CI Outlook - Archives

July 2011

July 5, 2011

For the month of June the Dow lost 153 points, or 1.2%.  From beginning to end we endured a sickening 6% slide only to regain most of the lost ground and rally 5% in the last week.  Several factors appeared responsible for this roller coaster performance.  First, was worry over a potential loss of liquidity in the markets.  Led by falling prices in mortgage backed securities and rising rates in the treasury market the news media reminded us daily that QEII would end in June.  Not surprisingly the world did not end and treasury rates peaked on June 30th.  The second factor was lower corporate revenue guidance started in early in June.  This updated guidance caused many analysts to ratchet down earnings forecasts for the second half of the year, and stock prices fell accordingly.  The last and probably most publicized uncertainty was Greece.  It was resolved when the Greek government accepted the austerity measures imposed by the IMF.  For the time being the European situation is off the front page. 

Now that these uncertainties appear resolved, the big question remains, “how well will these solutions hold up going into the end of the year?”  We would answer that question as follows.  Liquidity will remain sufficient.  We believe that the end of QEII does not signal the end of Fed accommodation.  The Fed will roll over debt and do whatever is necessary to maintain liquidity in the capital markets.  Additionally, revenue will be sufficient to support corporate earnings.  Lower revenue guidance is logical given the continuing slow growth environment we are in.  It may well prove a positive influence as earnings estimates now reflect lowered expectations.  This will make it much easier for companies to meet or exceed those expectations.  As far as the Greek/EU situation is concerned we expect further turbulence.  That is because the current IMF fix is no more than a band aid on a much bigger problem in Europe.  With that in mind we think the summer market will remain volatile. 

Throughout the summer the continuing instability of Europe, combined with our own government’s inability to reach a debt limit and budget compromise agreement, will continue to roil the investment markets.  With that thought in mind we continue to view high cash levels as appropriate.  However this is becoming a momentum driven market.  For short periods of time strong momentum markets are capable of ignoring the worst news imaginable.  Therefore, if it appears the current rally will continue, we will commit cash reserves with a shorter than normal investment horizon in mind.  Most likely we will utilize ETF’s for these short term commitments.  With their high liquidity and market driven returns they should be the most preferable instrument for coping with that situation.

We hope this gives you some insight into our current thinking.  Please call us with any questions or comments.  Thank you again for your patronage.

 

CJ Brott                      Karen Burns

 


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