Market Update

Market Commentary:

Stocks retreated today as investors grow increasingly nervous of what earnings announcements are about to revealed.

For S&P 500 companies, profits probably fell 37 percent in the first quarter, according to estimates from more than 1,700 securities analysts compiled by Bloomberg.

The problem is most securities analysts tend to be overly optimistic.

The stretch of seven straight declines in earnings is the longest since at least the Great Depression, data compiled by S&P and Bloomberg show.

I think they have been very successful at getting many to believe that we are about to see a second half recovery this year. We all want to believe this.

But wishing and hoping isn’t going to cut it. Bear markets are notorious for their bear market rallies that set up the next down leg and this is not a typical bear market.

George Soros, the billionaire hedge fund manager was interviewed today.

“ It’s a bear-market rally because we have not yet turned the economy around,” Soros said in an interview with Bloomberg Television, referring to the rebound in stocks since March 9.

“ This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.”

Recently, Barry Eichengreen, Professor of Economics and Political Science at the University of California and former Senior Policy Advisor at the International Monetary Fund, along with Kevin O’Rourke, Professor of Economic at Trinity College wrote a paper called “A Tale of Two Depressions” in which our current economic contraction is being compared to the 1929-1932 depression.

Their conclusions is global industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. Global stock markets are falling even faster now than in the Great Depression.

“ Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30.”

“ To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimize this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.”

I would suggest reading their article and seeing their charts here.

Yesterday, bank analyst Mike Mayo wrote that bank loan losses may exceed the Great Depression.

“ Mayo said he expects loan losses to increase to 3.5 percent, and as high as 5.5 percent in a stress scenario, by the end of 2010. The highest level of loan losses in the Great Depression was 3.4 percent in 1934, according to the report. In the 3.5% loss rate scenario, Mr. Mayo said banks will lose between $600 billion and $1 trillion over the next three years, more than the roughly $400 billion in write-downs they've taken on risky investments.” RGE Monitor

It has been difficult to manage money this last quarter when the rules change nearly every day – what will Bernanke, Obama, Geithner do and say next?

I have to include Karl Denninger’s comments, who writes:

“ The IMF is now in the "Roubini" camp with regards to their "estimate" of losses.

The obvious question is this:

Given that we're two years into this mess, how come we're still arguing over what losses "might be"?

Simple answer: The lies have not yet stopped.

When the lying stops we will be able to actually read balance sheets and figure out what exposures are. From there we can figure out the damage to the economy, and from there we can craft a reasonable set of expectations for what lies ahead, how much contraction in lending will be required, how much contraction in GDP will occur, and what the economy will look like in a couple of years.

We cannot do that until the lying stops.

We cannot get an accurate read on balance sheets today because of the intentional obfuscation of both corporate and government officials…

If our government has ANY desire to see the economy bottom and recover, the lying must stop. It really is that simple. Until and unless that happens, there will be no recovery of substance or durability in our broad economy, as trust cannot be restored so long as it is common knowledge within the markets that the truth is being concealed.”

This is tricky business and this earnings season may hold some of the biggest surprises of all.