Kevins Korner

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Weeks Where Decades Happen

"There are decades where nothing happens, and there are weeks where decades happen"- Vladimir Ilyich Lenin
 
It's been an interesting couple of weeks in the world, thought it was time to share some thoughts with everyone on some of the issues dominating the news. I'll try to keep it brief, but feel free to contact me if you want to talk any of this through in more detail.
 

GREECE

After essentially years of kicking the can, the EU is finally confronting the reality that linking countries who try to live within their means with countries who cannot is doomed to fail. Greece now has a few days left to propose a plan that will be acceptable to the EU (read: Germany) to reform their system and get on a track of fiscal sustainability. The prognosticators are giving about 50-80% odds that Greece will leave the EU. Very fluid, seems to change day to day, but by Sunday night we should have a pretty good idea of how this will play out. If Greece capitulates and agrees to the strict "austerity" the EU wants, markets would likely rally. If Greece and the EU cannot find common ground, the next few weeks could be volatile. But the long-term issue is the precedent set by these negotiations that will impact how the EU deals with Portugal, Italy, and Spain, all larger/much larger economies and messier situations.
Bottom line: we have little or no exposure to Greece directly in portfolios, but world markets could be impacted to some degree by what happens in Greece.
 

CHINA

After more than doubling over the past eight months, the Chinese stock market has plummeted 30% in the past month. This was widely expected by many market-watchers (Bill Gross, George Soros, etc.), the run-up was being called a bubble months ago. While the decline in that market is attention-grabbing, what really matters is how the Chinese economy is affected by this. Already the prices of commodities like copper (which growing economies like China consume a lot of) have hit multi-year lows, and even oil has dropped 10%+ recently, so expectations are mounting that we will see a slowdown in China growth. This isn't insignificant for the US, but it's not nearly as impactful as a slowdown in Europe would be.
Bottom line: Overall portfolio allocations to China are small-- China is an "emerging market" and in even the most aggressive portfolios "emerging markets" make up only 5-10% of the total mix, with China being just a part of that 5-10%.


CYBER-WARFARE

 
Today the websites of United Airlines, The Wall Street Journal, and the operations of the New York Stock Exchange all experienced "technical glitches". Some are attributing this to a cyber attack from China. It's a good headline, but as long as payment processing systems at major banks and the Federal Reserve and other key computer systems that facilitate the daily conducting of business are unaffected, this seems more of a nuisance than a grave threat. But if you're interested in this type of thing pop a beer and check out this website, I found it engrossing for about 10 minutes: www.norsecorp.com
 
Bottom line: Whether it's from a Chinese cyber attack or a bad software upgrade, we need to learn to live through 30 minute outages in Twitter...


The US Stock Market

 
Things have been volatile with all of the news I outlined above, but even after today's 1.6% decline we're only 4% off the all-time highs. That said, we closed below the 200-day moving average on the S&P500 for the first tie since last October, a signal many market-watchers believe opens the door for a more meaningful decline. The US market hasn't had a correction (10%+ decline) in more than three years (corrections normally happen every 18 months or so), so we're way overdue for a pullback. Could this be a 30-50% collapse like we saw in 2008-2009? Most market analysts agree that stocks are not extremely overvalued and the backdrop isn't there for such a decline, but 10-20% would not be out of the question and in many was it would be healthy in the long run.
Bottom line: Whether we're at a correction point or not, it's always a good idea to consider your risk tolerance and goals and confirm how your investment portfolio is positioned. In most cases, a 20% decline in stocks would translate into a 10-15% decline in a balanced, diversified portfolio. If you have discomfort with the prospect of that happening, talk to me and we'll take whatever steps necessary to make sure you're positioned to ride out that scenario. And if you have cash, such a correction could be the time to buy.
As always, feel free to contact me if you'd like to review your situation. 
 
 
 
 
 
Buckle Up
El Nino and the stock market (10/10/2014)
 

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