Second Quarter 2012 J.K. Financial, Inc. Performance Report Cover Letter (Clients)

Dear Investor:

In true manic form, capital markets participants over-shot early in 2012 being too optimistic as they bid most world indexes up to lofty levels from a very negative posture at the end of last year (2011.) As economic and financial data points poured in throughout the second quarter (Q2 2012/Current Quarter) it became apparent that international economies were slowing dramatically and the EU still had problems.  

A fast start here in the US early in the year was explained by a softer winter and a tugging of sales from purchases scheduled later in the year.  

On the last day of this quarter (Q2 -2012), German Chancellor Angela Merkel caught many in the investment world leaning the wrong way and forced negative short sellers to cover, most likely attributing to a sudden upward and exaggerated move in the world markets. Excluding the last day of the quarter global markets as measured by the Vanguard World index were down over 8% for Q2 2012. With the Merkel induced last day of the quarter rally, that number was cut down to a loss of slightly less than 5.5% for the quarter. Our favorite domestic index, the S&P 500 was down slightly less and still holds a respectable mid-single digit gain so far for the year.  

Recently many have noted the dramatic moves from capital markets from what seemed liked dubious announcements or micro data points.  From our perch this is occurring due to the tightrope we are walking currently from a domestic economic situation. With US GDP growth near only 2% (4% being a more bullet proof level) any dramatic data point or economic occurrence outside of the bounds of expectations can be extrapolated into doom and gloom or accelerating growth.  

With a US election that is much tighter than expected just a few weeks ago and an unanswered fiscal cliff (tax breaks scheduled to expire without a vote) in the works for the end of the year, we expect continued volatility throughout the year. (We will be speaking more to these points in our coming Q3 2012 Newsletter.) 

While we do not expect the US to enter a recession, it is certainly possible as economic data is pointing directly to a slowdown but not a screeching halt. We also expect the EU headlines to continue to garner glee and frowns over the next few quarters, while they work out their economic problems.  

We remain very happy with our allocations and will continue to buy low and sell high (greater details on this again in our Newsletter) as the capital markets offer discounts and premiums in various asset classes. 

Have a super summer!


John A. Kvale CFA, CFP



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