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Do You Know The Magic Word?

Stocks have weakened midday, but after the S&P 500 has rallied 8 percent in the last 7 trading sessions, no one seems surprised. Bids are light; bonds have rallied.

Still, several companies have tried to sound a more optimistic tone. They are using the magic word: stabilization.

Both United Technologies and Caterpillar talked about sales stabilization.

"Stabilization" implies an even more important word: visibility.

Bulls are arguing that companies are sending signals that they have a better grip on where earnings might be in the next couple quarters.

This is a sea change from the prior six months, when most companies simply said they were clueless about where earnings were heading; many even suspended guidance.

Analysts accordingly kept reducing estimates. That trend may now be ending.

Increasing visibility implies that it is now becoming worthwhile to talk about forward earnings, and what multiple should be assigned to those earnings.

There is no consensus on this at all, but right now Standard and Poor's has an estimate of $75 earnings for the S&P 500 for 2010. What multiple should be put on this? Mike O'Rourke and others have noted that if we assign a normal historic average multiple of 15x forward earnings, we arrive at 1,125 for the S&P.

We are currently at 950, which is not that far away.

The bears have not been defeated; many still complain about the poor quality of the earnings (there have been complaints about accounting and taxation gimmicks at Caterpillar and other companies that helped boost earnings). Still, they are now more on the defensive.

In addition, credit issues have not gone away. Look at regional banks-Regions Financial is down 12 percent as they reported a larger loss than expected on credit quality deterioration.

Analysts noted that nonaccrual loans (loans that are nonperforming, on which interest is overdue) increased 58 percent compared to the prior quarter.

That is a lot worse than most other regional banks have reported so far, so this might be just a specific problem for Regions.

Net charge-offs (loans they are essentially writing off as uncollectible) were 2.06 percent of average loans, up from 1.61 percent in the first quarter, and again worse than most expected.

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