Stock Market -- Fundamentals

The SP500 Market Tracker has the SP500 fairly valued in
the 1550 - 1560 range (now 1552). The upward thrust of
the Tracker has lost considerable momentum in recent months
reflecting a leveling off of yr /yr inflation readings (thus
leading to a flattening of the p/e ratio) and a projected
modest rising earnings trend. A look at the risk factors:

My forward inflation gauge is continuing to rise but has been
blunted over the past two months by a downdraft in gasoline
prices. Not enough of a break yet to signal relaxing one's
guard. Capacity expansion in the US continues too low relative
production growth potential. This remains a concern.

The leading economic indicators I track most closely have firmed
up substantially in recent months, suggesting a re-acceleration
of growth. My long term indicators -- real average earnings and
the monetary base, are still subdued.

On the monetary side, credit driven liquidity remains the primary
driver of stock prices. Viewed yr /yr, this indicator remains
strong, but growth is moderating.

Credit driven liquidity growth exceeds that of the real economy,
so for now, there is a good tailwind for stocks.

My top down earnings indicators are not impressive for the economy
as a whole. In Q 2 '07. The dollar value of all production was up
only about 4.5%. This suggests that many companies are struggling to
maintain profit margins. But there are important offsets: a weak
dollar, growing offshore operating earnings for US based companies,
strong pricing power in basic and heavy industry and better than
anticipated lifting results for the oils. Tech and export driven
companies are also showing decent comparisons. However, unless we
start to see the dollar value of production growth accelerate,
stock market breadth could prove quite vulnerable.

Widening credit spreads have occured in the junk markets, but spreads
have been maintained elsewhere. So far, crunch conditions have
been narrowly focused.

The SP500 has an earnings / price yield of 5.8%. With high quality
short term paper available at 5.25 - 5.50%, the e/p yield is nothing
to wtite home about.

The monetary policy indicators I watch most closely have turned up,
signaling that odds of an increase in short rates are rising.
Since the Bernanke Fed is less formulaic and more discretion prone
than the Greenspan Fed, take it as an advisory and not a prediction.

Feeling funny about this market? This is not an elegant mosaic of a
bull market. It is butt ugly instead, mostly because as a credit
driven market, it lacks the balances it needs to allow even bulls
to sleep that well at night.