From: Justin X Gratz To: Undisclosed recipients:; Subject: Eye on the Market, April 27, 2010 Date: Tue, 27 Apr 2010 18:17:02 +0000 Attachments: 4-27-10_ EOTM_-_Cynics.pdf Inline-Images: image001.png; image002.png; image004.jpg; image007.png; image008.png; image013.jpg Eye on the Market, April 27, 2010 (the attached PDF of this email is much easier to read) Topics: Fundamentals vs speculation; Greece, unraveling; investing in commodities and the tech upgrade cycle The hardest part of this investment cycle will be determining when asset prices move past fundamentals into speculation. So far, improvements in global profits and manufacturing/services appear to justify modest gains in equities (the MSCI World's total return index is up 6% this year). As shown last week, our profit and margin models suggest another quarter or two of 30%+ y/y profits growth in the U.S., and the OECD leading indicator is as high as its been in 30 years. Recent positive reports include U.S. durable goods, Chinese GDP growth, and improvements in Federal, State and local tax receipts from individuals. Treasury estimates of TARP costs continue to decline, with losses mostly related to AIG and automakers. U.S. corporate profits: model vs actual % cttangtVoY 40% 30% 20% 10% 0% •10% -20% -30% 1993 1905 Model forecast (dotted) Actual (solid) 032010: 38.1% 042009:30.6% 1997 1999 2001 2003 2005 2007 2009 OECD global leading indicator Index, amplitude adjusted 108 104 100 96 92 68 aa . 19611111969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 P rr But there are concerns about the real cost of money being set so close to zero, which makes it harder to distinguish between well-founded and reckless risk-taking. Jeremy Grantham (and others) have highlighted investor dynamics that the Fed and other central banks may be fostering. For the third time in a decade, investors are encouraged to bid up asset prices, believing that the cost of money/return on savin