Just imagine for a moment if Einstein spent his life contemplating the valuation of things. I’m kind of joking, but also serious. Really think about that for a minute. Instead of coming up with the Theory of Relativity, what if he spent his precious time on earth contemplating valuation. It’s difficult to speculate what would have come of such deep thinking, but I will tell you for certainty no one would know the name Albert Einstein if that was his devotion.

Assets are priced, by in large, in relation to something else. In a world of alternatives, choice matters. To the highly paid analyst or asset manager, “valuation” is a overwhelming part of their investment philosophy. Such dogma can be a major handicap to results. This idea that someone is willing to pay $180 million for a Picasso painting is lost on those who simply say, “but it only costs $50 for the canvas and some paints.” Sure, the pricing of assets have several drivers, but a big ingredient is relativity. It is always a necessary consideration.

By now I hope it is clear that asset prices are screaming at us that Winter has come fast and furious, but also more subtly, and that it could be with us for some time. As you know a big part of my investment philosophy is using rate of change of economic growth and inflation. I use the association of winter because it symbolizes the end or dying of the cycle. A winter investment climate is synonymous with deflation. I fully understand that as of today, all you read about and frankly only see is inflation. I’m not going to argue that. The thing is that successful investing involves being right about the future.

So let’s just go with the concept that we’re in a Winter investment environment. It may turn out to be mild deflation (or dis-inflation) or it could become a horrific recession and the bursting of every asset-bubble known to mankind. And this is where the true inspiration comes for writing this missive (Thanks C.M. - and you see what I did there I got you both covered!) I was speaking with a wonderful client this week and, as many of you do, send me articles about various financial matters - topics that have caught your eye. This particular article was well reasoned with lots of known facts highlighting the many excesses in U.S. financial conditions. Fast-forward to his conclusion is that stocks will crash and/or will see zero returns for the next decade.

Not knowing is okay. In fact, it is probably the most profitable attitude to take. Not knowing keeps one open to possibilities. I don’t know if an elk is going to pop out on the road at mile-marker 57 and I’ll have to swerve, slam on the breaks, and end up with my car in the ditch. “The ditch” or massive capital loss is a known we don’t have to know. What we have to know is that the road is covered in snow and we need to adjust our speed (risks in the portfolio) IN CASE an elk pops out on the road. We play the game that is in front of us. We invest and drive adjusting to the conditions that are visible - no guessing. The problem with investing is that the general public have been told (sold) ideas by Wall Street and their peeps that can be hazardous to one’s wealth (Perma-bull, fully allocated pie-chart portfolios).

Every winter investment climate does not have to be met with massive capital loss. Although it is equally import to point out that we do not experience massive capital loss during the investment season of summer. It is not a coincidence that many negative geo-political and “black swan” events oddly occur during winter. Bad things tend to happen when the rate-of-change in the economy turns decelerates.

As far as capital deployment, we will be taking up our allocations to long-dated treasuries and reducing exposures to corporate credit. Almost all commodity exposures have already be eliminated. I’ve begun to make some small purchases in gold. It has not really moved much yet, but the is large upside here IF that elk pops out. As far as stock sectors, risks have been significantly reduced by selling out of technology, consumer discretionary, and energy holdings. I like our healthcare names, and will be looking to selectively add into traditional defensive names such as utilities and consumer defensive. This cycle will play itself out in due time. The data will tell us when to take on more risk, but we are definitely not there yet.

Have a blessed day!

P. Franklin, Jr., CEO

Franklin Trend Investment Management, LLC