KFA Blog

2nd Quarter 2015 Market Commentary

 

Trouble Abroad, Strong Dollar, China    

In spite of global uneasiness, the overall US economy continues to chug along. Economic conditions in China have worsened, Greece continues to disappoint, and Puerto Rico faces collapse. Greece and other irresponsible southern European countries continue to act as thorn in the side of the EU’s largest economies in Germany, the UK, and the Netherlands. European leaders have worked tirelessly to limit a Greek contagion effect that would infect Europe with sluggish growth.

The US economy has a thorn of its own, the territory of Puerto Rico faces a $72 billion debt that Puerto Rico’s governor has admitted cannot be paid. Much of that debt is held in the US, over 20% of bond funds own Puerto Rican bonds which have been downgraded to junk status. In effect, Puerto Rico is America’s Greece. Although Greece and Puerto Rico don’t hinder European and American growth, there are much larger problems.

The same man in China that sells you eggs is giving you stock tips. The Chinese middle class has been coerced from every direction to buy into China’s closed market. Two-thirds of Chinese investors have not finished high school and are trading on margin. Trading on borrowed money has artificially pumped the Chinese market to new highs. This is an attempt by China to build their own market to meet their own consumption and to strengthen their middle class.

The Chinese dragon was able to take flight and lead the world in growth for much of the past decade based on a manipulated and devalued currency that made exporting easy. China’s miracle years have played out and the government cannot control the reality of economic gravity. Furthermore, China is running out of money to artificially stimulate its economy. The country’s corporate and local government debt totals an extraordinary 280% of GDP, the Chinese market has been growing twice as fast as its economy for more than a decade. We are keeping a close eye on the 2nd largest economy in the world and have made adjustments to offset risks.

Despite trouble abroad, American corporations are enjoying large cash balances and balance sheets are positive. Corporate earnings are looking positive in 2015 and the S&P 500 is nearing an all-time high. We anticipate earnings will continue to look good in the following weeks. There has been speculation that China will call US debt in order to cover its own debt, we do not expect that to be the case. China will not call US debt because they need the US to continue to feed their production and exports, the US may serve as China’s lifeline in the future.

As the dollar continues to strengthen, imports will rise and inflation will be held in check.  A stronger dollar and US economy will continue to boost exports internationally which will lead to a healthier global economy. This seems to be a good time to travel, you will find that your dollar is going farther internationally and airlines are saving money on lower fuel costs – leading to better deals and more weekend getaways. Oil prices are forecasted to keep dropping and consumers will find extra money in their pockets leaving more extra cash for discretionary spending.

What does all of this mean for your portfolio? There have been some adjustments made in the past few weeks and days to account for changing economic climates abroad. As need be, we will continue to make minor adjustments to put you in reach of your financial goals. Our confidence in the US economy remains strong and our investments reflect that.

We are looking to add positions in consumer discretionary funds and we are also looking at alternative investments for risk management purposes. These new investments will be funded from positions previously held in volatile international markets. In order to serve you best, we are always researching domestic holdings, other regions, and other countries that are growing and on the rebound.

As always, should you have any questions regarding your portfolio or a life changing event, please feel free to contact any member of the KFA Team.

Your Friends,

Kabarec Financial Advisors, Ltd.

 
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