Today's news - Bernanke told Congress that the economy is showing “tentative signs of stabilization” and Caterpillar Inc jumped 7.7 percent after reporting earnings that tripled analyst estimates. U.S. stocks rose on these news, extending the Dow Jones Industrial Average’s longest rally in two years.
Are we out of woods? There are some doubts.
Earnings... The current stream of "positive" news on beating analyst estimates is caused mainly by two factors: a) Wall Street analysts set their expectation on "inch above the ground" (e.g. Caterpillar reported a 66% fall in second-quarter profit and still beat analyst expectations) and b) Growth in earnings is caused mainly by cuts, not by growth in revenue.
Regarding stabilization of economy... Current stimulus package (more than 800 billion dollars) effectively substitutes the 1 trillion drop in spending which is caused by alteration of consumer behavior (see my previous post Spending vs Saving). Thus, when stimulus package will be over (Q1 2010) the economy will resume its freefall to a new sustainable level, which can be estimated as 90% of its pre-crisis capacity.
