The Market Direction…

Corporate Profits for 2Q 2008 reached $1.361 trillion vs. $1.348 trillion. 2Q profits were up year-over-year 3.9% while 1Q profits came in -27.5%. On an annualized basis 2Q profits decreased -5.9% while 1Q was off -3.1% (see Chart #1 below). This is all pretty much common knowledge but it is worth noting that the annualized rate of profit declines is approaching a bottom not seen since 2001 - 2002. Whether profits will decline to the negative levels last seen in 1998 is unknown but should recent historical patterns suggest a bottom could be nearby.

As financials represent a significant portion of the market weigthed capitalzation for equity benchmark indices, any positive revision in their projected earnings will have a tsunami impact on overall EPS estimates for the broad market. The stock market is still considered to be a reliable leading economic indicator, and despite the volumes of negative news out there, investors would be well advised to heed the monthly chart patterns of the Dow Jones Financials index. It has formed a major bottom and historically such patterns precede signficant upward moves before another major correction occurs (see Chart #2 below). Will this happen again or is it different this time? Who knows…

Credit risks still remain unquantified but the Ted Spread has been on a downward descent. The TED Spread is the difference between the 3 month T-bill and 3 month Libor (Eurodollar contract) and is used to measure credit risk amongst commercial banks. Quite simply, when the spread is narrowing, credit risk is decreasing and when the spread widens, credit risk is increasing. Since the 4Q 2007 peak in the TED Spread, it appears the market is gradually getting a better handle on credit risks (see Chart #3 below).

Summary: The challenges confronting the U.S. and global capital markets are of epic proportion, but just as manic greed contributed to the real estate bubble and the related subprime credit debacle, extreme fear may be leading some bears to overlook that surrender of the bear market is inevitable and soon approaching. Hillbent’s advice is to stop shooting, lay down your arms, and prepare for the impending bull market.

 Chart #1

Chart #2

Chart #3