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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 !!!

Friday, April 23, 2010

Stock Market In Longer Term Context

The stock market panic of 2008 brought the market to its lowest
level compared to its very long term price trend since the 1970s -
early 1980s period when accelerating inflation and sharply rising
interest rates viciously suppressed the p/e multiple. Before that
you can go back to the immediate post-WW2 era when investors
feared the economy would re-enter economic depression. Each of
these three intervals presented great long term buying
opportunities. (I'll never forget being at a Bear Stearns luncheon
circa 1980 when a smart young lady opined that folks interested in
the stock market were mildly retarded.)

The post WW2 bull took about 15 yrears to run to the top of the
long term price channel. The bull run from the 1974 low took 22
years to top the long term price channel before it went into full
bubble mode for the first time since 1927. We then had something
of a mini-bubble running from late 2002 into 2008, before the
crystal chandelier fell to the floor.

The cyclical bull move from early 2009 has been so strong off an
historically low level that we are now only about 15% below
regaining that trend channel top (SP 500 at 1425). This is an
expensive market based on latest 12 months earnings. However,
players are looking forward to $80 earning power on the SP 500
by late 2010 and $100 - 105 earning power at the end of 2011.
Given those projections, it is easy to talk about a 1500 level for
the SP 500 at some point in 2011.

Now, earnings are in a rapid recovery uptrend. But what has really
been most surprising has been just how fast confidence has returned
to the capital markets. Just look at the performance of smaller cap
stocks and junk bonds off the 2009 price lows. I know I was
guilty of underestimating just how fast the BIG money would
regain its swagger in the wake of a near death experience in 2008.

So, the market has experienced an amazing lift-off from depressed,
cheap levels to where it is possible that within 12 - 18 months, the
market could already be in a zone where only exceptional economic
performance going forward would warrant longer term players
remaining on board.

Everyone should feel free to debate return potential for stocks over
the next two to three years. Until I see otherwise, I am in the bull
camp despite seeing the market as overbought currently. Yet, I
would insist we have moved from a low risk / high return market
profile to one that involves above normal price risk going forward.
In short, earnings have to continue very good and inflation and
interest rates have to behave well and moderately when cyclical
forces push them higher or else the market will have significant

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