CI Outlook - Archives

September 2011

In our August letter we continued to emphasize our belief in a slow growth economy.  Based on expectations of continued high unemployment and uncertainty over government fiscal policy we continue to hold that outlook. On the positive side, we still think corporate earnings will surprise investors to the upside.  And we still believe the possibility of a decent year -end rally exists.  That expectation is based not just on better than expected earnings but on technical conditions currently existing in the market.
 
Technically we sight the current extremely pessimistic investor sentiment readings.  Combined with recent market price action leads to an interesting conclusion. While most investors are very negative, and most likely have sold out their holdings the markets are refusing to go lower.  In fact the S&P has set a series of higher lows and higher highs in the latest month.  When markets refuse to respond to negative news by continuing lower that is usually a sign of bottoming action.  And if in fact, most people are out stocks and in cash that cash will become the source of funds for any year-end rally that develops.  The “fly in the ointment” will continue to be Europe.  As that situation develops it may well become the “wall of worry” that US markets climb.
 
Why do we specify the “wall of worry” as applying to domestic markets?  We are doing so on valuation. Although on August 31st the S&P was down 3% the rest of the worlds markets were down, on average 10%.  And many countries, such as Brazil and China were down over 20%.  Normally markets which have fallen the most would offer the greatest bargains.  However the emerging markets are still not as cheap as large cap US stocks. Therefore our strategy remains one of investing domestically for the foreseeable future.  If Europe’s banks falter US cash rich low PE companies will weather the storm far better than the over leveraged high priced stocks of the emerging markets.  When Europe does solve its problems we will consider investing in overseas markets through ETF’s.  We will monitor the situation and take action when it is appropriate.
 
As for current and future investment ideas we can report the following.  In the last month we liquidated Freeport McMoran for a small loss and traded Brigham Exploration for a gain.  We continue to hold Cascade after it reported 300% earnings growth for the quarter.  Importantly analysts expect Cascades earnings to continue growing next year.  And recently we purchased Sandridge Permian Royalty Trust as a high yield investment with considerable upside potential.  According to the prospectus the annual dividend payout is expected to be approximately $2.50 per share.  This produces a yield of 13.75% at the current price of $18 per share.  In our opinion, over time, the stock should appreciate to a price level with a yield closer to its peers, currently around 6%. That is a price substantially above the current level. Additionally we are also looking at a number of large cap technology companies.  Many of these companies have large cash hoards, no debt and are producing growing amounts of cash flow and earnings.  The majority of these companies have not appreciated in price over the last 10 years.  This sector seems to be an area of tremendous value and we believe the time for price appreciation is close.  One large tech acquisition could set off a stampede into these stocks and we would hope to be there ahead of that move.  Overall we believe valuations in tech are as cheap as they were in the late 1970 early 1980 time period.  That was a time of immense opportunity and we hope to take advantage of that situation going forward.
 
Thank you for your patronage.  As always please call us with any questions or comments.  We would enjoy talking to you.
 
CJ Brott               Karen Burns


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