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This is a publication by Scott Anderson Financial. Scott K. Anderson, CPA, CFP®, EA is a Registered Investment Advisor in Newport Beach, California.
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Scott Anderson Financial

In This Issue

Monthly Quote

“If things seem under control, you are just not going fast enough."
-- Mario Andretti, professional race car driver

Financial Trivia

There is currently talk about replacing Alexander Hamilton on the $10 bill with a picture of a woman as if this was the first time a woman appeared on US currency.   Who was the first woman to appear on US currency?​

Click here for the answer.

It's Your Money:

Fall Workshop Series
Hear Scott & Julie speak about
Fixed Income Investing
October 26th
10-11:
30am
Newport Beach Central Library

Volatility: Bridging Over Troubled Waters

In finance, volatility is the range of prices over which an investment might trade… including zero. Statistically, volatility is measured as the standard deviation of the price range of the stock over a period of time.  When an investment changes price rapidly over a short period of time, the investment is said to be quite volatile.

There is actually an index called the VIX that tracks the volatility of the market. Like most indexes of the market, the index itself cannot be traded but future bets can be made about where the index will be at certain times.

Here is a chart of the weekly average of the VIX over the last ten years:


In recent weeks, the VIX was in the 15 to 19 range as late as Thursday, August 20th.  The VIX hit is most recent high of 40.74 on the following Monday, August 24th but was back under 30 by Thursday, August 27th. As I write this on Friday, September 11th, the VIX index is back in the 25 range.  It was a quick summer squall that ruffled the lake waters for a brief period of time. .

What is the best basic strategy to weather the squalls of volatility that periodically run through the market? 
  • First: diversification, which is what investors get with mutual funds and ETFs (Exchange Traded Funds). This ensures that the volatility of any one security is not going to bring the portfolio down.
  • Second: patience. Remember that this too shall pass.  Just look at the 10-year history of the VIX above. 
  • Third: buy and hold. Buffett says that his favorite holding period is forever.  He rarely sells his investments and then only after he has given them a respectable time to not work out. 
  • Riley AndersonFourth: follow the cash.  Focus on investments that continually generate cash.  So when the market gets the hiccups (a.k.a. volatility) from time to time, cash is being reinvested to buy more securities at lower prices. To quote Buffett again, “Whether it is buying socks or stocks, I like buying quality merchandise when it is marked down”.   
I asked Riley, our golden retriever pictured to the right, what she does when she encounters market volatility.  She looked at me with those big brown eyes, turned and went to the closet. Ah, a walk. Good advice. Stop watching TV or listening to frantic market commentators who make their living stirring the pot. Go for a walk knowing that the cash is still coming in whether the market is up or down.

All the best,
Scott K Anderson Jr., CPA, CFP®, EA
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What Does The Devalued Yuan Mean for the U.S.?

Brought to you by GW Financial, Inc.

A look at China’s unexpected move & its potential impact.

China has surprised global investors by weakening the yuan almost 5%. Its central bank may even weaken it further.1,5
  
Why did the PRC make this move? Its long-booming economy is in a slump. Most notably, Chinese exports have taken a major fall. In July, they were down 8.3% year-over-year. By depreciating the yuan, China is trying to help its exports maintain their competitive edge.2
  
Some of China’s other economic indicators have also disappointed lately. Chinese imports have retreated for nine straight months, slipping 6.1% for June and another 8.1% in July. The pace of retail sales in China slowed to a 15-year low in July. Producer prices in the PRC suffered their largest annualized slip since 2009 last month. Lastly, the nation’s economy may grow less than 7% this year – which would be the worst showing since the 1990s.1,2 
   
How may this impact America? The effects could be felt in several areas of our economy, and there could be some positives as well as negatives.
   
The Federal Reserve might decide to postpone a rate hike. Our central bank appears committed to raising interest rates before the year ends, perhaps as early as next month. A repeatedly devalued yuan might make the Fed think twice about that, however. China has effectively strengthened the dollar versus the yuan, making Chinese imports to America cheaper. That could lower consumer inflation pressure, and since annualized inflation in this country is already low, there would be less incentive for the Fed to raise rates. That would be bad news for savers but better news for some mortgage holders.3
  
Consumers could benefit more than businesses. As referenced above, a weakened yuan makes imported goods from China less expensive for Americans. Conversely, it also makes it that much harder for U.S. businesses to sell their products in the PRC, as Chinese consumers will have reduced purchasing power.3  
  
You may see less hiring. A mightier greenback relative to the yuan means new hurdles for U.S. businesses in China, which could cut into earnings growth. While scores of American firms sell directly to Chinese consumers, others have strong ties to Chinese factories: look at Apple, which outsources the production of its iPads and iPhones to the PRC. A devalued yuan essentially whittles down the income U.S. businesses create in China and makes outsourced manufacturing costlier for American firms. You can draw a fairly direct line here: less income and lower earnings for American businesses could lead to slimmer payrolls. In particular, firms in the technology, energy and materials sectors could be impacted.1,3  
   
Oil & gas could become even cheaper. Oil is a dollar-denominated commodity, so a newly weakened yuan will test China’s demand for it. A stronger dollar relative to the yuan means that oil and oil-based products will be costlier in China. The Chinese might react by decreasing oil consumption. If China’s demand for oil lessens, that would help to keep oil prices low and American drivers would likely see lower gas prices as well.3
      
How about the markets? Equities seem to have regained their footing. When the PRC started devaluing the yuan on August 11, Wall Street read the move as a distress signal. The Dow opened with a triple-digit drop August 11 and lost 212 points for the day. On August 12, it took an even bigger fall at the open on news of the yuan weakening again, but it was down just 0.33 points at the close. The week’s subsequent trading days brought no further dives at the opening bell. Looking at the global picture, the DAX, CAC 40, Nikkei 225, and Shanghai Composite were all up 1% or more shortly after they opened Thursday.4,5  
  
As for the forex market, the yuan has certainly sunk versus other key currencies. By August 13, it had lost nearly 3% against the dollar over the past five trading days, and almost 5% against the euro.6
  
Is a global currency war about to heat up? The People’s Bank of China insists it does not seek to start one. A Barclays client report released August 13 noted the PBC “downplaying the need for a weaker yuan” at a press conference and refuting claims it wanted to devalue the currency at least 10% to support exports. Yi Gang, one of the PBoC’s deputy governors, stated that there was “no basis for a persistent weakening in the yuan... and that the aim of the PBoC is to have the market determine the exchange rate.”5
  
If the yuan does keep sliding and global markets slump significantly, the Federal Reserve and the European Central Bank could react supportively, providing investors with some reassurance. A weakened yuan presents another challenge to the Fed’s plans to tighten.
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By The Numbers: As of August 31, 2015

Click Here For The Monthly Update

Yield Curve: US Treasury Securities Versus Maturity

August 31, 2015



“Normal” curve – sloping upward – longer maturities command higher rates than shorter maturities reflecting higher risk of inflation in the meantime.

Analysis: rates drifting lower in spite the Federal Reserves threat to raise rate. Note that the Fed can only influence the very shortest maturities so there is a real question whether the Fed raising rates will have much effect at all.
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Financial trivia answer: A picture of Martha Washington appeared on the face of the $1 bill starting in 1886.  In 1891, the picture of Martha was moved to the back of the $1 bill and was then accompanied by a picture of George Washington.  The basic design of the $1 with the picture of George Washington was introduced in 1923.
IRS Circular 230 Disclosure: if this newsletter contains any type of tax advice, please be advised that, based on current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to the matter.

Citations.
1 - foxbusiness.com/markets/2015/08/12/us-stock-futures-slump-as-china-devalues-yuan-again/ [8/12/15]
2 - marketwatch.com/story/chinas-economy-enters-second-half-of-2015-on-weak-note-2015-08-09 [8/9/15]
3 - usatoday.com/story/money/business/2015/08/12/yuan-and-you-how-chinas-devalued-currency-affects-us-consumers/31524925/ [8/12/15]
4 - money.cnn.com/data/markets/dow/ [8/13/15]
5 - usatoday.com/story/money/markets/2015/08/13/market-calm/31610769/ [8/13/15}
6 - money.cnn.com/data/currencies/ [8/13/15]
Copyright © 2015 Scott Anderson Financial, All rights reserved.​

P.O. Box 7463 | Newport Beach, CA 92658 ​| (949) 200-7111​

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