CI Outlook - Archives

Fourth Quarter 2005

January 4,2006

Mr. & Mrs. Investor
123 Elm Street
Dallas, Texas 75213

Dear Clients,
This year started out with a bang as the market moved up more on the first day than for the entire year of 2005.  In Wall Street lore this bodes well for stocks.  We hope so.  Last year was every bit as flat as we had predicted.  For the year the S&P 500 was up only 3%, and bond prices were actually down.  While some stocks we owned, such as Luby’s or AirTran, doubled last year most bonds preformed poorly.  But if the “January Indicator” holds true 2006 will be a better year for stocks.   And if the Fed cooperates, this should be a better year for bonds.

Delving deeper below the hype of financial headlines, we are more optimistic about the upcoming year for two reasons.  First, we believe the level of corporate earnings will be up again this year.  Based on current earnings projections for 2006, the markets projected P/E is at or just below its historical average.  This is significant because unlike the prior few years this year the market P/E has room to rise.  Expanding price earnings ratios have been the missing ingredient.  Without them the market has been stuck in the same range since 1999.  We think the earnings have finally “grown into” the market and a good earnings performance could be rewarded with higher earnings multiples.  We are hoping this will be the year in which we can abandon our now five year old market prediction of “10,500 on the Dow until further notice”.

Second, we believe the Federal Reserve is close to achieving its goals.  It should finish raising short term rates this year and that should be good for both stocks and bonds.  Not only will bonds have room to rise but lower interest rates almost always facilitate higher price earnings ratios, and this is the formula for higher stock prices.

In summary we believe that 2006 will be a very volatile year.   We think as the year progresses two important differences between this year and last will become evident.  First, the headwind of higher rates will dissipate allowing a positive return on bond investments.  Second, the underlying trend of stock prices, which has been sideways for the last six years, will begin to shift upwards reflecting continuing earnings growth and the more realistic expectations inherent in today’s lower P/E ratios.

With this outlook in mind we will continue to search out investments suitable for your account.   We thank you for your continuing patronage and wish you a happy and prosperous new year.



CJ Brott                                                                                    Karen Burns

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