Bears Locate a Template for a Crash

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"History repeats itself, first as tragedy, second as farce."

-- Karl Marx

In order to understand the possible future course of equity prices, it is helpful to call upon history.

Today's opening missive asks two questions: Are the conditions underlying the strong market advance over the last year similar to any other time in history? If there is a historical precedent to today's market conditions and prices, what could this portend for 2007?

Based on the recent (2006-07) trends in domestic equities, emerging market equities, interest rates and volatility indices, there appears to be a clear parallel to a past period. Specifically, these four factors leading to the present seem best compared to January 1994.

Although equities are hitting record levels (the S&P Index has climbed in 12 of the last 13 months) and everything is coming up booyahs as disbelief has been virtually suspended, should the market relationships hold to the pattern of the first quarter of 1994 in the first quarter of this year, the investment implications should be worrisome.

Strong parallels exist between today and the markets 13 years ago in 1994.

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