Stock Market

Fundamentals
Of all things, my SP 500 Market Tracker has moved up from the
1000 level to the 1050 - 1075 range. This is because the p/e ratio
is allowed to expand as inflation pressures abate. Market players
are having none of it. Today the "500" closed around 807, which
is nearly 25% below the mid-point of the Tracker's current range.

Players are tacking on a large business risk premium in looking
at market prospects. The fear is that a sharper downturn will
imperil earning power and dividends for the corporate sector.
Few are now waiting for the next round of estimate cuts. The
psychology through today is that the current downturn could
be severe enough to lead to much higher levels of unemployment,
sharply falling profits and possibly deflation, which if not quickly
contained, could wreak economic havoc. Even the Fed is now
looking for a minimum 12 month recession with a consequent
return to price stability. For seasoned Fed watchers, the
colloquial equivalent is having Bernanke yell: "Holy crap, the
damn may break. Head for the hills!".

What many fear is an era of frugal chic whereby consumers keep
spending very restrained and businesses start hoarding cash.

The recent downdraft in the economy has been sudden and steep.
There's no debating that. Whether the decline is more reflective
of a temporary shock or the beginning of a more difficult to control
downturn is too tough a call for me at this point. My long term
economic indicators suggest a recovery to develop by mid - 2009,
and the next step is to watch how the short term leading indicators
behave. These data sets are currently very weak and if they
remain so into Feb. ' 09, it will be tough not to turn more bearish
on the economy.

I remain a step away from turning positive on the market. I
continue to monitor credit quality yield spreads and the trend of
intermediate quality bond yields to see if confidence flickers back to
life.

Technical
The market broke to new lows today, flummoxing the hopes of those
who thought a bottom was forming. Let's see whether this is another
breakaway downleg in the days ahead. That "bottom" formation we
saw through yesterday was too neatly manicured (See 11/18 post).