Of Stocks And Bonds

The recent sharp rise in the stock market has forced me out of the game and not just to the

sidelines. For example, the SPX, now trading above 3800, would have to fall by more than

1,000 points to attract my interest on the long side. I would not hazard a guess how it will

do in the near term, but it would not surprise me to see it trading at the current level in three 

year's time. At this point the SPX is already overbought and hyper-extended not only on a

long term basis but in the near term as well. It could be just in a speculative blow-off stage,

but it might be in a bubble, with Lord only knows how much upside is left and eventually

with big downside as well. There is talk of a new valuation paradigm which all players will

have to live with, and in the unlikely even such is so, then I have done my last long side

trade. The bullish talk continues to be inspired by the huge glut of monetary liquidity in

the market which is keeping short term interest rates near the zero-bound and is seen as 

forcing money into stocks.

I did participate rather fully in the greatest bull market in bonds in US history. For years on

end, it was like shooting fish in a barrel. But I have not done any long side trades in bonds

since the long Treasury fell below 3.5% in yield. with long term inflation risk of at least 3%,

I am still out of bonds, and even though yields are rising on a cyclical basis, I will stay away

until the 3.5% threshold is met.