Cracks in the Glass

But now sleet is pounding on the roof again, the wind threatens to shred the protective plastic and it's clear that while hope has taken root, the soil outside remains rocky and the climate harsh.

In the wake of ADP, Alcoa, Intel, Satyam and Time Warner it would be easy to dismiss the recent speculative gains as a mirage soon to give way to a renewed bear market. All the more encouraging, then, that the market is doing no such thing, treating this morning's pullback as a routine correction. The S&P 500 would need to drop another 30 points or so to retest its 50-day moving average, something it will certainly need to do at some point if the recent gains really presage greater things, as I believe.

It's possible to downplay each of the bad-news headlines hobbling today's market. The ADP survey has, since its inception, proven such a poor predictor of the official monthly payroll number that the methodology has just been drastically revised. In other words, it's a complete shot in the dark. Wall Street was already expecting a December loss of half a million jobs, and ADP's 670,000 estimate doesn't materially alter the odds for the official tally one way or another -- it simply hasn't been close enough in the past.

Alcoa? All the jetliners parked out in the desert were already providing proof that aluminum demand won't recover in 2009. Intel is in a similar position with chips, the marginal PC buyer deciding that their current clunky machine will do for another year just fine. Time Warner's suffering from slow ad sales -- shocking, I know. Satyam? Why worry about crooks in Bangalore with so many famous ones on the loose much closer to home.

But let's not kid ourselves: the economy stinks, earnings stink and will continue to foul the air for quite some time. There's no point buying anything at all on expectations that we'll be back to business as usual by, say, August. Colleague Jack Hough presents a persuasively bearish case by digging into this year's prospective earnings trough. But to make it he's compelled to include all the non-cash charges, and do you really believe that Time Warner is $25 billion poorer this morning because it's written off that much in intangibles?

S&P 500 earnings estimates told us little about the market's prospects a year ago, and there's little reason to believe that the current batch, derived at the moment of maximum uncertainty, will prove any more reliable. The better indicator, I believe, is valuation based on trailing cash flow. I keep running into industry leaders with excellent growth prospects selling for four, five, six times cash flow. And if you don't agree that that's quite cheap, good luck with 40 times cash flow on the 10-year Treasury.