CI Outlook - Archives

December 2007

Last week we finished the complete liquidation of your small cap ETF and sold another one half of your remaining mid cap ETF.  Those have been long term core holdings established to take advantage of the long term cycle of out performance in smaller stocks.  That cycle started in 2000, now we believe that cycle has ended.  In fact last month we mentioned that the small cap Russell 2000 Index could go negative for the year.  That happened surprisingly quickly in November.  We believe this is the beginning of a long term bear market for small cap stocks.  Furthermore we think that the bear market is spreading up into the mid capitalization stocks. That is why we are in the process of liquidating your mid cap ETF as market conditions, and tax considerations, allow us to do so.  Going forward we plan to use large cap ETF’s, foreign ETF’s, and inverse small and mid cap ETF’s as your core long term holdings.

Since it is our belief that a long term bear market for small and middle capitalization stocks is underway we plan to take advantage of that trend with inverse ETF’s.  There are ETF’s available whose share price will rise as the underlying index declines in value.  These inverse ETF’s have no leverage and should track the Russell 2000 or the S&P 400 fairly well.  We believe the small capitalization market as represented by the Russell 2000 is in a confirmed bear market.  It is our plan to purchase the Russell 2000 inverse index as soon as market conditions allow us to do so.  The middle capitalization stocks have not completely rolled over into a downtrend, and therefore we have not finished liquidating those long ETF positions.  However we believe that as the economy slows the middle capitalization stocks will break down and we are planning to finish selling the mid cap ETF and adding an inverse mid cap ETF as that happens.  These are longer term strategic moves we are making.  We hope to take advantage of anticipated long term weakness in these smaller stocks just as we benefited from their long term strength in the past.

We know this strategy and the terminology surrounding it is complex.  We would welcome your phone call or visit to answer any questions about this strategy, or any other matters concerning your portfolio.

 

CJ Brott                 Karen Burns


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