CI Outlook - Archives

October 2011

While the political gridlock in Europe and Washington continues as the focus of most headline news the equity markets have decided to move on.  Because investors are forward looking their attention has turned from the “old news” about politics to the pending financial news about corporate earnings and outlooks.  So while political news dominated the last quarter, causing the markets to discount a replay of 2008, we believe the next quarter will begin the process of discounting an end to the problems in Europe and investors will concentrate more on the rate of world-wide economic growth.  That being the case, the focus should shift to the economies of both China and the US.  If Chinese growth stays positive, and we believe it will, then demand for everything from commodities to US export goods will remain steady.  That combined with cash rich corporate balance sheets and improving macro economic conditions sets the stage for a strong recovery in the market going forward.  That recovery will be based on better than expected earnings and more importantly better than expected corporate outlooks for the future.

We believe it is possible that current investment opinion seriously underestimates the level to which earnings could expand.  That situation exists because of the current slowdown in economic activity.  Earlier this year stronger growth and inflation worries had bid up commodity prices to high levels.  That phenomenon was beginning to put extreme pressure on corporate profit margins as companies could not pass these higher costs along to consumers.  Recently these same costs have come down sharply.  Consider the price of oil, copper, aluminum and zinc all down over 20% in the last few months.  Food prices have fallen, although not to that extent.  We think that situation is underappreciated in the current atmosphere of fear.  It should be the “surprise” factor that causes price earnings ratios to expand as the markets absorb this information and incorporate it into the price structure.  Therefore we believe that while employment news will dominate the airwaves the real story will be told in the commodities markets.  If we are right, and profit margins hold up to currently high levels, than far better times lie ahead for the stock market.

Although this positive case is our hoped for outcome we believe the market will take its time in responding to the improving conditions.  As a result we are continuing to invest in securities which provide current income while we wait.  Recently we bought the CVR LP for $19.  This is the same company which we sold near $25.  With a projected dividend of about $2 per share the 10% yield seemed attractive.  This was in addition to our recent purchase of Sandridge Permian Trust whose projected yield should exceed 13%.  While we are positive longer term we remain cautious in the near term.  But while cautious we continue to scour the market for additional purchase candidates and will acquire them when it is appropriate.

Thank you for your patronage.  Please call us with any questions or comments about your investment portfolio.

 

CJ Brott               Karen Burns


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