Market Thoughts Excerpt

The wonderful Henry To writes a great newsletter, this is from recent email and guest writer Mr. Peter Richardson, CFA,

"I do not manage money for others anymore, so I do not have to be in the market. When short rates are rising and monetary liquidity is decelerating as presently, I keep long exposure down to a minimum. The market may be reasonably priced, but in this kind of monetary environment, risk is on the rise and return potential diminishes. So, I may play the occasional interesting idea with some mad money, but I leave the field to the more adventurous."

On U.S. Economy
I believe that a period of lengthy economic expansion, perhaps reaching out to the end of the decade, is a crucial objective of U.S. economic policy. The main idea here is to generate a stream of rising budget revenues through higher earnings and incomes that will outpace expenditures and lead to a sharp contraction of the budget deficit. Only limited progress can be expected with expense reform, so revenues will have to carry the day. I would point out that the GWB Administration can expect ever stronger pressure to reduce the military commitment to Iraq, which I think it will do. This would generate substantial savings."

The U.S. remains in a cyclical bull market. The popular S&P 500 (1227 as of this writing), has been trending under “the average bull market” since this spring. This reflects the liquidity squeeze discussed earlier, plus continued investor preference for small and mid-cap stocks. To qualify as a more typical bull market, the “500” would need to rise to about the 1360 area by late 2005 or early 2006. This benchmark is do-able if the Fed was to begin to add liquidity into the system soon. But, such remains to be seen.

Stock Market Long Term
Recent bubble-burst notwithstanding, I see the U.S. as remaining in a long term bull market that began in earnest back in 1982, and which swung back into gear again after the 1987 meltdown. There are now too many indices, sectors and individual stocks at or near all time highs to suggest otherwise, in my view. This market has been fed by decelerating inflation, a progressive downtrend of interest rate structure and extraordinarily aggressive balance sheet management by corporate America that has kicked up the long term growth rate of earnings to 8%. This extraordinary confluence of fundamentals coupled with the most favorable demographics in modern U.S. history has produced this grand market.

I am looking forward to a modest new all time high in the S&P 500 in the 2008-2010 timeframe. After that, I see trouble ahead. I believe the U.S. will be in for a period of slower growth in output and earnings, more inflation pressure to contend with, and a reversal of fortune in demographics as aging baby boomers increase financial liquidity. These developments will have major global repercussions, especially for sizable exporters to the U.S. This stark turn will throw into sharp relief just why the U.S has been interested in globalization, as new locomotives of growth will be needed.
This new, oncoming epoch will usher in great changes and will keep the investment scene interesting to say the least."
Economic and Stock Market Observations (Guest Commentary)