Many years of real-time market experience does not make one clairvoyant, sadly. It can however lend some valuable perspective. Call it realism, call it wisdom; some have it sooner, some come to it later, some just never will.

There is so much excitement today about the momentum in stock prices. Those looking to think clearly must take care. Six months ago our firm were one of few optimists. As markets hit 12 year lows over a 17 month decline, in February-March we were seeing some of the best valuations that we had seen in several years. Not that stocks were "cheap" or high yielding, but relative to several years of uber-expensive, stocks were starting to look relatively attractive.

Fast forward six months and market sentiment has changed 180 degrees. Risk assets around the world are exploding (once again) fuelled with the liquidity of "free" money from government intervention. We can see this pretty much everywhere that we look in the world. The Russian stock market is up 99% year to date, China is up more than 100%. (although these markets are still down heavily from their cycle peak); all dramatic shock and awe. But this is where the plot thickens.

The gains off the March lows have not been fuelled by organic revenue and earnings expansion but rather by an expansion of the multiple buyers are willing to pay for anticipated future earnings. Experience tells us that eventually the present valuation imbalance that we are seeing today will be corrected either by an actual and dramatic increase in corporate revenue and earnings, or by a decrease in stock prices.

Longer term, we see a pick up in revenue albeit at a modest pace as a reasonable probability. But in the more immediate term we measure that stocks today are over-bought and over-priced. Sentiment has gone from depressed to manic euphoria in a matter of 6 months. This is not typically the way lasting bull cycles begin. Real economic recoveries begin gradually and build over time with the stock market climbing a wall or worry as it goes...   more »