In his latest dispatch, David Rosenberg, chief economist at Gluskin Sheff, says no one should feel guilty taking profits in a market trading at 130x trailing earnings:

“Boy, with all that good news – Case-Shiller, housing sales, durable orders, consumer confidence, Bernanke (!) – one would have thought that we could do better than 2.6 points on the S&P 500 in the last two days. It could well be that the buying momentum is subsiding. Indeed, over 50% later, it would make perfect sense for the market, which investors were buying on rumours five months ago, to begin to sell on facts; nothing wrong with taking profits in a market trading at 130x trailing reported earnings. Moreover, sentiment is a clear obstacle here with Investors Intelligence flagging a 51.6% bullish chorus with just 19.8% of respondents in the bear camp – like Tuesday’s bull-bear ratio in the August consumer confidence report, we haven’t seen market sentiment this smug since the autumn of 2007 (right before the fall). Is that all there is? Despite the good news the S&P 500 is up only 2.6 points

“The real enemy for the equity market is Mr. Bond – that pesky Treasury market that just won’t sell off and validate the great reflation trade. Indeed, if we were seeing a real asset allocation move on the part of investors, as opposed to massive and ongoing short covering, then the 10-year Treasury note yield would be trading close to 5.0% – especially with these freshly minted Obama debt forecasts. But instead, the 10-year note is now getting perilously close to the July 10 low of 3.32%. Keep in mind that July 10 was the day when Meredith Whitney gave the green light to Goldman, and Roubini declared the recession to be ending, and what a spark that provided to this last leg of the bear market rally. Now what if Doug Kass’ declaration yesterday that the major averages have hit their highs for the year proves as prescient in the other direction? Come on, not only is the market trading at a nutty 130x multiple, but September-October is right around the corner (as is H1N1).”

Subscriber Peter Montgomery, editor of   Pot o’ Gold,  thinks the Fed is paying top dollar for mortgage paper that many investors wouldn’t touch:

“What I find extremely interesting is the timing of quantitative easing relative to rally this summer. Market commentator Bill King notes that since June, the Fed has only twice purchased Mortgage Backed Securities (MBS). The first time was options expiry week in July for $80 Billion. The second time was the past options expiry week in August for $67 Billion. Arguably, most MBS are trading well below 50 cents on the dollar with some below 10 cents on the dollar. The Federal Reserve will not disclose how much it is paying for MBS and from whom it is buying. 

“Bernanke is railing against any kind of audit, which probably means what he is doing is wrong and does not want their actions to see the light of day. My suspicion is they pay full face value. IMO, Wall Street likely uses the freshly printed script to pay off some liabilities but puts the rest to work in equities. The July $80 Billion injection week broke the back of the stock market slump turning it into the rally we see now. Last week’s $67 Billion succeeded in pushing the markets to 2009 highs. These two large MBS buys could also be timed to push liquidity into the system to make bond auctions AND the stock markets do well in tandem.”