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<< Return to Part II

My last comment dates from December 7. We were at S&P 1257, with the euro-dollar December futures at 1.341. To quote:

“Given the current earnings yield of some 8%, my target of S&P 1600 is on the horizon; the question is when. I originally thought 2014. The political agenda may make it happen sooner.”

Nothing much has changed in my opinion. Political stability is slowly getting back to our shores, and the dollar remains its best champion. Much to the chagrin of perma bears, Europe did not experience a liquidity crisis, because of its collective vested interest of survival (here).

For sure, Europe did shrug and there are a slew of new actors on the scene. Good for them. We may be averting a return of the Darth Vaders and other Teutonic Knights. The old recipe worked painlessly, in retrospect: Guarantee, nationalize, monetize. With China humming along, and housing reviving in the U.S. (it’s about time, see my July 6, 2011 article here), the employment needle may be starting to move beyond seasonal adjustments.

The one thing that has not changed is the level of excess reserves held by banks at the Fed. As of January 11, they amounted to $1.52 trillion, compared to $94 billion in required reserves – see here. Hence, with the outlook for the economy and credit stabilizing, I continue to believe this excess liquidity will find its way in both. This is my main rational for S&P 1600, as I expect a major P/E expansion wave. How do you think we got to 1300 in the first place? There is a bit of resistance here, but I would not hold my breath.

Click to enlarge charts

I’ll start to worry when the multiplier revives. Then, the Fed may be tempted to withdraw some of the liquidity splurge that started in late 2008. But by the same token it took some three years to finally address the problem globally, and this ain’t gonna happen tomorrow. If you don’t believe me, just look at what Bernanke said – 2014, unless things substantially improves. I read this as a win-win jawboning 101. Thank you, John Galt.

For the record, this was written on January 18 at 11:30 EST, with the S&P at 1301 and the euro-dollar March futures at 1.282.

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Source: S&P Target 1600: Europe Shrugged, Not Atlas (Part III)