Schansinger: It's a combination of both.
Individual companies' circumstances are
being exacerbated by an increasingly
difficult macroeconomic environment. The tendency is always to
dismiss each warning as a company-specific one -- bad management,
product cycle difficulties, etc. -- but when you start to see
disappointments manifest themselves across industries, one has to
start to look at the bigger picture.
I don't want to blow this out of proportion -- conditions are generally
good, and the economy is good. But we're going through a pretty
significant adjustment process. Think about where we were six months
ago: We had high stock prices, strong economic growth, rising profit
margins and terrific earnings. A lot of that has changed. Oil prices and
labor costs are causing pressure. I read today that HMO prices to
corporate customers are going up. Earnings growth is slowing, and
prices and valuations are going to have to come back a bit. Everyone
always says that a rising tide lifts all boats; well, a falling tide exposes
some pretty serious shortcomings.
One thing that's pretty interesting is that September, in particular,
seems to have fallen off a cliff for a lot of these companies -- Eastman
Kodak, Rockwell International (ROK:NYSE - news), priceline.com.
Something's going on there.
Hobson: So what does this all imply for the fourth quarter? Are the
estimates that are out there too rosy?
Schansinger: Yes. You can look at it from the top down or the bottom
up [from the point of view of equity strategists or sector equity
analysts]. From the top down, the strategists seem to have more of this
[negative stuff] factored in. But when you look at it from the bottom up,
there are still some pretty fancy numbers out there. Estimates both for
the fourth quarter and next year still have further to go on the down
side. The bias for stock prices is lower.
Again, I don't want to give a terribly negative outlook. The economy is
still reasonably good, and corporate profits are growing at a reasonable
rate. But expectations and valuations got way too high. We need to
downshift to a slower growth, hopefully more sustainable growth
scenario.
DAK |
