Stock Market Fundamentals

The SP500 Market tracker continues to sit around the 1300 level.
So, with the "500" now trading 1350-1360, investors have been
endeavoring to look beyond the current situation to a brighter
future. Short rates are falling, monetary liquidity is expanding
more rapidly, the yield curve is positive, intermediate quality and
junk bond yields have been inching down, and all know the US is
in for a round of tax rebates designed to provide a mild spur to
consumption. Investors also likely expect that there will be some
degree of positive swing to earnings of the financials later in the
year.

But there are significant uncertainties. Earnings estimates are still
being cut, and the present quarterly earnings reporting period is
being carefully watched to gauge the breadth and depth of eps
shortfalls. Moreover, the commodities price boom , although
narrowing, is still intact, leaving the risk of further inflation
pressure going forward. The financial system in the US is widely
perceived as remaining under duress, and key indicators such as
short term yield quality spreads and the very slow improvement
in the growth of credit driven liquidity reflect the pressures within
the system.

For now, I am watching the inflation potential inherent in the
ongoing round of heavy speculation in commodities most closely,
as a continuing surge in fuels and other basics would damage the real
economy further. At this point I doubt I would mind much if the
Fed decided to take a pass on cutting short rates again for a while
to assess its handiwork to date. I think it is fair to wonder if that
might jolt the commodities speculators enough to allow underlying
supply / demand fundamentals to regain more focus and attention.