Monday, October 20, 2008

Earnings, Not Credit, Scare Bears Away

Some market analysts are pinning their hopes for a renewed bull market on historical analogies, according to this:

Patterns of previous crises in the past half century suggest interbank lending rates tend to reach extremes about two months after a major financial shock, some note. In the past week, incipient signs that credit conditions are easing -- albeit with the help of colossal central bank liquidity injections -- are starting to conform to this pattern.

Traders are counting on a rise in sentiment to push stocks higher when economic fundamentals are still clearly deteriorating. Wall Street expects excess liquidity and wishful thinking to inflate another asset bubble, just as they did after 2002.

Wait a minute. "This time it's different." It's different because U.S. households had a debt service ratio of 13.85% in Q208, according to the Fed. Paying down this debt ratio even to the 10-11% levels of the 1980s requires households to spend less than they earn. This huge hit to consumer spending will soon make its appearance in disappointing corporate earnings reports:

With little question the U.S. is in the grips of a recession, investors this week will lean on a stream of earnings and economic reports to help determine exactly how prolonged and painful the downturn might be.

There's certainly been fresh evidence the credit market has begun to thaw. But, that alone might not be enough to restore confidence in the stock market at a time when investors are clamoring for stronger signs of a bottom.

Good luck finding a bottom. We're just not there yet.