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Market Commentary

Market Bullets on Employment Friday
December 07, 2012  David R. Kotok, Chairman and Chief Investment Officer

We are currently scheduled to “guest host” Bloomberg’s Surveillance from 6 to 7 AM on Monday, December 10.  Morning coffee with Sara Eisen, Scarlet Fu and Tom Keene will be interspersed with market and economic commentary.

Now let’s get to some bullets following the employment report.

Today’s jobs report is a very strong upside surprise.  There are some anomalies in it due to Sandy but the overall response has to be constructive.

Fed policy will not change because of this one-month report.

Fiscal cliff negotiations are underway.  This employment report does not change them.

Our equity market thesis remains intact.  Our equity risk premium calculations are based on a very low interest rate trajectory for some extended period of time.  We measure that in years, not months.

That means stocks are cheap.  Maybe they are really cheap.  We confirm our forecast of 1450 to 1550 for the S&P 500 Index by yearend.  We are nearly at the lower band.  Markets are breaking out to the upside.

We confirm our longer-term forecast of higher than 2000 on the S&P 500 by the end of the decade. 

We confirm our estimate of S&P earnings of $100 plus or minus $3 for next year and of $125 to $140 by end of decade.

We confirm that the dividend yield on stocks (over 2%) is higher than the riskless ten-year Treasury note (1.6%) and that the dividend is likely to increase by end of decade.

We confirm our slow-growth, slow-recovery strategy, with low interest and inflation rates for the remainder of the decade.  The upside changes to this forecast will be gradual in the beginning.  The housing sector recovery is slowly gaining strength.

We are fully invested in our US stock market portfolios, with sector choices reflecting this bullish outlook.  And we are still favorably inclined toward the energy sector and the banking-financial sector.

Finally, we have a note on the Obama-Boehner debate, with thanks to readers, including Carol and John Merrill. 

They wrote:

“David, you speak for many of us.  Here are things that really gall me about this discussion: 1) A couple earning $250k/yr is far from rich ... why is everybody buying into this artificial line in the sand? 2) $250k was the bracket for the top rate when Clinton established it in 1993; that bracket level has been indexed for inflation and is now something over $380k, so imposing the higher Clinton rate on the $250k level is a huge step backward in relative taxation. 3) Why are the Republicans going down swinging to defend the carried interest treatment of management fees that enable a handful of ultra highly compensated individuals to be taxed at a 15% rate? It’s obscene.”

Thank you, Carol and John. 

In spite of the politicians, we remain bullish.  Markets are going higher, maybe much higher.

David R. Kotok, Chairman and Chief Investment Officer

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