Unrelenting Bullishness

Good post from Mish; here's what I posted in response:

What the analysts NEVER seem to get is that forward earnings will not only go down, but PAST earnings will be revised down, making PRESENT valuations too high on a P/E basis.

This happens in every recession, but it will be much worse this time. Not only are there big write-downs to match profits aggregated under previous "scams" (like negative-amortization loans), but rules have even been passed allowing home builders and banks to spread losses back over previous quarters.

So yeah, the market may be fairly valued today, but paradoxically, tomorrow we will likely find out it was OVERVALUED today. And then to make matters worse, since we will have rallied based on the false valuation, the market will be even more overvalued tomorrow, and ripe for another correction.

In other words, the problem is our understanding of the status quo today is likely to be flawed, and in a downturn, it is likely to be overly optimistic. Remember, even recessions can only be declared in retrospect, as more solid data comes in for a particular time period. Something similar goes for corporate earnings.