Stock Market Fundamentals

When I look at consensus earnings estimates for 2007 and
2008, it is easy to build a case for a 1625 - 1650 close
for the SP500 for this year, and 1825 - 1850 for next year.
As a group, analysts expect earnings growth to accelerate
significantly from a very tepid 3rd Q '07, and many
economists are looking for inflation to stay under reasonable
control. The 50 bp. cut to the FFR%, stabilization of key
weekly economic indicators and stabilization of financial
system liquidity have reduced risk and form a decent down
payment on a positive market turn.

We have the down payment, but a fair measure of uncertainty
remains. The global economy is more likely to slow down
before it would regain sufficient positive momentum to support
the presumed earnings outlook. We still have to see whether
US liquidity will turn sufficiently positive to support faster
growth, and just as important, we have to see whether faster
liquidity growth will drive commodity prices sufficiently to
produce an acceleration of inflation pressure and a consequent
reduction of the market's p/e ratio.

It is reasonable to assume that managers of large pools of
equities are thinking that the Fed will attempt to do what's
needed to keep the economy growing. After all, 2008 is a wide
open national election year, and the Fed would not like its
failings to be a major campaign issue. I agree with this view,
but like many other greybeards, know the Fed does not always
succeed at what it intends in a timely fashion. However, recent
Fed action has likely earned a measure of investor and politician
patience.

So, it is easy to lean positive. Yet, I think it could take
five or six months before the uncertainties inherent in the
economic environment are resolved. This translates to thinking
about return potential in the context of elevated uncertainty.

My SP500 Market Tracker currently has the "500" fairly priced at
1600 - 1625. The market closed at 1562 today, suggesting some
continuing investor wariness despite the recent strong advance.

I am anticipating elevated volatility through Q1 '08, and am more
interested in trading than taking investment positions.