"Off The Charts"
By Barry Habib and Art Adams.
OVERVIEW
After a parade of negative pre-announcements, investors will finally get a
chance to see some actual corporate earnings results next week. Earnings
from some bellwether technology names and three Dow components are
expected to steal the limelight. The Dow Jones industrial average ended
last week down 54, or 0.5% at 10,597 and the Nasdaq Composite index closed
the week down 312, 8.5%, at 3361. The S&P 500 index ended the week down
28, or 1.9%, at 1409.
The number of negative pre-announcements this quarter have been abnormally
high, with many companies blaming higher energy costs, weakness in Europe
and a slowing U.S. economy for revenue or profit shortfalls in the third
quarter. While First Call notes the impact on aggregate estimate
revisions have been relatively mild, the research firm said the fourth
quarter is at risk. "It is likely that the reasons for many of those
negative pre-announcements could have an even wider and deeper impact on
fourth-quarter earnings growth," First Call said. Perhaps as important as
the results themselves next week, therefore, will be any outlooks the
companies provide in their statements or conference calls. Yahoo (YHOO)
and Motorola (MOT) will kick off the technology earnings on Tuesday.
Yahoo is expected to report a third-quarter profit of 12 cents a share
versus 7 cents last year. Motorola is slated to post a third-quarter
profit of 26 cents a share versus 16 cents last year. Dow component
International Paper (IP) will also report Tuesday. Advanced Micro Devices
(AMD) and Applied Micro Circuits (AMC) will chime in on Wednesday, while
Gateway (GTW), General Motors (GM) and possibly General Electric (GE) will
post results Thursday. Gateway is projected to report earnings of 46
cents a share versus 35 cents last year. Keep a close eye on Gateway
after the Apple and Dell debacles. General Motors is forecast to report a
profit of $1.58 a share compared to $1.33 last year.
The Federal Reserve kept interest rates unchanged at 6.50% this week but
left the door open for further rate hikes, noting risks are still weighted
toward conditions that could generate higher inflation. Friday's
employment report was further confirmation of that, as the jobless rate
fell to a 30-year low of 3.9%. Still, average hourly earnings climbed
just 0.2%, below analysts' estimates of a 0.3% rise.
The most important economic news next week will come on Friday, with the
producer price index and retail sales. The PPI is expected to rise 0.4%
in September, with the core rate up 0.1%. Retail sales are projected to
rise 0.3%, or 0.5% excluding autos. The Retail sector has been getting
clobbered and we have done well shorting this area. The inventory reports
for oil on Tuesday and gas on Wednesday bear watching, as does the action
in the currency markets. The euro continued to hand back its
post-intervention gains, slipping to a two-week low of 86.65 cents against
the dollar on Friday.
Trading is expected to be somewhat quiet today with many participants
absent for the Columbus Day holiday, as well as Yom Kippur. Equity
markets will be open but the bond market will not. Stocks will probably
drift lower on a lack of bids. Equities futures, which often signal the
direction of the cash market, ended Chicago trade relatively flat. U.S.
Dec. Treasury bonds climbed 19/32 as investors sought a safe investment
haven. The yield on the 30-year cash bond tumbled 0.06 to 5.83%, while
the rate on the 10-year note was off 0.03 at 5.81%. This is helping move
mortgage rates a little lower. Light sweet crude oil futures gained 32
cents to $30.86 a barrel, aided by the fact that 2.5 million barrels of
petroleum in Mexico were shut in by Hurricane Keith.
WHY IS THIS HAPPENING AND WHEN WILL IT END?
Wall Street analysts remain positive about above-average earnings gains
for the third quarter. Despite a wave of profit warnings, the Street
remains an optimistic lot, forecasting a 16% profit gain for stocks in the
S&P 500 in the quarter over 1999's third quarter. That's down from a
predicted 18% rise at the beginning of July, but far ahead of the
historical average of 7%. However, this earnings season marks a critical
test for the bull market, which with the exception of the October 1987
crash, has risen largely unabated for the past 18 years. Unlike the tech
wreck we lived through last April, the current decline comes at a time
when the profit picture is weakening. That makes a case for the bears.
The evidence lies in the number of major companies across a broad sector
warning of profit or sales shortfalls for the third quarter. About 14% of
the companies in the S&P 500 have pre-announced earnings. The earnings
casualties now stand at 10 of the 30 in the Dow Jones industrial average:
Intel, Alcoa, Caterpillar, Microsoft, Wal-Mart, Procter & Gamble, AT&T,
DuPont and McDonalds. These companies either will miss third quarter
earnings or have issued warnings about lower expectations.
The market is spooked because typically the companies forecasting profit
shortfalls are citing what Wall Street calls worries about the "3 E's,"
the economy, energy and the euro. The economy is slowing due to the rate
increases by the Fed. The consumer also is running out of gas, evidenced
by the weakness among retail stocks, succumbing to high levels of debt and
higher costs to drive cars and heat homes. A falling European currency is
making American goods more expensive to one of the country's largest
export markets. As a result, the evidence mounts that Europeans are
buying less from U.S. companies.
Another problem afflicting technology issues is the collapse of many
Internet and telecom companies with high cash "burn rates". The
deteriorating profit outlook also is causing investors to begin to shy
away from stocks with high price-to-earnings ratios, mostly in the
technology, telecommunications and biotechnology area.
Once again, the market always turns higher at the time when it looks its
worst. This is also true of downturns when the market looks rosiest. We
have been very profitable with our short selections and it has helped, to
some degree, to moderate the pain we are feeling during this decline.
However, we are very careful to keep a tight leash on the "stops" for
those short plays because we know that the general direction of this
market over the long term is up. |
