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Bull or Bear? Which Case Gets More Press?


Without something other than liquidity to backstop the eventual slowdown in the flow of funds, the ultimate risks are growing bigger as the market ramps higher.


Hey Fil -

You penned the complete Succo/Reamer Armageddon menu, but left out any shred of a bullish case. Respectfully, I think that you can take Brian's points further (simplistically) by merely noting that the Supply in the equity market is dwindling more each day…LBO's, M&A, buybacks, etc, while there is virtually no replacement of said equities -- no IPO market. (Question, how many tops in market are marked by a dead IPO market?) There is NO mention I see on the clear "de-equalization" happening before our eyes. So Massive
Demand (global liquidity glut) meets dwindling supply.

I also take (respectful) exception to the statement that stocks are not cheap. Since 1955, there have been eight two-year periods during which corporate earnings were increasing and yet P/E ratios were declining. It is a relatively rare event and two of the years in which this phenomenon occurred were 1994-1995….the average advance in the third year was 24.7% for those 8 periods. We're now in one of those periods again. *(source Legg Mason).

Which case do you feel is getting more press these days -- all the negatives, or the positives I mention above?

Hope you are well, Fil.

Minyan Scott

Scott – point well taken. I make no secret that I am in the Armageddon camp (starting time To Be Determined), but the purpose of my earlier piece truly was to explain the liquidity driven bullish argument which you underscore. So, to repeat it, the reality of the current market is that demand from buybacks, LBO's, M&A, etc. is swamping record selling by individuals and hedgies. It is not a stretch to suggest that as long as this pattern continues stocks will continue to go up. The price trend is undeniably going in Hoofy's favor and there are no signs that the supply of liquidity from the corporate bond market is abating.

You are also right that the IPO calendar has been nothing extra-ordinary. However, looking back to 1999, when you throw in secondaries, Q1 2006 ranks second only to Q1 2000.

On the issue of whether stocks are expensive or cheap, I am going to stick to my original argument. Using basic P/E ratios - simplistic as it may be - the SPX is at 17.8, the Russell 1000 at 18.2, the Nasdaq 100 at 32.3, the Russell 2000 at 41.4 and the Nasdaq Comp at 45.9. In my view these are steep multiples under any circumstances, but especially so if one takes the view that the earnings growth of the last couple of years is due for a pause, and cycle-peak EPS deserve a discount (rather than premium) multiple.

That being said, in a liquidity driven environment, I will concede that valuations really do not matter (I am seeing that first hand in the commercial real estate market). As long as the global liquidity glut persists Hoofy will continue to have the upper hand. I simply caution that without something other than liquidity to backstop the eventual slowdown in the flow of funds, the ultimate risks are growing bigger as the market ramps higher.

-Prof Zucchi

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