Third Quarter 2011 J.K. Financial, Inc. Performance Report Cover Letter (Clients)

Enclosed you will find your Q 3 2011 Quarterly Performance Report. What started out as a relatively calm quarter, ended with an interesting chain of events, many of which are unrelated to capital markets, yet had a dramatic impact.

For the Quarter, the S&P500, our favorite domestic capital market index, was down just under 15%, with markets across the globe down a much greater amount. Much of the domestic decline came without warning or economic reason, as corporate managers have been steady in their past earnings and future guidance, bringing US valuations to levels not seen in some time. Many estimate the S&P 500 PE ratio at 10 currently; with a longer term average of near 15, there may be room for dramatic upside.

High flying Emerging Market leaders such as Brazil, India, and China saw their capital markets dive as much as 30% in the quarter, reminding investors where there are such accelerated appreciation, retreats can happen
quickly as well. We believe there are possible bargains in many of these markets, and may take actions accordingly.

By now you have heard the continuing problems in Greece are raising the fear gauge for many.   The issue is not Greece as much as collateral damage. Many investors fear that if Greece fails other countries may follow. We do feel there is a high possibility Greece will fail, but do not feel others will follow.

Looking forward, we do have the tug of war of politics versus domestic economic events associated with the debt ceiling. We feel the S&P downgrade of US debt was a wakeup call and may help expedite the situation.

If history holds true, the final quarter of the year is the best for capital market returns, and we do feel there is ample possibility for a nice finish to the year. We feel there is a possibility of a swoosh type of event, that may last for a few days to a week, and may be very scary. In our opinion, once the news is digested, investors may take heed and determine it is not as bad as feared, and begin more rational and positive investment decisions.

Diversification and rebalancing across various different asset classes, and sectors of the domestic, and global economy, in our opinion, will once again have a very favorable outcome in the quarters to come.

Have a Great Fall!

John A. Kvale CFA, CFP

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