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Earnings estimates for the first quarter of 2016 are projected to show a decline of 10% in year-over-year growth. Take away the impact from decimated Energy sector profits and the picture is a little brighter at only minus 5% “growth.”

Second quarter estimates still retain some optimism because, after all, things may only get better. That quarter is projected to see negative 4.5% growth and only a drop of 1.1% ex-Energy.

In the video that accompanies this article, you can see some terrific charts of the evolution of these quarterly estimates over time. What becomes instantly apparent is that expectations are nearly always too rosy. For instance, at the end of December, Q1 2016 was expected to realize positive growth of +1.5% ex-Energy.

That’s what the Oil Bear has done to other sectors like manufacturing and banking. And that’s why I’ve been so cautious-to-bearish for the past 6 months because I knew that earnings estimates still needed to come down, even if analysts waited until the last possible moments to revise their fundamental outlooks.

Energy Sector Borrowing Base Redeterminations

Next month, oil and gas companies across the US are meeting with their bankers to review their existing loans and determine how much debt they can continue to carry for the next few months.

This “borrowing base redetermination” happens twice a year in April and October. Shasha Dai, writing for the Wall Street Journal’s Private Equity Beat last September, summed it up this way…

Oil and gas companies typically must borrow large amounts of capital to help finance drilling, exploration and other operations. Lenders often use a company’s proved reserves as collateral for these loans.

However, because commodity prices are volatile, banks typically reset the value of these reserves twice a year, usually in spring and fall. When determining the value of the reserves, banks use so-called price decks, or predictions of what oil or gas prices will be for the next few years.

With their oil and gas price forecasts in hand, banks calculate the present value of a company’s proven reserves by discounting the company’s future cash flow. And we know therein lies the problem because E&Ps are still pumping cheap oil furiously just to pay their existing debts and keep the wells and cash flowing.

What bank in the world would lend them more money if the oil price/supply equation is only expected to get worse?

My guess is that banks used something close to $50 per barrel to mark reserves last October. My next guess is that they will use something closer to $35 this April. That situation will not be good for E&Ps in more need of financing as the value of their reserves – their “borrowing base” – gets cut by another  30%.

But What If Investors See the Trough?

In my March 11 video blog Bear Hunt FOMO Melt-Up, I conceded that I would have to give up the bearish view of an over-valued stock market in an Earnings Recession if one thing was happening. That thing is institutional investors seeing the light at the end of the tunnel.

In other words, if they look at the earnings decline and see the trough, then they also see the recovery 6-12 months out. That is what makes them less negative on equities and selective buyers of companies and industries that still have solid earnings growth trajectories.

Here’s what I said then…

As a stock market bear, I decided earlier this week that I must “sleep with one eye open” on the bull case. And the biggest argument against my Earnings Recession thesis is that it is nearly discounted in current valuations.

In other words, global investors can see past the earnings decline and imagine the worst as ending soon. That’s the big “what if” that every investor must consider right now.

While I have said that forward earnings estimates are "still in jeopardy" of being revised downward with each passing week, it’s possible that the momentum of that slide has stalled. And therefore, earnings estimates that stop going down, while oil keeps going up, could give solace to stock market bulls, and nightmares to the bears.

Be sure to watch the video that accompanies this article to see all my earnings graphs and possible targets for the “valuation re-set,” even if that blessed event is delayed until the summer.