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To: Les H who wrote (894)	10/29/2001 10:54:29 AM
From: Les H	Read Replies (2) \| Respond to of 29609

Earnings Warnings Bombardment Continues The biggest concern over the near term outlook for earnings is the continuing feverish pace of warnings for 4Q01. Since 1 October, when the 4Q01 earnings warning meter was turned on, the reading has shot up to 283, well ahead of the numbers registered at the equivalent time in each of the first three quarters of this year. The 283 is well ahead of the 127 in 1Q01, 234 in 2Q01, and 213 in 3Q01. It is too early in the quarter to say warnings are headed for a new record, but it is clear that there is not even a hint of any slowing in the pace of warnings. That means more slashing for at least 4Q01 and 1Q02 estimates in the coming weeks. Post-Attack Consumer Spending Patterns Still a Mystery Consumer confidence is in a very fragile state. This fragility results from worries about layoffs, bioterrorism, and an escalation of the Afghan war that spills over to Pakistan or Iraq. The latter two seem to dominate the news but the layoff announcements continue, and even worse, the implementation of the earlier announced layoffs is moving forward. When you hear your neighbor or your cousin got their pink slip, you cut spending. Adding to the uncertainty of how the consumer is going to spend in the future is the lack of useful information on what the consumer is doing currently. The data for consumer spending for autos, home furnishings, and retail goods in the two weeks following the 911 attack was of no use since every one was glued to their TV set. We had hopes that the October data for those quarters would provide some insights, but since companies in those industries are providing unprecedented and un sustainable incentives, the October data will not be very enlightening as to what consumers will do once the give-aways are gone. On the eve of the attack, consumer cyclical S&P500 sector earnings were expected to be down 8% for 3Q01 but are heading for a 26% decline with 53 of the 79 companies having reported and mainly retailers left to report. Since the eve of the 911 attack, the 4Q01 consumer cyclical estimates have plummeted from an 8% gain to a 15% decline. Over the same period, the estimates for 1Q02 have fallen from a 26% gain to a 4% decline, while those for 2Q02 have dropped from a 36% gain to a 19% gain. The big question is how much more analysts will cut estimates as some meaningful data on consumer spending finally emerges. 4Q01 Earnings Outlook The free fall on 4Q01 estimates continues. The expected decline for the S&P500 dropped last week from 13.9% to 15.5%. Driving the slashing of 4Q01 earnings estimates is the high level of earnings warnings for 4Q01. Final results still appear to be headed for a 22% decline. The sectors showing the biggest earnings declines in 4Q01 are led by transportation, technology, and energy. More modest declines are expected in communications services, consumer cyclicals, and industrials. The analysts expect healthcare, utilities, financials, and consumer staples to have good earnings growth in 4Q01, but the optimism for financials and consumer staples may evaporate as it has in earlier quarters. The scary thing about 4Q01 earnings is that the expected 22% decline would match that for 3Q01, but in reality would be much worse. First, the 4Q01 results would be comparing to a much weaker quarter than was 3Q01. Second, the 3 percentage point drag on 3Q01 earnings for the insurance industry's catastrophic losses will no be present in 4Q01. CY02 Earnings Outlook The most encouraging sign is that analysts are cutting estimates for further out quarters than they had been before. Estimates for 1Q02 and 2Q02 are in free fall. Although the year-over-year earnings decline in 1Q02 will not be as deep as that for 4Q01, the improvement will not be enough to push 1Q02 earnings above those for 4Q01 on a seasonally adjusted basis. The earnings for 2Q02 could so improvement over 1Q02, but it is too far off to discern whether that will happen or not. We continue to believe that analyst and strategist estimates for CY02 are too high and expect meaningful downward revisions, particularly in November and January. www1.firstcall.com\|market