Stock Market Fundamentals

Directional Fundamentals
A strong "easy money" positive remains in place. Primary liquidity measures continue to
grow in outsized fashion. T-bills trade a few basis points over the 0% level. Corporate bond
prices are in an uptrend. Profits are growing. Inflation is low.

Even with a successful full taper of the QE program and an eventual rise of short term interest
rates, the yield curve may not  flatten out enough to signal an eventual downturn in the economy
until as late as 2017.

But there are risks. The US economy is growing as the Fed tapers, but we cannot be sure
business / banker confidence will hold up as the Fed zeros out the growth of its balance sheet.
If the economy manages well, we will see the Fed eventually abandon ZIRP and begin
to move rates higher. This could lead to sharp gains in rates at the shorter end of the maturity
spectrum and such might suppress the market's p/e ratio. The specter of an eventual return
to a more nearly normal monetary policy operation -- tighter liquidity band and a cyclical rise
of short rates -- may already be causing some caution in the stock market, leaving players
leery of an eventual price correction. This is why Ms. Yellen is directing her verbal ammo toward
keeping the short end of the curve from getting ahead of where the Fed would like to see it.

SPX profits rose sharply over 2009 - early 2012, with 12 mos eps coming close to the top of
a very long range band. If profits regain stronger momentum over 2014 - 2015, we could see
earnings back up to the top of a rising band which would normally signal a very mature market
and economic expansion. But for now, this idea may be a little far ahead of the story.

Valuation
The SPX is relatively fully valued at about 17.4 x latest 12 mos. net per share. The p/e ratio
is above norm on cyclically elevated earnings. The SPX is trading at 20.8 x normalized
long term trend earnings, which is up at a level not seen that often. Can investors push these
valuation measures higher? They have done so in the past and surely can this time. If such
happens, recognize that fundamental risk will rise sharply and there will be players who
start searching more diligently for risky assets with more appealing risk / return tradeoffs.