Market Brief – November 2016 

Posted by Koenig Investment on
 November 10, 2016
  · No Comments

Election Impact – Tuesday’s dramatic U.S. presidential election result has shocked the world.  A number of clients have expressed high levels of anxiety due to the outcome.  It is important to reiterate that elections by themselves do not decide policy outcomes, nor do they generally direct the long-term health of the economy and the businesses that operate within it.   Without knowing which policy proposals will eventually be enacted – and how implementation may play out – making preemptive, emotionally charged investment decisions is more likely to hurt one’s portfolio than help. 

We have carefully analyzed the performance of the stock-based mutual funds we own for their performance during the 2008-2009 sell-off, choosing funds that held up better than their peers and/or benchmarks during the downturn.  One can never assume past performance will be repeated in the future.  However, past activity can be a guide to probable reaction to similar future events assuming no great change in mission statement or portfolio manager(s). 

 Diversification – We cannot emphasize enough the importance of having a healthy level of respect for the highly unpredictable nature of the markets over the short-term.  We have learned this lesson over 30 years of managing money.  The start of this year saw equity markets decline across the globe.  Markets had regained the ground lost and returned to a 1-year high by May.  Then June saw a sharp Brexit related decline that now appears as a small blip on history graphs.  Managed futures holdings provided valuable diversification benefits and reduced risk to client portfolios during these events as they have almost no correlation to broad stock market activity.  A diversified portfolio, like that of most of our clients, should hold asset strategies that have positive expected returns and either low or no correlation to each other over the long-term.  As a reminder, correlated assets move with each other, while non-correlated assets move independently of each other.  For example, stocks and bonds tend to move separately, or even opposite of each other.  There are significant benefits to adding assets that have very low or no correlation, even if their expected returns are somewhat lower than that of existing holdings.  Managed futures is just one example of how we gain diversification and lower risk by adding assets with low correlation to an existing asset mix.

 Bonds – Bonds are another diversification tool we use in client portfolios.  We expect a gradual increase in interest rates over the next year.  Shorter term bonds and bonds with the ability to increase their interest rates, such as floating rate bonds, are sectors we are comfortable holding in client portfolios.  Bonds are lower risk assets to hold in case of a stock market sell-off, acting as a shock absorber as money flows from the stock market to bonds.  As with managed futures, we have been adding to these asset categories over the past year.  Media reports of a change in Federal Reserve policy regarding raising interest rates due to the election outcome are speculative in nature at this point in time.  This is currently an area of unknown policy shifts.

Summary – We have entered a period of uncertainty linked to possible and probable policy changes.  We do not know the nature of these changes yet. Trump’s most recent speech referenced infrastructure spending increases, indicating this is a likely front burner topic to be addressed by the new administration.  A measure of clarity in this and other areas will be obtained over the next 60 days as the outline of the new administration takes shape.  We have already seen some positive activity as the steep market drop predicted by after-hours and international trading failed to materialize.  Many stocks within the financial and energy sectors have seen large gains since the close of the election.  In contrast, tech based companies have seen some declines to their valuations.  It is too early to react strongly to any of the changes expected to materialize from this election.  It would not be prudent to react until new policy positions are noted and the details of these changes are fleshed out.  There will undoubtedly be a number of new positions to parse over the coming weeks, but we are not there at this point in time.  Now is the time to reflect on what this election shows about the country as a whole and to prepare for the general changes ahead.

 

October 2016 – U.S. Employment

Posted by Koenig Investment on
 October 7, 2016
  · No Comments

The employment situation in the United States has slowly, but steadily, been improving since the 2008 recession.  The below graph shows initial jobless claims numbers from 1967 through October 2016.  As you can see, current initial jobless claims are at the lowest level seen since 1973.United States Initial Jobless ClaimsThe U.S. economy added 156,000 new jobs in September.2  Larger employers (those employing 500+ workers) recently outpaced smaller firms in job creation.  Individual sectors do differ in their employment outlook.  For example, energy has seen a contraction in employment over the past year while trucking companies note difficulty filling positions even while offering signing bonuses of $5,000 or more.  The overall unemployment rate did rise slightly to 5%.  However, that rise has largely been attributed to previously discouraged workers reentering the labor market and is not an indicator of a softening job market.

Some workers are still struggling despite current job growth rates.  Figures noting people who gave up looking for work or who can only find part-time jobs remain flat at 9.7%.3  Much of this can be attributed to the “skills gap”, meaning workers without advanced skills do still have difficulty finding full employment.  This figure is not expected to change meaningfully as employers having difficulties filling job vacancies have noted the need for skilled workers within their industries.

A tighter labor market for skilled workers is driving wage inflation.  Hourly wages have grown by 2.6% over the past year to $25.79/hour, just below the post-recession high.3  The numbers of hours worked per person has also increased.  An improvement in both average hourly wages and hours worked is encouraging.  Several economists think we may begin to see worker shortages by next spring.  Pay increases are expected to continue as companies seek to either fill vacancies or retain skilled workers.  This trend is being watched carefully as it may spur an increase in overall inflation, leading to interest rate increases by the Federal Reserve.  A ¼ point rate hike is likely in December given these employment trends.  The employment trends noted above have been gradual, meaning the upward inflationary pressure and need for the Fed to respond have also been slowly growing.  A continuance of current labor market trends is likely to make the Fed more comfortable with future rate increases.  However, while these are positive trends with steady momentum, they are still slow moving.  While this does make future rate hikes more likely, it is not overwhelming pressure on the Fed to raise rates.  While we do expect to see interest rates rise in 2017, we do not expect to see large increases.

In summary, the U.S. job market has basically recovered to pre-recession levels.  Workers can expect raises as their skills are more in demand and valued greater.  The economy is likely to see some upward inflationary pressure due to the tightening job market.  We can expect the Fed to respond with measured interest rate increases.  Unskilled workers still face employment challenges and are likely to continue to do so.

1)  http://www.tradingeconomics.com/united-states/jobless-claims

2)  http://www.ftportfolios.com/retail/blogs/economics/index.aspx

3)  http://www.morningstar.com/news/market-watch/TDJNMW_20161007241/update-us-adds-156000-new-jobs-in-september.html

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

Market Brief – July 2016

Posted by Koenig Investment on
 July 28, 2016
  · No Comments

We’re in the midst of 2016 second quarter earnings releases and I wanted to share with you the picture of the U.S. economy that is becoming clearer as companies release data.  Overall earnings figures are a bit better than expected.  In general, companies made more money last quarter than most analysts expected.  The consensus amongst most analysts is for a better than expected second half of 2016 than originally noted in January.  Both plow horse and tortoise metaphors are common in reports as they sum up thoughts on the current state of the economy.  While this often makes for bland reading and tame headlines, it is good news that should be welcomed as slow growth means less volatility in how companies operate.  Companies that are growing slowly and adding jobs at low, steady rates are less likely to overproduce and need to cut those jobs in a hurry when facing some contraction.  This lower volatility within operations helps keep the company, and the economy as a whole, chugging along a slow growth path.

There are several data points analysts are pointing to as they upwardly revise their expectations for the rest of 2016.  Unemployment is decreasing, year over year retail sales are up, housing starts continue to increase, and average worker pay – a previously worrisome weak spot in the recovery – is increasing.1  In fact, the current economy is basically meeting the definition of full employment.2  The one figure that has been noted again and again in these analyses is the ISM Manufacturing Index.  This index is a survey of purchasing managers around the country and tends to quickly reflect any changes in employment, production, inventories and new orders.  This index rose from 51.3 in May to 53.2 in June.3  Historically, such rises indicate a period of economic growth.  Lastly, investors are largely bearish at the moment.  The contrarian view is often correct as we do typically see a rising market when investors are pessimistic and expect a pullback.  The combination of all this data points to an economy continuing on a path of slow, steady growth.  While there is nothing especially exciting to report, this should nonetheless be welcome news embraced by the average investor seeking portfolio growth and lower volatility.

 

 

  1. http://www1.realclearmarkets.com/2016/07/27/fed_policy_not_in_tune_with_data_181382.html
  2. http://money.cnn.com/2016/05/23/news/economy/us-full-employment-williams/
  3. https://www.instituteforsupplymanagement.org/ISMReport/content.cfm?ItemNumber=30524

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

Market Brief – Brexit June 2016

Posted by Koenig Investment on
 July 28, 2016
  · No Comments

I wanted to take a moment to comment on the Brexit leave vote and its effect upon world markets today.  Part of the movement we’ve seen in the markets is due to the surprise nature of the vote.  Polls had predicted British voters would opt to remain a part of the EU.  That drove gains in the stock market yesterday that are largely being reversed today.  The rest of the drop we’ve seen today can generally be linked to the uncertainty regarding how British decoupling from the EU will effect various corporations, as well as entire economic sectors.  There are questions regarding how difficult the EU will make the exit in order to deter other countries from making the same move.  UK companies will continue to trade with mainland counterparts as they have been doing since ancient times.  There will need to be adjustments in how economic activity is conducted though.  Times of change are always unsettling and markets generally do not respond well to change.  We expect to see the broad market regain ground as a path forward for affected companies is determined.

While volatility in the markets is often unsettling to watch, it does provide opportunities for account growth.  For example, we expect managed futures and fixed income positions to gain ground in the next few days, oil and gas sector assets to remain largely unaffected, and stock based assets to decline less than the broad market.  Please do expect some short-term volatility within your accounts.  We will be making adjustments to accounts if appropriate in order to capture price change opportunities if they fit with your overall financial profile and risk tolerance.

While the broad market has ended the day well in the red, that is not an indicator of long-term problems within the U.S. markets or economy.  The current unemployment rate is 4.7%.1  This figure needs to be put into the context of the people it does and does not capture as the official definition of “unemployed” does not necessarily match the common definition.  However, the current figure is seen to more accurately portray the current employment situation than it did during the recession and immediate aftermath.  I would note that the average unemployment figure since 1950 is a much higher 6%.2  The bottom line is that volatility creates opportunities and we do not see today’s drop materially affecting what you can expect from your accounts over the long-term.

 

 

  1.  http://www.bls.gov/news.release/empsit.nr0.htm
  2. http://www.tradingeconomics.com/united-states/unemployment-rate

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

March 2016

Posted by Koenig Investment on
 March 7, 2016
  · No Comments

Volatile Markets

This year has begun with market activity that has left many investors nervous.  Although economists noted the overall U.S. economy was performing at a decent level throughout January and February, the markets reacted sharply to fears over China and lower oil prices.  The S&P 500 declined by a little more than 10% as of mid-February, leading to talk of recession in some media outlets.  Economists as a whole did not endorse this speculation, but could not definitively say if or when the market would recover.

The decline in overall stock prices occurred in tandem with a falling of oil and other commodity prices.  Many parts of the world are expected to have slower economic activity in 2016, with China most notably experiencing slower economic growth.  Declines in commodity prices appeared to be a reaction to various projections of slowing overseas activity.  Data on the economy led to an uptick in commodity prices in late January and into early February.  The broad stock market followed suit and gained back some of the ground lost earlier in the year.  As of March 6th, the S&P 500 has regained most of its earlier declines, now posting a modest year-to-date decline of less than 2%.

It is difficult to call either a market high or low until well after the fact.  While few are willing to definitively state that the bottom has been reached and passed, a number of analysts are now stating we have likely passed the bottom.  There are a number of reasons for them to begin to make this call.  Both Canada and Australia have economies heavily reliant on commodities.  Canada has a large oil sector and mining is important to the Australian economy.  Both currencies took a hit starting in 2014 as we saw non-oil commodity prices begin a decline.

The graphs of both the Canadian and Australian stock markets mirror their currency graphs with declines from mid-2015 and then bouncing back in February.  Commodity based company stocks such as Freeport-McMoran (copper), Alcoa (aluminum), and indices like the Dow Jones U.S. Steel Index all show declines beginning in the summer or fall of 2015, with bottoms in late January.1 While it is too soon to definitively call a bottom to recent commodity and market activity, a number of signs are pointing towards this being the case.

United States Economy

Employment – The unemployment rate continued its slow decline to 4.9% in February.  This was accompanied by a small increase in the labor force participation rate, meaning that the decline in unemployment is a result of increased employment and not workers giving up on looking for jobs.2  In fact, the discouraged workers (defined as persons no longer looking for work as they believe they will not find any) figure is down 18% from the previous February.

An interesting development in the current labor market is wage growth.  The average wage in February 2016 is 2.2% higher than for February 2015.3  Costco is a notable example of this upward wage pressure, making national news with their increase of a minimum wage to $13/hr.  They are not the only company to note pressure to increase wages in order to stem employee turnover and attract desirable workers.

Corporate Earnings – Corporate profits remain steady overall.  We are seeing a smaller group of companies project earnings growth in 2016 compared to the number of companies projecting growth in 2012 and 2013.  This is a more mature market that is holding steady.  Dividend paying stocks remain attractive as investors seek alternatives to low interest rates paid by bonds.

Other sectors – Statistics for the overall U.S. economy continue to portray a boring, yet positive picture.  The economy is continuing its slow, steady growth with healthy levels of new-vehicle sales for February, greater than expected existing-home sales for January, and manufacturing and purchasing data in line with a GDP growing at about 2% annually.

Summary

2016 has gotten off to a volatile start, with markets regaining much of the ground lost in early 2016.  Commodities look to have been oversold in this period.  Recent price rebounds in commodity prices have been led by currency and stock market reversals in Canada and Australia, historically a signal of stabilizing or growing commodity prices.  The U.S. economy is in better shape, continuing its slow, steady growth.  We expect 2016 to continue to show steady U.S. growth and a recovery within a number of commodity sectors.

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

2016 K-1 Release Dates

Posted by Koenig Investment on
 February 23, 2016
  · No Comments
ALLIANCEBERNSTEIN HOLDING LP COM AB 2/25
AMERIGAS PARTNERS-LP COM APU 2/26
BUCKEYE PARTNERS L P UNIT LTD PARTN BPL 3/7
BOARDWALK PIPELINE PARTNERS COM BWP 2/29
THE BLACKSTONE GROUP LP COM BX late March
CRESTWOOD EQUITY PARTNERS LP UNITS CEQP 3/15
ENBRIDGE ENERGY PARTNERS LP EEP 2/24
ENTERPRISE PRODUCTS PARTNERS LP EPD 2/23
ENERGY TRANSFER EQUITY LP COM ETE 3/31
ENERGY TRANSFER PARTNERS LP COM ETP 3/18
KKR & Co KKR 3/31
NUSTAR ENERGY LP NS 2/29
NUSTAR GP HOLDINGS LLC LP NSH 3/4
ONEOK PARTNERS LP COM OKS 3/1
PLAINS ALL AMERICAN PIPELINE LP UNIT PAA 2/26
PHILLIPS 66 PARTNERS LP COM PSXP 2/26
SPECTRA ENERGY PRTNS LP COM SEP 2/23
SUNOCO LP COM SUN 3/11
SUNOCO LOGISTICS PARTNERS COM LP SXL 2/26
TC PIPELINES LP LP TCP 2/26
TESORO LOGISTICS LP COM TLLP 3/7
WILLIAMS PARTNERS LP MLP WPZ 3/1

Copies of most K-1s can be found here:

https://www.taxpackagesupport.com/(S(mtyoy445juacfwuqkbsglpri))/k1SupportHome.aspx

 

Blackstone K-1:

https://www.partnerdatalink.com/Blackstone/Login/Logon.aspx

 

January 2016

Posted by Koenig Investment on
 February 23, 2016
  · No Comments

China’s Economy

We ring in 2016 with a good dose of market volatility. The five year graph of the Shanghai Composite Index shows a bit of a decline in 2011, fairly flat in 2013 through mid-2014, and then a steep rise starting in mid-2014.  This rise coincided with the Chinese government encouraging citizens to buy stocks, even as monthly economic statistics were showing the economy was slowing and economic data was coming in below forecasts. Unlike the United States and Europe where pension funds, university endowments and mutual funds make up a large portion of stock ownership.  China is almost all affluent, individual investors.  Given this dynamic greater volatility is almost a given.

SOURCE: https://www.quandl.com/data/YAHOO/INDEX_SSEC-Shanghai-Composite-Index-China

In the latter part of the 1990s corporations were moving manufacturing to China from the United States and other countries to take advantage of lower labor costs.  This mass influx of manufacturing drove the Chinese economy for the last 15 years, resulting in annual GDP growth of 8-10%.  This is an almost unheard of figure, and one that eventually has to moderate.  Growth in the Chinese middle class has been fairly rapid and consumer spending will be a larger portion of their economy going forward.  The Chinese government is trying to transition from primarily a manufacturing and exporting economy to be more of a consumer based economy.

Currency – We continue to see China’s currency (Yuan) be devalued against the U.S. Dollar and Euro.  Although currency instability has rattled markets, it does have a positive impact on U.S. corporations purchasing Chinese products.  Walmart specifically should be a big beneficiary, as a weakening Yuan reduces the costs of Walmart’s extensive purchases from China.

Markets – The Chinese government has looked somewhat clumsy in their actions in dealing with a slowing economy and a stock market that had a huge one year run up from mid-2014 through mid-2015.  They imposed a circuit breaker to shut down the stock market if it dropped by 5%.  It took 29 minutes to reach that point during one day this week.  The government has now withdrawn that rule.  In addition, most of the individual investors within the Chinese market are also Chinese citizens.  Their market rules make entry of foreign money difficult to say the least.  This has created a situation in which large numbers of persons relatively new to stock market investing have driven up market prices to unsustainable levels.  We are seeing a drop in price as the President, Xi Jinping, has begun to change the government’s oversight of the markets.  These are long-term oriented reforms that are painful in the short-term, but should give better results than the patchwork stimulus implemented over the past summer.

While the volatility in the Chinese stock markets is attention grabbing, it likely would not impact the average investor elsewhere.  You may recall stories in the 1980’s about Japan’s rapidly growing economy.  Their economy was growing by leaps and bounds until 1989.  Their market peaked in that year and has never fully recovered.  Most U.S. companies and households did not notice this slowdown in the 1990’s even though Japan was a U.S. economic partner.  China is 0.7%1 of the U.S. export market.  A slowdown in the Chinese economy is likely not going to be felt in the broad U.S. economy.  It is simply not large enough to be felt.

United States Economy

Employment – December employment figures released today show a gain of 292,000 jobs. This beat a consensus estimate of 200,000 jobs.  The employment figures for October and November were both revised upward by 50,000.  Almost all sectors of the economy posted job growth except energy.  The unemployment rate remained steady at 5%.2

Corporate Earnings – Corporate profits are the life blood of stocks.  GDP projections are holding steady at low, but positive numbers. Some sectors are seeing typical cyclical contraction, but a company that made money in 2015 is likely to continue to make money in 2016. I would guess the year over year growth in 2016 will be a bit lower than recent years but still growing.

Starting the middle of January we will start to see the release of 4th quarter corporate earnings results.  These results should help support the markets.  In manufacturing employment gains in chemical and plastics are offsetting job losses in metals and energy. Retail sales show a migration of consumers to online firms over traditional brick and mortar retail.

Construction – Construction continues to hold up well in both commercial and residential.  New home starts for November rose 10.45% from October and 16.48% since one year ago.3  US existing home median sales prices are up 6.32% over the one year period.4  Housing is no longer a drag on the overall economy, but rather a healthy sector contributing to overall growth.

Summary

Bright spots in the market in 2015 were technology companies, including biotech.   Several companies have interesting new drugs, devices, or other technology based products that are likely to help company earnings.  REITs are another area to watch.  REITs tend to perform well in rising interest rate environments.  We’ve seen some healthcare REITs whose valuations have dropped far enough during the past year that early 2016 is an attractive entry point in these offerings.  Overall, the U.S. economy is in good shape.  The market activity in China is interesting to follow, but will not have a material impact on the economy here.

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

 

December 2015

Posted by Koenig Investment on
 December 7, 2015
  · No Comments

Federal Reserve and Interest Rates

The long anticipated Federal Reserve increase in interest rates is expected to occur this month.  While the rate change itself is likely to be a modest 0.25%, the stock market does tend to get a little nervous over interest rate increases until two are behind them.  The second rate increase is expected for the first quarter of 2016, meaning we are likely to see increased market volatility through March.  A variety of factors influence the Federal Reserve on when to increase interest rates.  Three factors to note in this current cycle are employment, wage growth, and consumer debt.

Employment – Nonfarm payrolls are up 2.8 million in the past 12 months ending October.  This is the best growth in a 12 month time period since late 1999.  October’s employment report was released in early November with surprisingly strong figures.  This was interpreted as a further push towards the beginning of the Federal Reserve’s long telegraphed move to increase interest rates.  November’s employment report released December 4th was also strong, showing 211,000 new jobs with the unemployment rate steady at 5.0%.1

Wage Growth – The US economy is starting to see signs of accelerating wage growth.  Average hourly earnings have increased 2.5% in the past year.  This is the biggest increase since the start of the downturn in 2008.2

Consumer Debt – Measures of the obligations consumers take on each month for categories like mortgage debt, car payments and credit card payments, the current ratio of income to debt is one of the best since the early 1980’s.  Debt delinquencies – including mortgage debt, auto loans, credit card loans and home equity loans – combined are currently $50 billion lower than a year ago.2

In summary, more Americans are employed, their wages are rising and they are more likely to be meeting their debt obligations than they were a year ago.  The news at the corporate level is also largely positive.  Most analysts expect U.S. companies to post higher earnings in 2016 than they did in 2015.  The biggest factor in a company’s stock price is the company’s earnings.  We may see interesting price fluctuations as some investors react to the Fed’s interest rate increase, but the overall picture for U.S. stocks is one of modest gains.

Oil

Saudi Arabia has been the biggest factor in lower oil prices.  They felt themselves losing influence within the global energy sector and decided to throw their weight around.  The objectives were to inflict pain on Russia and Iran, while undercutting the U.S. fracking industry.  Russia has suffered, Iran has not due to the lifting of sanctions, and fracking output has declined in the U.S.  The Saudis did not count on the efficiency gains U.S. frackers have been able to achieve, thereby, causing less of a decline in the industry than had been hoped for.

Obviously, large state-owned oil producing countries can’t flood the world with cheaper oil without direct economic pain.  These nations are now drawing upon foreign reserve accounts in order to fill the gaps created by lower revenues.  Russia and Venezuela are experiencing more severe pain than other oil producing countries.  Saudi Arabia’s net foreign assets declined by $90 billion from February 2015 through September 2015 as they began to tap into reserve accounts, with the full year total drawdown total estimate at $120 billion.3  The biggest Arab economy is burning through financial assets needed to support domestic spending and could fully deplete these reserves within five years if current policies are maintained.  Even stable oil economies like Norway have started to draw on reserves due to lower oil prices.  At some point the ongoing economic reserves will be drawn down.  Analysts are currently looking to the end of 2016 or into 2017 before Saudi Arabia is willing to curb current output levels and revert to more typical production and pricing.

On December 4th OPEC stated that it was going to raise its oil output ceiling cap to 31.5 million barrels from a level of 30 million barrels.  Given that they have already been producing 31.57 million barrels a day in recent months this is largely a symbolic move rather than a real change in production levels.4

Summary

We continue to see a great number of media reports regarding the economy that do not accurately portray the financial outlook of the average American household and business.  While our economy is not growing at leaps and bounds, the picture is more positive than negative.  Not every family or business has recovered from the financial crisis of 2007-2008, but the overall economy has.  It has taken years, but slow, plodding growth adds up over time.  Stories speaking about imminent doom and gloom cherry pick data points in order to appeal to the emotions of readers.  They do not give an accurate picture of either the status of U.S. businesses nor households as a whole.  The U.S. economy is not perfectly poised and many families do have issues with making ends meet.  There will always be weak spots in an economy as large as that of the United States.  A country with a population of 320 million is going to see some members financially unstable.  However, most companies are currently experiencing growth and most family finances show improvement.  Trumpeting that reality does not generate excitement and often loses out to stories with eye grabbing headlines.

Please remember that the market is closed on December 25th and January 1st.  It closes early on December 24th and 31st.  We hope you and your families have a pleasant holiday season.

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

Market Brief – August 2015

Posted by Koenig Investment on
 August 24, 2015
  · No Comments

Market Sell-off

Stock markets across the globe went into selling mode last week, with stocks in the U.S. declining more than 5%.1  European markets saw a slightly higher level of sales.  The Shanghai Composite, the major Chinese stock market, sold off more than 11% last week.1  This activity is continuing this morning as we write.  The Dow Jones Index opened down nearly 700 points this morning, but then saw several hundred points gained back.  It is currently trading down by a few hundred points, with this figure likely to have changed by the time you read this Market Brief.  The recent devaluation of Chinese currency and concerns regarding further devaluations are front and center in this sell-off.

However, there is little evidence that the U.S. economy is about to slow, necessitating a large market correction.  Additionally, manufacturing activity in Europe and Japan has actually accelerated somewhat in recent months.  The economies in the United States, Europe, and Japan will all benefit from lower energy prices.  Oil price decreases from $104/barrel in June 2014 to the around $40/barrel price we are seeing currently significantly cuts energy costs for many sectors.  Recent data on retail sales and housing have been positive.  The Wall Street Journal surveyed economists recently, with the general consensus being an expectation of an upward revision of U.S. 2nd quarter GDP to around 3.3%.2  The Fed had been expected to raise interest rates in September because the U.S. economy has been performing well enough for inflation to begin to be of concern.  While this may now be delayed, the general indicators that show a strengthened U.S. economy have not changed.

China

China accounts for about 15% of the world’s economic output, with an economy heavily based on export activity.  While a slowdown will be felt in China, it is unlikely to impact the United States.  Exports to China from the United States comprise less than 1% of U.S. GDP.2  Japanese exports to China are greater at 2.7% of their GDP.2  European countries such as Germany, France, Italy, and Spain all have Chinese export figures similar to either the U.S. or Japan.  The bottom line for all of these economies is that a contraction in the ability of the Chinese consumer to spend will have little to no effect on the export economy of each country.  Countries near China, such as Korea and Vietnam, will likely see more significant effects to their economies from a slowdown in China.

Summary

I would remind both retired and near retirement clients that stock market sell-offs do not directly impact the level of income earned from their accounts.  Company profits determine dividend levels and other distributions, not stock prices.  The Price Earnings (PE) ratio for the S&P 500 is currently about 16.5,3 compared to a 60 year average of around 17.  In comparison, the PE of the S&P 500 in early 2000 – just before the market drop – was around 34.

Heavy fixation on the short-term can make it harder to remain focused on longer-term goals.  Each time the market has seen significant drops, a client or two has asked me to sell-off significant portions of their portfolio.  The plan is always to wait out the drop.  Unfortunately, this strategy has never worked.  In each case, the client sold at or near a low and waiting to reenter the market at a higher price.  This type of selling is emotionally gratifying, but cause real long-term losses.  Prudent homeowners do not sell their homes when Zillow dips as they know the value in the property is in the long-term.  The prudent stock market investor should view their portfolio from a similar perspective.  A well-diversified portfolio and a little patience helps the experienced investor ride out market volatility.

1) Wall Street Journal (weekend), 8/22/2015-8/23/2015, What Investors Shouldn’t Do Now, Jason Zweig

2) Wall Street Journal (weekend), 8/22/2015-8/23/2015, Economic Risk Varies Around the Globe, Greg Ip

3)  SPY PE for 8/21/2015 as listed by State Street and WSJ Market Data Center for 8/21/2015

In-Service 401(k) Rollovers

Posted by Koenig Investment on
 June 18, 2015
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A potentially powerful and often overlooked investment strategy

Most people are under the impression that they can’t touch their qualified employer plan such as a 401(k) until they reach age 59 ½ and are no longer employed.  What people don’t know is that many qualified plans allow what is called an “in-service rollover” of their account balance.  This allows a current employee to open an IRA account and rollover part of their balance to the new IRA account.  This can be done all while continuing to work and contribute to their employer plan.

As investment advisors, we often hear from people complaining about the lack of investment options or lack luster performance inside their 401(k) account.  If you find yourself thinking this, or wish you had an investment advisor to manage your account for you, an in-service rollover might be right for you.

There are many potential benefits to an in-service rollover from your 401(k) account to an IRA account.  Many 401(k) accounts provide very few investment options and most do not allow individual stocks to be purchased.  Inside an IRA an investor has access to a much wider array of mutual funds, individual stocks, bonds and other investments that can diversify a portfolio and potentially add additional growth and income.  In addition, by having an IRA account with an advisor, an investor has access to retirement planning and other financial services not typically offered by employer plans.

If you think an in-service rollover might be right for you then the first step is to find out if your company allows this kind of withdrawal.  You’ll want to check with your benefits department for the specific guidelines of your employer plan.  You may want to enlist the help of an investment advisor to review the details of your plan summary document as there may be limitations or certain restrictions that apply.

It’s important to understand that normal distributions from a qualified plan are subject to income tax and distributions under the age of 59 ½ could be subject to a 10% early withdrawal penalty.  By taking an in-service rollover and moving the assets into an IRA, you would not be subject to a tax liability and you would maintain the benefits of tax-deferred growth.

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Koenig Investment Advisory, LLC is a registered investment advisor in the States of Oregon, Washington, California, and Colorado. Advisory firms with five or fewer client households are exempt from registration in such states. The advisor may not transact business in states where it is not appropriately registered, excluded, or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities or the rendering of personalized investment advice for compensation will not be made without registration or exemption.