April 8, 2008
Last year we wrote that this year’s
market would suffer from reduced earnings growth, unnerving market volatility,
compression of price earnings ratios, and lower prices. Prescient as that prediction was, we did
not foresee the rapidity with which the markets would adjust to the approaching
economic slowdown. Now, we think the markets rapid drop of
twenty percent from last October’s highs has discounted an exceedingly dreary
outlook for the foreseeable future.
And it is at times like these that it pays to question the widely held
beliefs of the “common wisdom”.
Foremost among these widely held beliefs is that we are in a disastrous
recession from which there is no respite.
As a result of this recession there is another commonly held conviction
that selling stocks and buying gold and treasury bills is now the correct course
of action. This was prudent last
year, but it may now be tantamount to closing the barn door after the livestock
have escaped.
We do not purport to know, with
certainty, the future course of the investment markets. However we still believe our predictions
from last year are valid. At that
time we forecast painfully slow economic growth for at least the first half of
this year. We believed then, as
now, that the economy in the second half of this year would begin to firm
up. Due to the recent actions by
the Federal Reserve that is still a likely outcome. Monetary action taken by our central bank
has a lag time, upwards of six months, before its effects are seen in the
economy. Given that lag, we believe
that Mr. Bernanke’s actions over the last few months should start to show
results in the second half of the year.
Normally this would be perceived by the stock market, which always looks
ahead about six months, and a rally would ensue. However, this time, we think
confidence has been so badly shaken, that market participants will be reluctant
to commit funds to an advancing market.
Thus we believe any near term advance may be easily turned back at the
12,800 to 13,000 resistance area of the Dow Industrials. This discouraging situation likely will
end suddenly, when confidence levels rise and cause the holders of record
amounts of cash and money market funds to believe they are missing the
rally. That should be signaled by a
move above the trading range highs accompanied by significantly higher trading
volume. Although we are trying to
anticipate this event we remain cautious in the very near term. Without evidence of a change in
speculative confidence we are willing to forego buying at the bottom in favor of
capital preservation.
|
1st
Quarter 2008 Returns |
|
12/31/2007 |
Net
Addition |
3/31/2008 |
S&P
500 |
Corp
Bond |
Portfolio |
|
|
|
|
|
|
|
Lastly, you will see a change in the
reporting format of this quarter’s reports. This is the result of RBC Dain’s back
office conversion. We know this
change has been disruptive and apologize for the inconvenience. RBC Dain’s decision was beyond our
control and we plan to resolve the situation in the near future. In the meantime please continue to
contact us with any questions or concerns.
Thank you for your patronage.
CJ Brott
Karen
Burns
