CI Outlook - Archives

July 2008

The stock market strength of April and May, a product of softening energy prices and improved housing data, quickly gave way to new highs in oil and a worsening market for housing.  The resulting June stock market decline of over 10% crushed both prices and investor psychology.  The resulting negativity is reflected in many indicators of investor expectations that are now at the lowest levels in decades.  Some of these indicators such as the absence of IPO’s, high levels of cash, and extreme negativity in sentiment surveys are all signs of market lows.  Therefore, whether or not we are at a market low, the psychological conditions are in place for one.

In addition, based on earnings expectations, market valuations are not excessive, even though the economy should remain slow.  Although we have believed, since last year, that the 2008 economy would be slow, and earnings growth would be minimal at best, we believe current market prices discount these conditions.  Therefore, barring a complete panic on the part of investors, the greatest part of the current market decline should be behind us.

Given this outlook, what could cause us to become concerned that the market might have a great deal further to fall?  One thing would be an unexpectedly large rise in unemployment.  This would likely be perceived as new weakness in an already fragile economy.  In our opinion, many of the other negatives such as mortgage and credit card defaults are mostly priced into the current market.  Therefore we ask, what is the unexpected event that could cause a market rally?  An unexpected drop in energy prices would be the primary reason for investors to buy stocks.  Although major weakness in energy stocks would temporarily hold back the broad market indexes other sectors of the market would do very well.  And, given that many investors who wanted to sell have already done so, any rally from current levels would be sudden and sharp.  That may happen as second quarter earnings are released.  In the mean time we will continue to hold cash and research new investment ideas.

As always we thank you for your business and invite you to call us with any questions or concerns.


CJ Brott               Karen Burns

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