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Boeckh Investment Letter

Investment and economic commentary by J.Anthony Boeckh and Robert Boeckh

Are Equities Too Expensive for a New Secular Bull Market?

This report is a follow-up to our Special Report, dated January 17, 2011, “Why the Secular Bears are Wrong.” For a variety of reasons discussed in that report, we argued that investors should at least examine the possibility that we are in a secular bull market. We pointed out then that at the beginning of secular bull markets, the macroeconomic conditions (and frequently geopolitical as well) are always frightening. Fundamental pessimism among the most credible gurus is widespread. It is never possible to “prove” that a secular bull market has begun when it is still in its early stages. In fact, it is much easier to assert the opposite.

If it is true that we are in a secular bull market, investors should still act with appropriate care as there would still be enormous volatility and cyclical swings. However, it would imply that the March 2009 low in the S&P marked the end of the bear market that started in early 2000. It would also imply that future sell-offs would hold well above that low and the market should move in a pattern of ascending lows and highs over time.

A number of subscribers, responding to our previous Special Report have pointed out that a secular bull market has never started with equity valuations as high as they are currently. That is true. Over the past 120 years there have been five clearly defined secular bull markets, beginning in 1888, 1921, 1932-1933 and 1982. Each began with a P/E ratio well below current levels. This raises a key question: does the current equity valuation level preclude a secular bull market from developing?

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