Stock Market Valuation

My SP 500 Market Tracker is an entirely empirically based way to value the market. The
"500" kept up nicely with the Tracker in the current cyclical bull until May, 2010. The
Tracker kept on rising, but the market corrected sharply on concerns about the sustainability
of the economic recovery. The Tracker now stands with fair value at 1400. So, even with the
strong market recovery of the past five months, the SP 500 stands at an 8% discount to Tracker
value. Investors have recovered some of the confidence lost over the spring / early summer,
but remain wary.

From a fundamental point of view, the market is now trading at a reasonable 13.6x consensus
earnings for 2011, and a still reasonable 14.5x my more conservative estimate. Whether
investor confidence recovers enough to catch up with the Tracker over the rest of this year
remains to be seen.

Investors are now not worried about accelerating inflation or rising short term interest rates.
Instead the focus is on whether the economy can develop enough internal balance to sustain
positive direction so that stimulus programs are not integral to growth. Regaining that balance
is still a matter that is "on the come". The more proximate focus of investor attention is on
the continuing positive trend of earnings.

If I was a long term investor with a minimum five year time horizon, I would be cautious
about adding to long term holdings at this level as I believe true long distance positions
should be purchased cheaply. There were nice windows of opportunity through 2009 and
during the sharp correction of May - Aug. 2010, but I would not be interested in taking
on more true long unless and until the SP 500 drops to 1240 or lower. Cyclical players who
are looking out 1-3 years should find their own comfort levels by applying their own
disciplines.

I continue to be unhappy with the corporate world. The dividend yield on the SP 500 is
a paltry 1.8%. This means that if you are long the market you need to count on earnings
growth of 8.2% and /or an upward revaluation of the p/e ratio to earn a 10% annual return
which is reasonable for capital at risk. High earnings plowback by the SP 500 companies
over the past 10-15 years has not resulted in earnings growth faster than the long term
average. In my view, investors should demand much higher dividends.