Stock Market -- Fundamentals

Core fundamentals -- monetary liquidity, short term rates, medium
quality bond yields, market confidence measures -- remain
positive. Earnings indicators are positive, although the weekly lead
measures have started to flatten out. Secondarily, there remains
substantial excess liquidity in the system (a positve), but two other
measures are less promising. Investor expectations regarding the
momentum of economic recovery have flattened out, and the real,
or inflation adjusted, oil price is up very substantially this year, a
development which is an emerging positive for oil production
earnings, but which could prove a negative factor for economic
growth.

Y/End '09 net per share currently looks to come in around $56.50
for the SP 500. My Market Tracker gives those earnings a value of
about 940 for the index. With the SP 500 now around 1090, the
premium in the market is 16%. This is a substantial premium, but
is not an unusual one for the early stage of economic recovery, when
the market does tend to run ahead of the fundamentals. However,
the premium does imply smooth delivery of higher earnings as the
economy progresses, and is vulnerable to widely perceived
perception that the recovery in profits could lose momentum.

So, despite strong core fundamentals, there is risk in the market
since the leading weekly indicators are taking a breather and since
the recent flagging of interest in cyclical stocks reflects flickers of
recognition that the forward view suggests some moderation in
growth momentum.

The SP 500 Market Tracker based on long term trend earnings of
$75. per share for 2009, stands around 1240. Because costs have
been slashed strongly, index earnings for 2010 could approach this
level on a moderate gain in sales. But keep in mind that SP 500
book value fell more than 15% peak to trough through the
recession, so that $75. in earning power would represent a strong
return on book equity of 15.6%. In short, if earnings could reach
$75. next year, that would represent a formidable development.