From my perspective, the fundamentals needed to support a
sustainable cyclical advance in stocks are moving in the right
direction, but are not fully in place yet. Moreover, there is a
chance for a fundamentals driven whipsaw later in the summer.
I like the action in intermediate and lesser quality bonds in
recent weeks, and clearly, there is a downtrend in short rates in
place. Moreover, the tax rebate checks will swell transaction
driven money supply components in the weeks ahead. So, a
tailwind for the recent rally in the market is building. However,
the broader measures of financial liquidity remain very subdued,
and, importantly, measures of monetary liquidity growth such
as Fed Bank Credit and the monetary base are just inching ahead,
and do not support strong enough growth of the basic money
supply beyond the rebates effect to support a sustainable
economics and profits lift-off. Without more meaningfully positive
turns of liquidity measures, it is possible this rally could fizzle as
the positive effects from the rebates wear off later in the summer.
It would also be helpful to the bond and stock markets if the
gradual development of global economic slack was to lead to an
easing of inflation pressures. But I cannot yet make that case,
either. So, I am stuck with a cautious view at this point, while
remaining alert to the possibility that events could take a more
positive turn. At cyclical market bottoms, indicator turns that
point to recovery are usually cut and dried. Not so now.
The SP 500 Market Tracker is saucering around 1270 - 1300.
With the "500" now close to the 1400 mark, the market is
well along in discounting a cyclical advance predicated on an
eventual earnings rebound. If the fundamentals were solidly
in place, I would say, "Hell, don't worry about the premium, the
market tends to lead the Tracker when a new advance is
underway." But, at this point, I cannot say that. I can say
though that since I have an idiosyncratic way of linking liquidity
behavoir to stocks, that you make sure to get a second opinion
if not more.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!