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It has been only two months since we last published our “Histographs” covering stock market P/E’s, dividend yields and book value ratios. But, 1987 estimates are now included and of course, the stock market has made a big move. It is time for an update.

No, we do not expect to see inflation over 3% by the end of 1987 or even in 1988. Actually, deflation seems more probable. But from the bond and stock market investors’ standpoint in coming months, inflation perceptions are expected to become more important than reality.

Self-examination is always good for the soul, so each year, time is taken to look back over the preceding year or so, critically reviewing the significant studies, portfolio shifts and recommendations appearing in this publication. Including where we were right....and where we were wrong.

Each year, along about February, this publication makes a series of “Fearless Forecasts,” frivolous flights of foolishness and fantasy that sometimes come remarkably close to reality.

A raging stock market, two Interim Memos in a single month, the Major Trend Index jumping up and down like a short-term trading tool, January was quite a month around here.

In January, our Major Trend Index, employed to assess the overall health of the stock market, has jumped around like some short-term oscillator.

Even after the excitement of early January, it still looks like a major cyclical bull market top is in progress.

1986 full year and final quarter performance for the major sectors the Leuthold Group regularly tracks, as well as some other areas of interest we are monitoring.

Current estimates are that only about 30% of the professional managers beat the S&P 500 this year, with its 18.4% total return. The DJIA produced a total return gain of 26.9%.... I wonder how many beat that?

Historically, have tax cuts been a stock market positive? Have tax increases been a negative? What impact do changes in the tax rate have on prevailing market P/E multiples? The answers to these questions may surprise some of our readers.

In this business, it is often best to conveniently forget what was said in the past. But unfortunately, when the opinions are written down and published, this does not always work. At any rate, this publication has a sometimes embarrassing commitment to full disclosure. So again, we will include our old (1986) crystal ball gazing right along with this year’s predictions.

The bond market traded in a narrow range in December, but did show some spark in the first days of the new year. For most of December, it looked like the bond players took an extended vacation.

Happy Holidays……Japan International Banking……Remember, patience is a virtue if you want to buy a farm.

Having been a super bull on the bond market since 1981, this publication has turned more cautious. A number of readers have asked for details and elaboration. Today we still view the bond market trend as up, but think a sharp decline might occur sometime in 1987, with T-bond yields rising by as much as 300 basis points.

The Major Trend Index deteriorated some and remains negative, as it has since mid-June. Major cyclical bull market top in progress. Shorter term work (Early Warning Index) rendered a “sell” signal on Nov. 21, after giving a “buy” signal on Sept. 15. The Bears may have Christmas.

For the most part, the market’s leading and lagging sectors were a continuation of October’s trends. Quality Growth did well, while deep cyclicals, inflation sensitive issues and financials lagged. Again, we suspect the derivatives had some impact, as big capitalization, heavy weight growth issues typically performed well.

We may have to wait for a while to see the next major cyclical surge in the secular bull market born in 1974, but when it gets underway we think the Technology sector will probably lead.

We continue to believe the Japanese Oil Patch invasion will develop and the sector continues to look oversold and cheap, with most institutions significantly underweighted. Larry Jeddeloh spent part of November on the west coast, combining a research trip with some client visits. Here are his observations.

Today’s normalized P/E multiple is close to the high quartile, with dividend yields in the low decile and book value ratios close to their high decile. The cash flow ratio is about at its historical median, but other benchmarks demonstrate the stock market’s potential downside vulnerability.