Stock Market -- Fundamental Note

With today's big rally, let me sneak a little not so good stuff in
under the radar. CPI inflation hit 5.0% yr/yr for June, for the
highest reading since 1991. That news puts a significant crimp
on the SP 500 Market Tracker p/e multiple and sends the
reading for late June / early July down to 1130 (vs 1245 for 7/16).

Commodities prices, particularly energy, is by far the dominant
driver in the inflation outlook. Since commodities can be so
volatile, forecasting visibility is low. For example, broad
commodities composites are down by about 5% since July 4.

Inflation is gobbling up the liquidity in the US financial system,
suppressing output, profits, and incomes and leaving a liquidity
headwind for equities.

The SP 500 has trailed the Tracker on the way down over
the past year, but has stayed above the Tracker's line. This
suggests that despite a bear market, investor optimism has
not fully burned out yet.

There are two additional factors to keep in mind. The stock
market is highly sensitive to commodities prices now because
they dominate inflation. Secondly, even if there is inflation
relief ahead, one has to go along carefully and check back to
make sure the inflation surge to date has not damaged the
economy more than we've already observed. In short, should
the commodities scene cool off, it does not mean an automatic
free pass to a bull run in stocks.