Markets Giving You The Woolies – UPDATE!

The following is a re-introduction of a concept that we shared with you in June.

I’ve witnessed many market declines during my more than 33 years in the investment industry, and I would be lying if I told you that I called the beginning, end, and ultimate magnitude of any of the sell-offs.  Market declines are part of the investing game.  But just knowing that isn’t enough, as unfortunately, they can have a profound impact on retirement plans and retirement planning, both institutional and individual, as they impact the psyche of the investors.

It is well documented how individuals tend to buy high and sell low. The market crash of 2007 – 2009 drove many individuals out of equities at or near the bottom, and many of those “investors” have kept their allocations to equities below 2007 levels. It hasn’t been that much better for the average institutional investor either.  We are aware of a number of situations (NJ for one) that plowed into expensive, absolute-return product at the bottom of the equity market only to see that portfolio dramatically underperform very inexpensive beta, as the equity markets rallied from the bottom in March 2009.

In some cases, the selling “pressure” was the result of liquidity needs, which lead to the tremendous explosion in the secondary markets for private equity, real estate, etc. in 2009.  The E&F asset allocation model, made so famous by Yale, was the undoing for many retirement plans, as the failure to secure adequate liquidity exacerbated market losses.  Given the heightened fear and volatility in the global markets, are you currently prepared to meet your liquidity needs?

As we’ve discussed within both the Fireside Chats and on the KCS blog, the development of a hybrid asset allocation model geared specifically to your plan’s liabilities, can begin to de-risk your plan, while dramatically improving liquidity.  The introduction of the beta / alpha concept will provide plan sponsors with an inexpensive cash matching strategy that meets near-term benefit needs, while extending the investing horizon for the less liquid investments in your portfolio. By not being forced to sell into the market correction, your investments have a greater chance of rebounding when the market settles.

Traditional asset allocation models subject the entire portfolio to market movements, while the beta / alpha approach only subjects the alpha assets to volatility.  But, since one doesn’t have to sell alpha assets to meet liquidity needs given that the beta portfolio is used for that purpose, the volatility doesn’t matter. Don’t fret about China, Oil and / or emerging markets and the potential implications for the global markets and your plan. Let us help you design an asset allocation that improves liquidity, extends the investment horizon for your alpha assets, and begins to de-risk your plan, as the funded ratio and status improve.

U.S. $ Strength – An Unwelcomed Guest For U.S. Multinationals

Readers of this blog may recall that in the KCS First Quarter 2015 commentary we wrote;
With regard to the strengthening U.S. dollar versus major currencies, particularly the Euro, we think that U.S. large cap, multi nationals will be particularly challenged as the cost of their exports ratchet up, and competitors import prices make sales domestically more competitive. Could the U.S. dollar reach parity with the Euro? We certainly believe that can happen, as Europe continues its own QE initiative to jump-start economic growth and inflation.
Well, the impact of a strengthening US $ is beginning to be quantified, and as we speculated, corporate earnings are being dinged. In an FT article from August 2nd, it is estimated that the impact on earnings of US multinationals could be significant in 2015.
http://www.ft.com/cms/s/0/ab30e1d4-37c2-11e5-b05b-b01debd57852.html#ixzz3hmoRs0US

“The sharp rise in the US dollar may slice more than $100bn off dollar-denominated revenues at some of America’s largest multinationals this year, a sum larger than the sales of Nike, McDonald’s and Goldman Sachs combined, according to a Financial Times analysis.”

As mentioned in the article, in the first half of the year, 10 of the largest American multinationals have had their sales reduced by a combined $31bn — including blue-chip companies like Apple, General Motors, IBM, Johnson & Johnson, Amazon and General Electric — and concerns have mounted that a move by the Federal Reserve to lift interest rates later this year will push the dollar higher.
Given our concerns earlier this year about the impact of a strong US $, we began to trim equity positions among large cap domestic holdings, favoring instead small to mid cap companies whose earnings would not be impacted. Furthermore, if the dollar continues to rise versus other currencies, we would suggest that cap weighted, passive portfolios (index funds) will also be stressed in this environment.
Is it the time for active management?

Tsipras Fiddles While Greece Burns!

Unfortunately in this age of the 30 second soundbite we have a tendency to get bored with stories and events, often long before there has been resolution. This seems to be the case with Greece and it’s inclusion in the the Euro / Eurozone.

Most news reports these days are reporting that there is a “DEAL” already signed and sealed as it pertains to a third bail out for Greece when in fact, negotiations on a potential resolution only began last week.  Furthermore, key players, most notably the IMF, aren’t at the negotiating table, and they likely will stay away unless considerable debt relief is negotiated – not a very likely outcome.

While the negotiations begin, Greece’s economy is plunging further into depression. As reported earlier today, the seasonally adjusted purchasing managers’ index (PMI), fell to 30.2 in July from 46.9 in June. Any reading below 50 suggests contraction in the sector. Furthermore, new business decreased sharply in July, surpassing the previous record set in February 2012, while employment dropped for the fourth straight month in July, and at the steepest pace ever recorded during the 16-plus years of data collection. In addition, production dropped for the seventh straight month in July due to diminished output requirements as new orders plummeted and firms had difficulty in sourcing materials and semi-finished goods for use in the output process.

As if that isn’t bad enough, a quick recalculation of necessary funding for Greece raises the number from $92 billion to around $120 billion, which includes re-capitalizing the Greek banks. According to Mark Grant, the number for the banks is now about $43 billion, and it could be far worse as it appears that loans in default are growing at an alarming rate. Clearly, this will not sit well in Brussels and Berlin, and could bring about even more stringent demands than had been previously thought.

Given the plethora of depressing economic news, it isn’t surprising that the Greek stock market got destroyed today after reopening for the first time in five weeks since the beginning of the country’s capital controls and the announcement of the bailout referendum. The overall Athens Stock Exchange (ASE) index plunged by 22.87% as it opened. That leaves the market at a low not recorded since the middle of 2012.

According to an article in the LA Times, several key participants in the negotiations don’t hold out much hope for Greece’s economy even if a deal is finally completed.  Greece’s own prime minister, Alexis Tsipras, says he doesn’t really “believe in” the new bailout deal he’s hoping to secure for his country. Germany’s top finance official thinks a Greek exit from the euro currency would be better than another costly rescue package. As mentioned previously, even the International Monetary Fund (IMF) doubts a bailout will work without major debt relief from Athens’ creditors, few of which appear willing to offer any.

To hear these key players tell it, the rescue plan they’re currently concocting to save Greece from bankruptcy is either a bad idea or doomed to fail. Yet they’re pressing ahead anyway, despite the questions that their own public statements raise about their commitment to keeping Greece solvent, helping its economy grow and preserving its membership in the Eurozone.

KCS August 2015 Fireside Chat – “Targeting Future Changes”

We are pleased to share with you the latest edition in the KCS Fireside Chat series.  This article touches on the burgeoning use of target date funds (TDFs).  However, all TDFs aren’t the same, and plan sponsors have an important responsibility to make sure that they stay on top of these funds from both an investment and fiduciary standpoint.  My colleague, Dave Murray, shares his expertise on these important investment vehicles.  Please don’t hesitate to reach out to us if we can provide any assistance.  Enjoy!

http://www.kampconsultingsolutions.com/images/KCSFCAUG15.pdf

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