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COMMENTARY

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					                    Slow Growth Does Not Mean No Growth

The market rally of September put the          indicated “businesses were holding back
S&P 500 back into the black at +3.9%           on hiring and spending plans because of
year-to-date. The third quarter can be         the uncertainty about future fiscal and
characterized as follows:                      regulatory     policies    that  remain
                                               undetermined.”          “Banks   remain
   Private        business       increased     generally cautious and uncertain about
   employment modestly but the level           the regulatory outlook.”
   of unemployment remained elevated
   at 9.6%.                                    The consumer continues to make
   Consumer spending continued to              progress. For households, the record
   improve in July and August and retail       low mortgage rates supported a high
   sales were a surprise on the upside         level of refinancing activity and the
   in September. The personal savings          decline in the level of credit and the
   rate declined in July but remained          improvement in the quality of credit that
   elevated near the high level of the         occurred in the second quarter and
   second quarter.                             continued into the third. Ratios of credit
   Business       outlays    for     capital   to disposable personal income remain
   equipment and software looked to            elevated, so more work needs to be
   have moderated from outsized gains          done, but the improvement is dramatic.
   in the first half.
   Housing activity weakened further,          The Outlook: Consensus forecasts lean
   and non-residential construction            toward continued growth, albeit at a
   remained depressed.                         slightly reduced rate into next year,
   Industrial     production     increased     strengthening of the expansion into
   solidly as the output of high-              2011 with further pickup in economic
   technology items expanded at a firm         growth in 2012.         This outlook is
   pace.                                       supported by accommodative monetary
   The rise in exports rebounded from          policy, and further improvement in
   June as overseas sales of U.S.              financial conditions, but the downside to
   manufactured capital goods rose             the outlook lies in greater household
   sharply.         Businesses reported        and business confidence.
   continued strong foreign demand for
   their products, particularly from Asia.     Equity Market Outlook: Currently the
                                               U.S. stock market is trading at 1163 as
Capital spending and exports have kept         measured by the S&P 500 Index or
GDP afloat as we wait for better labor         about 12.5 - 13x's 2010 estimated
numbers. Many businesses had built up          earnings. Inflation on a year-over-year
large reserves of cash, but were               basis is 1.9% with interest rates at
refraining from adding workers or              historic low levels. In more normal
expanding plants and equipment. A              times these metrics would call for much
survey conducted by the Federal                higher multiples of earnings and the fact
Reserve Open Market Committee                  that the overall market is this cheap
reflects the   low level    of   business        unnoticed by U.S. corporations as
confidence.                                      legions of chief financial officers have
                                                 taken advantage of the low yield market
Rising corporate tax receipts point to           (read this as yield hungry investors) by
continued profits for U.S. corporations.         issuing bonds with 2.5 - 3.0% yields for
Measured as a percentage of GDP,                 bonds maturing in ten years, while the
account profits grew 19% in the last             dividend yields on some of the same
quarter and 49% in the first quarter.            companies are higher than the bonds.
This represents six consecutive quarters         Meanwhile the current earnings yield for
for a cumulative 39% increase over that          stocks is 7 - 8%. Earnings yield is
period.     Governance by corporate              computed by dividing the per share
management remains at a high level               earnings into the stock price which is
guided by expense controls and building          relevant as a measure of the wealth
shareholder wealth. Guidance for the             being created for a share of stock.
third quarter has, so far, been positive         Example: The S&P Index is 1100 and
and as we enter the “earnings season”            expected to earn $85. $85 divided into
for the quarter we will be “hunkered             1100 equals a 7.7% earnings yield.
down” doing our due diligence as they            Active allocation dictates, above all else,
report.                                          gravitating toward the asset class
                                                 exhibiting the most value. In late 2008
In summary, in the developed world               we favored bonds as high grade yields
corporate profits have recovered to              exceeded 8% in some cases. Today
previous highs, the labor incomes, for           U.S. equities are cheaper than bonds
those who are working is growing again           and represent better value for the
yet discretionary spending is at a multi-        investor.
year low, probably due to the unwinding
of the real estate market for homes and          CIMI's outlook is for below trend line
the uncharacteristic uncertainty that is a       growth of GDP into 2011.       Current
result of changing public policies.              employment conditions are consistent
Consensus forecasts are for global               with real GDP growth of 2%. In a slow
economic growth to be 4% or so,                  growth environment we have chosen a
modest inflation and low long term               somewhat eclectic approach to equity
interest rates. Economic growth this low         investing:
becomes a matter of semantics to
investors and the challenge puts even               Favoring large cap stocks that have
more pressure on selection and timing               the propensity to pay and grow
to add value.                                       dividends.
                                                    Selected growth opportunities of
Investment Strategies: The flow of                  companies with a particular niche
funds has been massive away from                    that allows growth faster than the
developed market equities making them               norm.
cheaper than emerging market equities
and very cheap versus developed                  We continue to prefer companies with
market bonds.    This has not gone               large businesses overseas in the faster




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growth areas that are able to leverage         conservative approach and the average
their portfolios to the enhancement of         duration for all bonds owned by CIMI
the bottom line.      We favor energy,         investors is 3.2 years. The average
technology, industrials and consumer           yield to maturity for all bonds under
staples       for     their   defensive        supervision is 4.6% at today’s market
characteristics.      Health care and          prices.
financials while very cheap in terms of
valuations remain problematic pending          From now until early November the
clarification     of    newly   enacted        news will in all probability be dominated
regulations. We prefer the hard-line           by the impending elections. Those that
retailers     within     the  consumer         are in the business of predicting election
discretionary sector.                          outcomes favor a change in leadership
                                               in the House of Representatives and
We expend an inordinate amount of              perhaps even the Senate as well.
attention and time on the global macro         Historically, markets have responded
picture in an effort to discern both           with a rally in past elections. The post
strategic as well as tactical decisions.       election return has averaged 8%,
Policies and developments in one nation        beginning one month prior to two
have effects on one or more other              months after.
nations as economies and markets are
inextricably linked. For example, the          In summary, in the developed world,
unusual amount of activity in the              corporate profits are back, labor income
currency markets as nations attempt            is growing again; savings rates are up,
advantage by adjusting currency rates          rebuilding household balance sheets
to their own favor. The U.S. is a major        and, given time, discretionary spending
player,     a     leader,  in   currency       should return to normal levels, and U.S.
manipulation. Policy moves are easily          stocks are cheap by almost any metric.
misunderstood that may lead to policy          Headwinds remain in the form of public
errors.     These events bear close            policy errors that impede progress, yet
watching. So far, no one has blundered,        the private sector of the economy
irretrievably into the swamp quicksand         continues to do well.
of protectionism, but there is movement
in that direction.                             Eugene C. Hammons
                                               October 12, 2010
Fixed Income: If the Fed wins the battle
against deflation and is successful in
reflating the economy there is a very
high probability that the Fed will
overshoot in obtaining their goal of
2.5%. History is on the side of that
prediction. When and if that occurs,
long-dated      bonds     will   suffer,
disappointing investors in the process.
With this view in mind we prefer a




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Sources:

Bloomberg, Dividends Beating Bond Yields by           J.P.Morgan, Global Asset Allocation, The J.P.
Most in 15 Years, September 7, 2010                   Morgan View: Deflation risks rising, August 27,
                                                      2010
Credit Suisse, Monday, October 11, 2010
                                                      J.P.Morgan, Global Commodities Research,
Deutsche Bank - Data Flash (US), Non-                 Commodity Markets Outlook and Strategy:
manufacturing ISM tops expectations, October          Consumers, start your hedges, September 30,
5, 2010                                               2010

Deutsche Bank - Data Flash (US), Positive             The Wall Street Examiner, Employment Facts
news: Solid wage gains, lower savings rate,           You Didn't Hear, October 8, 2010
August 30, 2010
                                                      The Wall Street Journal, Economists React: Job
Deutsche Bank - Data Flash (US), Private sector       Market 'Uncomfortably Weak', October 8, 2010
hiring muddles through, October 8, 2010

Deutsche Bank - Data Flash (US), Revised
factory orders in line, pending home sales up,
October 4, 2010

Deutsche Bank - Global Commodities Daily,
Natural gas production falls, August 31, 2010

Deutsche Bank - US Daily Economic Notes,
Rising Corporate Tax Receipts Point to Further
Profits, September 8, 2010

Deutsche Bank - US Daily Economic Notes, ISM
survey points to economic momentum,
September 1, 2010

Deutsche Bank - US Daily Economic Notes, This
week's inflation news to frame Fed's QE
discussion, October 8, 2010

Deutsche Bank - US Economics/Strategy
Weekly, Capex & exports keep GDP afloat as
we wait for labor, September 10, 2010

Deutsche Bank - US Equity Strategy, Equities &
the Mid-Term Election, September 1 & 2, 2010

Deutsche Bank - US Equity Strategy, Equities
Versus Bonds: What's Priced In?, October 1,
2010

Federal Open Market Committee, Minutes of the
Federal Open Market Committee, September
21, 2010




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