Stock Market -- Fundamentals

The broad fundamentals to support a cyclical advance in the stock
market remain in place. For me, these include monetary liquidity
measures, short term interest rates, the trend of BBB bond yields
and financial confidence measures (bond quality yield spreads).
Secondary measures such as the Treas. yield curve and broader
measures of financial liquidity are positive as well. The guess has
been that a cyclical low in the market would occur March - May '09.

There are strains in the shorter term, however. Specifically, the
SP500 Market Tracker has dropped to a value of only about 650
reflecting still further weakness of earnings. Net per share for the
"500" through June could come in close to $40. on a 12 month basis.
That is down 43% from the 12 months ended 6/'08, and is 57%
under the record 12 months ended 6/'07. Now, the powerful rally
that began in March of this year has brought the market a full 37%
above the Market Tracker level. So, the recovery anticipation now
built into the market is quite large based on a consideration of
hopefully trough earnings. In my view, with a moderate economic
recovery starting in Half 2 '09 earnings through 2010 can easily
rebound to $70. by the end of 2010, and the market could trade up
to 1150 - 1200.

The economic indicators as I read them continue to point to recovery
sooner rather than later this year, but even if that reading is correct,
the market has made a very large positive adjustment in the interim.
At some point in the weeks and months ahead, it would not be
unreasonable purely from a fundamentals point of view to witness a
period of consolidation / moderate correction as investors pause to
review whether the fundamentals are on the right track. Fundamentals
are not that helpful for shorter term market timing at all, but the
big premium in the "500" over the Market Tracker does invite
reflection at this time.