Salient to Investors:

Joseph Stuber writes:

  • Stocks could reach the all-time high on the S&P of 1576 in 2013 driven by its momentum, but then the market will broadly sell-off to October 2011 lows of 1074. A correction to the 2009 low of 670 is possible on pure fundamentals, given few give credence to the very serious problems we face.
  • Predictions of 2013 gains in excess of 15% are absurd and not supported by fundamentals. The markets are rallying more on emotional and euphoric giddiness than any fundamental justification. Stocks move even when they have no reason to move.
  • Over time stock indexes rise, driven by monetary policy that seeks to achieve 2% inflation and by replacement of index laggards.  Stocks tend to move up at an angle of 45 degrees, correct rapidly at a 160 degree angle, briefly consolidation and then resume the rise.
  • Invest when the risk/reward is at least 1:2.
  • The US economy remains in a liquidity trap – where new money is hoarded by nervous banks and savers – for over 4 years. Cash hoarding is the dominant reason for continued high unemployment, low GDP and no significant inflation.
  • Recession is unavoidable and will boost the dollar. The economy is surviving only on life support provided by massive deficit spending. The Fed is rightly aggressively trying to boost inflation because inflation is the only solution.
  • However, QE3 just added more excess reserves to a system already bloated with excess reserves. QE3 failed to increase M2 and money velocity, but succeeded in enabling the government to continue its borrow and spend fiscal policy, i.e. print enough money to absorb all the fiscal excess. QE1 increased the inflation rate by 4.5%, QE2 by 2.75%, and QE3 by less than 1% so faces the law of diminishing returns.
  • The problem in Congress is not partisan bickering but the absence of a viable solution to the problem – the best solution near term is the one in play, which everyone knows is unsustainable. Any spending cuts will send us into recession.
  • U6 number unemployment levels remain at 14.4% and the labor participation rate remains at 30-year lows.
  • Housing gains are too little and too late and insufficient to significantly impact GDP growth; and there remains the serious overhang of underwater mortgages.

Read the full article at http://seekingalpha.com/article/1131881-using-common-sense-and-logic-to-forecast-2013-part-1?source=email_macro_view&ifp=0 and at http://seekingalpha.com/article/1131861-using-common-sense-and-logic-to-forecast-2013-part-2

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