Maggie's Farm

Please do not consider me pessimistic.

However, I am concerned that the current consensus forecast by analysts of earnings for the S&P 500 of around $65 is overly optimistic. This consensus is from mid-February and was revised lower by 2.2% from the prior week.

We had a horrid drop in GDP in the fourth quarter of 2008 and I believe that the first quarter numbers will not cause to many warm fuzzy feelings. Credit continues to contract and there has never been a macro-economic expansion when credit contracts. I expect downgrades in corporate credit ratings which will hurt the bond market, which is a flickering light of hope at the moment but subject to extinction. Banks may decide to cut credit card and home equity lines as unemployment rises and the need to reduce balance sheets continues in an effort to meet capital adequacy requirements. I could go on, but you get the point.

If S&P earnings come in at $50 to $55 and you assign a 10 multiple you get 500 to 500 on the S&P 500 index. A 15 multiple, which is relatively rich in a bear market gets you to 750 to 825. We closed at 750 today. I have learned from experience that a "cheap" stock can always get cheaper.

There are a number of risks to the global and domestic economy that could negatively impact earnings.

In short, I am being cautious because I see the downside risks as being significantly greater than the upside potential.

As always, caveat emptor. I wish you good luck in your trading and investing pursuits.