2017 April Newsletter

Has the transition of power in Washington DC impacted the market?  Read this quarter’s newsletter for an overview of: 

  • 1Q market activity update
  • Sterneck Capital’s perspective of “index orphans”
  • Scaling ideas to find income generating assets with low market correlation

Click Here for April 2017 Newsletter

2017 January Newsletter

2016 is over.  What’s to come? 

Is it time to partner with a trusted investment advisor?  Review our January 2017 newsletter for a glimpse into our thinking and investment approach.  You’ll see why our expertise is trusted by so many.

This quarter’s newsletter covers the following:

  • Our take on 2016
  • Thoughts on 2017
  • Sterneck Value Opportunity’s fund strategies expanded to individual client accounts
  • Women’s Educational Series Road Trip to Saint Louis

Also – check out Sterneck Capital’s footprint map!  If we aren’t servicing clients in your state yet, contact us.  We might be able to change that.

Click Here for January 2017 Newsletter

2016 October Newsletter

October 2016 Newsletter is available!

Check it out to learn about the following:

  • Sterneck Capital’s 3rd Quarter review
  • Our thoughts on interest rates
  • Semi-Liquid (Interval) Fund options
  • The election & the market
  • Educational Opportunity for Empowered Women

 

click-here-for-october-2016-newsletter

 

2016 July Newsletter

July’s Newsletter highlights Sterneck Capital Management’s value investment strategy.

Check it out to learn about the following:

  • Warren Buffet and Sterneck Capital’s shared philosophy
  • How Moore’s Law impacted investing
  • Research reflecting cheap stocks, on a relative basis, perform best over time

Click Here for July 2016 Newsletter

Sterneck Capital’s Latest Non-Correlation Option: AQR Equity Market Neutral Fund

As we continue a conscious pursuit of non-correlation within investment portfolios, we have recently added a new position broadly across numerous accounts.

AQR Equity Market Neutral Fund

Designed as a market neutral strategy, AQR Equity Market Neutral Fund (QMNIX), seeks to achieve positive rates of return over a full market cycle, regardless of the conditions or direction of the general market. The fund intentionally seeks to position itself in both long and short equity and equity like positions, to remain as un-correlated as possible to global equity markets. QMNIX is able to achieve this by looking globally at broad asset allocations and security selections by using three criteria:

  • Value indicators to identify investments that appear under-valued based on systematic fundamental metrics.
  • Momentum indicators to identify emerging directional trends, both positive and negative.
  • Quality indicators to identify stable companies with profitability and stable earnings.

Using value, momentum and quality metrics, the fund individually scores a large universe of stocks, then buys the top decile, and shorts the bottom decile. This long-short, market neutral strategy is the source of non-correlation. But, their systematic approach is a very different than most fundamentally driven long-short funds. It is the systematic nature of their process that removes impact of manager discretion and allows true non-correlation to emerge.

For details, see AQR Equity Market Neutral Fund Fact Sheet @ https://funds.aqr.com/~/media/files/fact-sheets/emnmfi.pdf

2016’s Initial Market Activity

Wondering what has been impacting market activity thus far in 2016?

Get perspective from thoughts shared by Frank Sterneck regarding:

  • Oil
  • China
  • Fed Rates.

Link to January 2016 Market Commentary

Weathering The Storm: Observing Non-Correlation

Last month’s newsletter previewed our Non-Correlation Strategy, which pursues investments that behave independent of the traditional asset classes such as stocks, bonds, and real estate.  The market volatility in August and September provided a useful stress test for the strategy.  Despite the domestic market being down nearly 11% toward the end of August, our no-correlated strategy performed as expected.   Review the linked analysis to review the encouraging results:

August-Sept 2015 Analysis Updated10192015

Sterneck Capital’s Market Reaction? Patience

A note from Sterneck Capital Management’s Investment Committee:

First, we feel it is important to frame the recent pullback by placing it in the context of the total market move during this current six-year bull run. From the 2009 low to recent highs, the broad market has moved up 217%. The recent pullback was 15%.

Under the surface, a large number of stocks have been in steep declines for the last few months. The indexes have been held up by a small number of large cap stocks that have a disproportionate impact on the indexes’ price. With these large cap names now ceding ground, it is placing further pressure on the broad sector of already weak names, it is in these stocks  where the potential opportunity lies. These are names that are now down 30/40/or 50% or more from their 52 week highs. However, there is no reason to be a hero in these stocks and catch every last penny of an up move. This is a message we have been communicating in recent presentations: knife catching is for circus performers, not investors. Even at current prices, few stocks are extremely cheap. Despite the pull-back, most are up considerably over a 3 and 5yr period. However, if and when markets stabilize and earnings visibility or sentiment improve, then we can initiate and accumulate new positions. We are less concerned about missing the first 5 or 10% of an individual stock move, if it is set to appreciate 30 or 40%. Conversely, we care deeply about avoiding 20 or 30% draw-downs, since we know that it takes a 40% upside return to make up for a 30% downside move.

The current price action in oil is an excellent example of why one should not simply buy something because it is down a perceived large percentage from its highs. In July of last year oil was at $107. Should it have been bought when it fell 20% to $80, particularly since it is known the demand for oil is high, and resources finite? A 20% drop must be a buying opportunity, yes? Or perhaps one should have bought it at $50, down over 50% –what an opportunity! Well, the good news is if we didn’t buy it at either of those spots, we can buy it today for $38 p/barrel, down 66% from its highs!  Even the lucky few who bought their oil on the March low of $42 (who were likely bragging about their 50% returns when oil was at $60 in July) are now underwater!

Using a previous price as a reference point for where to buy something is a perfect example of the common psychological fault of “anchoring” that we often discuss.

So what is the message? The message is patience. Returns are not made in a day; but significant losses can impact portfolios for a long period of time. Oil would have to double from here to get investors back to even on the oil they bought down 25% from its high. The old adage of “be very aware of the downside, and the upside will take care of itself” is very relevant in the current environment. This said, the wider market move has potentially set up some excellent opportunities, but we prefer to be patient stalkers of those opportunities rather than foolhardy knife catchers.

 

Chinese Yuan Revaluation

There has been a lot of news in the press in the last two days regarding the decision by the Chinese government to devalue their currency against the US dollar. As a result, we have gotten a number of incoming calls from clients regarding this news and what the relevance is to their portfolios.

 Some of the concepts involved here are somewhat esoteric but we are going to try to make this as simple as possible.

Traditionally, currencies have traded on open markets and their relative value has been determined by market forces. What do we mean by this? Well, if the economy in the United States is particularly strong and, as a result, the Federal Reserve raises interest rates while at the same time the economy in Brazil is relatively weak and their central bank decides they need to lower rates, all else being equal the US Dollar will increase in value against the Brazilian Real. This is because capital is seeking a higher return and will go to where it receives a higher rate, in this example the United States. A lower Real does benefit the economy in Brazil because they can price things more cheaply in the US and still receive the same number of Reals. If the US Dollar was $1/$100 Reals and once the market re-prices it, after the rate changes, it now takes 200 Reals to buy $1 (weaker Real/stronger dollar) the Brazilian shoe company can now sell their shoes for $.50 in the USA vs. $1.00 before and still get that same 100 Reals in return. Now, that shoe company should be able to increase US sales as they are more price competitive. Over time, as the higher rates in the US slow the economy and the lower rates in Brazil accelerate theirs the currencies should gradually rebalance. Thus, weakening a currency is one tool of a central bank to attempt to stimulate its economy. Interestingly, one of the reasons the Greek situation is still taking so long to resolve is that by entering the Euro countries lost the ability to control their own currency and let the market balance their exchange rate. This has led to strong countries like Germany not wanting to devalue while a weak country like Greece needs to devalue. The inability of the Greeks to do this is part of the reason for the current difficulties.

 Now, on to China. Considering that only about 30 years ago China was an agrarian communist state the evolution and growth they have seen in recent decades has been nothing short of phenomenal. However, given their communist history, many capitalist economic forces are still centrally controlled by the government. One of these forces is the value of their currency vs the US dollar. The Chinese government had set the exchange ratio of US$ to Yuan at a fixed rate. If the ratio got away from the fix the Chinese government would enter the market and sell Yuan and buy US$ or vice versa to maintain the ratio.

Why did they do this? A large part of Chinese economic growth was driven by the massive expansion of their manufacturing base driven by cheap labor. A large portion of this new production was shipped to USA and consumed by us. All of those good shipped to the US from China should have caused our US Dollars to be sent to those Chinese manufacturers and then exchanged for Yuan. This should have driven down the value of the US$ vs. the Yaun. However, the Chinese government wanted to make sure that their goods stayed competitive in the US market from a price perspective. If the US$ went down too much vs the Yuan the Chinese manufacturers would have to raise US$ prices to receive the same number of Yuan at home. The Chinese government worried that this may slow their economic growth and so they decided to peg the Yuan to the US$. Interestingly, until recently, most of the clamoring on this topic domestically was for the Yuan to increase in value vs. the US$ thus making US made products more attractive price wise to Chinese consumers.

However, with the recent slow-down in their domestic economy and weakness in their nascent equity markets the Chinese government decided to revalue their currency lower vs the US$. Just like the Brazilians in our original example they are trying to accelerate their growth by making their products cheaper in global markets. Also, they are likely trying to stoke inflation in their domestic Chinese markets. A weaker Yuan makes imported goods more expensive, as the importer needs more of them to get the same amount of their local currency back home. Inflation theoretically pulls forward demand as people go out and buy things now worried they may get more expensive later. 

 Generally, we have been raising cash in recent weeks and will likely be more cash heavy in the intermediate term.

Alec Bethurum Sr. Portfolio Manager

 

Cocktails & Non-Correlation Event August 6th

Join us Thursday, August 6th from 5:30pm-7:30pm to hear from our Portfolio Managers on the importance of non-correlation in a rising environment. 

Signature drinks  will be served while we speak on the timeliness of non-correlation within investment portfolios, a topic of great interest to us as we seek to insulate portfolios from market risk while compounding capital at meaningful rates.

We believe our insight on this topic is unique within the industry, thus we are eager to share.

 Please RSVP by emailing info@sterneckcapital.com or calling our office at 816-531-2254.

 Click Here for Invite