Sunday April 8th was an epic day for Southerners, and in particular University of Georgia fans, as a native of Bagdad, Florida and UGA graduate, Bubba Watson won the Masters Tournament. Similar to the equity market in the first quarter, everything seemed to be aligned perfectly: putts were rolling in, iron shots from pine needles landed on the green and the gallery was electric. If only Sunday’s euphoria could continue unabated for the rest of the year. Right now the performance of the first quarter makes us all feel like donning “Green Jackets” but three months ago the market was more of a deflated bubble if anything. The question now is if this market is “Bubble-licious” or “Bubba-licious”. Is all of this a one-hit wonder or is it the beginning of something positive?

The “electric” feeling within the market has lead to very exciting returns for the first quarter of 2012. The S&P 500 was up 12.54% for the first quarter. The foreign market as evidenced by the MSCI EAFE Index was up 9.97%. The small cap market (Russell 2000 Index) was also up 12.44%. Many of our aggressive funds that underperformed last year are up significantly this year such as Ivy Asset Strategy up 14.34%, Harbor International up 14.41%, Artisan Mid Cap Growth up 20.83%, etc… However, keeping with the golf metaphor, we are still worried about bunkers and sand traps in this economy such as debt levels, Eurozone issues, unemployment, inflation, etc…

On that note, the fixed income market has performed soundly. Hints of inflation have rustled through the masses but it has not reared its ugly head yet. In golf the old saying goes “Drive for show and putt for dough.” The short game of chipping and putting is similar to inflation, in our mind. A few extra shots here and there start to add up and before you know it your margin of error has disappeared. Interest rates have inched up a little in the first quarter from 1.80% on the ten year Treasury up to 2.37% before ending the quarter at 2.21%. We, of course, continue to focus on our short game by keeping the duration and maturity short on our bonds while we await inflation’s impending rise.

On the investment side, we continue to play a more conservative game. We focus more on staying in the fairway to try and perform consistently versus going for broke and landing out-of-bounds. We understand that hooks out of the rough or shots between trees can be invigorating. However, we are more focused on prudence when it comes to managing our rounds of investments. Downside risk, or “bogeys” in golf-speak, are hard to erase and many of our managers employ several tactics and strategies designed to keep us out of trouble. We continue to think our managers will allow us to earn a competitive rate of return whether the surrounding conditions are good or bad. We hope the conditions remain as positive as the first quarter but we are cautious when it comes to overly rosy forecasts. By the same token, we are typically optimistic when the market is very negative. Maintaining an even keel is important in our mind if one wants to turn in consistent results.

Hopefully there are not too many golf metaphors in this quarterly missive but we felt the situation called for it. It is not too often that a “Bubba” from the University of Georgia stands so prominently on the global stage. (Not to be forgotten, Matt Kuchar, a Georgia Tech graduate also finished in the top five at this year’s Masters.) Thus, golf seemed an appropriate background for investment discussions. If the golf metaphors were too arcane, then please call with questions and we will try to find another sports metaphor to use. However, please don’t ask us to draw parallels using Mike Bobo, UGA football coordinator, or Paul Johnson, Georgia Tech head coach as even we can’t explain why they do what they do.

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

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, Morningstar). 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.

High-quality bonds were on the other side of the volatility, with sharp flight-to-safety rallies that helped net the Barclays Aggregate Bond Index a 7.4% full-year gain. Our allocations to flexible bond and absolute-return-oriented fixed income funds hurt performance in our portfolios because they provided less of the short-term protection of high-quality long term bonds, but we remain confident in our belief that our bond allocations will provide better longer-term returns than the pure high-grade benchmark at still-acceptable risk levels. In addition, with the consensus forecasts among the 74 economists polled by Bloomberg at the beginning 2011 for the year-end closing yields of the 2-, 10-, and 30-year Treasuries of 1.10%, 3.75%, and 4.75%, respectively, we did not see a reason to extend duration and purchase long term Treasury bonds. The fact that the actual levels were 0.26%, 1.88%, and 2.90%, respectively, highlighted the under performance of some our active managers. In our opinion this shows the folly of short term forecasts, not a breakdown in logic. Over shorter periods in which investors’ decisions about getting in and out of stocks are driven by macro headlines (often referred to as “risk-on, risk-off”) there is less consideration for fundamentals of individual stocks and bonds. Our experience suggests this creates long-term opportunities, but this can be frustrating over shorter periods.

As the media saturates us with political coverage that will only grow over the coming year, we can relate to the grind a politician faces in staying on message for an extended duration. Our message is not positive enough to get us elected to any office, but we hope it will earn us respect for intellectual honesty and well-reasoned decision making amidst an environment that we expect to be a far longer grind than that of a presidential election year.

The grind we are dealing with—and the same message we’ve been delivering since 2008—is that the developed world took on massive and unsustainable levels of debt that may take a decade or more to fully unwind. We anticipate this will reduce economic growth below the levels we had come to think of as normal; levels which themselves became distorted upward based on the spending of all this borrowed money. Of course, if that debt is reduced going forward as we expect, it would mean less money available to spend. To that end, we feel the money spent will wisely be spent on the high quality offerings carrying low debt levels.

Another way that debt is reduced is through defaults, and this leads us to the reiteration of another very important point, which is that the risk of defaults—such as in Europe—poses a significant threat to the financial system, and in turn to the global economy. Very briefly, investors are afraid that Europe lacks the political unity and possibly even the financial capacity required to provide a sufficient financial backstop for the Eurozone. If correct, that increases the risk of weaker governments defaulting on their debt, making investors demand higher yields for taking on that risk. Those higher yields contribute to a feedback loop that makes a default even more likely, because governments can’t sustain interest payments above a certain level, leading to the conclusion that only some type of unified policy action and intervention can allow governments to roll over all the debt that is coming due.

It is possible that EU policymakers will fail to address the crisis before major economic damage occurs. However, we do not feel that this will be the case. The Eurozone may change the rules or some of the constituents but our reading indicates to us that the benefits of the Euro outweigh the costs for the stronger countries in the Eurozone and, therefore, we believe the Euro will remain in place.

On that note, if European authorities are able to coordinate on action that effectively takes away the perceived risk of larger countries defaulting, we could see a strong rally in stocks; and if the U.S. economy surprises further on the upside, the rally could be even stronger. It’s even possible that there’s enough positive feedback in the global economy that our optimistic scenario of a return to pre-debt-crisis levels of growth plays out. In these outcomes, our management style would likely underperform for a period of time than if we had maintained a more aggressive investment position.

We accept the risk of missing some of the upside for a number of reasons. First, while the odds of a very negative scenario playing out appear relatively low to us, its effects would be highly damaging. Second, our most-likely scenario involves no crisis but slow growth for many years, with mid single digit returns for stocks, and periods of high volatility that create opportunities to add back stocks at more attractive prices. Of course, rest assured our managers are seeking to take advantage of this volatility. Third, our process and the decisions that result reflect our commitment to thorough research, intellectual honesty, and discipline, and we believe this kind of process has the best long-term likelihood of success. Finally, although some might conclude we are wrong if these risks don’t happen it is our job is to make decisions that we believe best serve our clients.

We appreciate your continued confidence. If you have any questions, please don’t hesitate to contact me.

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

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, Morningstar). 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.

Nina is much loved by her co-workers – and our clients, whom she knows by name. That’s because she has seen them over the years of planning and, for many now, into retirement.

In a world where senior employees are a rarity, Nina is a major contributor to our success. She works because, “I am valued and I can make a difference,” Nina says. Is retirement in the picture? “We certainly hope not,” says Buzz Law, president and a CFG founder. “We don’t know what it would be like not having Nina to greet us and our clients every day. She helps us deliver the personal part of the financial planning process.”

On that note, we decided to take a different tactic with the quarterly commentary this month. Since we have been beholden to continued temporizing from policymakers on both sides of the Atlantic whether it be Greek Gotcha, slowing economies, double dips, credit spreads, commodity crashes or class warfare, we decided to not spend as much time ruminating on the fickle winds of change and instead spend time clarifying our philosophy of asset management. It is common knowledge that we drill into cash flow and retirement planning to hone in on risk tolerance and return expectations to then design an asset allocation. What bears repeating, in our mind, is the process by which we construct a portfolio and the foundation upon which we rest our beliefs and expectations.

Many years ago we designed portfolios based on the normal parameters of modern portfolio theory which called for low cost mutual funds with better than average performance over the long haul with the one and three year track record carrying far less weight than the five and ten year. The reason for this, to reference Davis Advisors, is that 93% of top quartile performing large cap money managers spent at least one three year period in the bottom half of the group; 62% spent at least one three year period in the bottom quartile and 31% spent at least one three year period in the bottom decile. However, though each of the managers in the study delivered excellent long-term returns, they almost all suffered through a difficult period at some point in time. In addition, we sought out a strong organizational framework that fostered performance, such as personal investment, long tenure and employee-ownership. Morningstar has since deemed this quality “stewardship” and quantified it for investors. We call it the “eat their own cooking rule”. Historically, we searched for managers that had a clear investment discipline and stuck to it. This is not as simple as, “Are they value managers as defined by Morningstar?” but it is something that we get a feel for by listening to conference calls, corresponding with fund managers, reading/watching their actions. In retrospect this method worked very well starting from low valuations in the 1980’s or over a long enough time frame per the Jeremy Siegel “Stocks for the long run” model but over shorter and more volatile time periods it proved less dynamic than we wanted.

Thus, several years ago we began adapting more of an endowment model. Borrowing from the Yale, Harvard and Virginia models, we began to add more flexible managers that were focused on absolute return rather than relative return. Instead of blindly accepting the Efficient Market Hypothesis without question, we added a behavioral finance perspective to our investing by asking ourselves if a mob mentality could push stocks to irrational points both at the top and the bottom of the market. Our conclusion was that this could happen and we needed to add managers that could adapt to this volatility via hedging or buying other asset classes. Of course, this type of investment had been dominated by the unregulated world of hedge funds for many years but over the past ten to fifteen years some very attractive options have become available in the regulated mutual fund arena. We continue to add to those funds instead of the unregulated hedge fund arena since we view the unregulated market as more of a compensation scheme masquerading as an asset class. In addition, the lack of liquidity and transparency of hedge funds stand in stark contrast to our commitment to manage your assets with prudence and caution.

We are spending such a great deal of time on this matter because our confidence in these “go anywhere” managers allows us not to feel the need to panic and move in and out of the market due to their ability to seek less portfolio volatility over time. Ten to fifteen years ago when everyone was “long-only” and wanted more and more risk because their friends were making money off of “dot.com” holdings while watching CNBC, we were skeptical. Now with approximately 52% of S&P 500 stocks yielding more than the 10 year Treasury bond and 50%+ sporting P/E ratios under 12x earnings as noted by investment analyst Jeffrey Saut, we are not as concerned. To wit, one of our recommended fund managers at FPA Crescent framed it as, “Our favorite investments are those that are so cheap that we feel we really can’t lose much money.” Of course, this could still happen over a short time frame but the point is that we are employing managers that are able to mitigate downside risk during a time frame when a 30 yr Treasury is yielding 3%, gold is near an all-time high, and markets are shaky with uncertainty.

We realize this is a break from our normal quarterly commentary but felt it was warranted in today’s headline driven market. Most already are fully aware of the problems in the world due to the inundation of 24 hour news. We worry that mentioning debt ceiling debate, Eurozone defaults, Operation Twist, and double-dip recession borders on tedium in today’s environment. We can certainly talk about these issues if you would like to call and chat. However, we think one of our recommended fund managers recently articulated our worldview about as well as we could when he quoted A.C. Piqou’s Industrial Fluctuations, “Prosperity ends in a crisis. The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born, not an infant, but a giant”. Our experience tells us things are never as bad as they seem or as good as they seem and the fund managers we hire work to find value in all types of markets. Please let us know if you have any questions as we are always here for you.

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.

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.

Use of Indexes

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, Morningstar). 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.

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.