CI Outlook - Archives

December 2008

Eighteen months ago, April 2007, we wrote “as long as employment rates remain high consumer confidence and therefore spending will remain high.”  With that in mind we were short term bullish on the market and it did indeed rise 30% over the next few months.  What a difference between that and the current situation.  Now employment is falling, consumer confidence is absent and consumer spending is virtually non-existent.  If normal logic were to prevail this should be the prelude to a catastrophe.  It may well be for the economy.  However as we are reminded, time and again, markets do not always seem to react to current events in what appears to be a normal, logical way.  In fact they seem to discount both the very worst and very best economic news before it happens.  That is why we are currently hearing that the market will turn up before the recession is over.  An early warning sign that the market is getting ready to turn will be its ability to ignore bad news and hold steady or even rally concurrently with the announcement of negative news. 

We think that may happen sooner rather than later.  Two reasons are seasonality and valuation.  Seasonally the market tends to bottom at year end and work higher after the first of the year.  It is thought this is due to the cessation of year end loss selling and the influx of cash at the start of a new year.  Both trends are being exacerbated this year by the forced selling of hedge funds.  Secondly, we think S&P 500 earnings estimates are too high, and may be reduced to $50 -$55 for 2009.  This would set the S&P forward PE at 15 on severely depressed earnings, and that is the average PE since 1950, and a very low level for this interest rate environment.  Thus, even though we believe economic weakness will continue, we are starting to look for signs that the market has seen its worst days. 

Thank you for your continuing patronage and please call us with any questions or concerns.

CJ Brott                          Karen Burns

 


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