Stock markets around the world have sold off and volatility has spiked

While you should receive our detailed year end newsletter soon, we wanted to quickly reach out to you to provide our thoughts and action plan.

First off, up until last summer US stock markets have been rather subdued with no correction (more than 10% down) in a few years. Even the dramatic decline in the price of oil which began mid 2014 had been orderly up to late last year.


China is probably the best explanation with the strong Dollar a contributor too. We have written about both of these before as well as covering the drop in oil in one of our quarterly economic updates at the beginning of 2015. We said you should expect the price of oil to stay low for a while, and that consumers would benefit and eventually spend some of the windfall.

We would boil this market correction down to changing expectations for corporate earnings this year. We don’t see a recession in the US or anything approaching 2008-2009. So take comfort from that. The US only exports something like $120 billion in goods directly to China. Also, interest rates are not increasing to any degree such that this would change how investors capitalize earnings or pose competition for investor dollars. Inflation, too, is still on hiatus. The drop in the price of oil is far from being a negative for our economy. The drop in gasoline prices alone added $134 billion to consumers’ pockets (more than total exports to China) in 2015 versus 2014. So, no recession here unless you live in oil country.

Even without a US recession global companies are exposed to slowing conditions abroad. For example, around half of the sales of companies in the S&P 500 index are from international markets. So Investors are concerned that corporate earnings will not measure up to what was expected in 2016 with the world economy slowing. They’re probably right. With the Dollar up, US firms can become less competitive and earnings abroad translated back into Dollars will be lower than expected just last year. And as we wrote in our year end newsletter, stocks are expensive and probably priced for perfection.


Take a close look at the chart below of S&P 500 profits per share since 1960 and the S&P 500 index value. (The red line shows earnings, and the blue line represents price.) Through war, recession, whatever, never before has the S&P 500 price and earnings failed to find a bottom and recover. This time will be no different–be patient.


The sell off has made some of the companies we own buys again. Many have been holds to use Wall Street jargon. And we have been able to add a couple new names in the industrial sector that we think are high quality and now good values –MSC Industrial Direct in the Smaller Companies portfolio and Rockwell Automation in Equity Income. We are looking for more. You can read more about those additions in our year end newsletter. Most of you, too, have a large portion of your portfolio in bonds. Bonds are up over this period of volatility as investors seek safety.  That’s the benefit of diversification.

So again, please be patient but don’t hesitate to call or come in if you have questions, concerns, or your circumstances have changed that may impact your tolerance for risk in your portfolio. 

The securities mentioned are not the only securities we have purchased in the last year for our clients. If you would like a list of all securities purchased in the last year, please contact us. Additionally, it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities mentioned.

Stock Market Update

With the 24-hour news cycle, all of you are probably aware of the ongoing correction in stocks (meaning down over 10%), and increased volatility, as the summer draws to a close. What’s going on? Weakness in China has led it to decouple its currency, the Yuan, from the U.S. Dollar. It also has allowed its currency to depreciate compared to the U.S. Dollar and other currencies to help its export sectors. You can see from the first chart how strong the Chinese currency has been over the last decade. Evidently, it has become too strong and weakened its export-focused economy too much for the leaders’ likings. In all likelihood it will manage its currency even lower in the year to come. But, Chinese leaders will pull out all the stops to keep the economy growing to absorb a growing workforce. So weakness shouldn’t be extrapolated to a major economic contraction in our view. We think the Federal Reserve will also delay hiking interest rates in September and this should cheer investors in the coming days.Real-Yuan

Let’s keep things in perspective. The second chart shows how subdued volatility has been over the last couple of years. It also shows that it has been a few years, in fact four years, without a meaningful correction in stocks. We were due for a correction in stocks. Where do stocks bottom? We really don’t know and no one else does either. So far, the Dow Jones Industrials are down about 10% for the year while the S&P 500 is down about 7%, both excluding dividends. Another thing to remember, while 500 points on the Dow seems like a big number and would have been a market crash in 1987 (meaning down over 20%), today it is about 3%. Short-term results like this are well within the range of what should be expected from time to time.

What is our strategy? First, we have been at this long enough to know panicking will cost you money in the long runsp500. Second, this pullback has made some companies we have on our target list more attractive in our opinion. So, we plan to stay focused on buying high quality companies at a discount to their intrinsic value rather than trying to time the market.

We encourage you to keep in mind, as long-term investors patience is your best friend. As always, your situation is unique and you may have liquidity needs of which we are not aware. Please do not hesitate to contact us if you have any questions or would like to meet to go over your portfolio.

Explainer: what’s the turmoil in the Chinese stock market all about?





Michele Geraci, University of Nottingham

The Chinese stock markets have experienced significant turmoil in recent weeks, with the Shanghai Composite Index – the country’s major reference – falling by 32% since June 12. But this fall was preceded by an equally sharp rise of 150% over the previous nine months. In the 20 years since I have been working in finance, I’ve never seen anything like this. So what is going on with the Chinese stock market?

There are several reasons for this unusual behaviour: firstly, when I teach stock market investment to my Chinese students, I always remind them that the Shanghai stock exchange should be thought of more as a casino, rather than as a proper stock market. In normal stock markets, share prices are – or, at least, should be – linked to the economic performance of the underlying companies. Not so in China, where the popularity of the stock market directly correlated with the fall in casino popularity.

Stocks and casinos

In China, given the low credibility of the financial statements published by listed companies, investors need to rely on other tools to predict share price performance. These tools include a heavy reliance on technical analysis and charts – a method that tends to predict future share price based purely on the company’s past performance, with no regards to its fundamentals. Even the name of the company is often neglected; all that matters is the historic price performance.

While this technique is also used in Western markets, my experience in China is that it is the predominant method for investment. Hence the disconnect between a share’s price movements and economic fundamentals.

There has been, however, a strong correlation between the stock market’s performance and the revenues of the casinos in Macau. While gambling revenues were growing at a fast pace in Macau, people largely ignored the stock market – whose performance was, largely, uninteresting for a number of years. But since China’s president, Xi Jinping, launched a campaign against corruption, gambling activity has started to decline. This was when the stock market started to move up. Coincidence?

Real estate

The other reason why the stock market experienced a sharp increase between September 2014 and June 2015 relates to the Chinese real estate market. In recent years, investment in real estate has been the only way for ordinary citizens to get returns higher than the paltry 3% offered by bank deposits (yes, 3% is paltry in an economy that grows at more than 10% a year in nominal terms). But high capital requirements and growing regulations on the purchase of real estate has meant that benefiting from this growing market has been increasingly difficult for ordinary citizens.

Macau: the traditional home of Chinese gambling.

Commercial banks therefore – in an effort to mimic real-estate returns – started to offer so-called “wealth management products”, which are basically funds that invest in the real estate market. These funds were then repackaged and resold in the retail market. Chinese individuals would take their savings out of current accounts and placed them into these wealth management products and achieve returns similar to those available to buyers of real estate.

This was the modus operandi until the beginning of 2014, at which point the economy and the real estate markets started to show signs of weakness. The once-easy money coming from the property market started to disappear and people with wealth management products started to get into financial trouble and some of them even defaulted on their payments (the government bailed them out, so no individual was at a loss).

Monetary policy

From November 2014 the Chinese central bank, worried about the slowing economy, decided to institute an aggressive monetary policy to rapidly lower interest rates with the aim of stimulating the economy, which also caused current account rates to decline. This created a perverse scenario where individuals who were already seeking returns higher than those offered by current accounts were then denied the opportunity to get them through real estate because of the falling market. As a result, deposit rates were cut further and the return on current accounts became even more dissatisfying. Commercial banks found themselves in a quandary.

The Shanghai Composite Index’s growth and decline in recent months.
Yahoo finance

With the casino route closed and real estate off the table, what was left? The Shanghai and Shenzhen stock markets: the two main stock markets that had remained dormant for years.

Banks then turned the old real estate wealth management products into investment vehicles to purchase shares directly on the stock markets. A large portion of customer deposits were then directly invested in the stock market, which then surged on the back of that demand.

An empty bubble?

Meanwhile, however, nothing happened to the earnings forecasts of the underlying companies. In fact, if anything, they should have been revised down because of the deteriorating macroeconomic condition of the Chinese domestic economy. But of course, as we said before, no one really looks at earnings and price ratios.

Due to the desire to maximise returns, many individuals then used leverage so that the inflow of money in the stock market was even higher. For example, if someone wishes to purchase shares for a total value of 100RMB, but only has available cash in his deposit account of, say, 60RMB, he could borrow the remaining 40RMB from the brokerage house. By doing this, the original source of 60RMB was turned into an upward push of the stock price equivalent to the full 100RMB. This drove strong share price growth between September 2014 and June 12 2015.

What happened on June 12 2015? Nothing. Just some smarter investors (generally large institutional investors, which represent 20% of all market volumes) started to sell and the rest of the market followed suit. Fear got hold of small investors (who represent 80% of the market) and selling accelerated, with margin calls making those selling do so even faster, and here we are today – a 32% drop and counting since the peak of mid-June.

In the past few days, the Chinese government has adopted a number of measures to try to mitigate this crash. The market finally reacted positively to a relaxation of restrictions on margin requirements. But this measure simply transfers the risks from investors to brokerage houses – it does not change the fact that the market has increased by 70% over the last year. The bubble, if it is a bubble, still has a long way to go.

The ConversationMichele Geraci is Head of China Economic Policy Programme, Assistant Professor in Finance at University of Nottingham.

This article was originally published on The Conversation.
Read the original article.


If you missed the live showing of our Private Wealth Management series on managing retirement cash flows and optimizing your Social Security strategy, here is a link to the replay on YouTube.  If you want a copy of the slides, please contact us.

The securities mentioned are not the only securities we have purchased in the last year for our clients.  If you would like a list of all securities purchased in the last year, please contact us.  Additionally, it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities mentioned.

Retire.Ready Private Wealth Management Series

Here is a picture from our Retire.Ready presentation this morning.  We will have a video summary up soon for those who missed the presentation.  Thank you to all who attended and thank you Christel Turkiewicz, CRPC and Matt Roehr, CFA for presenting our retirement solution.20150519_162008819_iOS Please follow us at @NWInvestment or @NWRetireReady to stay informed.

Retire.Ready Private Wealth Management Series

Please join us on May 19 for our latest Private Wealth Management Series on our Retire.Ready service.  Are you prepared for retirement?  Have you prepared a budget plan?  Have you considered strategies to maximize your Social Security?  How should your portfolio be structured to meet your retirement cash flow needs and still be sustainable, predictable, and flexible?  Matt Roehr, CFA and Christel Turkiewicz, CRPC will lead the discussion on this important topic.  Space is limited and filling fast so RSVP today to Theresa O’Donnell at 503-906-9624 or



Recent Market Volatility

With the 24-hour news cycle, all of you probably are aware of some increased volatility in stocks after a quiet summer.  It seems that October always brings such events and mostly on the downside.  The chart attached shows how subdued volatility has been over the last couple of years.  It also shows that it has been a few years without a meaningful correction in stocks.  We are due for a correction in stocks which is typically defined as down over ten percent.

Is this it?  We really don’t know and no one else does either.  So far, the Dow Jones Industrials are down a little over 5.5% from their recent highs so if it does become a correction, we have some more days like this to go.  While 200 and 300 points on the Dow seems like a big number and would have been a market crash in 1987, today it is less than two percent.

This pullback also has made some companies we have on our target list attractive buys in our opinion.  So, we plan to stay focused on buying high quality companies at a discount to their intrinsic value rather than trying to time the market.

Please do not hesitate to contact us if you have any questions.

dow jones

Short Term Volatility

The Dow and the S&P each finished down over 2% yesterday, and the year-to-date return of both is over 5% on the negative side. While certainly not predictable, short term results like this are well within the range of what should be expected from time to time. We have been reporting for several months now that on the heels of a big 2013, we were finding good bargains to be few and far between. Further selling over the coming days and weeks, if it occurs, should begin to reveal the type of risk/return situations for which we have been patiently waiting. With economic news mixed and 4th quarter earnings releases coming out daily, there is plenty of data to influence the marginal investor one way or the other. We will continue to bide our time awaiting the right situations.

Concentrated Stock Positions Can Cause Pain

There was a great article in this past weekend’s edition of the WSJ about the pain that a concentrated stock position may cause. We have many clients come to us with concentrated positions either due to an inheritance or simply a position that was purchased many years prior. However they have acquired this large holding, it typically has created an emotional attachment and thus becomes a difficult task in trying to pair back the holding.

As the article points out, the problem with holding a large position in any one stock is that the stock owns you rather than you simply owning the stock. Think of it as the proverbial tail wagging the dog as opposed to the dog wagging the tail when it comes to your portfolio’s performance. Whether the stock appreciates significantly in price or decreases significantly in price, the outcome is magnified in the portfolio’s performance.

Another point made in the article is the “regret” associated with action or no action when there is a large price swing in the stock. Regret can occur if one trims back a position and then watches it subsequently appreciate. Similarly not trimming back and watching it go down may cause just as much regret. Both forms of potential regret add to the emotional attachment of the position. The article goes on to state that emotionally diversifying is as important as financially diversifying.

We recommend to our clients who come in with large concentrated positions that they put a plan in place to systematically reduce exposure over time. Of course, tax consequences need to be taken into account so trimming a predetermine amount each year may prove to be the best strategy. We believe having a game plan that reduces concentrated exposure over a regular time period diminishes the emotional toll of the decision making process.

Below is a link to the article if you wish to read it.