Stock Market -- Fundamentals

There is an interesting divergence to discuss. The stock market
did rally powerfully off the 3/08 lows into May. Meanwhile, my
SP 500 Market Tracker fell sharply from the 1275 - 1300 area
down to roughly 1220. Operating earnings as reported came in
well below the earlier consensus estimate, reflecting a flattish
US economy, slower offshore growth, and the continuing
accumulation of red ink for the SP financials sector. Whereas a
year ago, strategists were using 90 - 100 as SP 500 Index
earning power, net per share for the 12 months ended 5/08 is
likely to come in around 75. Moreover, the precursors for a
"normal" economic recovery are not yet in place, as total
system monetary and credit driven liquidity are progressing
very anemically. Add to that the fact that the inflation thrust
indicator has yet to roll over, and you have confining short term
circumstance.

Near 1400, the SP 500 is now trading at a hefty 14.6% premium
to the Tracker level of 1220. Now, even allowing that the SP 500
financial sector could return to profitability in the months ahead,
the market is discounting a decent second half economic bounce
as well as some deceleration of inflation.

Since the market appears significantly vulnerable without the
development of a stronger economy and a moderation of inflation
pressure, the time interval known as "very soon" is where
improving economic performance needs to start taking place.