CI Outlook - Archives

May 2007

May 2, 2007

Supported by better than expected earnings, combined with tame interest and inflation rates, the Dow Industrials are setting new highs.  Today, the mostly large company Dow is close to being joined by the S&P 500, another index filled with large capitalization international companies.  Logically these new high levels for these market indices are justified.  Analysts’ estimates of earnings have been too low and many analysts are starting to revise upward their earnings outlooks.    This is in the face of slow economic growth and high interest rates for the United States.

But, based on strength in the world economy, earnings of the large multinational companies should continue to rise.  This is because large multinational companies earn profits in the currencies of the countries in which their business is conducted.  Then the profits are restated in terms of US dollars, our domestic currency for accounting purposes.  Since 2004 the US dollar has been weakening against almost all foreign currencies.  The weakness in the dollar has performed two functions.  First it allows US based companies to cut prices and sell more products overseas.  Then, when converted back to US dollars, the stronger foreign currencies buy more US dollars.  Therefore a weak dollar continues raising profits for large US based companies.  These large companies are the very ones which we rotated your portfolio into over the last year.  Although we expect some interruption in the dollars slide soon, we think further dollar weakness in the long term is probable.  Since this is the case we believe continuing to hold a mix of ETF’s investing in large multinational US companies and other ETF’s which invest in foreign markets is the correct portfolio strategy for the foreseeable future.  As the US market continues to drive towards full valuation we will likely become more conservative, holding more cash from sales rather than reinvesting 100% of the sale proceeds.  We may also make new investments in securities that give off more current income.  This should dampen portfolio volatility and help cushion the blow from any future market corrections.

On a final note, Jeremy Grant, our administrative assistant, and his wife have been blessed with the birth of their first child, a healthy girl. We wish them the very best and look forward to his full time return.  In the meantime please call with any questions or comments.  We appreciate your ongoing patronage.

 

CJ Brott                                                                      Karen Burns

 


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