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Stocks Still Over-Valued

 For at least six months we have been warning risk, as measured by our comprehensive credit model, has been increasing, despite better than expected earnings. Risk always holds the trump card.

As you know, we focus on operating cash flow and free cash flow, the former to which we make some serious adjustments to present a normalized and accurate reflection of the financial health of the entity.

The increase to our model based on the happenings in the EU is obvious, but less so have been increases in risk (which represents the rate at which we discount future free cash flows) based on other factors. These have shown a steady increase over the past several months on such items as cost of sales volatility (ex. depreciation), cash tax volatility versus the effective rate, foreign health care costs, cash pension costs, among other items. For individual firms, our credit model points to some serious flaws for some well-known firms, especially on the expense side.

The S&P, given the recent pull-back, is now 3% over-valued, although our portfolio, is at 31% undervaluation.

Disclosure: No Positions