CI Outlook - Archives

December 2006

December 7, 2006

When investing, one of the most difficult but important items to keep your eye on is the long term underlying trend of the market.  In order to be successful it helps to have an understanding of the major forces underlying that trend.  One of the trends currently in motion is the rotation from small to large stocks.  To capitalize on that we liquidated substantial portions of your small stock ETF’s and reinvested the funds in the S&P 500 ETF’s.  We believe this trend is valid for a number of reasons.

First of all we continue to believe that the first half of 2007 will be a period of anemic growth for the US economy.  Second, we have watched the weakness in the US dollar index which is a measure of the US currency vs. a basket of foreign currencies.  It has fallen over 30% in four years from 120 in January 2002 to a level of 83 today.  Lastly, many of the large companies in the S&P 500 derive more than half of their revenues and earnings from overseas.  Given this set of circumstances we think it will be much easier for large company profits to continue to grow with help from stronger overseas economies and currencies.  Small domestic companies on the other hand will not benefit from overseas exposure and as a result should show relatively slower growth in revenues and earnings.  Because the relative P/E ratios are about equal between small and large companies we believe the seven year long underperformance of large companies is over and they now represent the prudent place for a large portion of your core portfolio holdings.

We hope this further explanation of our investment thought process is helpful to you.  As always please call us with any questions or comments, we really enjoy hearing from you.


CJ Brott                                Karen Burns


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