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Pricey bear market


The recent equity collapse may well mark the end of the bear market. But I doubt it. Sure, there is a strong equity rally from oversold levels out there somewhere. And improving corporate and macro news will at some point drive it. But there are powerful opposing forces. Wealth destruction in equity markets, a plummeting dollar and rising risk aversion in debt capital markets will damage the global economy.

New economy productivity is real enough and the benefits are now accruing to profits instead of labour. With about 75% of US S&P500 companies having reported Q2 earnings, profits are up about 9% on Q2 2001. Most US corporations remain pure, productive and profitable. And the quality of profits is going to get a lot better now that the S&P profit bubble has been eliminated. In future, profit growth will be more pedestrian and in line with GDP but the market will learn to trust the numbers.

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