CI Outlook - Archives

July 2010

July 7, 2010

 Last week we sold two Etf’s the IShares Pacific and the S&P Equal Weight funds.  We felt it prudent to reduce your exposure to the equity markets.  Although we think equities are cheap we decided that the panic selling was getting out of hand.  We were concerned that prices might cascade lower as selling pressure was spreading across all asset classes.  This selling of all assets, including stocks, bonds, and commodities is usually a sign of forced selling.  It is normally due to margin liquidations, as lenders, either banks or brokerage firms, instruct their clients to put up more collateral or have their portfolios liquidated.  As we saw in 2008, that the selling easily becomes self perpetuating.  This was a situation we wanted to avoid.  Had we believed the danger was more than psychological, we would have sold earlier and sold more.  In this case we believed that market psychology had separated from reality.  And, although in longer term, cooler heads should prevail, we did not want to be caught in another panic.

Although we saw a parallel between 2008 and today, we do not believe the situation is identical.  The most important difference today is one of valuation.  Two years ago earnings were poised to plunge as the financial sector was on the verge of collapse.  Today, earnings are growing and corporate balance sheets are much stronger.  Currently the main danger to the markets and the economy is a lack of confidence, created by high unemployment, regulatory changes in Washington, and the banking crisis in Europe.  Increasing investment confidence will require resolution of these unknowns.  Previously we said that we believe the US banking system is on firm ground; that Europe’s bank troubles, while serious, will not engender a collapse of the US financial system.  The remaining problems creating market uncertainty are the unpredictability of new government regulations and lack of job growth.  The unemployment problem may begin to resolve itself as the elections near and regulatory outcomes become more certain.  Once businessmen know the amount of cost increases they may begin to hire new employees.  As the economy expands investment confidence should increase.  If we are correct, then the current very low valuations in the equities market will be recognized and prices will work higher.

We recognize this is a complicated situation and this letter may not be a sufficient explanation of our current views.  Please call us with any questions.  We appreciate your business and would enjoy the opportunity to visit and explain our thinking in greater detail.

CJ Brott                                   Karen Burns


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