Earnings are officially over for the 4th quarter and we can now turn our attention to the 1st quarter of 2009. It has become very popular to say that poor earnings are now fully expected in Q1. If you have CNBC on you hear it at least a few times a day, but does that mean it is priced in? I fear it does not. Analysts have cut their estimates at a rate never seen before and I fear their estimates might still be too high. Analysts are still pricing in a sharp second half recovery and S&P 500 EPS of $64 for FY 2009. I continue to think that number will come in closer to $45. That means estimates are still 30% higher than they should be.  The few companies that have reported earnings so far in Q1 have been truly horrendous. I recommend reading Nucor’s report from earlier in the month.  They have their hands on the pulse of the global economy and I can’t ever remember Dan Dimico being so negative.   I believe poor earnings are widely expected, but I the estimates will prove to be far too high in both this quarter and the next.

On the bright side, my expectation ratio continues to see mild improvement. The indicator posted 0.41 which is roughly flat with the last few weeks. This is a sign that expectations are coming down and are nearing a level where companies can consistently begin to outperform. This will be a vital ingredient in any new bull market.  The indicator is an excellent sign of long-term market health as it combines both expectations expectations with actual earnings to gauge the health of any market.  I am certainly not bullish because of it, but it is a good sign that investors are beginning to expect very little from companies which ultimately leads to outperformance.

It’s very fashionable right now to call the bottom, but I am having a difficult time seeing such a thing.  In my opinion, the majority of investors will not invest their hard earned money in companies until we begin to see the cash flows of corporations accelerating.  As of now, cash flows are decelerating at an alarming rate.  You simply cannot justify the risk of equities over the long-term if the future cash flows are not expected to be higher.  At this juncture I don’t see stabilization in earnings and it is for that reason that I continue to believe we are still in a bear market.  I will take the evidence as it comes in, but as of now I think the market is telling us loud and clear: estimates are still too high and earnings are still declining which means the bear is still here.