CI Outlook - Archives

Yead End 2007

January 4, 2008

Last years market was very volatile and culminated with a sharp sell off in the final quarter.  The sell off is continuing early this year amid a deteriorating outlook for the economy.  In our opinion, this extreme lack of speculative confidence will result in higher volatility and continuing compression of the markets PE ratio in the foreseeable future.  Consequently, if PE ratios are going to contract, the market can only go up when earnings rise sharply.  Unfortunately, the earnings weakness in the financial sector is continuing to spread to other areas of the market.  As a result 2008 earnings estimates for the entire market are being lowered from double digit growth to the six percent range.  Based on those assumptions the Dow Industrials should oscillate in a 10 to 15 percent range around a theoretical value of 13,500.  In other words, this year is shaping up as a period of limited upside and potentially unnerving downside.  This was the situation we were anticipating last year that led us to eliminate small cap ETF’s from your portfolio.

Although we anticipated the current market situation last year, we did not anticipate the rapidity with which it would develop.  In order to counter the increasing volatility which is swiftly developing we plan to do two things.  First we will be using closer limits when recognizing mistakes in our investment decisions.  Secondly, we will most likely be increasing our risk reduction operations by increasing cash and inverse index holdings in your account. 

This first half of this year looks to be quite challenging.  We are hopeful the outlook for the markets and the economy will improve for the later half of 2008.  We appreciate the opportunity to discuss the markets and your investments with you.  Please feel free to either call or come by at your convenience.  Thank you for your continuing patronage.

CJ Brott                 Karen Burns

 


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