From this quick Reuters article, comes exactly the reason that the US stock market is NOT “cheap” as pundits continue to cry out across the financial media. I’ve been saying since last year 2008 estimates for any company touching the domestic economy are too high, and will get slashed as the year goes by. But we will go through denial stage (remember most economists in most major firms did not even begin calling for even a potential for recession until December 2007!) … and we continue to go through denial stage as the mindset now has only fallen to “a mild and short recession”.

To see this earnings degradation starkly in just the first quarter (current quarter) here is the progression by ‘consensus’ (the herd got it very wrong)

At the beginning of the quarter, analysts projected 4.7 percent earnings growth during the period. (folks that is 3 months ago…)
Last week? 5.5 percent decline projected
This week? Earnings for Standard & Poor’s 500 companies are now expected to fall 8.1 percent in the first quarter
So in the span of 3 months we have a 12.8% swing in earnings projections – and that’s for the 1st quarter which in THEORY should be the easiest to project for companies and analysts since it’s the nearest to when they made said projections. If they are that wrong on Q1 how wrong do you think they will be on Q3 and Q4? I’ve been warning about this incessantly and will continue to warn because 2nd half 2008 projections are far too high (they are built on the “2nd half recovery” thesis) – and as they fall, if the market has any efficiency left in it, stock prices should as well. And no, these earnings shortfalls coming in the 2nd half of 08 are not “already built into stock prices”. We did not even accurately build in earnings shortfalls 3 months ago. That doesn’t mean we go straight down (or up) in the stock market; it simply means this is going to be a tough year, unless you believe P/E ratios expand at the same time earnings expectations fall (thus holding prices steady). Once again, the canary in the coal mine are these retailers who are beginning to simply pull future guidance altogether since it is pure guesswork at this point. Anything levered to the US consumer remains at serious risk… this is why all these “early cycle” rallies are pure folly when analyzed with any rigor.

Last 5 posts by Trader Mark

• Weekly Mortgage Applications Of Interest Today; Fed Already Loses $5 Billion on Mortgages - June 3rd, 2009
• CBSMarketwatch: Can Sequenom (SQNM) Make it Back into Investors's Good Graces? - June 2nd, 2009
• Jim Rogers Agrees with Marc Faber - May 20th, 2009
• Update on my American Idol Trade - May 13th, 2009
• HAL9000 Friends Did Not Enjoy the Rally; Hedge Fund Performance 4.2% YTD - May 12th, 2009