Stock Markets

US Fundamentals

My Market Tracker implies the SP500 should be trading at
1535 rather than the 1460 it closed at today. The Tracker
has risen rapidly since June '06 reflecting rising earnings
and a sharp bump up in the p/e ratio owing to a substantial
deceleration of inflation. The p/e on the "500" should be
around 17.5x but is down at 16.6x (12 mos. eps through Jan.).
However, the p/e on my larger 1,750 popular stock universe
is 18.9x. So, I conclude the market is a little richer than
fairly valued. In turn, the SP500 is trading about 11.5%
above my long term dividend discount model. Not a big
premium, but a premium nonetheless. I also look at the
market against the progress of the monetary base. The base
is rising -- a positive -- but not nearly as fast as the
market. This means investors have become increasingly
comfortable with an economy and market riding heavily on
credit driven liquidity, which happens to be rising
faster than the economy itself -- another positive. By the
same token, the risk level in the market is rising owing
to that increased dependency on liquidity, since it can
evaporate in a slow economy. I conclude that although the
fundamentals are tracking positive, there is little
value and rising risk.

The Shanghai Express

I have received over twenty e-mails since year end 2006
alerting me to a parabolic rise for the Shanghai Composite.
Most of the guys who sent e-mails along are greybeards like
me and are getting a big kick out of it. For a peek, check
here.

This parabolic looks very nearly complete. Most parabolic
trends end in a blowout, although such need not be fatal
as there can be a bounce back. Interestingly, the Shanghai
could fall 40 - 50% over much of the rest of the year and
still be in a longer term bull market. This market is not
one I follow closely, but it sure looks like there
could be some volatility ahead. It will be fun to watch.