CI Outlook - Archives

December 2010

December 3, 2010

Today’s hot topic on CNBC was the reallocation trade.  That is, the investment communities over exposure to bonds and corresponding under exposure to stocks.  While the commentators were talking about the public investor we continue to believe that the real potential for extended stock market upside lies in the relative lack of equities owned by pension and other institutional investors.  Our discussion of this in last month’s letter lays out our reasoning.  It also explains why we believe the stock market will continue to rise into year end. 

That year end move could be extended into the spring as investment perceptions change.  Those changes should take place if we get further clarification on government fiscal policy, especially taxes.  But a much bigger change in psychology should take place when investors realize the United States has inoculated itself against the European PIIGS flu.  We have believed for several years that European financial institutions never fully admitted the extent of their bad loan problems during the 2007 – 2008 period.  Therefore while US banks are relatively clean the Euro banks are where ours were two years ago.  The fear in this country has been that the EURO PIIGS contagion would spill over to our economy, and once again infect our banking system.  However, we believe the Federal Reserve’s tremendous injection of cash into our banks, combined with those banks lack of lending, has inoculated our financial system against this secondary infection.  If we are correct there are two possible outcomes for the US stock market.  One good and one better.  In the first case Europe succumbs to its problems and while their banks become very ill, and the problems affects regions around the world, the US banks are fine, and there is no double dip recession here in the US.  In the second and best case, Europe’s problems are contained and their problems do not spread to developing and emerging economies.  In that case the world economy will continue to grow and stock markets around the world will have a major source of concern removed. 

Given these developments what is the logical course to follow?  While we know we are early, our overall strategy will be to eventually pull back some investment capital from overseas markets and invest in large capitalization, high quality, dividend paying US stocks.  This will allow us to take advantage of an expected stronger dollar.  In addition the US markets are becoming very cheap in relation to overseas markets and should become a lower risk higher performing investment as this scenario unfolds.  We will be watching to see how events unfold and then react accordingly, changing your portfolio where appropriate.

We are happy to once again share our investment outlook with you.  Thank you for your continuing patronage.  Please call us with any questions or comments.


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