The Pope is gone, the Queen is ill, Hugo Chavez is dead.  (Unofficially, but quite dead nonetheless, I’m told, for some days now.)  China is in a real estate bubble whose bursting could cause global upset.  (Did you see last night’s 60 Minutes?).  And here in the U.S., the Tea Party Republicans seem hell-bent on cuts that would out-Hoover Hoover, driving us back into recession, increasing the deficit, and blocking investments that would modernize our infrastructure and enhance our prosperity.

Meanwhile, the stock market is at record levels.

From Chris Brown’s latest monthly letter:

I continue to see, both anecdotally and statistically, extreme optimism for the stock market. One wildcard which didn’t occur to me until early February is that the last time there was a capital gains tax hike was 1987. Investors sold much more stock than usual in late 1986 (as evidenced by capital gains tax receipts), and as soon as 1987 began, the market gapped higher and rallied sharply for several months, with fewer natural sellers. There was extreme optimism in February of 1987, and the market just rallied higher anyway. That could be the case again in 2013. Of course, the 1987 rally, massive as it was, was lost entirely in the course of the October crash. If the market reaches a point of extreme optimism, and then rallies further, that entire subsequent rally is often suddenly given back.

In 1999, the average Joe became fluent enough with the bull thesis to explain to you why economic growth and demographic changes implied a revaluation higher for equities. In 2007, he could explain the “Goldilocks” economy and that “subprime is contained.” A lot of people whose job does not involve the stock market have expressed views to me lately that with bond prices high and interest rates low, stocks are really “the only place to put your money.” It’s sound enough reasoning, but it’s getting very popular and quite stale. I wouldn’t bet the farm on it.

That is not to say that we have given up on finding good stocks; we are always looking for advantageous trades and new longer-term positions, but we are going to continue to be cautious in the current environment. Today is a better day to find a few morsels of spilled grain under the refrigerator than to go for the chocolate chip resting on the mouse trap.

Chocolate chip cookies!  Tomorrow, a few words on food.



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