CI Outlook - Archives

June 2007

May 30, 2007

In February the Shanghai stock market sold off and sent markets around the world into a tail spin.  Consensus opinion held that once again we were being hit with the dreaded “Asian contagion” and a worldwide stock market collapse was underway.  However, a month later markets had hit bottom and were getting ready to set new highs.  Today the Shanghai market “crashed” again and the world markets followed.  Today, in the US, our market was down for the morning but by the close of business was setting new all time highs.  What is different this time?  We think the answer lies in the changed level of investment confidence.  In February both individual and institutional investors were looking forward to a strong market.  Therefore, being fully invested, they were not prepared for any impending bad news.  However, after the correction in March many investors have fled to the sidelines.  This month cash levels are at higher than normal levels and short interest is at record highs.  In other words this time investors are prepared.  The question is what are investors prepared for?

The answer to that question is what seems to have set up this most recent spurt to new highs in the S&P 500 averages.  The majority of short sellers and cash laden investors were ready to buy the inevitable market dip that would surely be ushered in by the impending and highly predicted “crash” in China.  Unfortunately, the stock market rarely accommodates the majority of investors.  This morning, after three hours of trading, the US market failed to follow China over the abyss and the stampede of disappointed buyers began.  The market charged from down 75 points to up 111 by this afternoon’s close.  Should that buying follow through in the next few days or weeks the markets will go from current full valuation to being somewhat overvalued. In that event we will take our normal precautions and sell those investments which appear overvalued and vulnerable to a market decline.  As usual that cash will be held until another lower risk investment opportunity presents itself.

As you know our investment goal is to attempt to maximize returns while trying to reduce investment risk.  To that end we will make portfolio changes as necessary.  Once again we thank you for your patronage and look forward to your questions or comments.

CJ Brott                                                           Karen Burns

PS.  Enclosed with this letter you will find Capital Ideas required annual Privacy Policy disclosure statement.


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