Everyone, F is making a damn good profit. F people!!! In a crappy economy where no one is making major purchases, they are profitable!!

I hear all the bear cases and agree with them. But those arguments and what the market does are two different things.

That’s all I needed and I got long the market tonight, just a bit. TPC’s expectation ratio rising makes me feel happier about that.

But are earnings solid based on solid sales, or cost-cutting?

My money’s on the latter, which is unsustainable going forward. Eventually the pullback by consumers will have to be recognized on bottom lines.

Thought CXO’s reference to this research paper “Aggregate Market Reaction to Earnings Announcements” was interesting in this context (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1536894).

Was a little surprised by the conclusion that lots of “good news” generally leads to higher discount rates (via inflation expectations?) – and hence lower prices rather than the higher…

PM

http://pragcap.com/is-this-a-major-market-top

- CRE: Yes, everyone knows about, but everyone knew about RRE in 2007…and that didn’t stop the banks blowing themselves up.

- RRE: The second wave is coming (Option Arm Recasts, starting now…) and Prime defaults will be higher than historical (due to lower DTI standards introduced in 2003)

- Sovereign Risk: Greece is the tip of the iceberg.

- Liquidity: A simple driver for the markets in 09 — FED buys your crap MBS, you go buy Equities/Commodities/etc…What happens when the FED stops providing the liquidity (as it claims it intends to do per FOMC statements)..who’s the marginal buyer. Note the Stimulus becomes a negative contributor to GDP in Q3-10.

- Terrorism: Always a risk.

- China: I think it’s a bubble…inflation causes them issues (they need to stimulate but need to control inflation). Floating the yuan is the sign for me that it’s close to blowing-up (since it’s their last resort — an attempt to transfer risk from Chinese holders to foreigners). Listening to calls this E-season, China’s also the source of every mining/machinery/etc company’s positive future projections.

- Trade/Protectionism: Go back to the Great Depression, look what happened to Global Trade (it fell, every year!). There are signs already of increased protectionism, as unemployment continues..there’ll be more.

- Valuation: Equities have been systematically overpriced (on a PE10 basis), imho, for the last 10-15years! They’re expensive now, they will be more expensive even if S&P500 generates $70 this year and the S&P is flat. (Big claim i know, and I fully understand people not agreeing. I’ll be putting up a blog post that’ll give some data).

- Risk Aversion/Same Trade: Anecdotal, so feel free to ignore, but from speaking with people everyone seems to have the same trade on – L Risk, S Risk Aversion. Think of all the S Treasury Trades you hear about and Long Commodities (to take the 2 flavors de jour)…that’s the same trade, just expressed differently. Imho, there are too many people who have something similar in their book and think that they are hedged.
To take another example; the Wisconsin Board of Investments approved leveraging their investments in order to make their 8% targets. Now! When corporate bonds, junk bonds, equities, commodities, etc have all rallied! That smacks of reaching for yield, and ignoring the downside…
Take a look at the Harvard Endowment Allocation; it’s exceptionally overweight risk assets.

- Deleveraging: Bank’s aren’t lending, but it’s as much because there’s limited demand! Sadly, I think it’s a secular thing…the choice is take the bullet now (and declare our banks insolvent) or spread it out over 10-20years (and do a Japan).

I’m not saying that the S&P will trade down to <650 (though I think there's a decent probability it will), more that there's substantial risk that's not priced into this market…

And the PE ratio is the greatest trick ever played on investors.