Stock Market -- Fundamental

S&P 500: 1275

The fundamental models I use continue to put fair value
for the "500" at 1290 - 1320.

The models point to rising value. At the same time the
gauges of market risk are also on the rise, although not
yet at critical levels. So, the reward vs risk profile
is deteriorating although still positive.

Both short and longer term economic indicators point to a
return to more moderate growth. My profits indicators likely
made an interim peak in April, but still look solid. What
I do not like here is that analysts are raising estimates
for company earnings for both 2006 and 2007. Up earnings
are still indicated, but I suspect this is not a good time
to be raising estimates.

The case for a cyclical rise of interest rates has been
unabashedly strong since mid-2004 (Unlike Uncle Al, I would
have pushed up rates faster, but so be it). Now however, the
case is starting to weaken some. Manufacturing new order rates
are losing steam, and the yr./yr. growth of commercial and
industrial loans, although still strong, may well have rolled
over. The indicators still point to a 25 basis point upmove
in the FFR% for late this month, but the case for an additional
push beyond that is getting a bit "iffy."

Most disturbing near term is the upturn in the shorter term
inflation measure reflecting the recent rises in oil, petrol
and base metals prices. The longer term read on the indicators
is still tilted toward less inflation, but with atlantic hurricane
season here and Hurricane Khameini whirling in Iran, the outlook
is, shall we say, open.

This is not an easy time for investors in stocks to keep their
confidence levels up. Economic growth is going to slow, it is
a little early to be calling for a pause in the short rate uptrend
and there is uncertainty regarding the outlook for inflation in
the weeks ahead. Expect more volatility as investors struggle
to master this transition period.