One of our colleagues was trudging through the tedium of a 1,300 piece Lego set with his youngest this holiday season when his son blurted out “You’re the best dad ever.” Point of view is a funny thing sometimes. What is not as important to one set of eyes is highly important to another set. It is with this concept in mind that we come to the end of the year.
The financial marketplace is currently saturated by those with the point of view that the US equity market is a wonderful place to be with very little risk. The GDP from the 3rd quarter was revised to 5%i. The Dow and the S&P 500 have hit all-time highs while gas prices continue to drop. The November unemployment rate came in at 5.8%. It is almost as if the United States has achieved the “Goldilocks” economy (not too hot and not too cold) in spite of global unrest.
Conversely, many could argue that things are not as good as they seem. For instance, with oil dropping into the $50 per barrel level many highly levered energy companies may be in danger. Estimates are that 20% of the high yield bond market is exposed to energy companies and approximately 33% of capital expenditures in the S&P 500 are in the energy industry. Furthermore, the employment situation may be even worse. Since 2007 shale oil companies have added 1.6 million jobs while non-shale states have lost 424,000 jobs. In recent years, the energy industry has added $300 to $400 billion annually to the economy- without this contribution, GDP growth would have been negative and the US would have continued to be in a recession. Add to this the assertion that the energy industry is considered one of the strongest contributors to the middle class demographic and one may make an educated guess about the unintended consequences of extended periods of steep oil price decline.
Thus, is it possible that the five percent swings we have seen in the US markets since September are a more reasonable expectation of future market behavior than the past two years now that quantitative easing has ended? Is it possible that the Federal Reserve’s promise to be “patient” is only dust in the wind and the market is a far more complex system than a central bank can control? Will the market falter when liquidity standards are tightened on leveraged entities? Our most recent experience with significant systemic leverage in the marketplace didn’t go so well in 2008/09.
We bring this point of view to light for many reasons. Our intention is not to scare you into believing another Great Recession is around the corner. However, we do feel that risk is greatest when investors feel the most complacent. It seems like a contradiction, but no one wants to buy assets when they are on sale. Having the willpower to buy when others are scared is very difficult and is the reason we believe many pundits who practice this same discipline recommend that others just buy index funds (Buffett and Swensen come to mind). The masses are probably better served holding an index fund with low fees over a sixty year cycle and never selling , if they have that same conviction to not sell when the market goes down 50% from top to bottom (as it has twice in the past fifteen years). Of course, therein lies the rub. The same group that does not have the discipline to identify and hold individual equities through a market cycle is now expected to display conviction with their low cost index funds. It is enough to make a person’s head swim.
As an aside, we do think there is a time for index funds and there is a time for active funds. Right now we are not huge fans of index funds because we feel the risk is higher than many realize. However, when the market falls to cheap levels we will likely become index fans again. It is our feeling currently that our clients are best served with managers who look at the entire investment picture and attempt to find value across the board and this may mean they diversify among several asset classes. This, of course, means that sometimes our investment decisions do not always move in the same direction as the general market or else we would not be diversified. Last year was a prime example when it did not pay to be diversified. However, we have seen this before in the late 90’s with the “all tech and all growth” movement and then in the mid 2000’s with the “all real estate” movement. Historically, though, it does pay to have a diversified portfolio and given the risk profile of the majority of our clientele, we feel compelled to invest in a diversified portfolio of highly disciplined managers who can discern between values and value traps.
We always appreciate your point of view and we hope you have enjoyed ours this quarter. Please call us with any changes to your risk tolerance or financial goals. Of course, you can also just call us to tell us your “Best Dad/Mom ever” stories.
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
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.
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