"Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces" - Sigmund Freud

An interesting thing happened last week, garnering no coverage in the face of a global meltdown, literally and figuratively. Nike reported horrible earnings. A rare miss by the industry all star is best summed up by CEO, Mark Parker "higher costs for materials, labor and freight are here, as predicted." Then there was Fedex with another miss "earnings could be trimmed by ongoing Middle East turmoil and fuel costs."

Cisco warned about earnings the prior two quarters yet the Bernanke fueled optimism simply chalked it up to company specific issues and having nothing to do with shrinking government spending. Cisco, Nike and Fedex are not alone. Talbot's warned (and also confirmed when February CPI showed contraction in "apparel"). Kroger one of the largest grocery stores reduced 2011 guidance. Darden Restaurants lowered 2011 guidance. Best Buy lowered 2011 guidance.

Friday saw the jubilation of bank dividends being "returned" yet C and BAC did not even ask for Fed approval which means their earnings outside of FASB shenanigans will continue deteriorating. These are not isolated warnings but rather across all industries. Month after month PPI and CPI have been showing rising inputs costs, margin compression, rising non discretionary prices and contracting discretionary prices. At what point will corporate profits peak? It is quite possible that time is upon us.

Perhaps the bulls will spin Apple's higher freight costs caused by global supply disruptions as bullish for Fedex. Rising food prices are bullish for Caterpillar as farmers will buy new tractors. The chatter from the "all in" fund managers is how cheap stocks are. PE ratios are cheap on a historical basis spews from their lips like "crisp 20's" off the Bernanke press. Let's look at the facts and see just how cheap stocks are on a historic level.

PE Ratios are not low, dividend yields are horrible and earnings yields are average (all based on data from 1960 to present). So far a war in the Middle East, a nuclear meltdown of Japan and rising commodity prices have only been able to knock the SPX down 5%. Alcoa (AA) will kick off the Q1, 2011 earnings season on April 11. As Freud said, at some point reality will dash illusions to pieces. Perhaps that day is sooner than most anticipate.