3Q 2015 Asset Management Letter

October 14, 2015   ·   By cfgadmin   ·   Comments Off on 3Q 2015 Asset Management Letter   ·   Posted in Asset Management Letter Archive

No more “Déjà’ Vu, all over again”

August and September were bad months. Not only was the market down significantly but we lost one of the great ones:  19 time All-Star, Yogi Berra. We are not allowed to make many guarantees in our business, but we guarantee that you can find at least one Yogi Berra quote that will bring a smile to your face. In addition to providing entertainment value, Yogi also provides an interesting contrast between Main Street and Wall Street. The similarities and the differences between the down-to-earth wisdom of a highly successful baseball player/coach and the convoluted doublespeak of many heralded economists of our time are worth noting, in our opinion.

For instance, economists report our unemployment rate as a vastly improved 5.1%, but our labor force participation rate has hovered near its 37 year low for the past 17 months. In addition the past three months worth of jobs reports have averaged 167,000 new jobs versus 231,000 for the previous three months and the U6, number of underemployed people, lands around 10%. Meanwhile these same economists indicate that our economy has been improving so much it may be necessary to raise interest rates 25 basis points… unless the global economy and stock market become volatile. However, if our economy is so strong shouldn’t it be able to handle a 25 basis point increase in the federal funds rate pretty easily? Or have all the complicated economic programs such as TARP and Quantitative Easing really not helped our economy? Instead, maybe they have only improved the stock market?

Maybe, to quote Yogi Berra, “A nickel ain’t worth a dime anymore and we made too many wrong mistakes.” Maybe artificial support by government entities keeps creating asset class bubbles that economists only make worse with additional complex and artificial solutions. Maybe the Great Monetary Experiment after the Great Recession didn’t help and now we are back to “Déjà vu, all over again”. Maybe “It’s not the heat, it’s the humility” that our Federal Reserve governors need, to quote Yogi Berra.

These questions are the things that keep us up at night. We admit we needed some form of government intervention during the Great Recession but the continued printing of money seems to, in our mind, follow dangerous precedents. We do not profess to know how the Federal Reserve’s current plan will play out. We do, however, find solace in the “small ball” strategy that a good baseball manager like Yogi Berra would implement in a time like this. For instance, with energy stocks trading at price-to-book ratios not seen since 1986 and returns that have only been lower in 1929 and 1986, we think that’s a pitch worthy of a swing of the bat. If a stock is cheap by historical measures, then our downside risk is limited and our upside is exciting. We can, to borrow a baseball analogy, take it day-by-day and not get caught up in things outside of our control, or the “macro” environment. In our circumstance, focus on investing in names we know at a reasonable price and letting prices drift back towards their reasonable levels with the benefit of a long term plan is the way to go. We call it swinging at a “fat pitch”.

Rhetoric, Yogi-isms and baseball analogies aside, you will note that we have been playing “small ball” by adding to energy from our more conservative holdings recently. Of course, this strategy has hurt our performance a bit during the 3^rd quarter but keep in mind the 3^rd quarter was the weakest period for stocks in four years with the largest single day point decline in history on August 28^th. The good news is that at the beginning of the fourth quarter, energy stocks have shot up significantly. We feel this is a prime example of Howard Mark’s concept “The perversity of risk”, wherein the perception of risk actually leads to safety as the price of an asset becomes so attractive that it’s a buy. Of course, trying to find the exact bottom in value stocks that Howard Marks and his brethren purchase is next to impossible. That being said, disciplined investing coupled with a long-term financial plan gives us all more opportunities to drift towards the long term average and keep inflation from nibbling into our lifestyle. Regardless, we think you should take Yogi’s sage advice and “Take it all with a grin of salt” and maybe we will all live to see 90 golden years like he did.

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 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.

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.

The U.S. Securities and Exchange Commission adopted new oversight rules designed to help and protect all investors. These rules generally reflect a reaction to the Madoff and custody scandals, but they do require that we, like all investment firms, adopt new policies and procedures related to verification of your accounts. As such, we request that you take time to compare your account balances and statements from NFS and to contact us if you do not receive those quarterly statements and/or that the values 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

ⁱThe 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.