Stock Market Run-up ---Set-up for a Fall

Do not be fooled by how long insolvent organizations can perpetuate the poor capital allocation and spending decisions that created their insolvency.

The euro is not that different from Enron, WorldCom or the Madoff fund.

All of these organizations were able to pretend they were profitable or solvent long after they were insolvent.

The euro has the distinct advantage of support from central banks around the world, but printing money, does not create solvency. It only delays the inevitable, albeit for a bit longer than accounting manipulation and ponzi schemes delay their inevitable implosion.

Investors should brace themselves and their portfolios for a big market decline now. The shell game in Europe is ending and markets are yet to discount the structural decline in the productivity of economies around the world. These declines result from large-scale mis-allocation of capital over the past several years and in the present.

Whenever a general market decline is on the horizon, the best protection is shorting super expensive stocks with little underlying economic value. In other words, the stocks that will fall the hardest are those whose economic earnings are already too weak to support over-extended valuations.

the current valuation of the S&P 500 (at 1,248) implies just 9% compounded annual growth for 20 years. However, the S&P, actually generates significant profits with an ROIC of over 20%, making it economically profitable. The companies above are not currently profitable, which makes market expectations for future profit growth that much more difficult to meet.