Monday, July 27, 2009

Earnings are a Mirage

As I write just before the opening of the markets for Monday, July 27, I have to say: the rally based on current earnings reports can not last very long. I hesitate to comment through the blog unless there is a very strong reason.

The way I see it, the lift in earnings due to temporary effects has been even larger than expected by analysts. They knew they would be sizable-to-huge, but they've even been better than that.

This is a double negative in terms of longer-term values: one because it will create higher expectations that are certain not to be realized, and one because it seems to reflect a more serious issue: the failure to put enough money away for future problems.

This is (has been) the time to recognize any likely negative downstream issues and provide for them. I would reward, rather than penalize, those organizations which are demonstrably taking advantage of short-term bumps to increase bad debt provisions.

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