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Monday, April 14, 2008

Earnings Are Going To Be Awful

Intraday, on the 15 minute chart you can clearly see when the short squeeze started on April 1st as the new quarter kicked off. Prices peaked on April 8th just short of major resistance around 1390. Prices have retraced the entire move and are now languishing around 1325 as we enter earnings season.

Earnings are going to be awful. Worse than the market expects... at least that would be my bet.

Goldman Strategist Says U.S. Earnings Are `Awful' (Update2): “The U.S. corporate earnings season got off to an “awful” start and stocks will continue to fall, according to Goldman Sachs Group Inc.

“Early signs are awful,” a team led by New York-based David Kostin, Goldman's U.S. investment strategist, wrote in a note today. “We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor's 500 Index lower in coming weeks.”

Of course earnings are going to be awful. This is the worst financial crisis since the 1930’s. Funny thing is, analysts have just finally started cutting their estimates…

“Analysts surveyed by Bloomberg have cut their projections for first-quarter earnings at S&P 500 companies every week since Jan. 4. They now predict a 12.3 percent drop, compared with an estimate for an increase of 4.7 percent at the start of 2008.”

What do you think that does to the ‘equities are super cheap based on their PE ratio’ argument? A LOW PE doesn’t always signal a bargain; in fact it frequently foreshadows a sudden and significant decline in the E part of the equation. As a general rule, P drops before E as those more informed and the more sophisticated money bails out long in advance...

For example:

Wachovia Posts Loss, Plans $7 Billion Capital Raising (Update4): “Wachovia Corp., the fourth-largest U.S. bank, reported an unexpected loss because of subprime- infected mortgage holdings, cut its dividend and said it will raise about $7 billion in a share sale to replenish capital.”

Wachovia posted an UNEXPECTED loss. Haha… Gimme a break. If you couldn’t see that one coming you shouldn’t be trading or investing. It would be far easier and quicker for you to stand at the end of your driveway (for additional comic relief, somewhere near the foreclosure sale sign) and directly hand out your hard earned money to random strangers as they walk or drive by.

Notice the sudden cut in the dividend and the mad scramble to raise an additional $7 billion? That means the big boys are scared shitless about the next quarter… and the quarter after that… otherwise they would just ‘weather the storm’.

This isn’t going to be a ‘V’ shaped or even a ‘W” shaped recession. This is going to be a nasty long ‘L’ shaped or ‘\’ (perpetual slide) shaped recession that will last years.

Related Posts:
GE Disappoints, Citing Finance: Bottom? What Bottom?
Credit Losses and the Shape of the Recession