CI Outlook - Archives

Newsletter - Year End 2002

January 8, 2003

Mr. and Mrs. Investor
123 Elm Street
Dallas, Texas 72345

Dear Investor,

If we learned anything from 2002 it had to be this.  The facts may be important but perception of the facts is even more so.  Why do we say this?  Consider the facts.  As expected, in 2002, the economy grew in an irregular fashion.  Corporate earnings lurched along in a similar fashion.  With this perceived lack of consistency the market became very volatile setting a three-year low in October before rallying 20% and then, after the worst December in history, closing at 8341, down 17% on the year.  So what really happened?  At 8341 the Dow closed out the year at seventeen times operating earnings.  Interestingly a 17 PE is the post WWII average.  As a result, even though the year may have seemed very traumatic, in reality all we did was return to the long-term average price level.  The average PE probably means that most excesses have been removed from the market.  Couple that with the current lack of investor confidence and the question becomes, what is the outlook for 2003?

Starting with the facts, as they are today, we find PE’s are average, interest rates are at 30-year lows, earnings are at depressed levels and the economy is sluggish.  In contrast, last year at this time, PE’s were still high, rates were falling and, corporate America had still not come clean.  So now, in 2003, is the glass half empty or half full?  We would like to believe that the corrective forces of the recent three-year bear market have done their job and in fact the glass is half full.  

Whatever the facts, memories of the recent bear market should serve to hold investment enthusiasm in check.  That is why we believe the market in 2003 will be biased higher but will not runaway on the upside.  We also think that during this period of low confidence headline related events will have an inordinate effect on market volatility.  This year the market will be positively affected by tax cuts and dividend proposals; yet it will react to war in the Middle East and possible terrorist attacks at home.  In other words while we are optimistic, it is our opinion this years market will remain highly volatile.  In an effort to counter that volatility and yet profit from a rising market we have adopted the use of exchange-traded funds in your portfolio.  The diversity offered by these core holdings allows us to fully employ more concentrated trading techniques to your single stock holdings.  We think this approach to the current market will allow us to take maximum advantage of our stock picking methodology while allowing your portfolio to maintain the diversity necessary in these more volatile times. 

We are looking forward to helping you meet your financial goals in the upcoming year.  Once again we thank you for your continuing patronage and look forward to hearing from you in the near future.

 

C.J. Brott, Jr.                                                                                                          Karen Burns


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