Stock Market -- More On The Profile

S&P 500: 1233

I wanted to discuss further some of the risk factors in the
stock market environment.

Liquidity leading indictors such as Federal Reserve Credit and
the adjusted monetary base (St. Louis Fed) remain very anemic in
growth. Not surprisingly, real money growth -- M-1 and M-2 -- are
now down yr/yr on a % basis. Normally this is threatening to
prospects for continued economic expansion. However, as often
previously discussed, banks have switched funding to low and no
reserve deposits not counted in to M's 1 and 2. Even so, the
expansion is less well anchored because with no customary growing
base of liquidity, the economy is running on a mix of incomes and
increasing leverage only.

I also look at the earnings / price yield on the S&P 500 compared to
the "risk free rate" -- the 3 mo. T-Bill. The S&P e/p yield is 6.0%
based on 12 mo. earnings while the Bill is near 4%. This indicates
a still rather moderate risk level, but the gap has been closing as
the Fed raises short rates.

Important as well is inflation risk. The market has lost most of
its positive momentum over the past eighteen months because of a
sharp acceleration of inflation, which in turn, has reduced the
p/e multiple or earnings capitalization rate. In short, investors
have been raising the ROI% hurdle rate. Now the CPI yr/yr % change
may ease a bit for a couple of months, but the inflation rate trend
is still up.

To date, the gathering of incremental risk has acted only as a drag
on the market's progress and not as a negative trigger. But you have
to keep track.