• Bill Bullock

2015 Second Quarter

As I write this quarter-end report, some of the biggest financial news so far this year is taking place in Greece and China. Greece has made the front page for several days now, but many are turning to China's news as even a bigger concern.


Greece is back in the headlines with a familiar storyline: Greeks are sick of the austerity, higher taxes and slow economic growth and, therefore, have elected a government promising to rid Greece of these problems. The Greeks want their government to say "enough!" The referendum this past weekend gave their young Prime Minister Alexis Tsipras the backing he needs to confront their creditors and eurozone leaders and tell them that they want a better deal. On the flip side, many in Germany - the eurozone leading economy - believe the risk of contagion to other countries in the euro is smaller this time around. Most of the Greek debt is held by euro-area governments, the International Monetary Fund (IMF) and the European Central Bank (ECB) with a much smaller percentage owned by European banks. Also, other countries that had similar credit problems in 2008 (e.g. Ireland, Portugal, Spain) are on firmer ground at this point. Thus, Greece could easily be kicked out of the eurozone. Should that happen, you have to ask yourself, who in the world would lend to Greece? Their new currency, which I am assuming would be their prior currency, the drachma, would be highly inflationary. Sure it would be cheap to vacation in Greece, but would it be safe? In any event, I believe Mr. Tsipras will use the referendum result as a bargaining chip as Greece does not have many bargaining chips left. The eurozone may decide that Greece is not as important as it once was to the euro and let them drop out. The new deadline is this Sunday.


The other big headline is the Chinese stock market. There was an article in the July 8th Wall Street Journal by Ruchir Sharma that I found particularly interesting. The Chinese were expecting big returns out of the stock market on their leader's birthday on June 15th - instead they found that their market was down 2% on the leader's big day. "One deeply indebted trader committed suicide by jumping out of a window, his net worth wiped out by the collapse of a single stock that he had borrowed heavily to purchase." The article goes on to point out that Chinese investors seem to be a bit naive regarding their government's control of the market. They seem to think that the Chinese government will step in and place their massive amounts of cash to work by buying up stocks and back-stopping the stock market, which they have done and may continue to do. The question is: Will it be enough? Much or most of the Chinese market is made up of retail investors - not institutional investors. Moreover, "as a share of tradeable stocks, margin debt is now nearly 9%, the highest in any market in history." A stock market built on borrowed money certainly will not stay at elevated levels forever. The bottom line is that the Chinese stock market has been bid up for quite some time and hopefully it will be brought back down to earth with minimal impact on the U.S. market. Our foreign managers have done a good job of avoiding the Chinese equity market over the years. Perhaps some of the Chinese stocks will look more attractive to them over the next several days.


After six years of growth in the stock market, we all knew that the smooth ride would at some point give way to some volatility. The news coming out of Greece/euroland as well as China will most likely put a damper on our portfolio returns in the near-term. It is during these times that I find it incredibly difficult to try to time the market either on the sell side or the buy side. I look at these downdrafts as a positive for a couple of reasons. First, it allows those who are dollar-cost-averaging into the market the opportunity to buy more shares with their set dollar amount. It also allows our value managers the opportunity to purchase their favorite stocks at bigger discounts.


Make no mistake - the U.S. market is frothy and expensive. One of the best ways to partly counter-act this risk is to maintain a well balanced portfolio of stocks to bonds and to make sure you are diversified within these mutual funds. When you review your Position Performance report, be sure to check out how well our small-cap and foreign stock funds have done in comparison to the large-cap stock funds. The large-cap stock index has outperformed the small-caps and foreign stock indices over the past few years - that is not true this year. Trying to time these swings is very difficult and one of the main reasons we should always be diversified. That said, I personally don't believe we should be making forays into commodities, gold or hedge fund securities at this point. I happen to believe that stocks - ownership in corporations producing a product or service that is in demand - continue to be one of the top investment vehicles of choice over the next 10 years.

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