>>Everytime the bulls give it a go, they'll be met by more bad news. Today 3M, tomorrow...<<
To keep it short I only pasted part of this just off wire 7:59 EST
By Carl Quintanilla and Jacob M. Schlesinger
Staff Reporters of The Wall Street Journal
So many U.S. companies have been lowering their fourth-quarter earnings
forecasts that it was no great surprise Wednesday when Minnesota Mining &
Manufacturing Co. did so. But this was: Instead of blaming it all on exports to
Asia, 3M conceded that slower sales growth at home was a problem, too.
"This precipitous slowdown in the U.S. was surprising," says B. Alex
Henderson, an analyst at Prudential Securities Inc.
Is 3M, the $15 billion-a-year maker of office supplies, auto parts and
surgical products, a harbinger? At least some people are beginning to predict
the beginning of the end of the era of ever-surging corporate profits. Norwest
Corp. Chief Economist Sung Won Sohn, for one, says 3M's announcement shows that
"the international economic situation is going to be worse than a lot of people
anticipate."
The 3M statement was just four paragraphs long, but it was enough to leave
investors scratching their heads over where there might be a haven from profit
fears. Shares of 3M plunged $9 Wednesday to close at $84.875 on the New York
Stock Exchange, chopping more than $3.6 billion off the company's market value.
Throughout American industry, the rose-colored glasses are coming off.
Buffeted by turmoil in Asia and Brazil, a strong dollar that makes U.S. goods
more expensive and predictions of slower U.S. growth, the longstanding notion
that things will keep getting better is being questioned.
The roster of companies revising downward their fourth-quarter earnings
forecasts of late is long and diversified. In addition to a growing list of
technology companies, it includes shoemaker Reebok International Ltd. of
Stoughton, Mass. and FMC Corp., the Chicago-based chemical and machinery
company.
Eli Lustgarten of Schroder & Co. in New York says 3M "is the first of the
big companies to show" the effects of the weaker international economy.
"They've got pieces all around the world that are beginning to feel it. And
we're going to hear more of it. You've got to recognize there's a change."
That said, several times earlier this year, high-profile profit warnings
raised worries among some on the Street about the sustainability of profits for
a sector or the overall economy. In March, it was Eastman Kodak Co.; in May,
Intel Corp.; and in August, Coca-Cola Co. and Gillette Co. Those worries proved
generally unfounded, at least at the time.
But in a survey of 1,000 manufacturers released Wednesday, Dun & Bradstreet
Corp. said manufacturers expect slight declines in production and new orders
through February. "It appears that manufacturing executives have taken a hard
look at continued weak Asian demand for U.S.-made goods and the surge in cheap
imports from that region and, accordingly, have lowered their expectations for
the coming quarter," said Joseph W. Duncan, chief economic adviser to D&B.
First Call Corp., which monitors the profit predictions of Wall Street
analysts, says that as of Oct. 24, analysts were projecting 12.2% growth in
fourth-quarter earnings per share for stocks in the Standard & Poor's 500-stock
index. As of Friday, that had dropped to 8.8% growth. "That's more than the
normal sort of trimming," says Charles L. Hill, First Call's director of
quantitative services.
The revised outlooks reflect in part an overdue dose of reality. The stock
market's climb in recent years has been built partly on the notion that
double-digit profit gains can continue indefinitely. They can't.
For many companies, profits are being squeezed from three different
directions.
The first is export demand. The three nations that have applied for help
from the International Monetary Fund -- Korea, Indonesia and Thailand --
account for only 6% of U.S. exports. But all of Asia, including China and
Japan, now faces a probable slowdown. Together, those nations account for
roughly a third of U.S. exports.
The second squeeze is on the pricing front. Troubled banking sectors in
Japan and South Korea are causing a credit crunch, making it hard for companies
there to get financing. In Korea, in particular, "it's very difficult for these
guys to borrow money, even to cover inventory or meet payroll," says Lawrence
Lindsey, a former Federal Reserve governor now at the American Enterprise
Institute.
"A firm like that spends its entire day fixated on getting cash," Mr.
Lindsey adds. "That means selling output without any particular regard to
price. They're selling anything that isn't tied down."
The result is that some goods are coming into the U.S. market at fire-sale
discounts. And the problem is exacerbated by the recent plunge in Asian
currencies, which means the dollar prices of Asian goods are even lower. Since
July, the yen is down nearly 12% against the dollar, the South Korean won has
fallen nearly 40%, the Thai baht nearly 50% and the Indonesian rupiah nearly
60%.
Import prices have dropped for five of the past six months, and November
imports from Asia were down roughly 5%, in dollar terms, from a year earlier.
The declines in import prices are likely to accelerate, putting further
pressure on U.S. manufacturers' prices.
The strength of the dollar was one reason analysts lowered their profit
projections for Coca-Cola recently, causing the stock to slide. The company
derives 80% of its profit from overseas, including nearly 17% from Japan. Other
companies, such as Polaroid Corp., have blamed profit problems on the
developments in Asia. In revising its fourth-quarter forecast, FMC cited
unexpectedly soft sales not only in Asia, but also in Brazil.
The third squeeze on earnings comes from home: wages. Though prices of many
goods are falling, wages are starting to rise, driven up by unusually tight
labor markets in the U.S. Last month, average hourly earnings in the U.S. were
up 4.1% from a year earlier, the biggest increase in this decade. With the
unemployment rate down to 4.6% -- the lowest in a generation -- wage pressures
seem almost sure to increase in the months ahead. A recent report on regional
economic conditions showed that the Federal Reserve banks in Boston; Richmond,
Va.; Atlanta; and Minneapolis are all noticing shortages of computer workers
and engineers............
TC |
