As 2007 closes out, my SP500 Market Tracker has continued
to weaken, putting current fair value around 1400. That
reading is down from the all-time high of around 1600 set
in July, 2007, with the decline reflecting a 7% cut to
the consensus 2007 earnings estimate, and a sharp contraction
of the multiple to adjust for a ramp up of inflation
pressure. My profits indicators outside of the financial
sector actually strengthened a bit in Q4 '07, but financial
sector earnings have been slashed for CDO related loan losses.
Moreover, banks may warn of more losses for late 2007 after
the books have been closed and the auditors speak up.
The weekly leading economic indicators continue to decline and
are warning of a possible downturn. I am looking forward to
the ISM data on new orders for both manufacturing and services
due out next week to see how the monthly leading numbers shape
up. December may have been quieter for inflation, but the
inflation thrust gauge remains in a strong uptrend as we pass
The SP500 is trading at 1478, or a 5.6% premium to fair value.
A stronger liquidity injection by the Fed and declining short
rates have a number of investors and traders trying to discount
an eventual improvement in the fundamentals later in the year
just ahead, but the choppy price action off the 11/26/07 low
makes clear that there are plenty of players not yet on board.
The SP500 carries an earnings yield of roughly 6% presently.
That translates to a nice premium over the 91-day T-bill yield,
but there is still decent quality 5% short money out there, so
the market's e/p yield, although positive, is still modest.
Dividend growth continues strong -- up 10.9% yr/yr -- and the
dividend discount model I use has the SP500 fairly valued for
the long term at 1405.
There is no excess liquidity in the US financial system above
the needs of the real economy, so the stock market will remain
heavily dependent on managers' portfolio cash for support.
The continuing economic uncertainty surrounding near term
output growth and inflation potentials could well extend through
the first quarter of 2008, and it would not be a surprise
for the stock market to remain on edge and listless as a result.
I am not uncomfortable thinking in a range of 1400 - 1550 for
the SP500, nor am I uncomfortable with the idea of elevated
I do think that springtime 2008 will bring an improvement in
confidence, a topic I'll discuss soon.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!