Earnings season again

So it seems like the easiest way to keep up-to-date on a blog is to just go back to older post and see how things look now. For the past few weeks I have been very unconvinced that the rally in the equity markets is on solid footing. Here are some arguments, not particularly well thought-out:

• Yes, unemployment is a lagging indicator but two-thirds of the US GDP (as you'll remember form Econ 101 GDP=C+I+G+[X-IM]) comes from private consumption (C.) While government support for consumption (e.g. cash for clunkers) supports/supported consumption these programs run out. With close t0 10% unemployment and only a slowing in the new unemployment numbers at the margin (i.e. still more lay-offs every week, albeit fewer) I just don't see where those 2/3 of GDP are supposed to come from.
  
• It's not just unemployment. People are also saving more. The question here is, of course, what a new equilibrium savings rate would be. Right in the heart of the credit crisis we saw it jump back up to 6 percent, which is unlikely in the long run. But maybe something around 4 percent? I mean, that's still 100% more than in 2005 or 2006. Not only are people out of jobs the little money that they do earn they also don't spend.
  
• There is a very scary housing picture. Mortgages are in default and haven't even hit the foreclosure stage yet b/c... well, what does a bank want with a house? The mortgages in default now are increasingly of higher quality. It's not just the sub-prime people anymore. The ratio of going into default once a mortgage payment is 30, 60, 90 days overdue keeps rising, and the rate of people staying out of default once they have done a reworking of the terms of the mortgage keeps declining. So the housing picture could still get a lot worse. People won't have as much equity and banks similarly won't have a lot of collateral they can rely on.
  
• Banks are rationing credit. The credit markets aren't frozen but we're seeing a lot of pruning at the lower end of the credit spectrum.
  
• Currently there is a lot of G (government spending.) That's going to end sometime.

Some positives:

• Export might pick up, seeing that the USD is extremely weak.
• ummmm.....

But the stock market has rallied in the face of all of this, up over 63% since the low in March and 20% since the beginning of the year. Last earnings season was very positive since a lot of companies beat analysts' earnings estimates through a combination of cost-cutting, accounting gimmicks corrections (i.e. "extraordinary items"), and a genuine bottom coming in underneath plummeting sales. But, as we all know, cost-cutting is not sustainable over the long run. You can only trim so much fat before you're cutting into flesh and only so much flesh before you hit the bone. Similarly you can't keep having "infrequent" or "extraordinary" items. Once you have them twice, in a row they're not really all that "extraordinary" or "infrequent" anymore.

Since then I have essentially said that this next earnings season will give guidance and show that the market has gotten ahead of itself. Companies will disappoint and the market will correct. Except, an astounding 78% of the S&P 500 companies have beaten consensus estimates so far. What the hell? No wonder the Dow is close to breaking 10,000. Argh!