charlie and Bob and held a panel discussion on current bond markets and what investors can expect going forward. We greatly enjoy these events and are glad you can share them with us.

Bob and Charlie spent two days in New York for due diligence visits at several investment firms. Kim spent two days in California for training and best practices on Junxure, a relationship management software we are implementing in 2016 to further improve our clients’ experience.

Last but certainly not least, as Thanksgiving approaches, we like to take a moment to reflect on how fortunate we are to have our lives enriched with wonderful people. We wish the same for you and your loved ones.

With warm regards,

Charles F. Kreitler, CFP®
Robert P. Kreitler, CFP®
Founding Partner

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 Kreitler, CFP®, 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. RJFS does not provide tax or legal advice. You should discuss any tax or legal 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. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.

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