Market Commentary for the week of June 4, 2007

The U.S. equity markets certainly do not need another new high. After all, sequential new highs are, or should be, emblematic of a wave of good cheer, euphoria and high expectations. Today’s new high climate, however, looks more like a fisherman treading on thin ice.

There aren’t too many facts that dispute the numerical new high. There is too much momentum to dispute the market’s direction. But there are fundamental underlying data which might refute the integers.

Hope and trepidation are not market fundamentals upon which to draw any long-term economic conclusions. By following an emotional trail up the line, investors are setting the stage for the same factors to reverse their course. And this is just about the only influence that drives current strategy.

In the world of Wall Street any gain is good. However, do you know of any neighbor of friend who is as preoccupied with stocks as the business news channels? Do you or your friends pay less for gasoline, food, prescription medicine, tuition or rent? Are your salaries increasing at the rate of appreciation shown by stocks recently?

In fact, the underlying economic data are quite dissimilar from the Wall Street portrayal. Record profits in Energy are not shared by shareholders. The companies themselves say that theirs is a cyclical business and that record profits today are their reward for lean years previously and the enormous expense of capturing, refining, and delivering raw product to the marketplace. So, too, say the pharmaceutical companies, and now the food and agriculture manufacturers.

In a kind-of never ending spiral of greed, every manufacturer and producer lays claim to the capitalist demand/supply cycle as justification for raising profit margins.

This writer does not begrudge profits or capitalism. In fact earnings acceleration patterns are one of the benchmarks of my methodology.

What I caution against, however, is the dichotomy between market reality and Wall Street reality. At the end of the day, other than cheap money and plentiful egos, there is no solid fundamental case to be made for bidding up stock prices in anticipation of an earnings cycle that isn’t justifiably reliable. Decision making based upon emotion does not compute in a quantitative methodology.

I disagree strongly with the market’s current trend, absent any earnings or demand-cycle substantiation. The intrinsic value of stocks is several “standard deviations” from nominal valuation and unlikely to be maintained.

I disagree also with the policy of bidding stock prices higher through merger/acquisitions, share repurchasing, and low interest margin.

Everybody would like the emotional tide to continue. Few think about the damage done to them by the same emotional phenomenon that bid up Tech stocks in the late 1990’s. But boasting at cocktail parties about portfolio successes is not the same as structurally sound methodology. Therefore, I stand only as the voice of one such methodology.