While the bulls are spouting about the green shoots on the financial media channels, I can only think of the famous saying by Lee Corso, the college football analyst for ESPN - “Not so fast, my friend.” The recent economic numbers clearly show that the economy has stopped its drastic descent, but the recent move in the market might be more hope than reality.

Corporate Earnings

The market applauded the recent quarterly earnings numbers as a majority of companies beat the Street’s expectations. However, the earnings reporting method is inherently flawed. The analysts who determine these projections receive the vast majority of their information from the companies directly. Doesn’t it make sense that most companies are going to provide conservative estimates to the analysts? The companies have a decent idea of what number they can hit, and they make sure they estimate a number that is attainable. Certainly, the highly paid analysts add some of their own analysis to the quarterly estimates, but the lion’s share of information comes from the company.

Additionally, the earnings surprises were mostly due to cost cutting, not increased revenues. While cost cutting is an important step during a recession, earnings can only increase so much from layoffs, restructuring, and one-time charges. To get a true improvement in earnings, revenues need to begin rising. One sector, in particular, received laud reviews from Wall Street: the banking sector. But, it appears these results were due to accounting shenanigans, rather than actual earnings.

For example, Citigroup stated that it earned $1.6 Billion in the quarter. This included a $2.7 Billion one-time gain because its bonds lost value. While this may seem counterintuitive that earnings increased due to a drop in their bond values, the current accounting rules allow a company to book a profit on diminished bond values. The theory is the corporation could buy its bonds back at a discount. This wasn’t Citi’s only questionable improvement. Citigroup also lowered its loan loss reserves, which allowed it to earn another $1.3 Billion. Apparently, Citi feels the default on consumer loans and credit cards will be going down, not up. Finally, the new mark-to-market rules allowed Citi to earn an additional $400 million. Without these accounting tactics, Citigroup would have shown a loss of $2.8 Billion.

Citi isn’t alone in its bean counting maneuvers. Goldman Sachs skewed its numbers by revising its reporting periods. Previously, Goldman Sachs’ first quarter went from December through February. This year, they changed it to a January through March schedule. Lo and behold, December was a terrible month for Goldman Sachs with a $2.15 loss per share for that month. Goldman’s December earnings included a $320 Million loss in its fixed income, commodities, and currencies department. The same group earned $6.5 Billion from this group for its new, official quarter. Every other segment of its business was down 20-30%. Another area that most banks generated large revenues this quarter was mortgage refinances. Mortgage rates dropped as low as 4.5%, and homeowners flooded the banks with refinancing requests. However, mortgage rates have recently climbed back above 5%, which greatly reduces the number of eligible refinances and will affect next quarter’s earnings.

Insider Selling

Based on the actions of the directors and officers of public companies, earnings may not be improving as the market hopes. According to Barron’s, these executives were selling their company stock at its fastest pace since the bear market began. Over $353 million in company stock was sold with the sells outnumbering the buys 8-to-1. Company executives always claim that diversification is the reason for selling, and this is a legitimate reason to sell, but the level of selling could indicate they are seeing tougher times ahead.

Valuation

Earnings for companies within the S&P 500 amounted to $14.88 in 2008. The only thing uglier than this number was the earnings projections by the analysts at Standard and Poors. Their projection for 2008 earnings in March of 2007 was $92. By the summer of 2008, this number was down to $72. These estimates are a far cry from the final tally of$14.88. Despite this poor track record, these analysts have developed earnings projections for 2009.

If the S&P analysts are correct, and their past projections don’t instill much confidence, then the companies in the S&P 500 will almost double their earnings from 2008 - a lofty goal in this environment. This places the current Price-to-Earnings ratio (P/E) for the market at 33 based on the S&P 500’s current value of 943. The historical average for the market is 14. Many analysts will argue that the market deserves a higher P/E value due to the historically low interest rates, which is valid, but this still seems a bit rich.

What to do now?

If you are invested in the stock market through an Exchange Traded Fund (ETF) like the State Street SPDR (AMEX: SPY) or Vanguard Total Stock Market ETF (AMEX: VTI), you might want to think about using stop loss orders to protect against any pullback. For those who are a bit bolder, you may want to look at some of the inverse ETFs on the market. These vehicles gain value as the market declines. You can access a wide array of asset classes from U.S. large, mid, and small cap as well as international equity, sector, real estate, and value/growth.

Some of the more popular are the ProShares Short S&P 500 (NYSEArca: SH) and the ProShares Short QQQQ (NYSEArca: PSQ). Investors can even leverage the market’s movements with ProShares and Direxion funds. ProShares most popular inverse ETF is the UltraShort S&P 500 ETF (NYSEArca: SDS). This fund provides a 200% return on the daily movements of the S&P 500. The Direxion funds offer investors a triple inverse return on the underlying benchmark. Its most active market tracking offering is the Daily Large Cap Bear 3X Shares (NYSEArca: BGZ).

However, you need to tread carefully with these products. They are based on daily swap agreements so they track the market’s performance from day-to-day, not over a longer period. Most investors expect that if the market loses 20% in a year, then the inverse ETF would gain 20%. This is usually not the case due to the daily focus of these products. The returns could deviate considerably from the 20% loss.

So one of the green shoots that the market is celebrating may not be as strong as hoped. In the coming articles, real estate and the consumer will be discussed to show that other green shoots may not come to full bloom as hoped either.