KFA Blog

Market Conditions - Handling Market Volatility

 

Winter is being felt all across America; particularly in Chicago where temperatures are in the teens. Heavy snowfall is possible from Atlanta to New York. In spite of the groundhog’s prediction, we may be in for a long winter.  The market has almost been as unpredictable as the weather. Each and every morning we look for fundamentals, news, and the latest information to determine the best way to allocate your assets. KFA takes every effort to deliver the highest performance while balancing the risk of a fear driven market. Although we remain positive on 2016, we are currently plowing through a blizzard of emotional investing.

One of the top market forecasting groundhogs out there, Goldman Sachs, has abandoned five of six top recommended trades for the year[i]. There are a few other market groundhogs that have echoed negative sentiment, from the Royal Bank of Scotland to the doomsday forecasters who encourage you to buy gold now. At KFA, we are not investing in the shadows – we are looking forward to help you reach your long term goals. Goldman’s only remaining top recommended trade pits non-commodity companies versus emerging markets, which is the same conviction KFA has had since summer. None of our core portfolios are directly exposed to the energy sector and our international exposure has been around 1% since August. In the midst of groundhog discourse, prudence should be left to judge.  

Other than your KFA team, there are several prudent and esteemed economists that support our positive long term outlook. Dr. Jeremey Siegel, a Chicago native and professor at the University of Pennsylvania, strongly believes the S&P 500 may earn as much as 10% this year despite near term volatility. Another noted economist, Dr. Robert Genetski, believes stocks are undervalued by up to 30% and that short term volatility does not compromise long term performance. When we experience turbulence in the market, we consult our team of doctors and work in a pragmatic way to enhance your long term performance. 

Source: SentimenTrader as of January 15, 2016. SentimenTrader’s Smart Money Confidence and Dumb Money Confidence Indexes are a unique innovation used to see what the “good” market timers are doing with their money compared to what the “bad” market timers are doing. When the Smart Money Confidence Index is at 100%, it means that those most correct on market direction are 100% confident of a rising market. When it is at 0%, it means good market timers are 0% confident in a rally. The Dumb Money Confidence Index works in the opposite manner.

The trick for every business has always been to buy at the lowest price possible and sell at the highest price possible. There are several factors influencing the recent market downswing. On the forefront is oil, we are experiencing the biggest supply glut in US history and overblown recession fears hinge on oil continuing an almost never ending downward spiral. As we have mentioned before, demand will eventually meet supply and oil will find a bottom. OPEC nations have done everything they can to manipulate normal supply and demand conditions which has eroded the price of oil to historic lows and threatened the economic livelihoods of OPEC’s own members. On the horizon is the 2016 presidential election which means a new era of economic policy for the United States. There is no clear frontrunner and investor speculation is running wild based on the objectives of each candidate. In the near term, volatility will not end and to capitalize on market movement most portfolios have added an increased allocation in our market neutral fund. We will continue to watch over your portfolios with prudence and with an aim of long term performance. Should you have any questions or concerns you are always welcome to contact us.

 

[i] http://www.bloomberg.com/news/articles/2016-02-09/goldman-sachs-abandons-five-of-six-top-trade-calls-for-2016

 

 

 
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Market Conditions - Keeping a Firm Hand on the Wheel

 

We took two steps forward as we found our first positive week of the year but since Friday the market has taken a step back. The commodity sector is experiencing turmoil as historic lows have triggered a broader market meltdown in terms of investor confidence. Emotional investing is defining short term market movements. Think back to when you were learning how to drive, despite all the preparation and measures you took to pass the driving test you may have been caught off guard the first time you hydroplaned. At this very moment in time, the market is plowing through an oversupply of oil and some investors are losing control and crashing while others remain steady and firm on the wheel.

The good news is, the investment vehicle we are driving to help you reach your financial goals is fundamentally sound. Low oil prices have driven commodities to historic lows but that will change in time. Without doubt, there is cause for concern over an increase in oil companies defaulting. If more oil companies default, the spillover would adversely affect creditors and harm institutions as they are left holding the debt. The threat of a “one and done” federal interest rate hike for 2016 is another factor contributing to uncertainty in the financial sector. The market is reacting to shadows looming over us from the aforementioned past due threats. Poor emotional investing is only accounting for what is in the rear view mirror instead of what lies in front of us.

            

(CNN Fear & Greed Index)

Oil companies have adjusted to the current market climate and cancelled nearly $400 billion in energy projects. We forecast an increase in oil acquisitions as companies will be forced to sell assets and merge business to cut costs and survive amongst growing financial pressures. For small oil companies across the US, it is far better to merge with a larger company armed with more capital than to go bankrupt. This should relieve fear that financial institutions are in trouble for holding oil debt, as that debt is transferred from less viable companies to larger companies with greater liquidity and credit solvency. In 2016, the market has had its best days when oil looked poised to stabilize. If the Federal Reserve sees a stable and growing market they may again raise the federal fund rate which will add to the profitability on loans by financial institutions.

 

We enjoy a free market economy where oversupply has always been met with a slash in production. Years ago, we experienced an oil shortage which was met with more production until we found stability. Due to overproduction, the market is again seeking to find stability. In the meantime, your KFA team is not crashing your investment vehicle as we plow through oil puddles. We are presiding over all of our investment vehicles with caution and a steady hand to help you reach your financial goals. 

 

 

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Market Conditions - Mr. Wonderful to Mr. Doom and Gloom

By:  Lisa Thuer - Senior Trading and Research Specialist

January 2016 will go down as one of the worst if not THE worst January since 1937. It began down and continued free falling with a few positive days in between to end the final trading day of January 2016 with the Dow up nearly 400 points. We feel like we have been bungee jumping for the past month. Ending the month on a positive note going into the weekend is always an added bonus.
Let’s take a look back and see what happened and what is going on in the bear and bull camps. In the past several weeks, we have attended conferences and luncheons with the best analysts around the country to hear their perspective on the markets and where to go from here, including Kevin O’Leary from Shark Tank to Mark Faber, publisher of Gloom Boom & Doom Report. Unfortunately they are divided in their ways of thinking.
 
Bear Camp: Mark Yusko from Morgan Creek and Jeffrey Gundlach from Doubleline Capital are calling for a recession based on weakness in the manufacturing sector. They claim the Federal Reserve will lead us into a recession by raising rates. Then there is the surplus of oil which even though it is a positive for some of us, it is negatively effecting certain areas of the country such as, Houston and North Dakota. The slowdown in China with other countries exporting goods to China will reduce their bottom line. The strong dollar also making our exports expensive and impacting corporate profits to the downside.
 
Bull Camp: Professor Jeremy Siegel of WisdomTree and Liz Ann Sonders, Charles Schwab’s Chief Investment Strategist are cautiously optimistic. We had the honor of listening to them speak this past week. You could say that our views relate more to them than the Bear Camp. Professor Siegel believes that oil should stabilize around $40 and chances are the Fed will not raise rates anymore this year. Both Professor Siegel Liz Ann are basically in the same cautious bull camp and believe we will have a positive finish in 2016. All the worry on China but U.S. has small exposure to the country. Whenever the Fed raises rates, volatility becomes the norm. Slowly raising rates is good for the markets as long as it is not too fast. We may be approaching a mature bull market and realistic returns will be in the single digits.
 
KFA Camp: We also are cautiously optimistic. How is this reflected in your portfolio. KFA is not market timers. Sure it would be great to be able to always buy low sell high and be in all cash when the market drops. We have taken risk off the table and based on research and fundamentals. There is not always a clear signal to sell when the floor is dropping out and consumer sentiment is negative when in reality the data isn’t bad. So what are we doing? Alternatives have been added as a portfolio stabilizer, utilities and preferred stocks have been added to lower the volatility and receive a dividend yield of 3.5% and 5.5%, respectively. We remain overweight in healthcare, technology and financials, even though they did have a big draw down in January, they remain sound investments and this is where the future of innovation will prevail. Furthermore, we will continue to add quality dividend holdings to your portfolio. KFA has chosen not to panic and listen to only our trusted sources of research. There are opportunities in the market and we are looking for signs of stability and have begun to nibble at the markets.
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Market Conditions - Making the Shots

 

The east coast is preparing for a blizzard and folks in Georgia have closed half of the state down as the possibility for snow grows larger. Across the deep south, Winn Dixie aisles are emptying as bread and milk leave the shelves and 30 inches of snowfall is possible in Washington D.C. As our friends and family on the east coast and in the deep south brace for impact, we are preparing for a potential market rebound. After a hard bounce down in the market this week, we have finished almost where we started on Monday.

The sun shined through on the market today as oil found some balance and corporate earnings were generally positive. The biggest driver toward the end of this week was investor sentiment. As it turned out, the hoopla of gloom and doom by talking media heads faded as strong earnings results by Verizon, Starbucks, and several airlines calmed fears amongst investors. European markets aided a dismal international scene by bouncing back from a similar volatile week experienced in US markets. At noon on Wednesday a noted technical analyst, Joe Barto, stated that if the S&P 500 closed below 1810 points equities would free fall from that level. The S&P 500 tested bottom at 1810 points before rising to close this week at 1906.

Emotional fear and panic are not investment strategies. We are conscious of continued volatility but our resolve and our convictions in investments made in your portfolio remain strong. Global growth continues to be a chief concern amongst commodities and Fed policy. This month has seen market excess subside which could make our next bounce even more remarkable. While thinking about the game of basketball, imagine a hard bounce pass headed in your direction for an easy layup. Do you sell everything and drop the ball or do you make the shot? This scenario is similar to understanding market dips, the market has always dipped and history has shown it can come back up to reach never before seen levels. The perceived problem is only an opportunity for KFA investors as we aim to make the shots and help you reach your financial goals.

In 2016, expect volatility and a change in pace as we experience a season of adjustment. A new president is set to be elected, China must find solutions to alleviate multiple economic problems, and commodities are looking to find stability. We are left with a plethora of questions which markets, companies, and countries must answer. These challenges present themselves as opportunities for your investment team at KFA. We are always researching and developing ways to keep your portfolio protected and poised for growth.

Our sincere thoughts, prayers, and well-wishes go out to our extended family on the east coast and in the deep south.

 

 

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Market Conditions - Investing with Wisdom

 

Negative economic forecasts continue to pour in from every angle. A week ago, the Royal Bank of Scotland advised investors to sell all stocks and yesterday a CNN pundit broadcasted the coming of a bull market. In the words of Warren Buffett, “the only value of stock forecasters is to make fortune-tellers look good.” Take into consideration the weather in Chicago when attempting to forecast market performance. On December 13th Chicagoans experienced a high of 64 degrees and on this past Monday our high felt like -2 degrees with wind chill. In only a matter of weeks, we experienced a 66 degree shock. Our market system is experiencing a similar negative shock from an oil crash and a Chinese market that remains fundamentally unsound.

This is not a time of catastrophe but a rare moment of opportunity.  When we experience a negative setback in life, such as an illness or an injury, we seek the best medical advice because we are looking to alleviate a problem. The same can be said in regards to your finances, if you see a negative return on any portfolio you immediately tune into the media to see what is happening in the market. Talking heads across the world are not employed to take care of your finances or forecast anything with accuracy. Their employment often stems from feeding off of your emotion and selling you a story. KFA is not interested in buying stories; our sole purpose remains in helping you achieve your financial goals.

In the midst of a supposed catastrophe, KFA seized an opportunity and most portfolios added a shock absorber and a commodities driven fund last week. Both of these alternatives are well into the green and helping maximize return in your portfolio. In the meantime, equities continue to be vastly undervalued as China and oil have captured the attention and focus of mainstream media. The international economic scene is looking a little better as India takes over for China as the fastest growing major economy in the world, its finance minister projects the GDP could grow as much as 9% next year. Oil prices may eventually stabilize as government officials in Iran have publically stated they would lay down their arms and collaborate with the Saudis in order to “fix” the price of oil. What does this mean for your portfolio? In market history there have always been sharp selloffs and remarkable rebounds.

As the snow melts into the spring we will be walking with an extra pep in our step as fundamentals outweigh an emotion driven market. Today the Dow Jones started down by over 500 points; however the Dow recovered 200+ points thanks to positive momentum in healthcare and small caps. We are reassured by an overall stable housing market, strong corporate profits, and an expanding American economy. As always, we are honored to be your financial advisors and we will continue to serve you with results driven by understanding and wisdom.

 

 

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