The Start of Earnings Season

A nice little post with video from TBP on Q1 earnings.

Q1 Expected Earnings: -10.9%
2007 Q4 Earnings: -25.1%

Now expectations are generally that financials and retail will lead on the downside while tech, oil, and agriculture/materials will lead on the upside. But I thought this would be a good time to mention the disparity between analyst estimates and actual earnings. Check out the chart that was included in the latest Outside the Box from John Mauldin:

Earnings estimates clearly lag actual earnings by about a year. And this becomes pivotal in tops and bottoms. As you can see from the chart it's clear that sentiment hasn't really caught up with the decline in earnings. Read the entire piece via John Mauldin and you can see some reasons for this. It's pretty interesting stuff.


When you add this factor to the fact that we are overbought (see my previous post), it makes for a pretty enticing reason to be short if you are a longer term investor.


And now let's take a look at global P/E ratios courtesy of Bespoke Investment Group:

Does the U.S., especially the NASDAQ, deserve a higher P/E than China? As far as I am aware China's economy is growing at double digits while our economy has negligible growth. Remember my previous post about market returns YTD. This entire situation doesn't make a lot of sense to me. Yes, a lower dollar is helping exports and U.S. companies are not nearly as tied to the domestic economy as they used to be, but still....

Across the board the street is still expecting higher equity markets by the end of the year. Merrill's Thain recently said that the worst of the credit crisis is behind us, but I think we're probably only about half way through. Housing prices still have not stabilized. Today's pending home sales numbers fell more than expected. This is just one of countless examples of a housing market that is in the early to mid stages of a depression.

I think there will be a string of disappointments over the next 3 quarters. Volatility will come back in the market, risk premiums will increase, and valuations will decrease. Don't be surprised if you see the VIX hit 30 again the next three months. I'd like to setup a trade to take advantage of that but I still don't have that damn margin account.