What Will September Bring?

We were pleased to see Intel and Dell have positive outlooks for the rest of the year. At the beginning of 2009 our model portfolio had plenty of technology stocks. Companies and consumers defer such purchases first when economic conditions look bleak; however, if an enterprise wants to improve productivity and remain competitive, technology spending can't remain dormant for too long. As such, we don't find it too surprising that the technology sector has some positive teas leaves at this time in the economic cycle.

This doesn't change our stance of the last few months as we continue to proceed with caution. Investors are becoming a little more suspect of China's growth. China seems to be in better shape than the U.S. and most parts of the world but we have speculated that some of their commodity buying was a result of low prices and not current demand. Why not store cheap raw materials today and use them when manufacturing starts to surge again?

As we have been saying, the economic tsunami has passed and economic activity has improved. Most companies will say business is not getting worse any more but few see much revenue growth ahead. Stocks tend to reflect future earnings but sometimes other factors can affect reality. We believe the rally was justified to a degree as signs of an Apocalypse dissipated. Stocks were probably way oversold but because there was so much cash on the sidelines, investors jumped in to the market for fear of missing the next leg of the rally. Risk taking may be back but risk management is still more important. At some point there will be a stream of negative news which may reverse the upward trend of stocks. The consumer is still weak, debt levels everywhere are high, the auto stimulus is gone, and foreclosures continue to rise. Stocks can't go up in a straight line until leverage is much lower, credit is flowing to small businesses again, and the consumer is comfortable spending again.