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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (59612)	9/30/2000 9:14:25 PM
From: Les H	Respond to of 99985

A Bumpy Road Ahead for Corporate Earnings S&P Personal Wealth personalwealth.com First Call MARKET EARNINGS For the next several months, the market is likely to be underfoot of a big shoe - size quadruple E. That size EEEE shoe consists of Economy, Energy, Euro, and Earnings. But the issue is not 3Q00. The bigger impact from bigfoot will be in 4Q00 and maybe even more so in 1H01. Earnings growth for the S&P500 in 3Q00 will be very good in the aggregate, probably about 19%, which would continue the modest decay from the 23.6% in 1Q00 and 21.6% in 2Q00. Remember that the 23.6% was the highest since 4Q93, which was generated by the rebound from recession and was therefore not unusual. But 23.6% well into the economic cycle was unusual and not sustainable. But the impact of the slowing US Economy, higher Energy prices, and a weaker Euro are likely to be much greater in 4Q00 and maybe beyond, resulting in a much more dramatic slowdown than currently anticipated. Stocks have been reacting downward to these warnings, because investors seem to be worried about the impact on 3Q00 earnings. They may be right to be worried about the warnings, but, even though they may not realize it, the danger is what these warnings imply about even worse problems in 4Q00, and maybe beyond. The market tends to look ahead, so it is in effect reacting to the uncertainties of 4Q00 and 1H01 earnings growth, not 3Q00 earnings growth, which anyhow is likely to be very good. The Fed, OPEC, and the European Central Bank have each been walking their own tightropes in trying to fine tune the US economy, oil prices, and the euro/European economy, respectively. In all cases it is a delicate task, fraught with the risk that the effort could explode or implode. Unfortunately, the three areas are becoming more intertwined as we move into 4Q00, so the tightrope analogy becomes one of the Fed, OPEC, and the ECB all now on the same tightrope, meaning their efforts at doing their fine tuning and keeping their balance at the same time are now much riskier. Obviously, Friday's intervention in the euro and the announcement of tapping the strategic oil reserves could mitigate the impact of the weaker euro and higher energy prices, but maybe not enough to keep earnings from decaying faster than expected in 4Q00 and early 2001. The number of warnings last week broke out of the business as usual pattern, and, at 206, is currently running about 25% ahead of the 165 at the equivalent point in 3Q99. However, even with Intel's bombshell last Thursday, the downward revisions on 3Q00 revisions are down no more than the normal trimming. From expectations for S&P500 earnings growth of 18.8% on 1 July, the analysts have only trimmed 2.1 percentages point to the current 16.7%. Even with a 0.3 percentage point hit from the Intel revision, last week on dropped from 17.3% to 16.7%. Unless we get a spate of warnings with the impact of Intel or the earlier Lucent Technologies warning, the estimate trimming is likely to continue to follow the normal trimming pattern. If 3Q00 earnings reports come in the usual amount above the expectations at the time they report, the final results for S&P500 3Q00 earnings growth would be about 19%. But those who have been worried about the warnings on 3Q00 should not celebrate if we get 19% or close to it. Those 3Q00 warnings may have been an indication of worse to come in 4Q00.