Stock Market Fundamentals -- Part 2

Weekly Cyclical Fundamental Indicator (WCFI)
This broad based indicator turned up in mid-Jun. after a fairly sharp decline over May
and early Jun. Weekly leading economic indicator data are weighted heavily in this
proprietary index. The WCFI trend is usually coincident with the market's direction and
it tends to forshadow the direction of the real economy. The recovery of WCFI since
mid-Jun. has been modest so far and currently suggests only a mild acceleration of
economic growth in the months ahead. The stock market has advanced at a significantly
faster rate than the WCFI since Jun. and clearly suggests the market is discounting a
stronger re-acceleration of the economy once QE 3 kicks in. The stock market is out
ahead of the short term cyclical fundamentals by up to 5% by my estimate.

Noteworthy here is that US PMI new orders data for both manufacturing and services did
turn up substantially in Sep. Additional confirmation of a postive turn in economic growth
momentum is required to keep the stock market buoyant going forward.

Corporate Sales And Profits
Sales growth momentum measured yr/yr has retreated from peak recovery levels of 10-12%
in early 2010 to a sub-par 3-4% going into Sep. of this year. Output growth has decelerated
from the spring of 2010 (see production) and pricing power momentum has fallen off since
mid - 2011. My price / cost ratio has turned slightly negative, but the primary pressure on
profit margins has come mainly from weaker volume growth. SP 500 operating earnings
have plateaued around $92 - 100 per share on an annual basis.

The stock market can advance during periods of flat to slightly down earnings so long as
potential is there for a fresh positive turn in net per share down the road and in this case
the focus has been on the new and substantial QE 3 program at hand from the Fed. Unless
QE 3 fails to bolster confidence and output growth, it is reasonable now to look for
sales to gain 6% in the year ahead and for profit margins to recover modestly. Obviously,
there are concerns such as the possibility of a US fiscal policy mishap or failure of the
ECB and Eurozone to foster economic stabilization and eventual recovery. For now, I plan
to use the 6% top line growth assumption as the key marker.