CI Outlook - Archives

Newsletter Year End 2004

All things considered 2004 was a pretty good year.  December 31st completed another market beating year.  More importantly your portfolio growth exceeded the returns expected for your asset allocation.  According to modern portfolio theory you took less risk and made more money than was expected for your asset allocation. Any time that happens it is a very good year.

What about 2005?  Our outlook for the markets is based on interrupting the variables we believe will have the most influence on the market.  Experience has taught us it is the unexpected which has the most impact on prices.  So even though we agree with the majority and believe the economy will expand, interest rates will rise and corporate earnings will grow, we are focused on the potential for surprises.  In our October letter we mentioned our belief that corporate earnings growth would not be as strong in 2005 as last year’s 20% growth rate.  We believe that earnings growth may be surprisingly slow this year.  Our guess is below ten percent.  This would be a major disappointment, and if this is the case it will be difficult for the markets to set new highs this year.  Summarized below is the situation as we see it.

The current market price earnings ratio (P/E) is about 16.5.   That is down sharply from the 30ish P/E’s of the last five years and is about the post war average.  Over the last five years the markets have essentially gone nowhere.  Since 2000 as earnings grew at a rapid rate P/E multiples continued to contract.  It was that rapid earnings growth which held the markets up, and it was the shrinking P/E which held the market down.  Today, without rapid earnings growth, interest rates must decline to push stocks up.  Currently the Federal Reserve is pushing rates up not down.  Given this circumstance, while we think that the market could return to its old highs, (11,800 on the Dow), we think it will be difficult for markets to go much higher.  In addition, the uncertainties of Iraq, oil prices, and potential terrorist strikes will keep prices volatile throughout the year.  Given this environment we will continue to seek out investment opportunities suitable for your account and invest accordingly.

Thank you for you continuing confidence and patronage.  If you have any questions please call.  If we can help your friends please let us know.  We would enjoy talking to you and your friends at any time.


CJ Brott                                                                                  Karen Burns


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Newsletter Year End 2004
Client Newsletter 2nd Quarter 2004
First Quarter 2004
Newsletter - Year End 2003
It Ain't Over 'Till It's Over
Newsletter - 2nd Quarter 2003
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Newsletter - 3rd Quarter 2002
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Newsletter - Year End 2000
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