The Third Depression

I’ve discussed the potential for the coming 2Q earnings
season to disappoint as a primary reason for the recent weakness we’ve
seen in the stock market. The Wall Street Journal reported yesterday that
analysts have indeed been ratcheting down their earnings estimates for
the Second Quarter. Six of the top 10 sectors of the S&P 500 have had
earnings estimates lowered.

Basic materials companies have been hardest hit, with
current estimates now 13 percentage points below estimates from the
beginning of the month. Financial companies have seen the second biggest
fall in estimates, down more than 5 percentage points.

Overall, the companies of the S&P 500 are expected
to report $19.65 in per share earnings. S&P 500 earnings are expected
to peak in 4Q at $22 a share. Interestingly, 4Q estimates have not been
revised lower.

The S&P 500 is currently trading at 13 times next
year’s earnings estimates. That is on the low side of historical norms.

Pay particular
attention to JP Morgan (NYSE:
JPM). It reports
on Thursday, July 13. JP Morgan has said that its non-performing loans
are peaking right now. This is potentially significant because the bank
has been setting aside billions in loan loss reserves every quarter. And
that’s been a drag on earnings.

Still, JP Morgan has managed to beat expectations in
each of the last four quarters. But earnings will really take off if JP
Morgan (and other banks) has to set aside less to offset bad loans. The
banks might even <gasp> start lending again.

Of course, 2Q
earnings are one thing on investors’ minds. The tone of the recent G20
meeting is another that may be weighing on the stock market.

I discussed briefly yesterday that the leaders of the
world’s biggest economies are wrestling with the issue of debt and
growth. It’s also clear from the G20 meeting that European leaders are
more concerned with debt right now. And that may have some serious
consequences for the global economy.

Nobel-prize winning economist Paul Krugman wrote a
depressing op-ed piece in the New York Times yesterday titled The Third
. In it, Krugman has taken a decidedly bearish tone. He
expects that global leaders are about to make the exact same mistake that
turned the stock market Crash of 1929 into the Great Depression.

Krugman says “

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