J Arp & Company Research, LLC

With the economy slowing into what may be a credit squeeze induced recession and equity market valuations approaching unreasonably expensive, it seems almost surreal to imagine that there may quite possibly be more room to roam higher for stocks. Yet that is exactly where we sit. In between failing fundamentals, deflation beginning to seep into housing and other consumer discretionary sectors, and large short positions and a well ingrained sense of caution among those who are paying attention. Its at these moments where the naive and clever have the upper hand, for a time. Stocks loose the tether to fundamental valuation and begin rising despite deteriorating fundamentals due to increased psychological gains resulting from stregthening short covering rallies. This would be a repeat of the 1996-2000 episode where fundamental valuations were perverted by historically irrelivant metrics such as price to EBITDA. We can see that occurring currently in the near uniform acceptance of the price to forward operating earnings machinations. It is taken for granted that earings are non mean reverting, despite all the evidence to the contrary. Those who know better play the game as if they were Charles Ponzi.

Eventually this will, like in 1929 and 2000, will come to an end. But whether that end is in a year's time, or five years time is unknowable, depending on the extent that investors are willing to accept silly accuonting games with the hope that one more gullible than they will come along to bid at a higher price. Thus, the momentum game is at hand. A race to lower prices, routed through a permantly high plateau.