Searching for the bottom...Second quarter outlooks will be pivotal
___________________________________________________
By David Callaway, CBS.MarketWatch.com
Last Update: 1:15 AM ET Apr 5, 2001
<<SAN FRANCISCO (CBS.MW) - As Marc Gerstein remembers things, it was shortly after "Business Week" magazine did a cover story titled "The Death of Equities," that the bear market of 1981 and 1982 ended, stocks took off and investors never looked back.
Markets guru Henry Kaufman, then a strategist with Salomon Brothers, forecasted in the summer of 1982 that interest rates would go lower, sparking a rally in the stock market that would go for five years until the crash of 1987 and then beyond.
"Everyone laughed at the time because they still thought there would be a blow-off, but it never happened," said Gerstein, director of research at Multex.com (MLTX: news, msgs, alerts) .
Market bottoms can occur that way. Yes, sometimes there is a blow-off, an apocalyptic downturn that washes all the buyers out of the market. But other times, a minor event like a merger or a surprise statement acts as the catalyst for a turnaround that no one realizes has happened until stock indexes are 10 percent to 20 percent higher.
As this stock market enters first quarter earnings season -- what could be the five most treacherous weeks in the current bear market -- it's important to be on the lookout for potential catalysts.
Gerstein argues that the valuations are there. While some stocks, like Yahoo (YHOO: news, msgs, alerts) , may still have price-to-earnings ratios well above where they should be, many others are starting to look attractive at these levels. But without a catalyst, there's nothing to get investors interested in buying again.
We all know that earnings season is going to be bad. But it's the second quarter that matters now, and the make-or-break scenario for the market is going to rest with what companies say about their outlook for their next three months and beyond.
We got a taste of it this week with Ariba (ARBA: news, msgs, alerts) , which said it expects second quarter revenue to be half of what it originally thought and that it would cut 700 jobs, a third of its workforce.
More of these are coming. If they are as bad, the second quarter could shape up to be the biggest black hole in the history of the earnings universe.
Gerstein's numbers are sobering.
Three months ago, expectations for earnings per share growth in the tech sector in the second quarter were for 85 percent. Today they are zero, he said. For tech stocks with market valuations above $2 billion, expectations for earnings per share growth went from 28 percent three months ago to a decline of 4 percent today.
"The expectation degradation is coming down unfortunately in the area that people are watching the most - tech stocks," said Gerstein. "What we really need to look for is how everybody is going to start talking about the third quarter."
Gerstein's theory is that the catalyst could be John Chambers, the chief executive of Cisco, who has talked the market down every chance he's had in the last three months. When Chambers says he sees signs of a pickup in Cisco's business, it could be a significant milestone for stocks.
As good a theory as any, I suppose. My own theory is that it will be a merger; an unlikely combination that will suddenly make every stock in that industry look undervalued and spark a buying frenzy.
In any event, neither has happened yet. And with rising political tensions adding to an already vulnerable economic situation, the stock market still looks open to another serious bout of selling.
Over the next five weeks though, we'll get our first real glimpse of just how bad things are looking for the second quarter - and maybe the third.
It's not going to be pretty, but somewhere in the flood of corporate announcements, there just might be that sign that things have finally started to bottom out.>>
David Callaway is executive editor of CBS.MarketWatch.com. |
