2Q 2012 Asset Management Letter

July 16, 2012   ·   By Creative Financial Group   ·   Comments Off on 2Q 2012 Asset Management Letter   ·   Posted in Asset Management Letter Archive, News

“Comfortably Numb”

One of our managers mentioned recently how the Eurozone drama reminded them of Pink Floyd’s song “Comfortably Numb”. You could substitute Euro for child in the lyrics “I cannot put my finger on it/ the child is grown/the dream is done” it would be completely appropriate in my mind. Of course, we are not saying the Euro is completely done but more specifically indicating that as it has evolved into something many politicians had not envisioned. Ayn Rand’s book “Atlas Shrugged” comes to mind as the Euro falters. For the unitiated, the moral of the story is simply this: Politicians invariably respond to crises, that in most cases, they created themselves- by spawning new government programs, laws and regulations. These, in turn, generate more chaos, poverty, and subsequent programs until the productive sectors of the economy collapse, i.e., Germany. It could only be more eerily similar if Europe had programs called “Anti Greed Act”, “Anti-Dog-Eat-Dog-Act”, or “Equalization of Opportunity Act”. In simpler terms Reagan may have said it best when he stated that the nine most terrifying words in the English language are, “I’m from the government and I’m here to help.”

Moving back across the pond, the uncertainty continued to swirl as Scott Walker won in Wisconsin’s recall vote and then a few weeks later Justice Roberts upheld the so-called “Obamacare.” Historically, the stock market tends to be agnostic regarding political party and, instead, is more fervent about political stability. Unfortunately, we seem to be far removed from a clearly defined consensus. Of course, there are always solutions as President Clinton alluded to when he said “There is nothing wrong in America that can’t be fixed with what is right in America.”

Against such a mind numbing political landscape one can see why it is hard to believe that the S&P 500 was up 9.41% through June 30th. Of course, other sectors did not fare as well as the Russell 2000 was only up 5.46%i, and the MSCI EAFE Index (foreign market) was down 0.64%i. Fixed income performed as expected with the Barclays Aggregate Bond Index up 2.60% for the year. Of course, in between the end numbers there was quite a bit of volatility. Does this mean there is a disconnect between the markets and the economy, or does it mean there is a communication breakdown between the news media and the stock market? As we have questioned before, are things not as bad or as good as the media paints them to be?

It is our contention that if the training wheels were taken off the capitalist forces within our economy it would flourish. Keep in mind, we may swerve and fall in the short term but over the long haul we will run smoother without government reinventing the course, creating new obstacles and applying the brakes. For instance, without homebuyer credits the home market is starting to recover in the US whereas Europe has not even fully recognized its real estate issues. Natural gas drilling, while not allowed by the governments in France and Belgium, has begun to create a manufacturing renaissance in America as plants are fueled with natural resources seven times less expensive than the same resource in Asia. As we see it, large capitalization, multi-national corporations that seemingly run without borders are poised to flourish with their low P/E ratios and strong balance sheets.

It is with this mentality that we continue to invest. Flexible managers with a strong investment philosophy that will allow them to find value across the world and capital structure are where we continue to add. A global manager who can find a bargain in an international company that has been unfairly punished just because they are located in a country with debt issues is exactly where we see opportunity for our clients. A manager who can short a sector because he sees a confluence of negative indicators is another example. Further, a flexible manager may decide equities are too risky in a sector and the cost to hedge too expensive and then move to cash and fixed income. These are the types of decisions we want our money managers to make.

On that note, one of the managers we have been adding to over the past year, Marketfield, is a prime example of the flexible style of managers we feel can maneuver adeptly in today’s market. Obviously, someone else feels the same way as New York Life finalized the purchase of Marketfield on June 29th to add to their Mainstay family of funds. This clearly indicates to us that New York Life perceived Marketfield provided an expertise they could not replicate. The idea is that Marketfield will continue to make investment decisions while Mainstay merely provides marketing and distribution for the fund. While it is always encouraging to have someone else affirm your decision-making, we have already begun to consider what the future holds for Marketfield. Since the fund is primarily large capitalization in nature and uses exchange traded funds (“ETF’s”) for many of its shorts, we do not think performance will suffer in the short run because of asset bloat (the past one and three years it has landed in the top 10 percentile within its category long/short equity funds and should land in the same area when the fund turns in its 5 year performance at the end of July since it is up 8.77% YTD ). In addition, with the managers staying in place we are not concerned at this time that the organizational framework and philosophy will be compromised. However, we will keep an eye on the fund, being watchful of any signs that might indicate the founders are starting to lose their focus.

We have included this frank discussion of one of our funds to highlight the thought process involved in our decision-making. We are constantly monitoring your funds and investments for changes in philosophy, strategy, or organization. Some funds may underperform for a short period of time as they try to establish an idea before the rest of the market recognizes it. However, over the long haul, many of our chosen managers have outperformed their respective benchmarks. By extension, we hope to then earn a reasonable rate of return with less volatility than the respective benchmark. Please call with questions.

General Compliance Disclosures

Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions.

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 provided by Synovus are offered through Synovus Securities, Inc, Synovus Trust Company, N.A., GLOBALT, Inc. and Creative Financial Group. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. 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.