Latest note at Seeking Alpha discussing my latest look at S&P 500 earnings and broad market outlook as compared to current estimates of future earnings:

• 93% of companies in the S&P 500 have reported earnings with current TTM As Reported EPS (AREPS) at $87.66, reflecting a decline of 2.4% on an inflation adjusted basis; peak cycle earnings on an inflation adjusted basis remain at $89.97 set in February of 2012.
• 10-year Cyclically Adjusted Price-to-Earning (CAPE) based on recent S&P 500 prices stands at 24.0X compared to 21.8X a year ago; multiple expansion driven by a year-over-year price index increase of 17.6%, offset by 9% growth in CAPE earnings.
• Forward earnings expectations reflect outsized growth of 25.5% and 22.9% on a nominal and real basis, respectively; this is in stark contrast to the recent deceleration of recent earnings relative to its 10-year trend.
• Aggressive monetary policy remains the major catalyst supporting a constructive outlook on the equity markets and likely already discounted based on elevated valuations.
• Recent earnings trends, questionable economic data, and imbalances in the financial and economic landscape suggest current growth expectations will not be met and risks remain to the down side.
• Despite recent strength in defensive sectors, investors should be selective and focus on higher quality names with long track records of dividend and earnings growth through entire business cycles

For the complete article please follow the link.

From Wikipedia:

In modern psychology, cognitive dissonance is the feeling of discomfort when simultaneously holding two or more conflicting cognitions: ideas, beliefs, values or emotional reactions. In a state of dissonance, people may sometimes feel “disequilibrium”: frustration, hunger, dread, guilt, anger, embarrassment, anxiety, etc.

Now how about these headlines appearing today on popular financial news sites:

Cyprus is euro zone’s very own Lehman moment

Buy ‘Still Cheap’ US Stocks, Ignore Cyprus: Pro

If that doesn’t create dissonance I don’t know what will. From “The Psychology of Investing” by John Nofsinger

Investors seek to reduce psychological pain by adjusting their beliefs about the success of past investment choices.  For example, at one point in time, an investor will make a decision to purchase a mutual fund.  Over time, performance information about the fund will either validate or put into question the wisdom of picking that mutual fund.  To reduce cognitive dissonance, the investor’s brain will filter out or reduce the negative information and fixate on the positive information….

I bring this up because depending on what market valuation tools an investor could argue that today’s stock market is undervalued (Fed Model) or overvalued (Shiller PE10).  Likely depending on your “ideas, beliefs, values” you are likely to focus on one or the other.  From John Hussman and his weekly note sums it up:

“No market condition is permanent, and even the late-1990’s advance included periods where favorable trend-following measures were not joined by hostile syndromes of overbought, overbullish conditions. If you believe that stocks will continue to advance in the months and years ahead, with no intervening bear market decline, those instances are the main points where “don’t fight the trend” might outweigh negative return/risk considerations more generally. For longer-term investors, consider the prospective return you can expect to achieve over time if you are buying, and that you can expect to forego if you are selling. Compare this with your tolerance for volatility, missed short-term returns, and deep interim losses. All of this is what I know and believe. It’s fine to believe something else. But please – insist on supporting evidence and long-term data. The Tinker Bell approach just won’t cut it.“

And that Tinker Bell approach is created in my opinion by the cognitive dissonance just discussed.  How you consider Cyprus might be telling of your own view? I focus on Shiller PE10 and believe this is the most pragmatic way to approach investing given that the business cycle exists and there will always be ups and downs.  I believe Cyprus is a risk but it hasn’t changed my investment strategy nor should it change yours.  Your strategy should be able to coexist with such issues otherwise investment returns will likely be negatively impacted.

Looking at the global economy – the last peak was set in early 2011 based on global PMI manufacturing data. Not surprisingly, the typically late-cycle S&P 500 Material Sector (XLB) has underperformed relative to the broader S&P 500 index (SPY). However, since last fall it looks as though the bottom is being put in and therefore it is time to look under the hood for potential investment opportunities.

Continued (Seeking Alpha link) …

Most investors are surely now considering that the housing market has entered into a long-term recovery mode. The reality is that the U.S. housing market is one of the bright spots when looking at sources of global economic growth.

Therefore it is no surprise to see companies tied to the housing market do well in the equity markets. These often become story stocks that are bought as ways to benefit from certain trends such as the aforementioned housing market recovery. It is questionable how much attention is actually paid towards valuation or fundamentals in these situations. In our universe of companies that fall into the “high quality” realm as rated by Standard & Poor’s – Sherwin-Williams (SHW) is one of those companies.

Continued ….