Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Les H who wrote (75733)	4/23/2001 11:23:05 AM
From: Les H	Respond to of 99985

MARKET EARNINGS The surprising rate cut by the Fed last week came at a time when the market was already looking at the glass as half full. The net result has been an explosive rally. Three things have fueled the rally. The first was occurred early in the week before last. Numerous pundits declared the 1Q01 pre-announcement season over and that all the bad news was now out. Wrong! Not only have there been 75 negative pre-announcements in the last two weeks, including notables like Cisco Systems, EMC, Hewlett-Packard, and Juniper Networks, but more will come in over the next two weeks. Even more importantly, many of the 1Q01 will be accompanied by warnings or comments about upcoming quarters that lead to reductions in earnings estimates. In some cases, the earnings estimates for 3Q01 and 4Q01 are being reduced to levels below the 2Q01 estimate, indicating the bottom in earnings may not be near. Second, it became evident that the 1Q01 results were coming in above expectations (in many cases, above estimates that had been sharply lowered during the quarter). As is often the case, the market overreacted. It always seems to forget that the market forgets that the germane question is not whether companies are beating the estimates, but whether they are beating them by more or less than they normally do. With 47% of the S&P500 having reported, only the usual percentage are beating expectations – 57% vs 58% over the last 7 years. More have met expectations than usual – 30% vs 20%, but that is because there was a record setting number of negative pre-announcements in 1Q01, so many who would have otherwise missed at report time had their negative surprise earlier. Third was the surprise cut by the Fed. (On Thursday, the vice-chairman indicated that the main concern at the Fed may be the weakness in capital spending). Hmmm. When did we last see the market rally because of these same three items? Seems it was the most recent quarter, 1Q01. The market rallied last January on those same factors, and because of the expectation that earnings would show a sharp recover in 3Q01, the right hand side of the so-called V decline and recovery. Unfortunately, as it became evident that 2Q01 warnings were coming at a pace that was far exceeding that of the record in 4Q00, and that estimates for not only 2Q01, but for 3Q01 as well, were in free fall, the marked faltered. Investors realized that there would be no substantive recovery in earnings in 3Q01. So who’s to say that the pattern could not repeat? Will the expected earnings recovery in 4Q01 materialize, or will it wither away as did the expectations for a 3Q01 recovery? The number of 1Q01 negative pre-announcements may be slowing to a low rate, with most of them now coming from companies with an April ending quarter. However, that does not in any way mean the bad news is over. No doubt many of those reporting their actual 1Q01 earnings will be warning about earnings shortfalls for 2Q01 and beyond. It may be early in the game, but negative pre-announcements are again on a record setting pace. Warnings are running 82% ahead of the record setting 1Q01 pace, with 118 so far, compared to 65 at the equivalent point in 1Q01. Many investors may have already written off 2Q01 as far as earnings go, but those warnings for 2Q01 that result in reductions for 3Q01 and/or 4Q01 should be taken as bad news. That was not the case in the last two weeks, but if they keep coming, investors may turn wary as they did in May and June as they did in February and March. Last week it seemed no matter how bad the news, stocks went up. We understand that the market will turn up before the economy and earnings bottom, but it seems hard to believe that it will be sustained if companies continue to come out with negative pre-announcements for 3Q01 and/or 4Q01, and if analysts keep cutting estimates for the same periods. At this point, there is no confirming evidence that earnings will recover in 4Q01. They may do so, but the prospects of a substantive recovery could be pushed back to 1Q02 or later. As we have said in recent weeks, we believe the key elements to watch over the next month or so is whether the rate of negative pre-announcements and downward earnings estimate revisions change for the consumer cyclical or tech sectors. After being in free fall from mid August to late February, the consumer cyclical sector has seen a meaningful slowdown since the beginning of March. The tech sector has been in free fall since the beginning of October and, so far, there is no sign of any change in that pattern. It may be an oversimplification but we believe a useful one to focus on any changes in the pattern of negative pre-announcements or downward estimate revisions in these two sectors. Will the consumer keep spending and pull the rest of the economy out of the doldrums, or will the lack of improvement in capital spending pull the rest of the economy into recession? The consumer cyclical sector is a proxy for the impact of consumer spending on earnings, while the tech sector is a proxy for the impact of capital spending on earnings. The next month or so may tell the tale. Stay tuned, but focus on the comments and estimate revisions, not on the 1Q01 reports. www1.firstcall.com