Fancy Dinner and Candlelight

February 2, 2011

Well here we go again! Despite the potentially destabilizing consequences of Egypt and scary house price numbers in the U.S., equity markets are humming today. The latest batch of economic numbers around the world continues to confirm an unfolding and powerful broad-based business and household spending recovery. The PMIs released in the last few days were very strong and in some cases at 20-year highs. And it’s not just the U.S.! Across Asia, from Taiwan and Korea to Indonesia, ISMs and the high-frequency data are rising. Japanese consumer durable spending is growing at a double-digit rate, and global auto sales, amazingly, are now 10% above their pre-recession high of four years ago. Even Europe is looking better.

It could well be that the focus for a while is going to be on the U.S., the S&P 500, and technology (the QQQs). As fourth-quarter 2010 profits came in above expectations, analysts are revising their earnings estimates upwards for the S&P 500. For the full-year 2011, $92 to $95 a share is not inconceivable, and with the consensus real GDP forecast for 2011 around 3% to 3.5% with the nominal up perhaps another 300 basis points, fevered imaginations could be talking about over $100 next year. With ten-year Treasury bonds yielding around 4% to 4.5%, this combination could spark a run into the neighborhood of the old highs.

But this could be pie in the sky. I still have this uneasy feeling that the proverbial piper has not yet ...

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