The bullish case is pretty well established right now and there is no sense repeating them but what may be ignored are these half-dozen. Nothing of course says that the market can?t keep going up over the near-term. risks, I list. Just as the onus was on the double-dippers last summer given the sentiment and market action, the onus now is clearly on the V-shaped enthusiasts.

We can expect a showdown between the House Republicans and the Administration over the debt ceiling in Q2. At stake could be a good dose of spending restraint as ?pay-go? rules make a sudden reappearance after being neglected by the lame-duckers last year. There is always the reality of the payroll tax cut coming to an end in December and how that will crimp personal income in 2011. Of course, there is always the prospect of a Q4 corporate spending binge as the bonus depreciation allowance expires. The last 3 quarters of 2011 are going to be very interesting

We got a flurry of U.S. data releases on 12/24 that, at the margin, added some comfort for the growth bulls. Initial jobless claims came in roughly as expected at 420k on a seasonally adjusted basis for the week of December 18, down 3k from the prior week. The 4-week moving average is at 426k and this time last year it was sitting at 479k, so the pace of firings has clearly receded sharply. The issue at this time is really one of hiring and going beyond part-time help.

1) In Barron?s look-ahead piece, not one strategist sees the prospect for a market decline. This is called group-think. 2) The weekly fund flow data from the ICI showed not only massive outflows, but in aggregate, retail investors withdrew a RECORD net $8.6 billion from bond funds during the week ended December 15. 3) Bullish sentiment has now reached a new high for the year and is now the highest since 2007 ? just ahead of the market slide.

Market sentiment is as overly optimistic now as it was pessimistic at the July-August lows. Eurozone fiscal deflationary shock. Anti-inflation policy restraint in emerging Asia. Widespread cutbacks at the state and local government level. Debt ceiling issue triggers major rounds of market volatility. Tax breaks that are temporary tend to have marginal economic impact with few multiplier impacts, hence GDP revisions will likely be to the downside post-Q1. Another downleg in home prices undercuts confidence and spending (with around two years? supply of total vacant inventory backlog).

The bond bears and equity bulls are placing much of their faith in the $858 billion tax package in the U.S. Most of this ?stimulus? only prevented the federal government from acting as a contractionary economic force in 2011. How much of the tax cuts will go into saving and imports remains to be seen. We think the ?stimulative? effects are over exaggerated. What we don?t see discussed that much are the spending cuts coming our way and these indeed will show up directly in GDP.

If there is a secular theme that transcends the U.S. business cycle it is agriculture. Farm incomes are rising sharply and all indications point in a similar upward direction in 2011 and likely beyond. This is another way, beyond going long mining excavation equipment and industrial commodities, to play the increasing demand for food, especially proteins, alongside the ever-rising standards of living in China, India and other emerging market economies.

Considering that China has now exceeded the United States for two years running in terms of motor vehicle sales, it is not 100% the case that the country is exclusively reliant on fixed investment and exports for its economic success. Inch by inch, the consumer is comprising an ever-greater share of GDP. China is also largely responsible for the extended bull market in resources.

Europe remains a clear downside risk for the global economic outlook with the problems spreading to Spain and Portugal. Contagion risks are being underestimated by Mr. Market who has been myopically focused on irresponsible fiscal expansion in the US and recent hopes that QE2 would morph into QE3. As some proof that the recent economic data flow are over-rated, and likely exaggerated by seasonal influences, the Fed barely raised its macro outlook and actually seemed to dampen its view of the housing sector.

Despite all the noise that the Democratic left is making, the tax bill is going to pass very soon. There is a tangible positive effect here from the tax bill and pertains to dividends. Under the deal, the top tax rate on dividends will stay at 15%. If most of the spasm in the bond market is behind us, one would have to think that a focus on dividend growth is going to have some payoff with the taxation uncertainty put to bed. The U.S. nonfarm nonfinancial corporate sector is sitting on $1.93 trillion of cash/equivalents, which is at a 51-year high representing 7.4% share of total assets.

I've been a secular bond bull and am not yet changing my view of the fixed-income market, but the perception that the economy will grow vigorously is now extremely strong. I think it will only grow about 2% next year and that core inflation will continue declining. These are the primary downside risks: 1. The U.S. Treasury market becomes unglued. 2. Further sharp increases in energy prices. 3. Renewed fiscal problems in Europe. 4. Bad inflation news out of emerging markets. 5. U.S. state & local cutbacks become more severe. 6. Latest down-leg in home prices accelerates.

Consensus views of 1,350 on the S&P 500 and 4% real GDP growth are far too high. In my view, real GDP growth in the U.S.A. is set to slow from around 3% in 2010 to 2% in 2011, or possibly even lower. This is not a double-dip but it is a slower growth profile. The fiscal and sovereign credit problems in Europe are not going away. The U.S. dollar is likely to strengthen, particularly versus the yen. Emerging markets will struggle as central banks move more forcefully to curb accelerating inflationary pressure.

It is extremely difficult to judge what part of the economic cycle we are really in. If you look at the unemployment rate, the workweek, the industry CAPU rate, the levels of consumer confidence, housing starts and sales, you would think we were still in a recession. But if you looked at profit margins and the ISM index, you would come to the conclusion that we were mid- or even late-cycle.

There wasn?t really that much ?new? information in the Obama announcement, except for the fact that the President ended up repealing everything he said he stood for during the election campaign, like reducing the extreme income bifurcation that was exacerbated during the Bush era. Then again, who is going to risk a renewed contraction in the economy and then take the blame? How can anyone take the U.S. seriously when the country fails to get enough votes over the weekend to bring the deficit reduction package recommended by the White House debt-reduction panel to the House and Senate floor.

The just-announced comprise tax measures along with the Fed?s pump-priming, have pretty well extinguished double-dip risks, notwithstanding the myriad of other headwinds. This amounts to a new stimulus measure. If the U.S. government opts for a series of fiscal measures that could end up adding as much as $750 billion to the existing large public debt burden, the fixed-income market is not exactly going to like it. Elsewhere, EU finance ministers ruled out an immediate aid package for Portugal or Spain (putting the onus on the ECB to restore calm).

This was arguably one of the worst employment reports of the year. It was fascinating to see what little negative market reaction there was to the data ? not just nonfarm payrolls but also the news that factory orders slipped 0.9% MoM in October, the steepest decline in five months. This is why everyone seems to believe the economy is improving and it?s so easy to do that when you simply ignore the bad data points! One of the key features of the payroll report was the continued retrenchment in the state/local government sector. This promises to be a major macro theme for 2011.

The recovery is obviously still so fragile that the Fed felt the need to expand its balance sheet by an additional 25% and policymakers in DC fear that the economy can slip back into recession if the Bush tax cuts and the 99-week emergency jobless benefit plan are not extended. Job market conditions have improved, but the reality is that the preponderance of the employment gains in the past six months has been in part-time positions. The tailwinds to US profits from accelerating global growth, not to mention a weak dollar, which has turned the corner, are about to become headwinds.

The Conference Board?s measure of U.S. consumer confidence report was all the rage in November with an above-consensus print of 54.1 from 49.9 in October and 48.6 in September. But, five of the nine major regions were actually down in November. In a possible sign that the GOP victory may have been at play, the West South Central region, which includes Texas, soared from 68.8 to 92.6 ? the fourth largest spike ever!

All these ?rescue? packages in euroland really do is provide bridge financing ? they do not resolve the underlying structural problems or the deflating asset values in bank balance sheets. The massive selloff in government bond markets, even in countries like Belgium and Italy (let alone Portugal and Spain), is a clear sign that the bond vigilantes are now targeting the supposedly stronger governments in the eurozone. The austerity packages needed to bring intractable deficits down will fuel deflation, which will further destabilize the financial system and damage the economy.

Among Rosenberg?s concerns: China undergoing a significant, though likely brief, economic adjustment by 2012; The contagion reaching Spain, which would likely be game over for the euro; A renewed deflation in home prices in the US; State and local government budgets ? the critical source of downside risk for the U.S. economy in 2011, which could easily result in 1.5-2.0 percentage points of withdrawal from GDP growth.

The dramatic fiscal tightening in Ireland and others is insane and I wonder how a new government in early 2011 is going to react. Everybody seems to believe the euro is sacrosanct, but this was also the view around the Argentina nearly a decade ago; it ultimately devalued in order to reflate and pay off its debts in debased currency. Some of these peripheral countries will leave the EU, go back to their own currency to reclaim control over their monetary policy and pay their debts in devalued punts, drachmas and pesetas.

The Q3 real GDP is better, but momentum has clearly waned. Based on the hits that the household sector will likely face in the early part of 2011, Q1 growth is likely to be disappointing. On a sequential basis, corporate profits are still clearly rising, but at a more moderate rate than before. Not only did housing starts get clobbered in October, but existing home sales fell unexpectedly as well. Retailers are anticipating a solid holiday shopping season, and yet, they are aggressively marking down their prices well in advance.

Still-high levels of mortgage delinquency rates are a vivid sign that household financial strains have hardly abated. The NY and Cleveland Fed?s published reports outlining the severity of the deleveraging cycle that?s in full swing. The Fed?s yet again going to take a knife to its growth and inflation forecast as it has done with regularity over the past eight months. Corporate profits have come in fine despite one of the weakest recoveries on record, but to some extent, much of this has already been priced in.

The world's economic environment is extremely fragile. The growth bulls are underestimating the fact that the fiscal disarray at state and local governments is a major headwind for the U.S. economy --state and local governments are the second largest contributor to spending outside of the American consumer. There is still scant evidence of a vibrant organic recovery. At least initially, the reversal of all the risk-on trends in the markets suggests that the pullback that became apparent after the peak in April is likely to be sustained over the intermediate term.

Despite mixed indicators, it looks like real GDP is chugging along at a tepid though still above-water annual rate of between 1% and 2% at an annual rate. The fragility is what is important. Gold still looks very good in this uncertain and unstable environment.

State and local governments in the US are in a state of disarray and the need to cut spending to close massive fiscal gaps are simply acute. Companies, like Cisco, that sell into this part of the economy ? the lower levels of government represent 13% of the economy, which is the largest contributor outside of the consumer and double the relative share of capital spending ? are extremely vulnerable. Gasoline prices are up $.26 from a year ago. The core measure of consumer inflation in the U.S. has now been flat-to-slightly negative for three months in a row ? a feat last seen in the 1960s.

The S&P 500 has been locked in a rough 1,000-1,200 range now for 14 months. Most pundits still believe we are in a cyclical bull market but that is not the case ? it has been a sideways market now for over a year. Moreover, after testing support in July, the market hit resistance levels in November, so it would seem logical to expect the index to make a run at the low end of the range. The only question is whether support will hold up once again.

Spasms don't throw secular trends away. The bond market is going through a corrective phase right now. The sharp selloff in the municipal bond market is an over-reaction to default risks - there is a lot of supply coming onto the market and the end to Build America Bonds is looming. We have been advocating relatively low weightings in the equity market, but certainly not a zero exposure despite our cautious outlook. Our exposure is running between 20-25 percent with a barbell approach - income equity on one side, balanced by raw materials on the other.

So, when you do the simple math, Joe Sixpack sees inflation at 3% in the coming year (from 1% now) and then averaging 2% in the next four years. Depending on how food and fuels play out, this could well be consistent with a zero or even sub-zero environment as far as core consumer price trends are concerned. This is why long Treasuries are likely to remain in a secular bull market for some time to come.

The overwhelming consensus view is that the market will continue to rise through year-end and into 2011. The trend in most asset classes that had been rallying the past three months are now reaching an exhaustive phase. I?m a little nervous about changing our view at the high end of the range on equities. The problem with the U.S. fiscal outlook is that the intractable U.S. debt and deficit situation cannot be solved by cutting government spending alone. Taxes, that evil five-letter word, will have to rise in the future.

Oil is now challenging the $90/bbl threshold and this is more a reflection of the Fed?s quest to weaken the dollar than any incipient global economic boom. As in the case of most other commodities, the Fed has unleashed the floodgates of investor speculation on the commodity complex. How can this possibly be constructive for the 90% of the U.S. earnings outlook that is not hooked to the basic commodity sector? We don?t see where this is addressed anywhere in ?Street? research. The economy is much more vulnerable to an energy shock now than it was in 2007.

Yesterday?s manic performance in many asset classes may well have been a watershed event. The U.S. dollar reversed course and rallied and all the program trading risk-on trades are correlated with the greenback. It could well be that some folks are beginning to pay more attention to what is happening in Europe where sovereign default risks and bond spreads within the periphery are blowing out again.

Nobody thought a year ago that things would have weakened to such an extent that we would have needed QE2 or the extension of Bush tax cuts. The Fed is doing $600bln in quantitative easing, which is about one-third what it did last year. I?m not convinced that it alone will prevent the economy from weakening, even if contraction risks have abated. Now what will it take to turn me more positive? Well, a sustained job creation for one and if we can get initial jobless claims down to 400k that would be huge. But I have to admit, QE2 does not do it for me.

In the Fed?s latest QE quest, by targeting the front- and mid-part of the U.S. Treasury curve, it is only really influencing yields that were already at microscopic levels before anything was even announced. It is hard to figure out what a 0.3% yield on the 2-year T-note or a sub 1 % yield on the 5-year T-note is really going to accomplish as far a spending stimulus is concerned. The Fed?s action seems to have unleashed a wave of speculative trading activity in risk assets ? from stocks, to commodities, to emerging markets

Quantitative easing is no antidote for structural economic problems, even if it manages to give investors a short-term sugar high. Let's learn from the Japanese QE experiment. The day the Bank of Japan launched the program on March 19, 2001, the Nikkei surged 7.5 percent, from 12,190 to 13,103. Three months later, as it became painfully obvious that the real economy was not responding well to the shock therapy, the Nikkei index slid 16 percent to just over 12,000.

While the Fed could have done more yesterday, it didn't because the economy is doing better than expected, even if it is still quite fragile. Auto sales, for example, rose to 12.3 million at an annual rate in October from 11.8 million in September (best result since August 2009). However, recall that motor vehicle sales also jumped 2.4 percent in September and all that translated into was a +0.08 percent inch-up in total real consumer spending, which was one of the weakest months of the year. Consumer spending excluding auto will now be essential to watch.

We are definitely in an abnormal economic environment. We just came off a 2 percent real GDP growth performance in a quarter - the fifth in this nascent recovery - where the economy is usually humming along at a 4.3 percent clip and on a lot less government stimulus. Make no bones about it, heading into year two of the post-recession recovery, the pace of activity is usually accelerating, and doing so at a 5 percent rate. The Federal Reserve with its continued monetary expansion just may well see something in the economic outlook that has yet to fully register with Mr. Market.

After Tuesday's elections, there is little question that the GOP will take the House with a 1994-type landslide. Once in control, the GOP will not support more fiscal initiatives. We are therefore likely about to see a pronounced slowdown in the pace of economic activity; outside of government intervention and inventory accumulation, catalysts for growth are few and far between. Unlike during the soft patches of the mid-1980s and mid-1990s, the economy today is just a shock away from slipping back into contraction mode.

At 60 basis points above zero, real final sales are just a shock away from double-dipping - a shock like looming tax hikes, accelerating fiscal cutbacks at the state or local government level or the millions about to fall off the extended jobless benefit rolls at the end of November. The double-dip has been delayed but not derailed, despite widespread cries from the economic elite to the opposite. The economic recovery is extremely fragile and unless we get an improvement in real final sales, all it would take is a modest inventory drawdown to pull real GDP back into contraction mode.

There are two basic components to GDP: inventories and real final sales. The run-rate on real final sales is 0.9 percent, by far the weakest 'post-recession' recovery ever recorded. And we know with reasonable certainty that we will face a negative fiscal shock in 2011 that will drain at least 1.5 percentage points from the underlying trend in GDP. So arithmetically, there is a strong chance that the economy will contract next year, barring some exogenous positive development that can act as an antidote.

Consumer confidence came in at 50.2 in October versus the 49.9 expected. Of course, the media types were hyping up the number as another reason to load up on equities. Let's get a grip. In periods of economic expansion, consumer confidence averages 100.3 on the nose. For all the rejoicing, today's level is half what is normal for an economy supposedly out of recession, and in recessions, consumer confidence averages 72.9. We are 22 points south of the level that historically typified economic contractions. Yikes!

After adjusting the Conference Board's Leading Economic Indicators to include 'real economy' statistics only, the indicators have fallen four months in a row, suggesting that real GDP could slow meaningfully into this quarter and early next year (we currently expected Q4 real GDP to be sub-1 percent). Not only that, but the coincident-to-lagging indicator fell 0.4 percent month-over-month in September, the third decline in as many months, which also points to weaker growth ahead.

The equity market has now managed to climb three weeks in a row despite the fact that the U.S. dollar has done likewise in a classic countertrend rally from oversold conditions. Almost one-third of the S&P 500 universe has reported, and the year-over-year earnings growth rate is now running at plus-28 percent from plus-24 percent last week. Fully 83 percent of the companies have beaten their bottom-line estimate, which is far above the historical norm of 62 percent; although barely over 60 percent are bettering their revenue estimates, which is below average.

The U.S. economy may in fact be contracting again. The monthly data from Macroeconomic Advisers showed that real GDP contracted 0.6 percent in August. While this did follow a red-hot +1.25 percent gain in July, this marks the third decline in real activity in the past four months. Maybe the bond market does not need the Fed's help after all ? the super-soft economic environment is all the Treasury bond market really needs to sustain the downward trend in yields.

The U.S. economy is caught in a classic liquidity trap. With additional fiscal stimulus no longer a viable political option, even though the government is better equipped to deal with many of the structural hurdles to growth than monetary policy, Mr. Bernanke clearly feels that the Fed is the only game in town. Monetary policy, even in a non-conventional form, is a very blunt tool to use to reverse a secular uptrend in the savings rate, fix chronic unemployment or induce people to spend rather than correct their debt-laden balance sheets.

Despite a speculative equity market binge, a weakening U.S. dollar, an economy that seemingly avoided a double-dip recession last quarter and a renewed boom in commodity prices, what continues to prove elusive in this so-called recovery is pricing power in the broad retail sector. The headline rate of inflation sits at 1.1 percent today. The core inflation rate, proven to be the key driver for bond yields, is now running at a mere 0.8 percent year-over-year rate, the lowest level since March 1961.

So who's buying equities right now? Good question. We know it's not the retail investor and private clients - they have been selling into this entire bear market rally and rebalancing their asset mix in favor of income. It's not the mutual funds, because institutional private managers already have cycle-low cash ratios. There would seem to be three principal buyers right now: pension funds struggling to reach their 8 percent assumed annual returns, hedge funds, and the proprietary trading desks at big commercial banks.

The consensus is still expecting U.S. operating earnings per share growth of $95-plus in 2011, but at a time when profit margins are at a cycle high, not a trough. Judging from past performance at cycle highs, however, it may be more prudent to be valuing the equity market at $75 EPS growth, rather than $95. Slap on an appropriate multiple and you can see why an underweight position in equities still makes sense, speculative fervor sparked by quantitative easing notwithstanding.

Gold could be the only asset class that makes sense right now. If the bond market is right, then we will get deflation, and gold is a hedge against the uncertainty such an environment would entail. If the equity market is right, then we will get gobs of liquidity out of the Fed and then go off to a new reflationary credit cycle - gold would benefit in this scenario, too. And if the commodity complex is right, then we are heading towards a new inflationary cycle, and of course gold is a classic way to play this scenario.

Considering that policy rates are at zero, the Fed's balance sheet has tripled in size (with more to come), and a 10 percent deficit-to-GDP ratio that would have even made FDR blush, the unemployment situation is an unmitigated disaster that deserves the government's undivided attention. The question that has to be asked - and answered - is why the equity market would be rejoicing over today's somber piece of economic news.