Friday, May 06, 2005


Weekly Summary

Despite getting a coconut cream pie in the face today care of UTSI, my portfolio still managed to gain $4,432 for the week, an increase of 1.1 percent. Nevertheless, this was less than the gain in the NASDAQ (2.4 percent), and the S&P 500 (1.3 percent).

It seems like the tone of the market has changed. A lot of people believe that the market has hit bottom, and will begin to rally. Maybe. But as I've said before, I think a strong case can be made that the market is richly valued, and if you believe as I do that in the long run valuations drive the market, it's hard to be overly bullish.

Yes, I know that earnings growth has been very strong over the past year, and that the forward P/E on the S&P 500 is only about 15. But I continue to maintain that the outlook for earnings is poor. For the past 5 years, corporate earnings growth has upstripped wage growth due to strong productivity gains and a less than stellar labor market. As a result, corporate income as a share of GDP has risen well above historical norms. This isn't sustainable. As the labor market recovers, wages will rise and profits will get squeezed. The pressure on profits from increased commodity prices will only accelerate this trend. Thus, while we may see a recovery in stock prices over the next few months, I still continue to believe that we are in are in a secular bear market, and that in 3 years, the major indices probably will not be much higher than where they are today.

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