[Fish2006]

Reason I dont like domestic utilities is that you get the worst of being tethered to the dollar, plus energy market risk.

The key to this is buybacks and private equity activity. A lesser part of this is the upcoming sarbox act reform, which will reduce the costs of a lot of small and mid caps later in the year, if it passes.

Right now, we have a massive overpricing of risk because of subprime and forex fear. The S&P multiple at 13 or 14 is almost silly. We have this strange dichotomy of inflation fear (economy growing too fast) - and deflation fear (homes depreciating, stock multiples declining, global slowdown, etc.).

The reality is that the fed hikes and japanese liquidity tightening are driving us towards a deflationary trend. This means, in all likelihood, if the economy starts to slow down, we will get lower interest rates from the fed, which will un-invert the bond yield curve in the 2007-08 period.

The further lowering of rates will drive people back into housing, which I think bottoms in most areas around mid-year, and starts back up at more realistic levels in most areas (4-6% annual). You can't tell me that if you are getting A paper mortgages at 4.5% with zero points that people wont jump back in with abandon.

The lower rates will also, as usual, drive up multiples in stocks, back to around 17, reflecting the real amount of risk and growth in large cap, blue chip stocks. This, of course, will mean a 18% bump in stock prices from where they are today - putting the S&P around 1650.

Thanks for the post!