Earnings Indicators & Comment

Profits indicators were positive through the year and ended 2010 on a strong note as business
sales recovery accelerated in Q' 4. SP 500 profits are expected to come in at around $84, up
about 48% from a depressed 2009. S&P sales rose around 6% and margins expanded on a
reduced cost structure, with a nice portion of incremental sales falling to the bottom line.
Net revenue from the large financial services sector contracted by 11%, so non-financial
business sales were materially stronger than total sales. In addition, financials' earnings
benefited over Half '2 on a sizable decline in loan loss reserves.

The S&P estimate for "500" profits in 2011 is nearly $95 -- which would be a new record.
Many analysts, myself included, are more comfortable with a range of $90 - 93 for next year
based on reservations about continued profit margin improvement. As of now, two keys in
the outlook concern how fast oil revenues may grow and how rapidly the banks may allow
the loan loss reserve to contract as the economy improves.

The analysts have earnings progress through 2011 "back loaded", meaning the stronger gains
are seen coming over the second half of the year. Now, since the economy is entering 2011
with faster momentum, there could be upward revisions in the near term outlook for SP 500
net per share.

Looking at the longer term trend, quarterly earnings is seen as rising up to the mid-point of
the trend range. This is dramatic progress considering that the final quarter of 2008 saw
an operating loss -- the first since S&P started keeping data in the 1930's. Earnings in 2011
will come in well below trend peak levels, which would tend to reaffirm that the economy
will still be operating with considerable slack and that the potential should be there for
further significant progress provided the economy develops better internal balance as it
progresses further out of deep recession.

The dividend is projected to rise by another 8% in 2011 to over $25.50. I am not impressed.
The major corporations have a large and growing cash hoard which is earning them little.
The policy of a super high earnings plowback ratio has not boosted sustainable growth for
the SP 500. This and other aggressive balance sheet practices have only served to make
earnings more volatile on a cyclical basis. Jot me down for saying that "500" earning
power of $90+ calls for a $32 -35 dividend.