Asset Management Letter

Q4 2017 Asset Management Letter

January 22, 2018   ·   By   ·   No Comments   ·   Posted in Asset Management Letter, News, Newsletters

New Day and New Year

One of our portfolio managers was watching the Golden Globe awards with his daughter recently when Oprah Winfrey made her rousing “New Day” acceptance speech. From a father/daughter perspective, the determined tone of her words was very uplifting to say the least. Similarly, the market’s performance last year was also highly encouraging. Who would have expected the S&P 500i to be up 21.38% last year, given the headlines we experienced? Keeping with the “Golden” theme, the Hollywood Foreign Press honored Oprah and the foreign markets bestowed investors with even better performance than the S&P 500i (Emerging Markets were up 37% and International ex-Japan was up 25.03%). Couple this information with the small business index near a 35 year high and there is a definite luster to the market right now.

We highlight these observations because with great hope can also come great disappointment. The optimist in us wants tax cuts to spur the market even higher, but the skeptic in us wonders about the market last year where the S&P 500i was up every single month, a feat never before accomplished. A market where liquidity will be reduced as the balance sheet of the Federal Reserve shrinks from 4 trillion to 2.5 trillion over the coming years and the fed funds rate may increase by ¾ of a percent. Not to mention, one of the most reliable recession indicators is an inverted yield curve and if the fed funds rate continues higher without the long bond rate going up, then we are dangerously close to an inverted yield curve. In addition, the new chairman of the Federal Reserve, Jerome Powell, will have to navigate all these uncertainties with no guidebook, as there isn’t one for the grand experiment called quantitative easing.

In our opinion, a timely example of lofty expectations leading to poor results is cryptocurrency, such as Bitcoin. We have seen this before with the popular sentiment in 1999 of “all growth stocks, all the time” and in 2006/07 with the “real estate never goes down and they aren’t making any more”. Currently, there are over 1,400 cryptocurrencies and many were up triple digits in 2017. Yet this asset class operates in a decentralized environment with no discernible cash flow. We realize there is value in decentralized public ledgers, censorship resistance, and being off the grid, but there needs to be an identifiable expectation of future cash flows at a reasonable rate of return in order for it to be considered an investment or it is debatable whether one should part with their savings. However, with none of that in sight, cryptocurrencies had more money flow into them in 2017 than mutual funds and ETF’s. To be clear, we do not mean to impugn cryptocurrencies as there is merit to much of its design. It is our intention to refine the difference between investing and trading for our clients. There is a self-fulfilling cycle to investing and optimism that we do not see in the speculative world of trading.

It is with our fundamental foundation we continue to invest. When growth stocks have outperformed value stocks the past eight years, we lean into value stocks since they have outperformed growth since 1927. When domestic stocks have outperformed international over the past eight years and earnings have increased significantly for international stocks, we shift more into international. When sectors like pipelines that do not have a strong correlation with oil follow oil down but not up, we look there for possible gains. These are the types of moves we are making because the fundamentals look promising, not because they are the investments du jour.

We realize we spent a great deal of this letter dancing around the dangers of unbridled optimism, but we think that is part of our role as a risk manager for you. Please do not label us as cynics. To paraphrase Helen Keller, we feel nothing can be done without hope and confidence. However, we are also aware that hope oftentimes makes an asset class a poor investment as returns are a function of the price paid, not sentiment. When sentiment is high, there is a greater chance of mean reversion than sentiment continuing to march higher. Our job is to make sure your realistic expectations are met, so you can foster a “New Day on the Horizon” full of hope for others. Please call with any 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; 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. (“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.
Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank and Synovus Trust. Synovus Trust Company, N.A. is a subsidiary of Synovus Bank.
Pursuant to rules adopted by the U.S. Securities and Exchange Commission governing federally registered investment advisors, we request that you take time to compare your account balances and statements issued by 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.

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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