In his latest letter to his hedge fund clients, top value investor Whitney Tilson says he thinks “froth” has been a big driver of the market recently, and says he remains high on short picks that have thus far disappointed.

“The expectation (followed by the implementation) of another round of quantitative easing (QE2) triggered a ‘don’t fight the Fed’ burst of optimism across the market and, in particular, a speculative orgy among the most popular momentum stocks, which ripped upwards, irrespective of valuation,” Tilson writes in the letter, which is available on Scribd.com. That speculation, he says, has left several of his short picks heading upward.

But Tilson also says he’s not going to jump on board the “momentum bandwagon”. Quoting Benjamin Graham, he says, “we view the market as our servant, not our guide, so we are unperturbed when one of our positions moves against us. In fact, we view it as inevitable. After all, what are the odds that we precisely bottom-tick a stock when buying it or top-tick one when shorting it?”

Tilson says the upward moves of some of his shorts has now only made them more attractive as shorts. Among them: Netflix and InterOil.

Tilson does point to some positive economic signs, but adds he continues to think we are in a “muddle through scenario”. Over the next 2 to 7 years, he thinks the most likely outcome involves weak GDP growth, high unemployment, and continued government deficits, and he thinks stock market compound returns should be in the 2% to 5% range. He is, however, finding long opportunities. Among them: Iridium Communications and General Growth Properties.