One of our colleagues within the Synovus footprint recently joked that our quarterly missive was a little pessimistic regarding the market and economy. We respectfully take exception to that statement. In contrast, we actually think we are some of the most optimistic long-term investors you will meet. It is amazing to us that in this business if you are not a constant market cheerleader, then you are oftentimes considered a perma-bear. If you find a few cracks in the financial foundation and point them out, then you are considered too conservative. All of this reminds us of one of our favorite market commentators, Jeremy Grantham.
As a point of reference, Jeremy was called a perma-bear by investors when he argued the New Economy movement in the late 90’s was silly. He indicated that the S&P was at extreme price-to-earnings levels in 1998 and correctly forecast that over the next ten years the S&P would return between zero and two percent. He also said that emerging markets, bonds, small cap, and real estate would provide far better returns than the S&P 500. He nailed both of those (not to mention also predicting the order of returns for ten asset classes). He also called the 2008 banking crisis and even went as far as saying that one major bank would fail while other experts harrumphed in his general direction. (In his inimitable British manner, he states politely that he undershot that call.) However, he also wrote a timely missive dated March 4, 2009 called “Reinvesting When Terrified” persuading investors to put money to work when it was scariest. This, to us, is the definition of calculated optimism, putting money to work in areas that are inexpensive from a valuation standpoint but taxing from a psychological point of view. The opposite of this is unbridled optimism which piles into the market at all time highs and with arguably unrealistic expectations.
We are rehashing this bit of history regarding Jeremy Grantham for a reason. We continue to remain optimistic on select areas of the market. However, we are in month 66 of a bull market rally and the average has been 58 months for the 11 bull markets since 1949 per Barron’s magazine. Of course, this level on the market makes us pause and become even more careful in our deliberations. We note that the forward P/E ratio on the market is 15.2 and that level is not high compared to the historical average. However, the P/E of the S&P 500 on October 2007 was also 15.2i right before the market lost over 50% of its value. Thus, we feel justified in being cautious and not unbridled in our optimism.
All of the nebulous valuation commentary aside, the market may very well continue to trade higher. If inflation remains in check and mergers/acquisitions continue, then we may drift higher and higher. However, keep in mind that many of the managers we value continue to struggle to find cheap investment opportunities and have built their cash positions throughout the year. It is our opinion that economists and news anchors can pontificate on economic strength and inflation until they are blue in the face. The fund managers with their own money on the line (yes, we prefer fund managers with the bulk of their wealth in their funds) are what influence us most. If they continue to preach conservatism then we will tend in that direction. When the correction occurs, you will then see us become far more bullish.
We think it is appropriate to end the quarterly with a Jeremy Grantham quote since we focused on him throughout this letter. When asked what we learned from the “Great Recession” of 2009, Jeremy said “In the short term a lot, in the medium term a little, in the long term, nothing at all.” We still remember the “Great Recession” and note that the market upside has correlated significantly with the different iterations of Quantitative Easing. While we can debate the effectiveness of the different versions of the Quantitative Easing as unemployment is at 5.9% but labor participation is at its lowest rate in 36 years, we cannot debate one thing: This version of Quantitative Easing is ending. Thus, we feel this market may have some fits and starts and we should manage similar to the managers we respect, with a careful and deliberate manner not given to chasing speculative excesses.
Please call with any questions. As a sidebar, Creative has been doing some exciting new things and has recently received some accolades that are included on our website, www.cfgltd.com. Please stop by the website when you can.
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; investments in securities or other financial products involve risk and the possibility of loss, including a permanent loss of principal. Investments are not FDIC insured and have no bank guarantee.
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 (“SSI”), Synovus Trust Company, N.A. (“STC”), GLOBALT, a separately identifiable division of STC and Creative Financial Group, a division of SSI. Trust services for Synovus are provided by Synovus Trust Company, N.A. 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.
Pursuant to rules adopted by the U.S. Securities and Exchange Commission governing federally registered investment advisers, we request that you take time to compare your account balances and statements issued National Financial Services, who acts as the custodian for your account(s). We request you contact us immediately if you do not receive these statements or if the values reflected are materially different.
Cost basis reporting
If you buy and sell a security in a taxable account on or after the effective date, NFS will report cost basis for the sold security to you and the IRS on Form 1099-B. If you have a mix of covered and uncovered positions in the same security, NFS will report cost basis to you and the IRS for any covered position that is sold. NFS will apply the FIFO (First In, First Out) default method unless you inform us of a different method. Your cost basis method for all transactions must be final by settlement date. If you choose to change the default method, you can do so by notifying your Financial Consultant.
Use of Indexes
i The investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell,). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time. Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.
Copyright © 2011 Creative Financial Group
All rights reserved.
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