CI Outlook - Archives

August 2009

August 10, 2009,

The markets technical signals of early July proved false.  Instead of continuing to slide below 8,000 the Dow Industrials has rallied above 9,300.  As you know your portfolio preformed far better than the market through early June.  Early in July, in order to protect those gains, we instituted a short position as a hedge against a further market decline.  The market however rallied and although your portfolio gained in July, it did not participate in the rally to the fullest extent possible. 

During the recent rally we sold those securities whose price advanced at an unsustainable rate.  We have held the majority of the proceeds and the short hedge in an effort to protect against a potential market reversal.  However, because we have reduced your market exposure during this rally, there is much less need for the hedge position and we will most likely sell the inverse ETF in the near future.

Currently the market appears to be about fairly valued.  We reach that conclusion based on current low interest rates and the prospect for sustainably higher corporate earnings in the next six months.  Those earnings will come not so much as the result of strong economic growth but because companies have cut costs to the bone.  Because most inventories have been depleted many companies must restock just to continue in business.  That process of restocking will be accomplished with far fewer workers, and much lower raw materials costs.  Thus profit margins on any goods produced will be far higher than normal.  Combined with the lack of huge losses from bank failures and corporate restructurings the immediate earnings outlook is quite favorable.   Starting soon the market should begin looking forward to earnings prospects for 2010.  At that time volatility should return as uncertainty about the economy and earnings for next year will be high.

We will do our best to keep those gains made so far this year and add to them when opportunities arise.  Please call us with any questions concerning your investments.

 

CJ Brott                                  Karen Burns

 


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