TPC has a good piece from Annaly Capital Management on the banks profit “mirage”:

If banks had held their coverage ratio steady at 63.6%, where it was in the previous quarter, this would have called for an additional provision of $12.9 billion, which more than wipes out the $2.8 billion in “profits” for this quarter.  Instead, to produce those headline profits, the coverage ratio drifted further south, to stand at only 60.1%. It’s impossible for outside observers to say what level of reserves is adequate to cover future losses.  After all, if a loan is collateralized, losses won’t total 100% of the loan.  We can’t say what the “correct” amount of provisioning is, but it isn’t 60%.  The average coverage ratio in the nearly 15 years before the crisis began is roughly 140%. The current coverage ratio won’t do, not when credit continues to deteriorate (and not if you want an active and lending banking system).

Clearly, the administration continues to allow the banks to “extend and pretend”.  Can this be continued indefinitely?

dshort.com has a good piece showing the PE ratio based on as-reported earnings  and actual prices. Here’s their chart.  It doesn’t look cheap to us – what do you think?  If the PE ratio falls by half, then reported earnings have to double for the stock market level to not fall further.

As TPC points out, using actual reported earnings is the only way to keep emotion out of the analysis.