So Where Are We Now — Normal?

Maybe things have normalized.  After all:

  • Implied volatilities have fallen below long-run averages for equity indexes.
  • The equity market is within spitting distance of a new high.
  • The Fed is loosening (will they do more?)
  • The discount window is largely vacant.
  • Away from real estate, and real estate finance, things seem pretty chipper.
  • The yield curve is normalizing.
  • Inflation as measured by the government is low.
  • Long term interest rates are low, for investment grade borrowers.
  • Commercial paper problems are gone.
  • LBO debt difficulties will be solved soon, through a combination of losses to the banks, and canceled deals.

Or maybe not:

  • Inflation is rising globally.
  • The dollar is weak.
  • US inflation should start to rise as a result.
  • Housing prices are weak and getting weaker.  Default and delinquency statistics are rising.
  • The CDO [Collateralized Debt Obligation] problems are still not solved.
  • Defaults should begin to increase significantly on single-B and CCC-rated corporate debts in 2008.
  • The TED [Treasury-Eurodollar] spread is still in a panic-type range.

I’m seeing more of my stocks get closer to the upper end of my rebalancing range.  I will begin reducing exposure if the market run persists.  I’m not crazy about the market here, but I am not making any aggressive moves.