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Take Me Out To The Ball Game

…..take me out with the crowd, buy me some peanuts and Cracker Jacks, I don't care if I never get back, let me root, root, root for the home team…… No doubt most of us are familiar with this famous refrain. It was written in 1908 but is still sung in many ballparks during the 7th inning stretch. It is most famously sung at Wrigley Field in Chicago during Cub’s games. When there is a celebrity in attendance they are often given the honor of leading the crowd during the sing along. We love rooting for the home team too. There is however an incredibly importance difference between rooting for the home team and betting on the home team. We root with our hearts but bet with our heads. An interesting study was done on sports book betting in Las Vegas. It analyzed football gambling lines to determine if there were systematic disequilibriums that a bettor could take advantage of. For example, always betting on the home team. The findings were that football betting lines are extremely efficient, however there is some bias in the betting lines that a bettor should consider. The most prominent bias that a bettor could take advantage of was to systematically bet against teams from New York. The “spread” on New York teams was too big when they were favored and too small when they were the underdogs. The author of the study surmised that because New York is our largest metropolitan area, and has a passionate fan base, that New York fans tend to bet on their team with their hearts instead of their heads. They don’t properly analyze the match up and are biased towards the home team. This enables unbiased gamblers to make money systematically betting against New York teams, and systematically being funded by the overly passionate New York fans. It’s a great example of bias getting the better of logical reasoning. We fear letting our home team bias influence our investing. We are big fans of the United States. Our strategic (long-term) allocation has less international exposure and more domestic exposure than academic research recommends. Additionally, our tactical allocation (short-term) further favors the U.S. over International Markets. We currently hold about 15% of our Moderate Core Strategy internationally. This compares to an average allocation of 40% in the overall Moderate Fund Universe. While our overweight to domestic securities have treated our investors well, let’s take an unbiased look at our reasoning to make sure it’s our heads and not our hearts driving this overweight. Strategic allocation - Many “experts” have long argued that a true global portfolio needs to be allocated based on the global market capitalization of stocks. For example, if the United Kingdom makes up 11% of the global capitalization, you should allocate 11% of your stock portfolio to U.K. stocks. We disagree with this rationale for two reasons; When you purchase international investments, the purchase is made in local currency. This exposes the investor to foreign exchange risk. The investor needs to either hedge the currency risk, which is expensive, or accept the randomness of currency moves. Either way, this raises the hurdle for international investing. Our second reason is much more prone to bias. We believe the U.S. is a purer from of capitalism than any other country. For better or for worse, U.S. companies have fewer government rules and regulations regarding business practices. This leads to systematically higher earnings, which leads to systematically better stock performance.

Tactical Allocation – This is more immediate and concerns itself with the current economic environment and valuation. It’s unambiguous that the U.S. is currently growing faster than the rest of the world.

We believe this is a result of the supply side stimulus of tax cuts and deregulation. This compares to Japan and Europe that are still relying on the demand side stimulus of low interest rates and government spending. Until international economies address supply side issues, we believe the U.S. economy, and more importantly U.S. earnings, will continue to outpace international growth and earnings. There is also a third reason that may be even more important. The impact that the trade wars (or skirmishes) and tariffs are having on international economies. As US GDP heats up; Q3 is estimated at 4.4% and Q2 was 4.2%, President Trump has more ammunition for the trade war. We think he will continue to escalate the trade war since he now has less concern about damaging the U.S. economy in the short term. Additionally, the Federal Reserve is expected to continue raising interest rates. International economies have become dependent on borrowing at low rates. They borrowed lots of funds in U.S. Dollars and now they are being harmed by the rising US interest rates. Repayment and refinancing are much more expensive. Additionally, higher rates strengthen the trade weighted Dollar vs foreign currencies. Again, making repayment more expensive. Lastly, due to our strengthening economy international markets are experiencing capital outflows. If we get to the point where these export dependent foreign economies are forced to lower tariffs or face higher tariffs in the U.S., it could get ugly overseas. We are going to decrease our international equity exposure even further. We are looking for a period of Dollar weakness and/or international equity outperformance to do this. We will communicate these moves when that happens. We expect to make this shift within the next couple of weeks. We will then spend some time rooting for the Red Sox and Patriots. Our unbiased analysis says there is a 100% chance they are both winning world championships this year. (But please don't bet on that.) Thanks The GreenPort Team

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