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July 15th Market Update from Kim Mailey July 15, 2010

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As part of my ongoing investment due diligence, I participate in many conference calls and meetings with economists and institutional money managers. This provides me with the opportunity to learn their views without the sensationalism that often accompanies articles that find their way into the press.

The consensus view of the current situation and what lies ahead is as follows:

• For the next two to four months, it is expected that the markets will continue to be range bound. The de-leveraging (reduction of debt) that is taking place on corporate and personal balance sheets, along with the Sovereign debt issues in Europe has companies and individual investors alike, trying to decide if the economy will fall off the cliff or stabilize.
   
• It is believed that the latter will prevail. Stabilization is expected to win the day because:
   
  • Government stimulus is likely to continue but to a smaller degree in the coming months.
     
  • Companies are still rebuilding their inventories.
     
  • The US and European Central banks are not likely to increase their interest rates for the foreseeable future.
     
  • China is seeing some success in moderating their growth (and therefore inflation rate) to a more sustainable pace.
     
• Companies are sitting on a cash hoard waiting for some clearer signs of the cliff or recovery outcome. The Globe and Mail reported that corporate America is sitting on a stockpile of $1.84 trillion!
   
• The free cash flow to investment spend ratio is at the highest level seen in 60 years. Companies have been putting off hiring, capital spending to improve their business, mergers and acquisitions - all to preserve cash.
   

The next few months will be a very delicate phase. If the expected signs of stabilization appear this fall, the corporate spending that will follow will lead to a more self-sustaining recovery and potentially provide a significant move up later this fall.

In summary, expect continued volatility over the summer months that will result in a sideways market. If the signs of stabilization develop, the final quarter of 2010 could provide a nice lift to diversified portfolios. v