Friday, December 15, 2006

A Bull v. Bear Debate

Here's an interesting little back-and-forth from last night's show...

KUDLOW: I want to go to my buddy Herb Greenberg. Herb, I would say, except for possibly Dougy Kass, you have been the most pessimistic person to come on our program, and, of course, the market has gone up, up and away. What is your current thought about this market rally, which seems to have legs, it seems to have muscles, it seems to have sinews, and it seems to say that things are going to be just fine in the American economy and American wealth creation?

HERB GREENBERG: Larry, there's an old saying, "Don't argue with a crazy person." I'll add to that, and I'll say don't argue with a crazy market, and this market is still, I believe, and I know Dougy believes, in a speculative blow-off phase and if you look even at Jeff Saut's recent commentary, where he said it's an unnatural market, an unnatural market because he said there just hasn't been any correction in this latest, you know, phase, where it's going straight up.

KUDLOW: Well, Noah, look, what do you hear? I'm listening to these adjectives: speculative, unnatural. This is, you know, a family show, and I'm glad you didn't go deeper than that. Noah, can you set him straight from up there in Canada?

NOAH BLACKSTEIN: You know, I don't understand how Herb gets the moniker realist. I mean, it assumes that all of us who are optimists are deluded, suffering from a mental disorder, and something is wrong with us. I don't see it. You know, a speculative blow-off, you know.

The P/E multiple on the S&P 500 is lower now than when we started this bull market. Profits have risen much quicker than this market has risen. And really, you could argue over the last year and a half the market's been capped by the Federal Reserve really sitting on the throat of liquidity over the last little while. With the Fed pulling back here, there's a lot of room for P/E multiples to expand.

The market is discounting too much inflation and too aggressive a Fed, and so I think there is more upside. I don't see anything that would indicate this is a rampant speculative market like the late 1990s. In fact, valuations are low.