Asset Management Letter Archive

2Q 2011 Asset Management Letter

July 22, 2011   ·   By   ·   Comments Off   ·   Posted in Asset Management Letter Archive

The risk we alluded to in previous letters hit a tipping point in the second quarter as volatility returned to the market. The headlines were dominated by the fear of a Greek default on their outstanding debt, wildly fluctuating oil prices, death of Osama bin Laden, and the on-going political battle over the US debt ceiling. Of course, a late month rebound helped boost the market as it became increasing likely that the EU and IMF would manage to kick Greece’s debt “can” down the road at least one more time. When the dust settled, stocks wound up roughly flat for the quarter. The large cap S&P 500 Index was up 6% for the year. The small-cap Russell 2000 was down 1.6% for the quarter but still up 6.2% for the year. The MSCI World ex-USA was up 1.1% for the quarter and rests at positive 5.1% for the year, in spite of the European contagion fears. Fixed income provided a calmer ride as the Barclays Aggregate Bond Index was up 2.37% for the quarter leaving it with a year-to-date gain of 2.36%.

In spite of all the negative news affecting the domestic equity market, it is still up for the year. The seemingly schizophrenic behavior of the market is certainly nothing new. The contrarian in us actually likes the buying opportunities created by turbulent markets, as this gives us a chance to buy at cheaper prices.  To borrow from Sir John Templeton again, as markets “grow on skepticism” our managers are finding opportunities. We are typically more cautious when market sentiment is riding high and participants are no longer worried about the management of risk. For instance, we saw a great deal of euphoria throughout March and April as investors clamored for more risk due to positive market momentum.

Of course, as alluded to in past missives, we worry about all of the macro concerns. The good news is that we believe there are many high quality firms well-positioned no matter the big picture view. Specifically, many of the flexible managers we use have performed better than the S&P 500 with far less volatility while consistently adding to high quality names. Additionally, clients who are in the appropriate model for their risk tolerance will be able to easily redeploy capital in the event of a downturn. By extension, we expect the flexible managers we use will have already made that move for our clients as well. In addition, with the majority of our clients holding several years’ worth of cash in fixed income equivalents, we will be able to move to more opportunistic assets quickly when the moment presents itself.

In the meantime, we will continue to manage your assets with an evenhanded and cautious approach. When dislocations present themselves we will invest with conviction but while complacency and calm intoxicate the market, we will relocate to a more sober arena. Since our clients are firm believers in discretion being the better part of valor, we will continue to invest accordingly.

As an addendum, many have asked our feelings about the ongoing debt ceiling issue. We defer to Winston Churchill here who may have put it best, when he said “Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.” Both parties are using this issue as a political “football” for the time being and both know that some compromise will be the final answer. Doing nothing would seem not to be an option, as it would be political suicide for both parties. The politicians are well aware that the rating agency, Standard & Poor’s, will downgrade the US debt rating significantly if some agreement is not reached in the near term. Not only will this force the Treasury to pay higher interest rates to those that buy future US debt, it will increase the current interest rates demanded by current debt holders in the open market (driving down bond prices). More importantly, many banks and pension funds have a mandate to hold only “AAA” rated debt and would be forced to sell their US debt holdings if the S&P downgrades the “AAA”rating. Thus, in spite of the lofty rhetoric we expect the politicians will do the right thing.


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Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank. You can obtain more information about Synovus Securities, Inc. and its Registered Representatives by accessing BrokerCheck