Time to Row, or Sail?

Note to readers: Due to internet connection problems from the Shadow Fed fishing camp in Maine, important information that John wanted to include in this week's letter did not get out in time for the original deadline, and so we are reposting the letter.

A few weeks ago, Ed Easterling and I updated the work we published almost ten years ago about secular bear and bull markets in chapters 5 and 6 of Bull's Eye Investing. This week I am in Maine at the annual Shadow Fed fishing trip (for those of us whose invitation to Jackson Hole keeps getting lost in the mail). Ed has graciously agreed to do another piece with me on the earnings, or business, cycle, which is different in timing than the secular stock market cycle but is part of the total warp and woof of the markets. When you combine them, you get a much clearer picture of the markets.

Earnings are a topic of great debate. At any given time, you can hear someone on TV talking about how "cheap" the market is, while the person on the next channel goes on about how expensive the market is. Today we look at the cycle of earnings, rather than a specific point in time. Let me give you a little preview. In terms of time, this earnings cycle is already longer than average, and in terms of magnitude it is projected to go to all-time highs. Which makes one want to think about whether current projections are realistic. So let's jump right in. (Note: This letter sets the Thoughts from the Frontline record for the number of charts, so it will print longer than usual, but the number of words is about average.)

But let me note that this week is the start of the 13^th year of Thoughts from the Frontline. I started in August of 2000, talking about how the US would be in recession in 2001, analyzing the yield curve, which was beginning to seriously invert and which was also the signal for the recession call for 2007. I began with about 2,000 email addresses, gathered from readers of a previous print letter for another publisher and the readers of my first best-seller; and for whatever reason the list began to grow, and within a few years my entire business model changed, thanks to you, the readers and friends of this letter. The list has now grown to around 1 million of my closest friends and is posted on more websites than I ever imagined it would be. Who knew, 13 years ago, that this thing called the internet would be so cool? I am very grateful for your support.

I started Thoughts from the Frontline as a free service and hope to continue writing it for free for many years, as long are there are a few close friends who will still read my musings. My writing and thinking have evolved over the years, but I still sit down each Friday, wherever I am, and write about what I found interesting in all the reading I did the past week. I still find it exhilarating to hit the send button at the end of the process, every Friday night, and I relish the connection I feel with and the feedback I get from my readers.

And so, with an appreciative heart, here is this week's letter, as we kick off another year. And what a year it promises to be!

Time to Row, or Sail?

In April 2007, while forecasters predicted at least two more years of increases, the first "Beyond The Horizon" article stated:

"Earnings have increased at double-digit growth rates for five consecutive years – although many agree that earnings growth may be slowing, it's beyond almost everyone's foreseeable horizon that earnings might actually experience a decline."

By the end of 2007, earnings per share (EPS) for the…