Earnings surprises? They're on the downside.

And if you're a tech company, you can exceed expectations -- and get hammered anyway.

Monetary policy in both the United States and European Union (EU), geared toward inflation-fighting, threatens continued expansion. Oil prices remain high, threatening Asian economies, which are disproportionate importers. Geo-political troublespots from the Middle East to Colombia are heating up.

Third-quarter growth rate of the GDP was reported at 2.7%, sharply down from the second quarter's 5.6%. Sales of durable goods fell 0.5% in October after rising 1.1% in September. Retail sales rose only 0.1% in October after growing 0.9% in September. Most worrisome of all, at the end of November investors yanked some $8.5 billion out of stock market mutual funds, suggesting that faith in the never-ending bull market is finally lagging.

Alan Greenspan remains the Great White Hope for continuing growth in America and a new leg up in the decade-old bull market. His ability to manage the upcoming "soft landing" will determine his legacy.

Is the sky falling or is this just a prelude to a replay of the 1998 "crisis" that became a non-event for America's markets and the broader economy? Here are key areas to watch:

Monetary Policy Drag

Six rapid rate increases during the last year and a half by Alan Greenspan have popped the US tech market bubble, for good and certain. As P/E ratios return toward the historical mean, it appears that Nasdaq leaders have still got a long drop ahead of them. Since rate increases take a year or more to work their way through the system, it appears that corporate borrowers and New Economy stocks alike face more financial root canals ahead.

In Europe, where the European Central Bank, concerned about inflation caused by high oil prices and a weak Euro, has presided over far more rate hikes than Greenspan during the last year, statistics released over Thanksgiving reveal that the British, Dutch, French, Italian, and German economies report slower growth and higher inflation than expected. Consumer and business confidence is eroding rapidly. Once again, the pain from prior rate hikes has yet to fully snake through the EU economic food-chain.

Earnings/GDP Swoon

US GDP is expected to fall next year ... and as GDP falls, so do earnings expectations. As earnings expectations fall, so do stock valuations. As stock valuations fall ... and consumers move their money to money market funds, the value of employee stock options and 401(k)s evaporate. If consumers feel less wealthy and spend less, that could result in a cycle of increasingly reduced consumption. ...

Of course, from Alan Greenspan's point of view, this could be a virtuous cycle indeed, if it results in massive layoffs ... because the Fed wants to see increased unemployment as much as it wants to see a permanently deflated stock market "bubble."

Liquidity Crunch

Exacerbating the projected fall in corporate profitability is a nascent credit crunch. First the dot coms crashed, and the IPO window on Wall Street closed with a bang.

Then the bond markets froze, realizing that the $200 billion in corporate debt issued to telecommunications companies over the last few years was squandered on price wars and marketing rather than on build-out of new, profitable systems and acquisition of retainable market share. Whoooops. The bond markets now have a massive oversupply of unsavory inventory and no appetite for further issues.

Meanwhile, dealmakers on Wall Street say that the mergers and acquisitions markets have all but dried up, and next year will be a year of fewer and fewer deals, so corporations seeking money for M&A can fuhgeddaboudit. And finally, the banks are tightening credit in the wake of weak loans to telephone companies and others. The FDIC warned recently that bad real estate loans are depressing bank earnings, and that lending institutions have hit their lowest level of capitalization since the end of the last economic shock in 1989. The growth in bank lending has shrunk to just 1.7% a year. With the Nasdaq sinking, IPOs as rare as US Air Force certified UFOs from Mars, and new M&A fodder dwindling, will foreign investors continue to pour money into US markets? ...

The Oil Price Trigger

So it all sounds scary, but ... what major negative event or scenario could trigger a full-blown recession? After all, Greenspan wanted a slowdown that would reduce overheated valuations and create some slack in the labor market.

Oil is the common factor on everyone's mind. Prices for natural gas ... are expected to rise sharply this winter. But the key problem lies in Asia, where energy-dependent countries could precipitate a real downslide.

Nancy Lazar, well-respected for her economic forecasting at the International Strategy & Investment Group, explained it this way to Barron's: "Historically, there is a high correlation with changes in oil prices and changes in the economy, with changes in oil prices leading by one year. A good example is 1986, when you had the crash in the price of oil and the economy continued to deteriorate before lifting off the next year. The same thing occurred in 1998: Oil prices were down and the economy stayed weak, but it helped lift the economy in 1999."

Lazar argues that the US economy is so tightly tied to Japan's that if "the US slows, Japan will slow, and the same is true for Europe. In Japan, domestic GDP is virtually zero." The growth in Japan has been in exports, which have been growing at double-digit rates. Lots of those exports are coming to the US, so if Wall Street catches a cold, the Japanese may get pneumonia. Throughout Europe, retail sales are relatively sluggish, while vehicle sales are declining because of the increase in energy prices. Exacerbating the decline is the depressed euro and a higher rate of personal taxation. ...

In other words, a US slowdown could easily trigger a global recession that might feed on itself over time. That's the kind of doomsday scenario that keeps Alan Greenspan up late at night crunching numbers.

And Lazar isn't the only one worried about the oil trigger. At its Caracas meeting this fall, OPEC refused to substantially lift production, and the Iranian oil minister was talking about the producing cartel cutting production this coming spring in anticipation of a world recession.

The Deficit and the Dollar

Then there's the worsening American trade deficit. In September, Americans bought a record $34.2 billion more in goods from abroad than they sold. The deficit with China -- $8.7 billion -- is the worst ever with a single country. The foreign debt could turn troublesome, economists say, because right now, foreign countries, with Japan heading the list, are lending the US tons of dough to pay for these imported goods. If Japan goes down under an oil shock, the flow of cash will come to an abrupt halt.

The Commerce Department in its trade deficit report says imports rose to $126.6 billion during September. There were large increases in several sectors, with computer equipment, aircraft, telecommunications equipment, autos, clothing, and TVs heading the list. Our foreign oil bill rose 4.2% to $10.7 billion.

There is the possibility of a dollar shock. The armor-plated greenback has been vital to America's virtuous circle of debt reduction. Yet the dollar is a disaster waiting to happen. America's record-breaking external deficit is only part of the problem. A downturn in the global cycle of mergers and acquisitions threatens to crimp capital inflows into the US at a critical juncture. If foreign investors decide that a combination of weak Wall Street offerings and high American debt makes dollar-denominated investments unattractive, Alan Greenspan could be faced with a dilemma. He will need to lower rates to re-start a sluggish economy, but would need to raise rates to protect the dollar. ...

Black-Hooded Anarchists

So what's to prevent the sky from falling? Well, if we can just stop those pesky demonstrators that have been bedeviling central bankers at their exclusive conclaves from Seattle to Washington to Prague, all will be well, right? Fed chairman Alan Greenspan in a recent speech laid great emphasis for future world economic well-being on globalization and the continuing expansion of markets and trade around the world. He sternly warned his listeners that the protesters to globalization must be stopped. Implicitly, Greenspan argues that continued economic well-being depends upon harmonizing existing labor, environmental, and human rights standards downward to the lowest common denominator, and marginalizing all those who insist on tying trade to raised economic and social standards in the developing world. No one expects the French anarchists to heed Greenspan. If anything, the black-hooded demonstrators are likely to multiply. ...

FedMan Uber Alles [Above Everything Else]

FedMan Alan Greenspan is far too savvy to sit back and let his legacy as the most puissant [powerful] Fed Chairman of all time be destroyed by mere passivity. You can expect FedMan to come to the rescue of the US economy, Nasdaq investors, and the new administration by lowering interest rates dramatically, in the event that a hard landing begins to clearly manifest. ...

Greenspan has ample reason for heroic action. It's his place in history after all. But would massive rate cuts jump-start foreign inflows of investor yen, deutschemarks, and francs?

That seems counter-intuitive, but if such rate cuts are seen as prudent crisis management, and the protection of the world's only safe harbor for investors, maybe so. Would they short-circuit the bear market in tech that demands a return to historical P/E ratios? Probably not. But they would surely stimulate consumer demand, ease the credit crunch on corporate America, and prompt a round of refinancing by homeowners in suddenly over-priced MacMansions.

So will Greenspan once again be successful in engineering a well-managed global financial crisis? That's a damn good question. As of this writing, there is no good answer. For that reason alone, we recommend that investors park their money in fairly liquid vehicles, and prepare to bargain-hunt as this mess gets sorted out. But remember, buying on the dips is no longer a sufficient timing strategy. Now investors must be aware and concerned about the many complex factors outlined above, at a minimum, and must refuse to commit until they can be sure major mayhem has been averted.