Category Archives: China

Recovery of Emerging Markets

The MSCI Emerging Markets Index, up 28.09%, is the best performing major index year-to-date – better than the DASDAQ, better than the S&P 500, better than the DJIA.  That’s an amazing reversal.

Emerging Markets have lagged the other major indexes over the last decade.

  • 2.21% for 3 years (vs. 9.57% for the S&P 500)
  • 5.56% for 5 years (vs. 14.36% for the S&P 500)
  • 2.76% for 10 years (vs. 7.61% for the S&P 500)

Why do we mention this?  A well diversified portfolio often includes an allocation to Emerging Markets.  Emerging Markets represent the economies of countries that have grown more rapidly than mature economies like the US and Europe.

Countries in the index include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, and the United Arab Emirates.  Some of these countries have economic problems but economic growth in countries like India, China, and Mexico are higher than in the U.S.

Between 2003 and 2007 Emerging Markets grew 375% while the S&P 500 only advanced 85%.  As a result of the economic crisis of 2008, Emerging Markets suffered major losses.  It is possible that these economies may now have moved past that economic shock and may be poised to resume the kind of growth that they have exhibited in the past.  Portfolios that include an allocation to Emerging Markets can benefit from this recovery.

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Numbers, the Law of Averages, and the Dow Jones

As we wrote last week, volatility is back.  Two weeks ago today, August 20, saw the Dow Jones Industrial Average (DJIA) dip by 358 points.  Since then the stock market has taken investors on a wild ride.

We were wondering what the average daily price movement was during the past couple of weeks, and after a little research and some Excel wizardry, got the answer:

  • The last 10 trading days (August 20 – September 2) have seen an average move of 356 points in the DJIA.

Then we wanted to see what the DJIA did the 10 trading days prior to August 20:

  • From August 6 – August 19, the two weeks prior to this recent two-week period of volatility, the DJIA moved an average of 96 points per day.
  • The average daily price movement these last two weeks is more than 3.7 times the average price movement the prior two weeks.
  • Even more telling, from August 6 – August 19, there were 6 days that the index moved less than 100 points. From August 20 – September 2, there was only one such day.
  • During the month of July, the DJIA moved an average of just under 103 points per day, or less than a third of the average daily price movement these last two weeks.

DJIA Avg Daily Price Movements

(Another interesting tidbit that seemed to escape mention by the talking screaming heads on TV: despite last Monday’s big drop, both the DJIA and the S&P 500 closed up for the week ending August 28.  The DJIA was up 1.17% while the S&P 500 was up 0.95%.)

Eventually we will revert to the mean.  We are still not convinced that interest rates, China’s growth rate or currency movements are that big a deal.  Put another way, we do not think those things are enough to derail the slow “plow horse” economic improvement domestically.

We urge everyone to take a long-term view on investing and keep a cool head during bouts of market volatility.  We will continue to monitor the markets, economic conditions and our clients’ portfolios.  If you have any questions, concerns or comments, please do not hesitate to contact us!

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On Recent Market Volatility. An Open Letter to Our Clients.

And you thought we saw volatility last Thursday and Friday?…

It is normal to for you to wonder how all of this volatility affects your wealth.  As we are hearing it, China seems to be the straw that broke the camel’s market’s back.  Other forces added to the weight, including uncertainty over the timing of the Fed raising interest rates and the Greek debacle.  However, we do not think that any of these things are cause for long-term concern regarding your portfolios.  If you are feeling some stress because of the recent market volatility, remember:

Stock markets are supposed to go up and down

There have been over a dozen market pullbacks of at least 5% since March 2009, so this isn’t unprecedented.  We all realize that stocks are inherently volatile investments, and we must accept the fact in order to earn the expected higher long-term returns.  You have all undoubtedly heard us preach asset allocation and the importance of having a long-term, strategic view.  Your portfolio is invested in a model based on your unique financial and personal circumstances.  It is important to take the long view and realize that it is typical for bull markets to have corrections of 5% – 10%.

Market timing is a sucker’s game

None of us has a crystal ball.  Not even the traders and speculators on TV that want you to think that they do.  Luckily, you do not need a crystal ball to be a successful investor.  In times like these, it is best to keep your cool and stay invested.  Studies consistently show that missing just a few days of strong returns can affect your performance dramatically.  It is important to stay disciplined and not make short-term trading decisions based on fear and emotion.

Your portfolios are properly diversified

This is our most important point.  As we mentioned, we have invested your money in an appropriate allocation for you, so those investments that have not done as well as the stock indices the past couple of years (looking at you, bonds) should help cushion the blow from this market correction.  That is exactly why they are in there.  Having a mix of different types of investments is like having shocks and struts on your car – these things provide a smoother and more stable ride for your portfolio.  When the stock markets are going great, these other investments do cause drag, but we do not invest to beat an arbitrary benchmark, rather we invest to help you achieve your financial goals with the least amount of risk possible.

The things that are causing this correction are just noise

China is slowing.  So what?  To say that their growth rate is slowing is admitting that they are still growing, just at a slower pace.  Did anyone really expect them to grow at 20% per year forever?  Moreover, if you look at it from a numbers perspective, exports to China only account for 0.7% of U.S. GDP.

The Yuan is falling.  Just a few months ago weren’t the talking heads lamenting the thought of the Chinese yuan as the world’s new reserve currency?  Now that talking heads who brought you that idea are being proven wrong, they want you to believe that this is supposed to be bad, too?  Which is it that we are supposed to fear again?  We wrote a blog piece about this last week, so we won’t go into great detail rehashing it here, but our general reaction is, again: So what?

The Fed is going to raise interest rates. (Eventually.)  It was not that long ago that tapering was supposed to bring financial ruin to us all…  Look, we all know that the Fed is eventually going to raise rates.  We can argue about the timing, but whenever it finally happens and the federal funds rate increases by 0.25%, does anyone really think that will keep Apple from introducing the latest re-iteration of their products?  Or keep anyone from buying them?

We realize that we have been having some fun with things that may cause some of you serious concern.  What we do not take lightly as your advisors and financial fiduciaries is the amount of concern and care we place on your financial well-being.  In times like these, it is important to stay calm and avoid making hasty decisions that could harm you financially.  We will continue to monitor your portfolios with vigilance, and as always, please do not hesitate to contact us if you have any questions or concerns.

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“The Yuan is Falling! The Yuan is Falling!” – Chinese Chicken Littles

The financial trauma of 2008 was so great that many investors still can’t get over it.  The U.S. stock market has more than doubled in value since the dark days of early 2009, but ever since then there have been recurring predictions of another crash.

The latest reason given for fear is China.  Specifically, the Chinese currency – the Yuan – has lost 3.5% of its value relative to the dollar in the last year.  A recent commentary by Brian Wesbury of First Trust put this in perspective.

The Chinese pegged their currency to the dollar at a fixed rate from 1995 to 2005.  Since then the Yuan has appreciated relative to the dollar by about 33%.  That is until this year, when for the first time the Yuan was allowed to decline slightly.  Wesbury referred to it as a “minor wiggle” and he’s right.  But since it was unexpected, it hit the headlines like a bomb and provided the latest opportunity for the perma-Bears to whip up hysteria.

But let’s put this in perspective, in the last year

  • The Japanese Yen declined against the dollar by 17.6%,
  • The Euro by 16.4%,
  • The Canadian Dollar by 15.8% and
  • The Mexican Peso by 19.9%.

The U.S. imports twice the amount of goods from these countries than it does from China.  But their devaluation of 15% to 20% happened without notice or comment.

In the meantime, the appreciation of the U.S. dollar means that foreigners pay more for a new Boeing 787 and we pay less for stuff made overseas.  That’s good for U.S. consumers and helps keep inflation in check.

The other thing that’s happening in China is that growth is slowing.  That had to happen, but for people who simply extrapolate a trend to infinity, it seems to have come as a total surprise.  What this means is that Chinese demand for raw materials is slowing.  Not stopping, just not growing as fast.  That seems to have caught mining companies and other basic materials producers flat footed.  As we write this the price of a barrel of oil is threatening to go under $40, a price not seen since 2009.  The same is true of commodities like copper and lumber.  While this is not good news for workers in those industries, it’s good for consumers who buy products made with copper or wood.

In our view, the “Plow Horse” economy is continuing its slow but relatively steady growth.  Markets have always been nervous and traders pay lots of attention to the news ticker.  But long term investors who have well-balanced portfolios should not be concerned with the latest Chicken Littles telling us that the end is nigh.

If you have questions or concerns, call us and we’ll be happy to chat.

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Chinese guarantees and the illusion of safety

A “guarantee” is only as good as the guarantor. If you buy a car with a ten year parts and labor guarantee, you make the assumption that the company will be around for that long and able to make good on its promise.

That’s becoming a potential problem in China. The Wall Street Journal shows how a lot of Chinese loans are ‘guaranteed” by guarantors who may not be able to make good in case of trouble.

Since 2007, the central government has instructed banks to lend more to small firms run by entrepreneurs, the most efficient part of the economy but one that banks have traditionally eschewed. Banks prefer to lend to large and state-owned firms that have sufficient collateral – typically land – to cover their loans.
The banks’ solution has been to insist that in the absence of collateral, someone else guarantee the loan – absolving banks of the need to look too closely at borrowers’ ability to pay, while giving loans the veneer of being safe. In some cases, the guarantee will come from another small firm – maybe a neighboring factory, and a company run by a close friend.

This would not be a problem for the industrialized world if China had not become the world’s largest economy. Major firms throughout the world are making big bets on the Chinese economy. The Chinese are known for their “creative” accounting.   The next big “Black Swan” event could come at us out of the Orient.

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