There's some excitement about all the companies that beat Q1 S&P earnings estimates (see first chart). However, once you consider how many beat revenue estimates, it's a less compelling picture. Companies are slashing expenses at a ferocious pace, which is an anorexic approach to profitability that cannot be sustained for long (same dynamic in places like France, where employment is falling at the fastest pace since 1970) . A bounce in demand in H2 2009 will be critical in unleashing the operating leverage now being created; otherwise this is an Earnings Quality issue. The most vibrant activity appears in Asia, where recent import demand has been 3x higher than the developed world.

As for U.S. consumers, headwinds may still be under-appreciated. Notices of Default (which precede foreclosures) are surging, counter-cyclical municipal tax and spending policies will be widely felt, and issuance of new credit cards (closely tied to retail sales) are falling off a cliff. Perhaps that's why bank credit card losses are already running close to the Fed's Adverse Case. There's also the issue of Income Quality. Households are seeing escalating contributions from government transfer payments, rather than earned income (2nd chart). It does not take an economics degree to consider these transfer payments ephemeral, and something that will have to be paid for one day. The current savings rates have a long upward march from here.

Mike and JPMorgan