CI Outlook - Archives

August 2011

August 8, 2011

“While the short- term trading backdrop is highly uncertain, the longer term investing backdrop remains supportive.”  This quote, taken directly from Goldman Sachs Investment Strategy letter was written Sunday night.  In that letter they lay out their argument for the stock market over the next 12 months.  They state that due to the rising earnings guidance being given by over 72% of the companies who have reported, they believe the chance of a double dip is slim.  They acknowledge US economic growth is slowing, but point out that sales projections by US companies are still positive and most companies have pristine balance sheets and plenty of cash.  Given this information Goldman does not believe the S&P downgrade of US debt will derail the economy.  We are inclined to agree but with conditions.

First, we have written for many months about the exceedingly slow rate of growth the economy is experiencing.  The recent revision of first quarter GDP, down to 0.4%, supports our thinking.  This slow growth cannot provide the jobs necessary to support consumer confidence.  This has two important effects.  First it makes it difficult for investors to maintain investment confidence going forward.  Lack of investment confidence always leads to lack of demand for stocks and other risk assets.  Second, with slow growth politicians will find chances of their reelection waning.  In previous cycles this normally led to Fed easing and “good times” going into an election year.  However, (dare we say it), this time may be different.  Further Fed easing is a near impossibility.  And both parties have become highly polarized, rigid in their positions, and unwilling to listen to normal political compromise.  Should the intense partisan bickering of the type we just witnessed regarding the debt ceiling break out again, a negative feedback loop could develop.  That would impede development of consumer or investor confidence, slow economic growth, stymie development of a reasonable fiscal policy, and be a concern to investors and rating agencies alike.  Companies are lean, profitable, and growing.  The markets will again reflect this financial strength if we can avoid political gridlock, develop a sound fiscal policy which compliments Fed monetary policy, and thus avoid further rating agency downgrades.

In short, we continue to see the future as we have, slow growth, and volatile markets.  We think the short term will remain volatile, but that some stocks have reached values where they should be bought by those whose risk tolerance allows it.  In that spirit we recently made several portfolio adjustments.  We sold the additional S&P 400 ETF purchased a few weeks ago when the market was approaching three year highs.  At that time the market had begun to weaken and we did not want to continue to maintain the additional risk exposure.  Recently we bought Freeport McMoran Copper and Gold.  The thinking was that the gold play was attractive and if the global economy fails to continue slowing the demand for copper would increase.  Today we bought small amounts of Cascade for portfolios in which it was a suitable stock.  This company is the leader in hydraulic lift gates and other attachable devices for trucks and tractors.  It is a worldwide leader in materials handling equipment with a pristine balance sheet and good growth prospects.  Tonight Brigham Exploration will announce earnings and production prospects.  If the news is positive we will purchase it again.  Our plan is to utilize short term volatility by searching out bargain securities as they become available.  When we find suitable opportunities we will purchase them if they are appropriate for you.  In the meantime we may sell other less promising securities to either raise cash or preserve capital.

We know these markets are unsettling.  Please feel free to call us at any time with your questions or concerns.  Thank you again for your patronage.


CJ Brott               Karen Burns


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