Stock Market Discussion

MY SP500 Market Tracker puts fair value for the index between
1450 - 1480 as we move into January. The mid-point of the
range, 1465, is up nearly 16% from the 6/06 Tracker reading of
1265. About 2/3 of the gain reflects imputation of a higher
p/e ratio reflecting the very rapid deceleration of inflation
since mid-2006. The market had a strong second half, with
closing prints at 1427, but it has tailed off in recent weeks.

Mainly, I think this reflects the fact that the rapid run-up
in the Tracker was a bit too fast for a market that retained
a reasonable amount of discipline and did not chase stocks
willy-nilly. As it was, the actual run-up in prices produced a
strong intermediate term overbought which was likely corrected
this week. But today's sell-off introduced more into the mix,
as improving economic data, highlighted by today's stronger than
expected jobs report, has weakened investor conviction that
the Fed would cut the Fed Funds rate before long.

As discussed in postings over the past month, I have expressed
the view that the Fed would resist cutting the FFR for as long
as it could, and that it would tighten instead if the economy
firmed up. I took a cautious, but not bearish view toward
much of 2007, because the case simply has not been there to
support a rate increase. Higher short rates would cut the
positive differential between the market's earnings/price yield,
now about 6%, and the T-bill yield, to a very narrow 50 basis
points, which would bother a fair number of players. To
make matters a bit more confusing, consider also that a sluggish
economy in the recently ended final quarter, may produce an
increase in the volume of earnings disappointments even as
the shorter term and longer run economic leading indicators are
in the process of firming up.

In summary, there's enough uncertainty in the economic outlook
to make it understandable that investors might not eagerly
embrace the 1450-1480 range for the SP500 envisioned by the
Tracker straightaway.

For now, I am just along for the ride. My powder is dry and my
conviction this is not the kind of year for a guy with my
type of approach to be running around making forecasts, remains
undiminished.