What Has Earnings Season Told Us So Far?

If we focus on the high profile companies that reported this week, we can conclude that the first quarter was weak but not a disaster. J.P. Morgan, Google, Citigroup, and GE all reported in the last two days. The leaders of these companies believe the consumer is still weak, credit losses will continue to rise, and the economy is not turning around yet. The stock market liked each of these earnings reports as they all beat analyst's expectations. That is great for the short term.

It is a good thing that we try to take a longer term approach to investing. Stocks discount earnings and growth. The economy will be weak for a year or two and earnings won't likely appreciate much for another year. Perhaps cost cutting can camouflage weak growth but we continue to believe stocks have risen too fast as the weakness in economic conditions in the next month or so will cause stocks to reverse direction until the summer.

As we evaluate the consumer tea leaves, the housing situation, and commercial real estate market, perhaps we can develop a stronger opinion on the timing of an economic bottom. It is likely not happening in 2009. The banks continue to take write-downs and hold many toxic assets. The public-private partnership has not been implemented and we have our doubts with its structure and its likely success. We believe some hedge funds will embrace the leveraged gamble offered by the government but there may not be broad enough appeal for buyers and sellers.

Global markets can sustain rallies when it is obvious that financial institutions are cleaned up and leverage has been reduced. There is too much leverage on the balance sheets of most countries, corporations, consumers, and real estate projects. A major cleansing process still needs to occur for the global economy to regain its strength to drive trade and stabilize currency markets. We continue to add to our gold position as we expect the above process to be long and painful.