Lots to Fret About, Yet Stock Prices Continue Rising   

• Investors still have lots to fret about, Euro sovereign debt, a possible bursting of the China bubble, and financial reform/moral outrage at Goldman yet stock prices at least in the US and Asia ex-China remain buoyant.
• There is plenty of moral outrage about what is perceived as Wall Street's buccaneering ways. But while moral outrage may work in religion and politics, it had no role in stock prices, because stock prices are amoral.  Stock prices rise when there is blood running in the streets from wars or political conflict. A good recent example is Thailand, where stocks remain buoyant despite the political impasse that has already spilt Thai blood. Rather than morality, stock prices are driven by fear and greed. Thus stock prices reflect things (including the human condition) as they are, not as they ought to be.
  
• Things as they are in Euroland are a fiscal mess, and while investors would probably like to forget that they believed only a couple of years ago that the Euro was destined to replace the USD in trade and central government forex reserves, it is just as probable that the Euro and perhaps even Euroland political union may not survive this. Emerging market sovereign debt however has barely been affected by this crisis, while gold is stuck in a fairly well defined trading range.
  
• In China, efforts to cool an overheated property market are working, but not on the intended market. Instead, efforts to cool the property market are deflating stock prices, not only of the Shanghai exchange, but of Japanese stocks with high China exposure. But China looks like Japan circa the 1970s, i.e., in the initial stages of a major secular expansion in property prices, stock prices and the yuan. If Japan's experience is any measure, government efforts to clamp down will from time to time cause relatively shallow pull-backs, but not derail the secular move. Thus copper remains good to go as a barometer of continued upward revisions in global economic growth.
• Japanese stocks as a whole are benefitting from Euroland outflows, as European investors continue to be the largest regional block of net buyers of Japanese equities. The better Japanese alpha is in small cap names, although JASDAQ historically has been a poor proxy for small cap outperformance, at least since early 2000.
  

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