Stock Market Comments

My SP500 Market Tracker is weakening. It is now signaling
fair value at 1570, down from a range of 1600 - 1625 several
weeks back. Analysts are cutting earnings through 2008, and
with a fast rising retail gasoline price, headline inflation
is likely accelerating. The result is a lower market P/E on
lower earnings.

The subprime mortgage reset volume is peaking now, and that
assures more defaults and foreclosures going forward. One
difficulty here in trying to restructure these loans is that
law rquires you deal directly with the lender -- tough to do
with sliced and diced collateralized obligations. the larger
problem is that most of the delinquencies involve inadequate
collateral and fraud as to opposed macro-conditions. Not much to
work with even for sympathetic lenders. Net of foreclosure $
and tax writeoffs, I am thinking the total tab will be $145
billion. That figure could equal 10% of total underwriter
capital. The regulators will need to allow recognition of
these losses to be gradual or even amortizable so as not to
impair primary capital. A tough but not unmanagable situation.
The banking industry throws off about $150 billion a year in
gross cash flow.

So, there are more financial sector losses to come. On top,
leading economic indicators do not yet signal a recession but
are in a downtrend. Global indicators are still solid, but are
trending down as well. My inflation thrust indicator is moving
up sharply from a steep low set early in the year and is being
paced by the oil price, up 92% from the Jan. '07 low.

The Fed has so far taken 75 bps off the FFR%, and there are clear
signs that system liquidity is repairing. I'd advise the Fed to
maintain a stable policy course for the next few months to better
sort out economic and inflation potential and to glean how the
financial sector is coping with the mess it created.

The financial system is repairing and the problems, although
very large, are managable with deft regulatory handling. Also,
a little time is needed to take the measure of the oil price.
Yep, supplies are tight, but the action suggests a full scale
blow-off may be well underway.

Bottom line? Patience is needed here. I am not uncomfortable
with the idea that fundamental direction may remain elusive for
another four weeks or even longer.