299 South Main, Suite 1300, Salt Lake City, UT 84111 866.534.0530

Clear View Newsletter

At this gentle season,may you find time to enjoy

life’s simple blessings and the beauty of

each quiet moment.

From all of us at ClearStone,

A special greeting to express to you our sincere appreciation for your confidence

and loyalty. We are deeply thankful and extend to you our best wishes for a

happy and healthy holiday season.

December 2015 In this issue…Page 1……Viewpoint Changes

Page 4……A Case for Rebalancing

Page 7……Year End Gifting strategies everyone can consider

Page 8……Current Viewpoints

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299 South Main, Suite 1300, Salt Lake City, UT 84111 866.534.0530

Viewpoint Changes

During our latest Investment Committee Meeting, we decided to make a small change to our recommended sector allocations. We have removed our Underweight viewpoint on the Telecommunications sector and have decided to bring that sector to Neutral weight. Below is a brief description of why we decided to make that change and what it means for our clients.

From most basic measures, the U.S. market currently has a high valuation from a historical perspective. The rebound through the end of October put the S&P 500’s P/E ratio above 22, if you use GAAP (Generally Accepted Accounting Principles) earnings. There are other ways to determine earnings for purposes of this calculation - Operating Earnings, Median Earnings, and Cap-Adjusted to name a few – and all of these lead to P/E ratios that are above their long term average.

Higher P/E valuations can be expected when yields on U.S. Treasury bonds are low (which they are) or when future earnings growth is expected. Investors are willing to “pay up” for strong earnings growth and that is usually accompanied by an expectation of an improving economy. While the U.S. economy is stronger than most in the world, there are some worrisome signs that have us concerned.

1. S&P 500 earnings have, at least temporarily, stopped growing. Per market data provider, Factset,Q3 2015 earnings marked the second straight quarter of year-over-year declines in S&P 500earnings. (Factset “Earnings Insight”, November 20, 2015)

2. S&P 500 Revenues have declined for three straight quarters with Q3 2015 results according toFactset. (Factset “Earnings Insight”, November 20, 2015)

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3. While still healthy from a historical perspective, profit margins have been declining, possibly dueto pressures from wage growth (see the highlighted portion on the bottom clip of the chartbelow). Per Factset, analysts are expecting profit margins to decline again in Q4 2015.(Factset “Earnings Insight”, November 20, 2015)

4. While recent declines in earnings have tempered analyst’s expectations somewhat, we feelexpectations for earnings growth in 2016 are too high with nearly 20% year-over-year earningsgrowth expected in Q2 2016!

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Much of the anticipated rebound in earnings are based on the expectation that the Energy sector will return to profitability and that the U.S. dollar strength will eventually slow or reverse, thereby increasing profits for U.S. exporters. We feel that there are pitfalls with these assumptions. WTI Crude prices are currently around $43 per barrel. According to data from the International Energy Agency, the average price in Q1 2015 was nearly $48.5 and nearly $58 in Q2 2015. It may be a stretch for year-over-year earnings growth to occur with prices in the low 40’s, even with the capital expenditure cuts that have been made by energy companies in 2015. The dollar index (the value of the dollar vs a basket of foreign currencies) closed on 11/27/2015 at 100.02, within 0.13% of its high for the year. For the first half of 2015, it averaged 95.71 , so for year-over-year comparisons, the dollar would have to weaken by over 4% in order to get any tailwind from an earnings comparison perspective in the first half of 2016. While possible, it seems unlikely given that the Fed is about to start raising interest rates while the European Central Bank is considering more quantitative easing.

Because of these concerns, we want to continue to move towards a more conservative sector allocation and this is our primary reason for raising our Telecommunications viewpoint to a neutral weight. The Telecom sector has relatively stable demand which makes it less sensitive to changes in the economy than other sectors. It also has exhibited lower volatility than the market over time and pays a relatively high dividend yield. While we do have some concerns about higher-dividend paying stocks in a potentially rising interest rate environment, in our minds the relative stability of historical earnings from this sector balances out the interest rate risk. There have also been investments into higher growth areas in the Telecom sector that should provide the potential for higher earnings growth going forward. AT&T’s recent acquisition of DIRECT TV is one example. In fact, with the higher expected earnings growth, the Telecom sector is now the cheapest sector measured by Forward 12-Month P/E and is the only sector with a forward P/E below its 5 year or 10 year averages. As a caveat to the various methods for determining P/E mentioned earlier, Cash-Adjusted P/E (an interesting, non-traditional method of calculating P/E that takes into account cash held on company’s balance sheets), shows the market is fairly, or even undervalued. We also realize that the market could continue to rise even while being potentially overvalued and other factors may arise (i.e. high levels of cash on balance sheets or a low point in the earnings cycle) that may make historical P/E a less valuable measure. Nevertheless, we feel with the current slowing in earnings and revenues, lofty expectations for 2016 that may not be met and macro headwinds such as wage growth pressures, and potentially higher interest rates and a strong dollar, the more prudent choice for us is to continue to scale back risk.

As clients, you may see some small changes in your portfolios over the following days or weeks based on this new viewpoint. The changes may vary from client to client based on each individual’s goals and objectives as well as tax and income considerations. In addition, existing portfolio holdings may already provide adequate exposure to the Telecommunications sector for some of our clients.

We want to keep you informed on our thoughts and we welcome any questions that you may have.

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Written by Trent Bowers

299 South Main, Suite 1300, Salt Lake City, UT 84111 866.534.0530

A Case for Rebalancing On August 19, 2015 the stock market began a steep decline that ended up lasting for the better part of six weeks. During this time investors had a serious gut-check and many began to reevaluate their risk tolerance levels. Regardless of the asset allocation of one’s portfolio (equities to fixed income), whether it was only 20% exposure to the equity markets or 80% exposure, losses were incurred.

It’s never a good feeling to look at a portfolio, either from the client point of view, or the advisor’s perspective, and see losses building up. But what separates successful investors from the rest is the ability to not only stay-the-course with one’s investment plan, but to actually implement rebalancing as markets change.

What is Rebalancing? A typical investor will usually start the investment process by setting out a target allocation strategy, say 70% equities and 30% fixed income. As markets move, rebalancing means adjusting your holdings, selling stock to buy bonds, or vice versa, to maintain your established allocation target. The summer of 2015, or late Q3, provided a great example of the importance of rebalancing.

Rebalancing Put Into Perspective Lets look at a portfolio that is comprised of 70% equities (we’ll use the S&P 500 as a generic stand in for equities in this example) and 30% fixed income. If the S&P 500 dropped by 9% (which it almost did in August 2015) the new allocation of the investor’s portfolio becomes 61% equity and 39% fixed income, due in part because of rising prices on fixed income and a drop in the price of equities.

The basic idea behind an investor taking on more risk is they hope to achieve more return for the added risk. A portfolio of 70% equities and 30% fixed income should historically provide a higher potential return than a 60/40 portfolio mix because of the extra risk being taken by the investor. Some calculations would say that a 70/30 portfolio mix should create an average annual return of 8.34% and a portfolio with a 60/40 mix would generate a potential return of 7.70%. Compounding year over year. that one-year difference could have a significant impact on the portfolio return.

If the investor did not make any changes to move their portfolio back to 70% equities, their portfolio would potentially not grow as much even though their intentions were to take on more risk for the potential of increased return.

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The market can cause an

aggressive investor to

become more conservative.

299 South Main, Suite 1300, Salt Lake City, UT 84111 866.534.0530

A common question an investor asks is if their retirement plan can afford to miss out on that difference? If the answer is YES, then we could go with the more conservative portfolio. If the answer is NO, then we would suggest rebalancing back to their initial portfolio strategy with hopes of getting better long-term results and an higher portfolio value at retirement. Generally, we try to determine the appropriate long-term allocation for a portfolio at the beginning of the client relationship so that we can use that as a guide to keep our clients on track to meet their goals.

According to Forbes online contributor Janet Brown, many investors fail to use market volatility to their advantage and would rather let their emotions control their decisions. “When markets move down, our emotions tell us to start to sell, rather than to buy more. And, when markets go up, our emotions tell us to buy rather than to sell”, says Ms. Brown. If an investor can just stick with their strategy and purchase when markets fall they can improve their long-term performance.

If the market has taken your portfolio down by 9%, generally speaking that means the market is having a sale of 9%. Now, this may not be the 25% or 30% deals we see in department stores, but frankly, most people don’t want to see 30% discounts in the stock market (unless you are just starting to invest or have 30 years to go).

The flip side of this situation is also very important to point out. In a rising market, conservative investors can find themselves in a much riskier portfolio than they should be in, thus causing excess losses when markets take an unexpected turn the other way. In 2008, after a very strong bull market, many conservative investors in or close to retirement had let their emotions tell them they were comfortable taking on extra risk as they enjoyed the extra return with what seemed at the time little to no risk. Unfortunately, they failed to realize they literally could not afford to have their portfolio so risky. As the markets climbed, they should have been periodically selling a portion of their equities and reinvesting the proceeds into fixed income. Instead, as their equities soared in value, their exposure to risk and the potential for negative returns continued to grow just as quick. Many investors failed to proactively rebalance their allocations, leaving their portfolio greatly more susceptible to a horrendous market crash. We would rather this scenario not take place.

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The market can also cause a

conservative investor to become

more aggressive.

299 South Main, Suite 1300, Salt Lake City, UT 84111 866.534.0530

A Real World Example On August 18th, 2015, IVV (iShares S&P 500 index) was at $211.27. VB (Vanguard’s Small Cap index), was at $120.29, and the international index ETF, EFA (iShares MSCI EAFE Index Fund), was at $63.40. A dramatic sell-off began on August 19th. No equity investment was safe. Many hoped a bottom had been reached just six days later when equities began to rebound, but those hopes were soon dashed as a new plunge occurred and after a few weeks of misery, new lows for the year were reached on September 29th. During the sell-off, IVV ended the day at $187.97, a drop of over 11%. VB bottomed at $105.86, a drop of 12.4%. EFA had hit $55.88 during the day, a drop of just under 12%.

The months of August and September tested the resolve of investors. Then from September 29th to November 1st, in an almost complete 180 degree turn, markets surged back, recovering almost all their recent losses. IVV ended October at $209.05, VB ended at $114.08, and EFA ended at $61.1. Those investors that sold during the August to September decline missed the rally. The investors that hung tight to their strategy, didn’t panic, and chose to rebalance their portfolio during the same time frame by buying equities when markets were down benefited greatly. No one knows when markets will drop, and no one knows when they will rebound. Systematic rebalancing, then, provides us a tool to use market volatility to our advantage.

Final Thought Rebalancing does not protect an investor’s portfolio against losses. Rebalancing does help keep an investor in the appropriate balance of risk and reward that is comfortable to them.

Rebalancing takes commitment. Rather than making emotional decisions based on rumors, news, or a friend’s opinion, it is better to adjust your strategy based on your life needs and your life goals.

Anil Suri, Managing Director and Chief Investment Officer at Merrill Lynch Wealth Management says, “Portfolio rebalancing is a critical and often overlooked maintenance step. By rebalancing on a systematic basis, your investments may be more likely to align with your goals.”

At ClearStone Capital Management we are believers in rebalancing portfolios. Our goal is to regularly rebalance each portfolio, and when markets create additional opportunities. We strive to help our clients find an asset allocation strategy that fits their goals and risk tolerance, perform rebalancing of their portfolios, and adjust their strategy over time. Having the discipline to stick with this process can yield long-term success.

Written by Curtis Lamb D

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Year End Gifting strategies everyone can consider

As 2015 comes to a close and our thoughts turn to being with our families and friends, here are a couple strategies to consider when looking into how you can help others during the holiday season AND possibly reduce your tax liability.

Each of the above strategies has its own benefits and can be appropriate depending on your intentions and situation. We can help you understand your options and which may make sense for you. As always, we recommend you discuss with your tax advisor before making a final decision.

Gifts to Family Transfer assets from your estate to your family or friends

Key Points • NO TAX deduction. You may give $14,000 to any

person in any year (up to $28,000 if person ismarried) without triggering estate, gift, orgeneration skipping taxes

• Reduces estate value• Increase savings for family members• No cost

Family Foundations With an attorney, set up your own family foundation where you have all the control and flexibility to maximize your giving.

Key Points • Contribution and Distribution flexibility• Highly regulated• High cost

Written by Curtis Lamb

Donor Advised Funds Place appreciated shares into a fund you control. You can then direct the gifts to a charity of your choice on your timeframe (i.e. Fidelity Charitable Gift Fund, Charles Schwab Donor Advised)

Key Points • Immediate but Flexible• Make tax free gift now to your charity• May delay the gift to a final charity in subsequent

years (but deduction is in year you make thedonation to the fund

• Reduce your estate value• Very low cost

Direct Giving to Qualified Charity Give directly to your church, hospital, or any qualified 501C3 Charitable Organization.

Key Points • Immediate and Simple• Make tax free gift to your charity (counts for tithing)• Reduces your estate value• No cost

299 South Main, Suite 1300, Salt Lake City, UT 84111 866.534.0530

Overweight Neutral Underweight Bias (if any)

MACRO VIEW

Equities vs. Bonds

EQUITY VIEWS

U.S. Large Cap

U.S. Mid Cap

U.S. Small Cap

REITs

International (Developed)

International (Emerging)

SECTOR VIEWS

Consumer Discretionary

Consumer Staples

Energy

Financials

REITs

Healthcare

Industrials

Materials Bias to Underweight

Information Technology

Telecommunication

Utilities

*Viewpoints reviewed by ClearStone on a continuous basis and will update based on various economic factors and conditions. Please consult your advisor for the latest view updates.

** Viewpoints last changed by ClearStone Investment Committee November 2015. Prior views shown in grey

ClearStone Capital Management Viewpoints

prior view

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299 South Main, Suite 1300, Salt Lake City, UT 84111 866.534.0530

Thank You! We appreciate the trust you have in ClearStone Capital Management to provide sound and prudent investment advice. We also appreciate those individuals who are considering working with ClearStone and hope these updates arm you with insightful information. We believe our unique combination of thorough research and excellent service distinguishes us from other advisors. Whether you are a current client of ours or looking for an advisor, please reach out to us.

Sincerely,

Jared Stubbs, Trent Bowers, Michael Robinson, and Curtis Lamb ClearStone Capital Management’s Investment Committee

If you no longer wish to receive these emails please let us know via email or phone call. You can reach us at 866-534-0530 and at ClearStoneCapitalManagement.com

Important DisclosuresThe information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.All expressions of opinion are subject to change without notice in reaction to shifting market, economic or geopolitical conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.Brokerage Products: Not FDIC Insured No Bank Guarantee May Lose Value

Ned Davis chart disclaimerCopyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

ClearStone Capital Management LLC. All rights reserved Disclosure Version 04292015

Jared Stubbs Trent Bowers Ben Merryman Michael Robinson Curtis Lamb(From left to right)

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