Beware The Bear…Rally

We’ve turned the corner, right? Stocks are up for four days straight now, the Consumer Confidence Index for March shows a big upside surprise, and interest rates were just hacked by a half-point, with the promise of more cuts on the way. Good ol’ irrational exuberance is saddling up and ready to ride again!

Not so fast, pardner. As tempting as it is to believe the market is beginning to climb out of its yearlong slump, we’ve got an earnings season right ahead of us, and last time I checked most companies were prepping us for some bad numbers. The latest, delivered after Tuesday’s market close, come from handheld device market leader Palm and fiber-optic equipment maker Nortel Networks .

Granted, stocks may benefit from the expectations game, but my feeling is that lower revenues and lower earnings across the board mean…well, lower revenues and lower earnings across the board. And it’s doubtful that investors who previously thought tech and Internet stocks were impervious to business cycles will toss aside the hard lessons learned during their 12-month course in Economic Reality 101. Especially when many of the earnings reports will be accompanied by news of more layoffs. (See Palm below.)

What we may be looking at here is a bear rally, a temporary ticker turnaround that soon will evaporate under the steady downward pressure of lower corporate spending plans already in process. I’m not trying to be contrarian or downbeat, just issuing a sensible reminder that investors shouldn’t jump to premature conclusions based on fervent (make that desperate) hope.

Yes, the Consumer Confidence Index is crucial as an indicator of future spending, and the March advance to 117 reversed a five-month decline and mocked Wall Street forecasts of a dip to 105 from February’s 109. But the gain only gets the CCI back to January’s level and leaves it far below last May’s peak of 144.7.

Also, other economic data released Tuesday remind us that the downturn is more than the product of jittery consumers and investors. The Commerce Department reported that new orders for durable goods fell 0.2% in February, while new orders for capital goods – which tell us how much companies are spending on new equipment and software – dropped 4%.

Getting back to those pesky earnings reports, handheld device market leader Palm announced after Tuesday’s market close that it barely beat street estimates for its fiscal third quarter with a net profit of $9.3 million, or 2 cents per share. But Palm also said revenues will be down considerably in the current quarter and expects a net loss of 8 cents per share. The company said it would lay off 10% to 15% of its workforce next month.

And fiber-optic equipment maker Nortel Networks forecast a wider-than-expected Q1 loss and lowered sales estimates.

Finally, Berkshire Hathaway chairman Warren Buffet – who was dismissed by many investors and analysts only 18 months ago as an old-economy crank for daring to suggest that the vast majority of Internet and tech stocks were wildly overvalued – said on Tuesday that many U.S. stocks are still overvalued.

I suspect more investors may listen to the crank this time around.

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