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Strategies & Market Trends : Trend Setters and Range Riders -- Ignore unavailable to you. Want to Upgrade?

To: Susan G who wrote (23410)	10/13/2002 11:52:25 AM
From: Susan G	Respond to of 26752

Waiting for a Big Rebound in Profits? Wait Longer By JONATHAN FUERBRINGER orporate profits season goes into full swing this week, but results for the third quarter — and the outlook for the fourth — are not likely to be upbeat. Expectations are being lowered by loan problems at banks and the weakness in the foreign earnings of American companies. The dollar, surprisingly, is not helping, either. A few months ago, third-quarter reports from companies like Intel, Charles Schwab, Coca-Cola, Bank One, Bank of America, Caterpillar, Citigroup, General Motors, Johnson & Johnson and Motorola were expected to confirm that a long-awaited rebound in corporate earnings had arrived. Analysts hoped that this earnings surge, coming after five consecutive quarters of profit decline and one of minimal growth, would finally help lift the stock market. But earnings expectations for the companies in the Standard & Poor's 500-stock index are now falling for both the third and, more important, the fourth quarter. Taking their toll are a weaker-than-expected economic recovery, problem bank loans, the falling stock market, the threat of a war with Iraq and the fear that consumers may be slowing their spending. Wall Street analysts are now predicting earnings growth of 4.7 percent for the S.& P. 500 for the third quarter, compared with the year-earlier period, according to Thomson First Call. That is down from a forecast of 16.6 percent on July 1. For the fourth quarter, the current consensus is 19 percent, down from 27.7 percent on July 1 — and there is plenty of time for more downward revisions. The new forecasts are especially disappointing because the third and fourth quarters were supposed to be easy ones for profit growth. That is because they hardly have tough acts to follow: earnings declined 22 percent in both the third and fourth quarters of last year. Financial companies in the S.& P. have a big effect on earnings. That is because they are the largest sector of the index, accounting for 81 of the 500 stocks and 23 percent of total profits. According to Thomson First Call, the forecast for profit growth for this group in the third quarter has fallen to 25 percent, from 39 percent at the beginning of July, and to 27 percent for the fourth quarter, from 35 percent. Earnings expectations were reduced after J. P. Morgan Chase increased write-offs and reserves for bad loans. Bank of New York then said loan losses cut its profits by $260 million in the third quarter. More bank losses are likely because banks have the most bad loans on their books in a decade, according to federal regulators. The loans include those made to troubled companies like Enron, Adelphia Communications and WorldCom. The frantic pace of the estimate downgrades can be seen in the number of profit revisions at some individual banks. In the last 30 days at J. P. Morgan alone, there have been 16 negative revisions for the third quarter and 15 for the fourth quarter. Bank of New York has had 16 for the third and 13 for the fourth, while Citigroup has had 7 for the third and 7 for the fourth, according to Thomson First Call. About 20 percent of earnings for the S.& P. 500 companies index come from abroad. Analysts at Morgan Stanley estimate that these earnings declined by 2.8 percent in the second quarter and that they are unlikely to rise very soon. And while the dollar has fallen 7.6 percent against the euro in the year ended Sept. 30, it is stronger against many other major currencies. That means that gains from abroad will be reduced — or losses increased — when they are translated back into the dollar. A third negative, the port closings on the West Coast, may be limited by President Bush's move to reopen them using the Taft-Hartley Act. Still, billions of dollars have been lost. The actual cost to fourth-quarter profits will depend on how quickly the ports can unload their backlog, said Richard Berner, chief United States economist at Morgan Stanley. But any way you slice it, a meaningful revival in corporate earnings may have to await the new year. nytimes.com

To: Susan G who wrote (23410)	10/13/2002 11:54:08 AM
From: Susan G	Read Replies (1) \| Respond to of 26752

Hope Seen as Fed Keeps Vigil over Economy October 13, 2002 10:38 AM ET By Caren Bohan WASHINGTON (Reuters) - The U.S. economy's vital signs have proven encouraging enough to help spur last week's two-day rally in stock prices but Federal Reserve officials are surely still on tenterhooks about the recovery's fragility. Consumers are worried about their jobs and nervous about a possible war with Iraq. Profits of companies such as Gap Inc. and Limited Brands have taken a hit in the aftermath of a 10-day lockout at West Coast ports. And many companies are still dragging their feet about hiring workers, investing in equipment or even rebuilding lean inventories. Yet there are some rays of hope that may buy Fed officials some time as their Nov. 6 meeting approaches and they mull whether to offer the economy a shot of adrenaline through interest rate cuts. The meeting falls a day after U.S. congressional elections where in nervous voters' minds, thoughts of the economy and the fragile labor market are looming large. Analysts are split over the outcome of the Fed's next meeting but some said there may be sufficient good news to enable the Fed to stand pat for at least another month. "We haven't seen evidence to provide a convincing case that the Fed needs to ease," said former Fed Governor Lyle Gramley, now with Schwab Washington Research. SPENDING, NOT SPLURGING Among the data that may offer some comfort to Fed officials was a sharp drop in jobless claims last week and reasonably solid demand for retail goods. New applications for state unemployment benefits tumbled 40,000 in the week ended Oct. 5 to 384,000, which brought them below the worrisome 400,000 mark where the claims have been hovering for several weeks. Even though their mood is downbeat -- as evidenced by weak confidence numbers also out last week -- consumers are still spending money, albeit cautiously. Retail sales slumped 1.2 percent in September, but that number was weighed down by car sales, which hit a lull after a huge summer buying spree. Sales excluding automobiles edged up 0.1 percent last month, surprising some analysts. Soothed by such data and by optimistic outlooks for bellwether firms like International Business Machines Corp. and General Electric Co., stocks snapped back last week, breaking a six-week losing streak The Dow Jones industrial average jumped 316 points, or more than 4 percent, on Friday in a second day of strong gains after hitting a five-year low earlier in the week. Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania, said that while it is good news that Americans are still willing to spend, it is noteworthy that they are purchasing practical goods like building and garden equipment as opposed to splurging at restaurants or on new furniture. "Consumers are not not spending money just to spend money. They are being conservative," Naroff said. Referring to the 1.8 percent jump in building materials purchases that helped keep September retail sales in the plus column, Naroff pointed out: "People are investing in fixing up an appreciating asset: their homes." Retail sales and jobless claims are not the only pieces of data that suggest the economy, while clearly struggling, is at least persevering for now. The unemployment rate slipped to 5.6 percent in September even as payrolls shrank for the first time in five months. Later this month, the Commerce Department is expected to report a third-quarter gain in gross domestic product that some private analysts think could exceed 4 percent. But it is clear that spurt in growth started to flag abruptly by the last month of the quarter, September -- in keeping with the bumpy path the economic recovery has followed since last year's recession. SAVE SOME MEDICINE FOR LATER Naroff and Gramley said the very vulnerability of the recovery is one reason the Fed may want to hold off on cutting rates until it absolutely needs to. "If the Fed decides to make a 25-basis-point (quarter percentage point) cut, it has to consider how many more cuts it is prepared to do," Naroff said. With the overnight federal funds rate already sitting at a 40-year low of 1.75 percent, he noted that the Fed will be wary of running through ammunition it might need later on, if the economy gets hammered by another big shock. Gramley said that if and when the Fed intervenes to help the economy, it may do so forcefully and decisively. "There's a better than 50-50 chance that if and when they do go, they will go by 50 basis points, not 25," he said. Beyond getting the timing of a rate cut right, Neal Soss, chief economist at Credit Suisse First Boston, said it is not clear whether monetary policy holds a magical remedy that will cure what ails the economy right now. "It's not clear that throwing low interest rates at the economy will make that much of a difference," Soss said, noting that short-term rates are already at a such a negligible level, the Fed might not necessarily get a lot of mileage out of cutting them further. Fed Vice Chairman Roger Ferguson last week offered a similar note of caution about the powers of monetary policy: "Nobody would deny that central banks can be quite powerful and that monetary policy works, over time," Ferguson said. "But in the scheme of things, a central bank's ability to smooth asset prices (if it wanted to) or to buffer shocks to spending or production is somewhat limited." reuters.com