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

To: Les H who wrote (69602)	2/20/2001 12:25:02 PM
From: Les H	Respond to of 99985

MARKET EARNINGS Just when it seems the rate of downward revisions in earnings estimates seems to be slowing, along comes a few major jolts that trigger a spate of additional estimate slashing. And, as usual, much of it is coming from the technology sector. Last week, we were worried that one or more of the three big tech companies reporting that week, Dell Computer, Hewlett-Packard, and Applied Materials, might pull a Cisco. None of the three surprised to the degree that Cisco did the week before, but the guidance was nevertheless damaging. Both Dell Computer warned of earnings lower than expectations for the April quarter, and Hewlett said it would fall short of the October year estimate. But the blockbuster last week was Nortel Networks, which warned of a severe shortfall for the March quarter earnings, more than offsetting the good news from Ciena. The net result of last week's tech news was that the earnings growth expectations for the S&P500 tech sector last week dropped by 4 percentage points to a decline of 18% for 1Q01, by 2 percentage points to a 15% decline for 2Q01, and by 1 percentage point to a 3% decline for 3Q01. If you think that all the bad news is out, take a look at the warnings data for 1Q01. Compared to the warnings at the same point in 4Q00, the 1Q01 warnings are up 36%. And 4Q00 warnings, currently at 791, have already shattered the previous 554 high for warnings in 4Q98. Even more ominous is that 1Q01 tech sector warnings are up 87% from the 4Q00 record setting pace. But the key is not 1Q01 and 2Q01 earnings. The current 1Q01 estimated decline of 2.5% for S&P500 earnings will likely end up at a decline of 3 or 4%. The current 0.9% decline for 2Q01 will likely fall to a 5% to 10% decline by July. The market has already discounted terrible earnings for the first half, but is banking on a sharp recovery that begins in 3Q01. Therefore, the spotlight is on the earnings outlook for 3Q01. At present the 6.6% earnings growth estimate for 3Q01 supports the 3Q01 upturn thesis. But the problem is the lack of visibility for 3Q01 earnings. Many of the companies themselves have little visibility, let alone the analysts, so the 3Q01 estimates may be based more on wishful thinking than on hard facts. If the free fall in 3Q01 tech earnings estimates continues, the 3Q01 recovery expectations may evaporate. It is difficult to imagine a recovery in overall earnings if technology earnings are in the tank. Technology was the engine driving much of the strong earnings growth in the 1990's, as well as in the first three quarters of 2000. And it was the collapse in 4Q00 tech earnings (from 42% in 3Q00 to 3% in 4Q00) that was the main culprit in the decline in overall S&P500 earnings from 18.4% in 3Q00 to about 3.4% in 4Q00. The worry remains that, given these sharp drops in tech earnings, that the problems for earnings may be more than just the weak economy. With earnings expectations for the full 2001 year down to 5.3%, it now seems highly probable that, even if the earnings recovery does start in 3Q01 and continue in 4Q01, it will not be enough to offset the declines in 1Q01 and 2Q01. Expectations for the technology sector for the full year are already at a 4% decline, while communications services are at a 12% decline, basic materials at a 9% decline, and consumer cyclicals at a 2% decline. thomsoninvest.net