Just a link to the current consensus economic and earnings forecasts, which I would classify as a triumph of hope over experience.

My opinion is that all four quarters will be down y-o-y.

We’ll see, won’t we.

The disarray in the credit markets seems to be spreading daily. Will the equities finally get the idea that all is not well? There was a little selling yesterday, to be sure, but the pig is still very heavily lipsticked. Spitzer gave the monoline insurers “four or five” days before regulators step in and split off the muni business. I guess the failing muni securities auctions are getting his attention. If he does that, the CDO/CLO insurance business can’t stand alone because the only thing that sustains it is the cash flow from the muni business. That is big trouble for the banks’ balance sheets because then those assets will be downgraded and require more capital to be allocated. Scarce capital. Yet the stocks are holding up well. ‘Tis a mystery. Maybe someone knows something that I’m missing. Or it is just blind faith.

After the tech bubble cracked for the first time (it’s back, by the way) there was a certain amount of scorn heaped on the sell-side analysts, like Blodget and Meeker for example, who had hyped the tech stocks. Also a few investigations. Now the Globe and Mail discovers that they’re at it again. Who knew?

Tobias Levkovich, chief U.S. equity strategist at Citigroup Global Markets Inc., for one, feels that the consensus profit estimates are “way too high.” He actually has profits of the Standard & Poor’s 500-stock index member companies dropping by 1.5 per cent this year, not growing by 15 per cent-plus as consensus has it. “Sell-side estimates for 2008 EPS [earnings per share] growth remain wildly optimistic across most sectors,” he said in a recent report.

“Whether it is the fear of limiting their corporate access, the risk of stepping too far out of line from official management guidance, or simply ticking off shareholders, the sell-side community has been slow to mark down estimates, even as more signs develop that things are weakening considerably,” he added.

While I was searching on the PVR for a movie I wanted to record this morning, Bloomberg was playing in the corner of the screen. It was a guy who was explaining why, in his opinion, the market action meant that this was a bottom and that the “recession”, if there was one, was over. He finished his pontification with words to the effect that, “in the thirty years I’ve been in the business, this is the way it has always been.”

As I finished up, I thought about that remark. Thirty years means that he started in 1978, I presume. More or less contemporary with Paul Volcker taking over as Fed chairman. The S&P 500 index was about 100. In that thirty years, in only six years has the S&P 500 closed lower than the previous year (1981, 1990, 1994, 2000, 2001 and 2002). The current bull market is generally dated from 1982, but in point of fact even 1981 was higher than 1978 so this guy has really seen an apparently eternal bull. No wonder he’s a bottom caller. His working life has been one correction after another in a bull market, that is the way it has always been - to him. Even 1987 finished up.

Look at the Japanese stock market, currently struggling at prices last seen in the early 1980s, having been in a more or less steady decline for nearly 20 years. If it were the same here, the S&P 500 would be about 170 (instead of 1,360). That would be a different life experience, n’est-ce pas?

It is a huge mistake to rely on history in the stock market. That is because there is no explanatory power to it, really. Without an underlying theory as to how the world works, all we have is correlation without a basis to establish causation. All that matters is now and what is happening and what will happen in the future. We can absolutely guarantee that the state of the world today is unique, and will remain unique forever, never having been seen before and never to be seen again. “The moving finger writes and, having writ, moves on.” This is why economists don’t get rich, at least not from accurate prediction generated by economic theory. Past performance is no guarantee of future results.

Does this mean that it is impossible to understand what is going on? By no means. But you have to look at the world as it is now, not as it was. And you have to be holistic. You’ve got to scan the whole panel, not just one or two instruments. You can’t just look at a few data points out of context and say, well, the last time I saw this combination of factors, x happened. You have to ask, are those data still the driving factors, or, has something else come in from left field and taken over as the most important issue?

I’ve mentioned the brewing problems in the credit market, and the apparent lack of effect in the equity markets. Macro Man provides some actual analysis of this. “The chart below shows the SPX with the Itraxx Euro Crossover Index, a useful proxy for all things credit.”

He then goes on to conclude:

Ultimately, this seems to confirm Macro Man’s belief that the signals one receives from market pricing in this environment are unusually unhelpful in determining the state of play. Reminiscences of a Stock Market Operator* is a wonderful book and almost always touted as essential reading for traders. Predicated as it is, however, on discerning signals from market price action, the book and its lessons are probably best locked away in a cupboard somewhere until conditions normalize- whenever that may be.

Speaking of equities and credit, it is worthwhile (I believe) to consider the use of credit to support equities. While margin debt probably represents only a small portion of the leverage out there, the following chart of margin debt as a percentage of GDP may be helpful:

* Macro Man is, I believe, referring to Reminiscences of a Stock Operator, which is, indeed, essential reading. Even if one cares not a whit about the stock market.