CI Outlook - Archives

June 2012

The current market environment is a lot like being water boarded.  It feels as if we are drowning in market moving news.  In the month of June alone we have the European elections, the US Supreme court ruling on health care, and the end of Federal Reserve economic stimulus.  Adding to the tense atmosphere is the current 10% pullback from April’s highs which leaves the market averages at critical technical support levels.  As always the question remains “is this time different?”  As usual our answer is an emphatic no! 

We have no doubt economic growth here and around the world has slowed.  That is why we sold some holdings earlier in the year.  Some of those securities have fallen enough to represent value and we may buy them back.  One such stock is CVR Partners LP.  At $20 it yields 10% and its plans to double production by the end of the year remain on track.  Because we believe the world remains hungry we consider this an opportunity to put some of the proceeds from earlier sales back to work.  But because we believe the market is still vulnerable to bad news we are slow to commit any further funds to investment.

Looking out past June we still see the news potential in this year’s presidential election as well as the well discussed “fiscal cliff” thereafter.  It is those two uncertainties which soften our economic outlook for 2013.  Current estimates call for overall earnings growth of 13% in 2013.  At this time we believe that is an overly aggressive forecast.   This is important because the current market P/E ratio would expand rapidly in that situation.  However if earnings expansion is limited to single digits then the upside targets for the market are also limited to single digits.   That would imply our best course of action is to continue investing in higher yielding securities and defensive industries.  We would however still have occasional momentum based trading opportunities such as the earlier trades in Spirit Airlines and the SPDR Technology ETF.  We will be looking for investment opportunities and try and take advantage of them as they become available.  However with the highly charged news background and the atmosphere of economic uncertainty it creates we are not aggressive.

Please call us with any questions or comments.  As always we consider it a pleasure talking to you.

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