CI Outlook - Archives

July 2013


Last month we talked about how the market might set new all-time highs, and it did.  We also mentioned that after that rally the long awaited correction might start, and it has.  Due to the large amounts of liquidity sloshing around the capital markets we do not think this will become a full blown 10% correction, but more of a consolidation in prices.  However, at this juncture we think the market is ahead of the economy.  Investors are anticipating a slow growth economy fueled by continuing Fed easing and world-wide currency devaluations.   However recent comments by the Fed combined with an extended market have resulted in the current selloff.  While we believe the current dip will be very shallow, much depends on the situation with employment and inflation.  Those are the variables the Fed is concentrating on as it debates a potential change in policy.  They are also the economic releases the financial press will be concentrating on in their reporting.

We do not believe the Fed will change policy this year.  This is the eighth year US GDP has grown at a sub 3% rate.  Since 1929 only three years, 1930-1933, has the growth rate been this low for more than one consecutive year.  We think this continuing lack of economic expansion will probably continue until such time as Congress and the administration craft a fiscal policy that compliments the Fed’s extreme monetary ease.  Until that happens we think interest rates, inflation and economic growth could remain at these low levels.  However worry that Mr. Bernanke and company might change policy, along with razor thin economic growth, will keep the markets tense for the foreseeable future.

Internally the markets are beginning to discount a change in fed policy.    Not only bonds but Interest sensitive stocks are falling in price.  Areas such as utilities and REIT’s have dropped more than 10% on average from their highs.  They have experienced a correction and may continue to stay weak until the rest of the market finishes its consolidation.  Money flowing from these defensive income oriented stocks is beginning to flow into old line cyclicals and forgotten blue chips.  We own some of those stocks such as Merck, Microsoft, and Intel.  Each has a common theme, reasonable and growing dividend with a low P/E in relation to its earnings prospects.  We think this consolidation will be a buying and portfolio upgrading opportunity.  During this time we plan to continue looking for other companies of comparable quality and value.  If such an investment becomes available we plan to add it to your portfolio, assuming it is appropriate for you.  In the meantime we will continue holding most investments unless they reach full valuation of other circumstances dictate their sale.

We expect this consolidation to be stressful and create fairly high levels of anxiety and noise in the financial press.  If you would like to discuss the current situation or any other investment matters please give us a call.  We enjoy hearing from you and would enjoy setting up a face to face meeting if you would like to do so.

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