As frustrated technically as we became with May equity market strength, we were heartened today to receive from a hedge fund manager the following fundamental observations about the past month. We share these observations with you to highlight once again the silliness and unsustainability of recent equity strength. Specifically, during May 2003, lower quality names were the rage with investors as evidenced by:

• Stocks whose earnings have declined over the past two years outperformed stocks whose earnings have risen over he past two years by 400 basis points...[More precisely,] stocks whose earnings have fallen the most over the past two years outperformed stocks whose earnings improved the most over the same period by 720 basis points.
• Stocks with operating losses over the past 12 months outperformed stocks with operating profits over the past 12 months by 190 basis points.
• During May, stocks with a high variability of historic earnings outperformed stocks that have exhibited consistent growth. In addition, buyers demonstrated a preference for stocks with uncertain future earnings over stocks with greater earnings predictability.
• Also in May [and as hard as it may be to fathom,] stocks with negative analysts revisions outperformed those with positive analyst revisions; stocks with low operating margins outperformed those with higher margins; and stocks with deteriorating balance sheets outperformed stocks with improving capital positions.