Corporate Profits

Over the past 15 months, corporate profits, as measured by the
SP 500's earnings have fallen by about 1/3. There are now indications
that peak to trough earnings for this cycle could be down by more
than 50%.

Most of the decline in profits so far reflects the loan and securities
losses sustained by the financial services sector. The financial
component of the SP 500 will likely wind up moderately in the red
for 2008. Commercial banks / thrifts were only nominally profitable
in Q3 '08. When common dividends are deducted, retained earnings
from operations declined. So, prior to the TARP program to inject
capital directly into the banks, they would have had to cap off the
loan book. Now, continuing loan losses are keeping financials from
generating capital internally. Moreover, with broader economic
weakness in evidence, loan loss provisions for C&I loanswill rise as
may losses on CDS swaps.

Profit indicators for the large nonfinancial group started to tumble
in earnest in Sept. '08. Peak quarterly profits for the entire SP 500
hit an index value of 24.06 in Q2 '07. The index was about 16.35
for the recent quarter, and with nonfinancial profits now in decline,
the index could fall to the 10. - 12. area over the next 6 months,
barring an earlier than expected economic turnaround. If this
deeper weakness develops, my SP 500 Market Tracker will
likely begin to recede again in the interim.

My longer term economic indicators continue to point to the
development of economic recovery starting around mid - 2009.
With the extra earnings leverage of falling loan loss provisions
that would accompany an economic rebound, the quarterly net per
share index for the entire SP 500 could easily rebound to the 20.
level by late next year or early 2010.