As each day passes, estimates for how bad Q2 earnings will be grows. According to The Wall Street Journal, "analysts estimate S&P 500 operating earnings -- income excluding one-time items -- fell 11.5% in the second quarter."

While the paper points out that earnings often come in a bit worse than expected, this quarter could be a bit different. Everyone expected the numbers to be bad in sectors including banking, brokerage, insurance, autos, and airlines. But the real question is whether business and consumer spending have been hit harder than predicted.

If spending is down, even companies which are expected to do fairly well such as Apple (NASDAQ: AAPL) and Cisco (NASDAQ: CSCO) could face rough earnings reports as big business and the little consumers defer purchases which they feel they cannot afford. That means that tech earnings, which were expected to be OK, could take a big hit.

If tech falters, what is left? Energy and commodities companies? Perhaps, but that is thin ground on which to build an earnings season.

Douglas A. McIntyre is an editor at 247wallst.com.

In a quarterly dance routine that's becoming quite familiar -- call it the write-down, capital raising dance -- the Wall Street Journal reports that Merrill Lynch & Co. (NYSE: MER) is planning to sell a $5 billion stake in Bloomberg, the media company, and to cash out of its 49% stake, estimated at $12 billion, in Blackrock (NYSE: BLK).

Why is Merrill doing this? As we've seen over and over again in the last year, banks must maintain specific levels of capital to assets in order to meet regulatory requirements. When a bank reduces the value of its assets, as accounting rules require, the bank writes off the decline in asset values against its capital. In order to maintain a sufficiently high ratio of capital to assets, banks seek to raise capital equal to the amount of the write-down.

Merrill anticipates taking $6 billion in write-downs for the quarter. These could come from its $41 billion in Level 3 assets -- assets valued based on computer models since there is no active market that prices them. Merrill is fortunate to have these stakes available to sell because it will be able to raise capital without diluting current shareholders. Unfortunately, once it sells these stakes, Merrill shareholders will no longer get the earnings stream they generated.

Japan's Nikkei Index, the weighted average of 225 stocks in major companies, fell for the 10th day. That has not happened since 1965.

According to the FT, "Rising fears about the impact of inflation on slowing economies took their toll on Japanese and other Asia-Pacific markets." That sounds a bit like the current trouble in the US.

A number of other indicies have had sharp declines lately. The Shanghai Composite has fallen by more than half since late last year. Rising energy and food costs in China have not helped it. Neither have concerns that a recession in the West could cut demand for its exports.

The Nikkei news says two things. The first is that the economies in other large nations may be as troubled as that in the US. Traders often look out several quarters when they make their buying or selling decisions. But, the second, more ominous sign from the Nikkei's decline is that it says that the smart money in Japan believes that the price of oil is not likely to fall. Japan is relies more on imports of crude that the US does.

The tough run for the Nikkei is not restricted to Japan. US and EU markets are likely to set records of their own, and not the kind that traders look forward to.

Douglas A. McIntyre is an editor at 247wallst.com.

The Wall Street Journal reports that the stock market finished the second quarter just above Bear market territory. Does that mean everything's great or that things are going to get worse from here? I think the worst is yet to come and that investors should hold onto their stocks unless they and/or the companies they've bought are going bankrupt. And they might look to buy stocks in the coal and fertilizer industries.

The Journal reports that the Dow Jones Industrial Average (DJIA) began its march downward, ending the quarter (including Monday's slim 3.50-point gain) with an overall loss of 912.88 points, or 7.4%, at 11350.01 -- and perilously slightly less than the 20% decline from a recent high that is considered the start of a bear market. It was the third straight quarterly decline and the worst second quarter since 2002.

I think the 20% decline that designates a Bear market is pretty arbitrary. People know that the market has been a disaster. And if earnings matter, it's likely to get worse. The Journal notes that analysts expect earnings at S&P 500 companies to be down 11% for the second period, led by a 60% plunge in financial-sector earnings. Estimates fell sharply as the quarter progressed. On April 1, analysts were expecting a 2% drop in S&P earnings and a 31% decline in the financial sector.

What will it take to break the downward cycle for the U.S. stock market and its economy? Get back to our roots as a country that lives within its means.

The source of the problem is that we have gotten away from the idea of paying only for things we can afford. To close that affordability gap that results from lower income and higher prices, we have borrowed money -- $9.3 trillion in federal debt, a $410 billion federal budget deficit, and $2.5 trillion in consumer borrowing -- which has caused other countries to view the dollar as a distress currency. It's lost 72% of its value since January 2001 -- when it traded at 92 cents to the euro.

Having spent the last two weeks in Europe, that weak currency hurts -- everything seems to be about 50% more expensive there than it is here. Gasoline there is far more expensive than it is in the U.S. -- roughly $9.60 a gallon compared to $4.25 here. And the reason that our stock market is dropping while oil rises is a result of deliberate government policies designed to weaken the dollar and strengthen oil.

Investors looking for good news today can take solace knowing that Friday the 13th is not especially unlucky.

Indeed, researchers in the Netherlands have determined that fewer accidents and reports of fire and theft occur on Friday the 13th than other Fridays. And stocks are actually trading up in early market action. Still, some people won't care. About $800 million to $900 million will be lost in business today because people will not do things they normally do.

Investors need to remember that there are many ludicrous theories about the stock market. There is the Super Bowl Indicator where people figure that if a team from the old American Football Conference (now the American Football Conference) wins, the market is headed down, while a win for the old NFL (now the National Football Conference) means good times are ahead. People believe that bad things happen in October and that May is the time to sell and go away.

Sometimes these theories "work." Other times they don't. None of them should serve as the sole basis for any investing decision. I understand their appeal because they seem to take the guesswork out of figuring out the gyrations of the market. Real life, though, does not always fit into theories.

The Dow Jones industrial average and the NASDAQ Composite Index are both down more than 8% this year. Gasoline prices have topped $4, sending many trucking companies to the brink of bankruptcy. Soaring commodity prices have squeezed profits of businesses ranging from Dow Chemical Co. (NYSE: DOW) to the local pizzeria.

If you want to invest, do your homework. Of course, people still need to avoid black cats crossing their path, stepping on sidewalk cracks and breaking mirrors.

The stock market was down without much conviction in the early going with the DJIA off 40 to 50 points. But someone must have pulled the plug somewhere as it has been dropping fast from about 2 p.m. and the Dow was down over 180 points as I pecked away at the keyboard.

What the heck changed overall market sentiment so suddenly? Some say it's oil prices drifting higher. That's always a good scapegoat and probably has something to do with it. It might also be a connected issue with the raging conflicts in the middle east and Africa.

There is always the negative sentiment about housing, employment, last night's democratic primaries in Indiana and North Carolina just muddling on. It might also be our current president just muddling on, or it might just be that all of these things just prompted some profit taking after weeks of appreciation.

Maybe it is my pal Warren's negative sentiment about the financial sector and the years of pain that may still need to be worked out of the system. Whatever it is you can be sure that after the market closes the Wall Street pundits will discuss all their presumptions as if they were facts...

UPDATE: The DJIA closed at 12,814.35 down -206.48, or -1.59%

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.

The New York Times reports that the market was up 190 points yesterday and has risen 11% in the last few weeks. Not only that, but AP says that the jobless rate fell to 5% in April -- better than the expected 5.2% rise. So does this mean that happy days are here again? No. And you should use today's rally to take money off the table if you have any.

Why? Things are not good for the consumer who accounts for 70% of economic growth. My mailman stopped me yesterday after my run and gave me a grim look. He is very friendly and talks to many people on his delivery route and elsewhere. And he told me that with gasoline prices so high, many people are canceling their vacations so they can pay their bills.

As I posted here, gasoline prices are gobbling up a bigger and bigger piece of the median family's income. And USA Today reports that worldwide food prices have skyrocketed 45% -- sending consumers on a recession diet. Businesses are having trouble getting money from banks because the banks still have $500 billion in hard-to-value assets which requires them to hold onto every scrap of capital they can get.

As investors await today's start of earnings season, they should remember that Wall Street's equity analysts blew it in the fourth quarter, overestimating profit by 33.5 percentage points, the biggest miss ever, according to Bloomberg News.

"Merrill Lynch & Co.(NYSE: MER), Bank of America Corp. (NYSE: BAC) and the rest of the securities industry aren't losing credibility because of anything sinister," the story says. "The problem is they didn't get their math right after credit markets froze nine months ago."

I am not terribly optimistic that analysts have improved much in the first quarter. Earnings estimates are probably still way too high. Many, many companies are going to miss their earnings estimates. This will erode Wall Street's credibility even further.

Richard Weiss of City National Bank told Bloomberg that first quarter results will be a "big wake-up" call for some analysts. Some may lose their six- and seven-figure jobs because of it.

The lesson here is for investors to do their own homework. Anyone who doesn't have the time or motivation to do it should either hire an adviser or buy index funds.

These days, you can't take Wall Street's word for anything.

The Dow Jones industrial average soared almost 400 points today as a plethora of good news soothed the frayed nerves of investors. This is the best start for stocks in the second quarter since 1938, according to Bloomberg.

First, Lehman Brothers Holdings Inc. (NYSE: LEH) and UBS AG (NYSE: UBS) announced plans to raise an additional $19 billion in capital to bolster their balance sheets that have been pounded by write downs from exposure to subprime mortgages. The news lifted the shares of many financial stocks including Merrill Lynch & Co. (NYSE: MER), Bear Stearns Cos. (NYSE: BSC) and Morgan Stanley (NYSE: MS).

For once, the economic data wasn't all that bad either. Data from the Institute of Supply Management showed manufacturing activity slowed in March at a slower rate than February and the government also reported better-than-expected construction data for February.

I'm glad all these "blue chip stocks" are blowing up. No, I don't enjoy seeing investors suffer, but as I've written about here, here and here, investors need to learn not trust any company or anybody in this business. Investors don't even have to remain invested all the time! Contrary to the advice of fee-earnings-professionals, the majority of whom continually fail to match the S&P 500's returns, you don't have to manage your money like a $500 million mutual fund. Diversification is for widows and orphans!

While it'll probably take me a few years to truly get through to all of you, if you've been invested for any length of time in any company listed below-considering what you've been through-you're probably more likely to believe me:

Merrill Lynch & Co. Inc (NYSE: MER)
The Bear Stearns Companies (NYSE: BSC)
Citigroup Inc (NYSE: C)
MF Global Ltd (NYSE: MF)
E*Trade Financial Corp (NASDAQ: ETFC)
Sirius Satellite Radio Inc (NASDAQ: SIRI)
Bank of America (NYSE: BAC)
Washington Mutual Inc (NYSE: WM)
Thornburg Mortgage Inc. (NYSE: TMA)
Alcatel-Lucent (NYSE: ALU)
Sprint Nextel Corp. (NYSE: S)
Intel Corp. (NASDAQ: INTC)

We've been on the phone a lot with investors over the past few weeks. I don't know about you but from where we sit, there is a lot of fear in the market. Investors are worried: worried about what's going to be, how low the markets can go, how the dollar will continue to drop, inflation, etc. There's what to worry about.

But, there is a counter-Chicken Little story setting up behind the backdrop of fear. Bloomberg has an interesting piece out this morning entitled "Buy Signals Abound in U.S. Stocks Shadowed by 1970s". Bloomberg reporters draw comparisons with the almost 20% drop in the S&P 500 (Amex: SPY) we've seen since the October highs.

So, are things any different this time?

Well, for one, Bloomberg claims companies in the S&P 500 are trading at their cheapest levels in more than 18 years to forecasted profits. That means investors believe that forecasted profits are going to fall way short of projections. If the world doesn't come to an end, Bloomberg thinks there may be an opportunity here.

Secondly, valuations versus 10 year Treasuries are also lowest in at least two decades.

Investors don't want to hold stocks. I can't blame them. Anyone who's been trying to pick up some value has probably seen their trades go against them.

Reuters reports that Carlyle Capital -- an affiliate of Carlyle Group that counts former President George H. W. Bush among its advisers -- can't pay back the $16.6 billion it owes banks. So its lenders are taking possession of its assets to try to recoup some of the money they lent. Interestingly, it said that the only assets held in its portfolio as of Wednesday were U.S. government agency AAA-rated residential mortgage-backed securities (MBSs). If these securities are indeed worth their AAA rating, I wonder how much of a "haircut" those lenders will take.

This latest collapse is evidence of two viciously destructive cycles in the global credit markets which government policy decisions are making even worse. The first cycle is driving down the stock market, setting inflation on fire, and hammering the dollar -- which is down 68% since 1/19/01 -- as the economy slows. The second cycle is reinforcing a chest-clutching decline in the value of the $6.1 trillion MBS market:

• The Bernanke call. As I've posted, this means that Federal Reserve Chairman Ben Bernanke's moves mark a ceiling below which the market keeps falling. The basic idea is that when the stock market falls, the Fed responds by flooding the market with money -- interest rates have fallen from 5.25% to 3% and are likely to hit 1% and then there's the "Term Auction Facilities" like this week's $200 billion month long swap of government securities for MBSs. The lower rates and added money spur inflation -- oil (+357% since 1/19/01), food prices rise (e.g., milk prices +12% in 2007) and gold futures hit $1,000 -- but do nothing to solve the basic problem -- which is to recapitalize banks. The market falls on the announcement of a new credit market problem, such as Carlyle's default, and the cycle begins anew.

Nobody knows why the market rose 416 points yesterday. But The New York Times reports that the Fed made an extraordinary move yesterday -- it offered banks $200 billion for a month -- letting them use Collateralized Debt Obligations (CDOs) as collateral for the loan. This inflationary move helped drive oil to $109.72, up 357% since 1/19/01 and cut the dollar declined to one Euro to $1.5469, down 68% since 1/19/01.

But beyond the inflationary impact of the move, there's less here than meets the eye. Certainly, the surprise effect might have forced investors who had a short position to cover by buying back shares. That short-covering may have had a snowball effect. But there's also this -- if banks take those $200 billion off their books, there's still $6.1 trillion worth of CDOs on the market. And what will happen to those $200 billion worth of CDOs at the end of the month?

But there is an interesting twist -- the Fed claimed in a conference call with reporters that it was minimizing risk by accepting only securities that still had the highest triple-A ratings and that they would impose a discount, on mortgage bonds that appear to carry additional risk. If there is any meaning in those AAA ratings then the banks will end up pledging their highest quality securities as collateral and retaining more of the dodgy ones.

An op-ed in today's Wall Street Journal wonders (subscription required) whether Eliot Spitzer's high-profile demands for change at AIG (NYSE: AIG) and Marsh & McLennan (NYSE: MMC) did more harm than good:

"In both cases, Mr. Spitzer issued ultimatums to the company boards that they had to replace their CEOs, or else he'd indict the company," the paper says. "Both companies have struggled ever since."

Before we get on Spitzer too hard, it's worth noting that almost all companies see their stock prices go down following the announcement of investigations and charges. News items like this generally reflect serious problems at the company -- and mark the first time investors become aware of certain issues that the company hadn't previously disclosed. If regulators worried about driving down share prices by launching investigations, they wouldn't be able to launch any investigations! Ultimately, investors are protected by zealous enforcement of the law.

However the notion of an Attorney General essentially installing at executives at public companies is frightening one and hopefully the failure of Mr. Cherkasky -- his resignation as CEO prompted a 5% run-up in the stock -- will put an end to experiments like this one for a long time to come.

Ideally institutional shareholders would lobby for strong upper management replacements in the face of scandal.