Stock Market -- Fundamentals

The SP500 Market Tracker has now dropped into a range of 1280-
1300. Accelerating inflation suppresses the p/e multiple and
analysts have resumed cutting estimates. Today's SP500 close of
1334 might indicate some willingness on the part of investors to
anticipate a better economic environment later in the year. The
market has held well above the intraday spike low in the 1260 -
1270 area since January even as the Market Tracker has continued
to move lower. Hardly conclusive, but worth noting.

The liquidity environment does not support a sustainable bull market.
Both monetary and credit driven liquidity are growing at subpar rates.
Importantly though, sideline and portfolio cash in aggregate are
running at high levels. Looking forward, monetary liquidity will
increase by more than 10% for a spell starting in late spring as $150
billion in IRS rebate checks are mailed out. The sideline cash and
rebates are positives, but are not indicative a stronger underlying
trend of system liquidity needed to sustain economic and profits
growth over time.

Credit quality spreads in the bond market are still widening, with
intermediate quality bond yields topping 8% and still rising. Concern
over the depth and duration of an economic downturn are still
evident. That's not a positive for stocks.

My long term dividend discount model has the SP500 fairly valued at
1410. The 5.4% discount of today's 1334 close to the DDM fair value
is also worthy of note and is a reflection of a modest degree of
investor concern for the long term.

I continue to watch the oil market and the broader commodities
composites. The powerful uptrends in evidence here are suppressing
stock prices. Rising oil / commodities have pushed up inflation,
punished real take home pay, eroded the market multiple and have
restricted the Fed in supplying liquidity to the economy. The
oil / commodities booms are in highly speculative stages, but
blow-offs of this sort can be very confounding when you are
looking for suggestions of tops.