My take on the sub-prime fiasco, as reported in the April issue of Kenneth Coleman's Investment Tracker newsletter, is that the sub-prime fallout will not sink the U.S.'s improving economy. This presupposition was based on the fact that these loans were given to buyers who, under standard procedure, did not qualify. In order to put these potential homeowners in homes, lenders designed loans that only required extremely low down payments and low monthly payments.

When sub-prime borrowers defaulted on their loans, they suffered a pain that was more about the loss of an American Dream than a monetary defeat. In fact, most sub-prime borrowers who have or will default on their loans will do so with homes valued at prices considerably lower than their purchase price.

According to USA Today (April 25, 2007), a vast majority of sub-prime loans were issued to minorities and those of low socioeconomic status. The article reports that 54.7 percent of sub-prime borrowers were African American, 46.1 percent were Hispanic, and 17.2 percent were either Caucasian or Asian.

This marginalizes any damage sub-prime loans inflict upon the U.S. economy as a whole. The Dow evidently agrees; most stock averages made new highs in recent days. The earnings estimate has climbed almost 100 percent (from 3.3 percent to 6.1 percent).

Fred Dickson, of DA Davidson Co., stated, "Bull markets do not end when valuations are closer to a ten-year low rather than a ten year high." Dickson was referring to the current price/earnings ratio, which is currently 16.93 (it hit 28.43 on December 31, 1999 before it topped in March 2000).

Historically, the S&P 500 P/E starts with the beginning of a new business cycle at a P/E of 12.13. In most cases, it tops out only after it doubles, at minimum, from its initial ratio. Corporate America tends to concur with this reasoning. This is why there is a current mania in Mergers and Acquisitions, which is why it is much cheaper to buy someone else's company than to construct one from scratch. So, what are earnings and the S&P 500 P/E ratio telling us?

Earnings and the S&P 500 P/E ratio are telling us we are at a much earlier stage in the business cycle than most analysts are able to fathom. There could be at least another two to three years remaining in the current business cycle. The best way to gauge the end of any business cycle is to monitor the P/E ratio and the X-factored yield curve.

Currently, the X-factored yield curve is very positive. I expect the 2007 GDP to finish between a low of 2.5 percent to a high of 3.0 percent. This would allow the stock market to move a little above 14000 (or 7.7 percent) by the end of the year.

What does this tell us? Mainly, investors should continue to invest until the X-factored yield curve and the S&P 500 P/E ratio tells us otherwise.