I am concerned about the same thing, although I did get out of the market. I think that Bob is correct that profits are way up. In this regard, the second half of 2004 and first half of 2005 will have to show profit growth over excellent data. However, the concern that I have is the sustainability of the economy. Clearly the stimulus is over, Fed rate decreases are long past, tax reduction and rebates are about over, and more importantly the mortgage refinancings are over where about 40% of borrowers increased their mortgage and spent the excess money.
The question is now, how sustainable is the economy. In this world there are two main drivers of growth, the US and China. Both look to be in the mode of raising rates. China's economy is inherently unstable and there is no way of knowing weather the slowdown they attempt will be too much, particularly with their potential overcapacity in some areas. On the US side, as we discussed the stimulus is gone. In addition, there are some indications to me that growth at the levels we are seeing are unsustainable. We may be looking at GDP growth rates of closer to 2% or so in 2005 and given an increase in Fed rates, the value of stocks at these levels may look poor. Finally, oil prices have increased significnatly. When prices increase as such, it has to be a big negative on many economies. There is an argument that the US is less effected than before and there is trueth to that, however, that is not the case for most of the world.
Other concerns that should not overly effect one's investment decisions, but I believe are affecting investment decisions are terrorists targeting of economic and political targets and successfuly have an effect in their favor. In addition, the Fed is currently looking like it missed the boat on interest rates and probably should have raised rates earlier in the year...back in March a bit. The Fed has a habit of moving too late and then too hard...which could be upseting to the market if it raises rates at 50-basis point intervals. I kind of consider the long rate increase to be the first punch and a negative to future growth. I consider the increase in Fed rates a second punch at available credit as banks and business will require higher returns at a juncture where consumer spending is slowing or at least dissapointing. Finally, I think we are nearing the time when we will indeed see how sound Freddie, Franie and some other banks (JP and Citibank) are given the increasing rates and also how safe derrivative transactions really are.
Although the markets have had a rather dramatic decline of late, I think the market may post another rally here, although it should be relatively short lived. I think once again we will see another decline in the latter part of July and then all bets are off. Nevertheless, I could be wrong as the current decline has broken sharpley below the 200-day moving average which could signify further current weakness even though we are oversold.
Overall, I've not seen anyone better than Bob regarding market timing on an overall in or out call. So, I cannot say firmly that he made the wrong call. I respect his economic model, wisdom and understandings greatly. I have made the personal decision a while back to get out of the market because I don't think the market offers an acceptable risk return ratio because the stimulus gone and interest rates are set to rise as well as the other factors mentioned.
Best wishes....
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