Monday, June 11, 2007

Time for a Little “What If”

excerpts from this week's report

In light of last week’s upside breakout of the 10 year Treasury rate complete with confirming momentum and MACD (see chart in this week's report*), perhaps it’s time to play a little “What if” with our modified Fed Model.

What if rates continue to rise by another 50 basis points? What if earnings growth disappoints over the next twelve months producing a modest decline to, say, $88 operating earnings for the S&P 500? What might be the likely market impact?

As our modified Fed Model shows (see table in this week's report*), a market decline of approximately 10% from current levels is not out of the question (and some might say long overdue)...

Investment Strategy Implications

Given the highly correlated nature of ALL equity markets, a self reinforcing downward spiral could easily develop, particularly if weakness continues into the end of the current quarter and portfolio managers...

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1 comment:

Robert Bodogna said...

This market is full of distortions. You have to look carefully behind the numbers. For instance, I bet one of my associates a beer in early January that S&P 500 earnings would not be up more than 4% for the quarter. We were both right. S&P operating earnings were up 3.9% Y-O-Y. However, S&P EPS were up 8.1% thanks to share repurchases.