Updated from 7:03 a.m. EDT.

Amid dire talk of the credit markets in recent weeks, investors' usual chatter about earnings growth has retreated to the background. And the sad thing is that when you peer a bit closer at what to expect when companies start reporting first-quarter earnings in two weeks, it becomes clear that this subject is not suitable for discussion in polite company.

Consider that on Jan. 1, analysts' consensus expectations for the first quarter earnings growth for S&P 500 companies was 5.7%. Two weeks ago, estimates had fallen to -1.1%. Now they're down to -4.4%, according to First Call data. Oops.

If this number turns out to be accurate -- and my guess, based on recent trends, is that it's overly optimistic -- it will mark the third straight quarter of earnings contraction. That hasn't happened for S&P 500 companies as a group since the recessionary span from the third quarter of 2001 through the first quarter of 2002.

In this context, you might think every single institution on the Street must be pessimistic. But that's far from the case. There are still prominent bulls out there who believe that not only is there no recession now, but there won't be one this year, either.

I think the bulls are wrong, and that the market is setting up for another major leg down. But it's important for bears to understand the bulls' case, and that it's backed by some of the top U.S. economic forecasters, including the intellectually potent ISI Group in New York.

Here's their angle:

Bulls believe that real consumer spending is on track to rise in the first quarter and that capital expenditures by corporations are also rising. They think that exports are the hidden lever, as they boosted fourth-quarter GDP last year by almost 1% and could do the same in the first quarter of this year. They believe that inventories were down by $10 billion in the fourth quarter, making room for enough buying to lift GDP in the first quarter.

Bulls also believe that unemployment claims remain below recessionary levels, that tax refunds are up 29% year over year and that the M2 measure of money supply has surged $151 billion in the past five weeks, lifting its annualized growth rate to a stunning 11%.

While even bulls admit that consumer net worth is being hit by house prices, that food and energy prices are acting as a tax, that lending standards are tightening and that employment is weakening, they still think that netted out against the positives, GDP has a shot at rising as much as 1.5% in the first quarter, which would shock a lot of people.

Moreover, they have the bond market on their side. Yields on two-year notes fell to 1.6% this week, as the stock market tumbled and municipal bond market melted down. That means bond yields don't offer much competition to stocks. I mean, does anyone really think that you can prepare for your future by having your money earn 1.6%, when inflation is probably higher than 2%? Bulls argue that low Treasury yields will essentially force institutional investors, and the public, into stocks.

The bulls have no doubt that the U.S. economy is slowing -- don't get me wrong. They can see that in lower consumer confidence readings, lower home sale prices, poor earnings reports from major companies like Home Depot ( HD), and sales reports from Google ( GOOG). But they believe there is still demand from the global economy, as even during a slowdown, India is still expected to grow by 8.4% this year and China is expected to grow by 9%.

The bulls also say that you just can't count out the effects of all the efforts that the Federal Reserve and Bush Administration are making to solve the credit crunch. They haven't gotten much return for their work so far, but man, at some point, you have to think that it will have an effect.

ISI points to 16 notable policy moves including interest rate cuts, the initiation of the new Treasury Auction Facility, the tax rebate checks coming soon, the lift on the limits of Fannie Mae ( FNM) and Freddie Mac ( FRE) loan sizes, and the fact that the federal funds rate is likely to be cut another half percentage point at the Federal Reserve Open Market Committee meeting next week. That will put the cumulative total at 2.75 percentage points over nine months, which is believed to be one of the sharpest, fastest cuts on record.

Now add the latest talk out of Washington for a $35-billion federal bailout program for mortgage holders facing foreclosure, and you can see why bulls see a light at the end of the tunnel within the next few months. It's all very inflationary, which is why gold has been soaring, but bulls believe these government dollars do have the potential to work their way into improved corporate earnings and, thus, higher stock prices.

Bulls also point to rising levels of investable funds around the world, from sovereign wealth funds to U.S. companies' cash hoards, which will put a bid under the market. ISI points out that a railroad IPO in China last week drew out $420 million; Visa announced plans for a $19-billion IPO of its own; IBM ( IBM) announced a $15-billion stock buyback; and Allstate ( ALL) announced a $2 billion buyback. Corporate cash is said to total at least $1.6 trillion right now.

Meanwhile, pension funds and banks worldwide are putting money to work. ISI logs these:
  1. The Inter-America Development Bank reportedly pledged $4.5 billion for projects in Brazil;
  2. Two Canadian public pension funds have pledged $1 billion to Asia;
  3. Sovereign wealth funds in the Middle East and Asia have $3 trillion to put to work;
  4. Vulture investor Wilbur Ross is planning to put $1 billion to work in the bond insurance biz;
  5. Carl Icahn put another $1 billion into car parts maker Federal Mogul;
  6. And the California state pension fund said it is putting $7 billion to work in commodities.
So while the banks are still in a lot of trouble as their screwup in subprime mortgages continues to harass their earnings potential, bulls say bears miss the real glimmers of hope emerging elsewhere.

That may be the case, but the really big problem that trumps all positives, in my view, is that commercial lending is contracting due to banks' need to husband as much money on their books to match the magnitude of their derivatives-related losses. That's why banks are issuing margin calls to fixed income hedge funds. That's why Citigroup ( C) fell to its 2002 bear market low last week. And that's why sovereign wealth fund investors in the Middle East, who normally suffer losses with silent stoicism, have begun complaining publicly about Citi and UBS ( UBS) management.

Bottom line: I'm the first person to want to be optimistic, but I continue to be skeptical of the bulls' arguments. In my last column, I mentioned that the only investment I favored -- based on seasonal work by Logical Information Machines -- was natural gas futures. The ETF that I recommended, U.S. Natural Gas Fund ( UNG) is up 26% since the start of February, so it's probably a good time to take profits now. Although a one-week broad-market rally is likely now, expect a material drop in equities after a cloud of increasingly serious credit concerns again blots out the sun.

Know What You Own: Natural gas is a segment of the energy sector. If you want broad exposure to this sector, an exchange-traded fund (ETF) to consider is the iShares S&P Global Energy Sector Index Fund ( IXC). This ETF was recently trading at $132.06.

The current top five stock holdings in the S&P Global Energy ETF are Exxon Mobil ( XOM), BP ( BP), Chevron ( CVX), Total SA ( TOT) and Royal Dutch Shell ( RDS.A).

These stocks were recently trading at $84.42, $64.72, $86.30, $74.80 and $69.16 respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section, and to stay up to date on the energy sector, don't miss TheStreet.com's Energy/Commodities section.

At the time of publication, Markman had no positions in stocks mentioned, although positions may change at any time.

Jon D. Markman is editor of the independent investment newsletter Strategic Advantage. He also writes a regular column for MSN Money. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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