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(a) Jerry Favors is still bullish. He is looking for 9500-10300 to mark the
final top. Only if 8700 is broken can he say the top is in.
(b) Yes, PE is very high but we are already higher than any previous high. Who
knows how long the mania can continue?
(c)PPI and CPI are good gauges of inflation. Look at the CRB - it set 5 year
lows yesterday. Journal of Commerce index also at new lows. This is very
bullish for bonds and bonds prices tend to lead stock prices. Caveat - unless
you believe we're having a repeat of 1929-32, the low rates will keep prices
from falling too far (8-15%).
Don't forget that interest rates rose for over a year before the Sept. 1929
top and the Fed reduced money supply by 35% in 1930-1931. Greenspan, in
response to the Asian crisis, has increased our money supply by a 9% annual
growth rate to offset the deflationary tendencies.
(d) technically the market does look shitty. Falling AD line, new highs peaked
last October, volume peaked last November, insiders selling at rapid pace. But
with bonds and utilities making new highs (and the idiotic public continuing
to pour money in), you still have to give the benefit to the bulls.
(e) Before I hear a reply from someone that 'Japan has low interest rates and
their market is still down 60% from the top', I have two responses:
1. Japanese broad money supply has dropped from a 16% annual growth rate in
1989 to approximately zero today (and reached a low of -2% in 1996-7).
Increases in money supply is the fuel that drives the economy and markets.
This is as true today as it was 100 years ago.
2. See Harry Dent's The Great Boom Ahead for the demographic argument. Japan
has a much older population and is straining to meet social security (or
whatever they call it) payments. We still have 5-10 years left before the big
top.
Howard Bernstein
P.S. Just because I'm bullish longer term doesn't mean I won't reduce my longs
should the Dow make a new high with these continuing divergences. Especially
if rates then start to tick up.
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