Stock Market -- Fundamentals

Back on 1/3/09, I posted that my primary fundamental indicators
had turned positive. Ditto the secondary as well. I expressed some
considerable misgivings -- overbought market, unstable psychology
and my worry that a turn in earnings was still "out there" in time.
I suspected January could be bumpy, but had no idea that SP 500
operating earnings would collapse into the first ever quarterly loss
for Q 4' 08. I had a low end of the range number of $10. and it
wound up - $.o9. I also did not expect the Fed to drain so much
liquidity from the system in January, either. Blindsided on 2 counts.

Well, my indicators -- trends in short rates, liquidity measures, BBB
bond yields and confidence measure yield spreads are not likely to
turn bearish until the Fed tightens liquidity and raises short rates.
So, I am stuck on positive. My secondary indicators remain in positive
territory as well.

My longer range economic indicators continue to point to a Half 2 ' 09
economic recovery. the shorter term indicators suggest a stabilizing
economy, but not recovery yet. I have been guessing a market bottom
over Mar. - May 2009 in lieu of earnings recovery later in 2009.
So far so good on that.

My SP 500 Market Tracker has fallen to fair value of 750 in April as
12 month earnings have sunk much further. The earliest bottom in
earnings is likely after the June quarter. ( 12 mo. earns. now $45.51).

Analysts have been incinerated by a collapse in SP 500 profitability
relative to their earlier expectations and consensus going forward
through 2010 is now much more muted.

The market is at a 13% premium to the Tracker in April as investors
are again trying in a moderate way to discount the bottom of earnings
and look toward recovery. I believe investors are also rejecting the
idea of anything more than a very transitory brush with deflation.

If earnings bottom later this year and recover moderately through
2010, there is still very sizable upside in the market from current
levels. Earnings recovery up to the mundane long term trend of $70.
by the end of 2010, would get you 1155 - 1200 on the SP 500.

Now the bottom line of all of this is that we need to see those shorter
term leading economic indicators start doing a fair bit better in the
months straight ahead. Otherwise, it's back to the drawing board.