Tuesday Market update

The stock market just can’t find a reason to rally. That may change soon.

I want you to keep your eye on March 12th. The House Financial services subcommittee is planning a hearing on “mark-to-market” accounting rules.

Mark-to-market accounting requires assets to be valued at current market prices. Some banks say it forces them to mark down assets to artificially low prices in the current financial crisis, even when banks intend to hold the assets past the current reporting period.

It is argued that if the meeting results in the government relaxing these accounting rules, we could see a powerful surge in the financial sector, which would spark a massive short covering squeeze.

Stocks are incredibly extended to the downside and that makes it exceptionally dangerous to get caught on the wrong side of the market given how stretched conditions are.

Yet investors are watching incredible wealth destruction on a magnitude unimaginable on a global basis and it is forcing more and more people to seek cover.

It was reported today that the financial crisis has wiped a staggering $50 trillion off the value of financial assets in 2008. That was last year. We are well on our way to matching these figures this year.

Global GDP will decline this year for the first time since World War II, with growth at least 5ppts below potential. World trade is on track to register its largest decline in 80 years, with the sharpest losses in East Asia, which has lost over $9 trillion alone. Latin America has lost $2.1 trillion.

I would love to think the worst is behind us but if economist Nouriel Roubini is correct, this recession could last up to 36 months, or well into 2010, which means we still have a rough go ahead of us.

Roubini argues that the S&P 500 is heading towards the 500 to 600 point area, with the DOW likely to test 5,000 sometime this year and given what we are seeing in the destruction of earnings of the S&P 500 and the breach of the critical 2002 long term support levels this looks likely.

Warren Buffett told CNBC today the economy “has fallen off a cliff”. Let me show you just what he means.

If you look at the S&P 500 earnings you can see why the stock market is in panic mode.

DATE	S&P 500 EARNINGS
12/31/07	$15.52
03/31/08	$16.62
06/30/08	$17.02
09/30/08	$15.96

With 98% of the earnings accounted for, Standard and Poor’s is now estimating the 12/31/08 earnings will come in at -0.56%.

There has never been a negative earnings report for S&P 500 index – in the red!

What kind of a P/E ratio do you get when there is a negative earnings number?

With little or no expected upside for earnings on the horizon, and the SP 500 trading at current levels, prices are still overvalued. I know this is hard to believe but it is what it is.

It’s no wonder that the government is seeking to get rid of mark to market accounting. They know that earnings are on the decline. They have to do whatever they can to increase or support earnings.

If you look at reasonable valuation levels, there’s no doubt that the S&P 500 could easily be at the 500 to 600 level - very easily.