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 Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved. 1 This private letter tries to provide so mewhat objective research, not investment advice. The Next 6 months: Should be good -- unless panic returns. My econometric models, based on just a few simple macroeconomic measures, forecast a continuing stock market rebound of about 20% over the next 6 months. The prospect of financial system drama like we saw this summer and probable missteps by European governments and/or Congress make me think that 12% to 15% is a more realistic target for gains. A sharp immediate cutback in Government spending, however, could really throw a wrench in the works. I make no promises for the next half year, but I am optimistic. The models forecast a very high probability of at least breaking even. Volatility will be high with a 50/50 chance of having a temporary market price drop of 8% or more along the way. In a long slow slog, with a gigantic Wall of Worry, economic recovery here and abroad continues to creep forward. Business profits, almost unnoticed to many pundits, stay much stronger than the economy thanks to historically-low interest rates, now guaranteed for years ahead. Truth is, it’s hard for a business not to make money when borrowing is almost free. The split between world-wide economic fear and strong business profits led to stocks being priced well below fair market value over the summer. Despite the October recovery, according to the  Morningstar.Com Market Valuation Graph  stocks are still underpriced by 8%. There is plenty of room for valuations to rise. The Past 6 Months: Whoops. Last May I forecasted “a bumpy summer  for the stock market followed by a strong 12% gain by November. Wrong. Thanks in large measure to the why-do-you-shoot- yourselves-in-the-head antics of Republicans in Congress and the like-trying-to-herd-cats Europeans; the broad stock market was slammed by fear of complete economic collapse, just like 2008  2009. Even with a spectacular market rebound in October, the broad market (VAY) fell 7% rather than gaining 12% for the half-year as the models expected. Sorry about that. Market Valuation Measures Several measures see the stock market as significantly undervalued. Other indicators with very long-term perspectives say market is fairly value d or somewhat over-priced. I favor the undervalued argument for the next six months. Economic Indicators About 20% of economists expect a second round of recession and a good number fear at least pockets of economic collapse. The Economic Cycles Research Institute, not a view to ignore, is convinced that we are hitting another recession. But, not all Composite Leading Economic Indicators are glum. Business profits should continue to be high as debt costs are at the lowest relative levels in several hundred years and businesses already are lean. Trader Signals - Fast The tremendous stock market rebound during October makes the market look a bit overbought on a short term basis, but stocks have not yet reached previous highs. By the time you read this, these short term signals may give an entirely different picture. Trader Signals Slow Winter and spring tend to be kinder to the market than summer and fall. It looks like the famous “Halloween Indicator” kicked in early at the start of October. The long running “Second Great Contraction” will likely continue to play out as a decade long disappointment much like the 1930s.  International View Tough economic times and below-normal growth span most of the world. Growth estimates generally are below normal. Emerging economies will probably have faster growth than major developed nations . The greatest fears are for sovereign defaults, cascading financial collapse in Europe, and a hard landing in China. Econometric Models Most number crunchers, of which I am one, conclude that things are bad enough that they will likely get somewhat better over the next six months. ”Reversion to the mean” is working in our favor – times are tough so eventually they are likely to improve. Six-Month Stock Market Indicators October 30, 2011 Over 50 mid-term market timing guides that might be helpful Overview

TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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832019 TomT Stock Market Model October 30 2011

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