CI Outlook - Archives

May 2011

Recently the financial news has been pretty bleak.  The Federal Reserve is ending QEII, economic growth has been markedly slower than expected, and the jobless rate remains stubbornly high.  With all that is in the headlines it is hard to understand why the market indices made new higher highs in early May and have not retreated meaningfully after that advance.  Perhaps the most enlightening quotation which encapsulates this situation is an old one written by investing legend Gerald Loeb.  He once penned that “the market is much better at predicting the news than the news is at predicting the market.”  Reflecting on that sentiment we must ask ourselves the following.  What set of future conditions could these current levels in the market be discounting?  In other words why won’t the market go down?

The most obvious answer is revealed by current corporate earnings announcements.  So far S&P earnings are 26% higher year over year.  The important observation here is that this earnings growth was generated by revenue growth, not cost cutting.  Even more meaningful is the predictions made by reporting companies concerning revenues and earnings.  Most companies are guiding analysts to higher revenue estimates for the balance of this year.  Thus, predicted revenue growth one of the factors producing the currently buoyant market. 

Besides earnings we believe another big factor supporting prices is the continuing excess monetary liquidity in the US economy.  We believe this condition will persist for some time.  The Fed has made abundant reserves available for lending.  However, as a result of the last few years’ economic chaos many companies have cut debt and will not borrow to finance their growth.  The excess capital created by this situation is in search of returns and it is being channeled into the equity markets.  As long as economic growth remains sluggish this situation will persist.

We believe there are two more trends which may serve as an ongoing source of demand for stocks.  One is the reallocation trade we have talked about in past letters.  The other is the relative attractiveness of US stocks verses those of other countries.  We believe these are some of the background events which are currently not obvious but will provide the future “news” the current buoyant market is predicting.

As always we thank you for your patronage and extend an invitation to you to call with any questions.  Also we want to remind you we are always available to meet with you concerning matters that pertain to your investments, and would welcome the opportunity to do so.


CJ Brott                      Karen Burns


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