Sunday, March 18, 2007

An Enron Economy


"Next worry for stocks: Earnings slowdown
Subprime mortgage woes have stolen the spotlight of late but very soon slow earnings growth will be back in focus."

"With "subprime" on everyone's lips and recession questions back in vogue, the stock rally's other big antagonist has been enjoying a low profile of late.

But not for much longer. With the first quarter winding down and the corporate confessional period heating up, Slow Earnings Growth is set to stage a comeback. And it ain't gonna be pretty."

Let's face it, we live in a culture of Arthur Anderson accounting and Enron accountability.

Goldman Sachs, Bear Stearns and Lehman Brothers all reported strong earnings this week as well as trumpeting their low exposure to the subprime mortgage market. Maybe their direct exposure is low but indirectly these companies are involved in derivatives which as far as I can see puts them at risk of a domino style downturn affect kicked off by subprime defaults.

As far as corporate earnings go, a slowdown in consumer spending equals a slowdown in earnings. Simple math, who doesn’t get this?

If you are looking for clear answers, they are probably not out there. This is a dangerous game and it can go on a lot longer than most of us might imagine. After all, it’s irrational. The fundamentals are disconnected from reality and there is a mass willingness to not ask questions as long as a stock or investment is making money.

In the end, we probably won’t see the bend in the road until we can’t make the turn, and then of course, it’s too late.


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