Economy and General Discussion

As aklways, he's sticking to his strategy and not making predictions, but he's definitely not optimistic...

Now, not even market internals support a speculative exposure to stocks. We have no basis for anything other than a hedged position.

As for the argument that stocks have support because the forward earnings yield is still above the 10-year bond yield, I can only repeat that this theory is based on a statistical artifact that can be easily refuted by a simple examination of historical data prior to 1980. I continue to believe that the first investors who abandon the Fed Model will be substantially better off than the last ones to abandon it. Some links to those prior comments on this topic:

June 4, 2007 - Speculating on Speculation
May 29, 2007 - Inflation, Correlation and Market Valuation
May 21, 2007 - How Much Do Interest Rates Affect the Fair Value of Stocks?
May 14, 2007 - An Optimistic Route to a Poor Market Outlook

It's also important to recognize how strenuously overextended international markets are at present. This can only exaggerate the impact of any shift in the preference of investors away from risk. With valuations rich, stock markets almost universally overbought, bullishness extremely high, and mutual cash levels the lowest on record, it seems very much like everybody is in because they expect everybody to get in, not knowing that everybody is already in.