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Why Earnings Look Opaque Beyond Third Quarter

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In this recovery, historical analogies may not apply.

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What about that fumbling financial sector? It's expected to be the best performer this quarter, with earnings on average forecast to climb 59% from the year-ago period.

Rotblut counsels caution, urging stock pickers to target-shoot for opportunity.

"Part of that huge growth is because the first quarter and the second quarter were such disasters this year so that makes the numbers look good in comparison," he says. "Now, there are companies that seem like they're doing well, like Goldman Sachs (GS). On the flip side, companies like Citigroup (C) and Zions Bancorp (ZION) still have a lot of exposure to those areas hit hardest by the real estate market."


More broadly, as third-quarter earnings season kicks off, the Street wants to see some improvement now in lackluster corporate revenue, says Peter Boockvar, Miller Tabak's equity strategist.

Last quarter, companies beat lowball estimates on cost-cutting and layoffs, but investors are going to want to see some top-line growth.

"Unlike the second quarter, where people rewarded better-than-expected EPS numbers and shrugged off revenue misses, there will be more of a focus on whether companies are driving revenue in a difficult economic environment," Boockvar tells Minyanville.

He adds, "If the company is US-centric, whether it's a retailer or a bank, then revenue growth will be tougher to come by. If you have exposure to overseas markets, particularly those that had pretty healthy GDP growth in the second quarter and the third quarter, such as Asia, then you will be much better off."

For all of 2009, earnings are expected to fall 16.9% from 2008's level. However, in 2010, analysts see profits rising 26.5%. Investors obviously agree with this peachy scenario, evidenced by an explosive seven-month rally that has taken the S&P 500 up nearly 60% from the March 9 lows.

According to Thomson Reuters, number crunchers predict profits generated by materials companies rising 85% in 2010; 73% for financials; 47% for energy companies; 37% for consumer discretionary companies.

Our response: Who cares?

This is pure guesswork. None of us knows how the US economy will perform next year. Right now, it's impossible to even get a real, honest reading on this ailing economy of ours, seeing as how the patient is currently all hopped up on medicine from the federal government, like Cash for Clunkers and housing subsidies.

What we've witnessed is a degree of government intervention in the economy that would make a bearded Che Guevara blink. Now we all wait and see, fists clenched, as to what happens when the government stimulus wears off.

Given that uncertainty, the proper response by investors to 2010 projections is skepticism. Your forecast is just as good as that pencil-necked Wharton graduate now spinning spreadsheets at Deutsche Bank.

"In an uncertain environment like this, trying to glean 2010 estimates is foolhardy," says Boockvar. "Nobody knows how the economy will turn out next year. A lot of people still think this will be a typical post-WW II recovery. But the downturn wasn't typical and the upturn won't be either. The historical analogies and benchmarks won't necessarily apply this time."

So where would Boockvar be putting money to work? Right now, he likes hard assets: commodities, commodity producers, countries that produce commodities, and anything ex-US, particularly Asia.

"My bottom line is you have to protect yourself from this depreciation of the dollar, which is the unofficial government policy," he says.



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