Stock Market -- Fundamentals

The liquidity cycle is edging a little more positive for stocks in that
inflation may have peaked for a spell. However, the growth of
monetary liquidity, which the Fed controls, is improving too slowly
to underwrite a new cyclical advance for stocks. As well, credit
quality spreads remain wide across the yield spectrum, indicating
low confidence in the US economy's prospects. Confidence readings
of this sort differ from measures of market sentiment in that the
former reflect the attitudes of people playing with real money while
the latter indicate opinion. When confidence in the riskier segments
of the capital markets is low, you are betting heavily against the
weight of the tape when you maintain sizable exposures. Better to
have some more risk takers out there with you.

The SP 500 is trading near 1270 as I write this. My SP 500 Market
Tracker hit a low 0f 1050 in July and is now around 1100 reflecting
the deceleration of inflation pressure underway. So, the market is
continuing to trade well above the Tracker as it has done in recent
months. Players continue to discount an earnings rebound to
start as 2008 wears down, and are also looking for the inflation rate
to moderate significantly.

The market has a 15.5% premium to the Tracker. The value of the
Tracker may well rise more in the months ahead if the inflation
readings turn more subdued, but fundamental risk will remain
elevated in the absence of a stronger liquidity push by the Fed
and some improvement in the very low level of investor
confidence. I harp on the issue of money liquidity because a
strong positive turn in growth is very important to an eventual
rebound of earnings.