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Likelihood Increases for a Rapid Rally

Stated simply, there is a genuine fear of the future, which should not be surprising considering the world's recent (2006-2012) financial and economic history.

He made a good point (especially of a European kind uncertainty) but so did Sir John Templeton in the quote that begins today's opening missive.

To state the obvious, the very need for immediate and extreme policy response underscores the severity of the problems in Europe, but it also represents potential investment opportunity. Contagion fears, previously ignored or rejected by many (including myself), have proven to be underestimated and have proven to be very real.

Over the past few years, we have moved from sovereign crisis to sovereign crisis in Europe -- the only good news is that this particular crisis and the contagion has been so wide that we are running out of countries that are on the brink of insolvency.

What I have missed in the last few weeks is that these issues have, to a large degree, trumped the strength of the U.S. economy (2% real GDP growth) and have served to further alienate the individual investor (who has continued to divest domestic equity funds and has continued to commit to fixed-income funds offering very little current yield).

Hopefully, our politicians are learning a lesson from the European experience and have learned from the harm they inflicted on the market in August 2011 during the debt/budget deliberations. Unless a divided and divisive Washington, D.C., changes its tune, market valuations will (again unfortunately) stay lower than perhaps is justified relative to corporate profits, interest rates, inflation, etc.

And risk premiums will remain high.

Nevertheless, I remain bullish (though wrong at this point in time), albeit chastened by the above realities -- those realities have led me to reduce my net long exposure to around only 35%.

And I remain hopeful for a rip-your-face-apart rally despite the seemingly long odds attached to this scenario.