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INVESTOR NEWSLETTER –   November, 2011

Written by, Jeffery Kreps - Fund Manager
Optimize Asset Management Inc.

The  European  sovereign  debt  crisis  coupled  with  worries  of  a  more severe emerging market slowdown, led  by  China’s  desire  to  quell  inflation  by  restraining economic growth,  contributed  to diminishing consumer confidence and escalating risk – off trades. Reduced trading volume escalated the market  downturn  as  systematic traders and short oriented  hedge  funds  capitalized  on  the  lack  of  conviction amongst bears. 

Cyclically  oriented  sectors  such  as  industrials  and  energy  sold  off  hard and with financials burdened  by  uncertainty  over  their  exposure  to  European  debt  (both banking  and  government)  the markets had one of their worst quarters ever. Only defensive sectors held up with the flight to safety trade providing support.

Despite the increased expectation of a global recession and declining commodity prices (which for many companies is extremely beneficial)  the majority of cyclically oriented multinationals (such as Caterpillar, Parker Hannifin, Eaton, etc) continue to maintain a neutral to positive outlook with cautious comments on the macro side based on government concerns and the media. Consumer spending in the technology  area experienced  a  slowdown  as  consumers  backed  away  from  some discretionary purchases but retail sales did not fall off a cliff and auto sales maintained a respectable pace.
As of writing of this report the earnings season is in full swing and overall fundamentals remain solid despite the macro economic headwinds. As outlook comments are crucial to stock market trends, I believe  the market reaction has been negative and overdone. As the European crisis resolves and emerging markets back off monetary and fiscal tightening, we might return to a less volatile upward trending market. Developing nations will continue to be a driving force for most multinationals, however, without resolution of these two macro headwinds we may be in for an extended period of low single digit global growth.

In summary,  the  markets  downturn  has  been  severe  but  when  we  look  at fundamentals, including  earnings  and  profitability (absolute  and  trends)  coupled with discounted  valuations, historically low interest rates and significant developing market growth potential, we remain cautiously optimistic. Globally, leaders must make strategically sound decisions based on sustainable growth objectives. As well both consumers and governments must address their balance sheets similar to what corporations have done since the financial crisis of 2008.  Optimize will continue its investment strategy maintaining a flexible approach to changing market conditions.


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