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To: Terry Rose who wrote (23352)	11/24/1998 6:38:00 PM
From: goldsnow	Read Replies (1) \| Respond to of 116753

US Finds Drop in Corporate Profits Tuesday, 24 November 1998 W A S H I N G T O N (AP) THE GOVERNMENT reported the worst drop in corporate profits in nearly nine years on Tuesday, even as stock prices hovered near record highs. Economists predict earnings could fall again next year and say they fear the market is vulnerable to another downturn, perhaps worse than the Dow's 19 percent plummet between July 17 and Aug. 31. So why did the Dow Jones industrial average begin the week by shooting to a record high? Many attribute the market's startlingly swift recovery since early October to a shortsighted focus on recent interest-rate cuts and on a spate of corporate mergers, including Tuesday's announcement that America Online will buy Netscape for $4.2 billion. "Investors have overdone it. They were overly pessimistic a few weeks ago and they're overly optimistic today," said economist Mark Zandi of Regional Financial Associates in West Chester, Pa. "There's no reason to believe investor psychology won't switch back the other way at some point next year," Zandi said. In any case, on Tuesday, the Dow average retained most of its extraordinary 22.8 percent runup between Oct. 1 and Monday. It fell 73 points, or 0.8 percent, to 9,301. Companies' after-tax profits fell 1.8 percent from July to September in the third quarterly decline of the past year, the Commerce Department said Tuesday. They're down 6.2 percent from a year earlier, the worst drop since 1989. A third of the world's economies, including most of Asia, remains mired in recession. As a result, the U.S. trade deficit is likely to set a record this year and another in 1999 and growth should slow appreciably. However, other analysts believe investors are well aware of the risks and diminished prospects for next year, and instead are looking at the longer term. "I don't think investors see a slowdown in 1999 as extending for a long time," said economist Norman Robertson of Smithfield Trust Co. in Pittsburgh. "There is now on the part of many investors a willingness to look beyond the next few months. That may be especially true among a large number of investors who are entering the market at a very early age." The market recovery is helping to restore battered consumer confidence just in time for holiday shopping. The Conference Board, a private research group in New York, said its index of consumer confidence rose in November after four consecutive declines that brought it to a two-year low in October. Analysts expect healthy Christmas sales but forecast a slowdown in U.S. growth to about a 2 percent rate next year. The Commerce Department's latest update showed the gross domestic product, the sum of all goods and services produced within U.S. borders, grew at a robust 3.9 percent annual rate during the July-September quarter. That marked an improvement from an initial estimate of 3.3 percent. Nevertheless, U.S. export sales declined for a third consecutive quarter for the first time in 40 years. And business investment in new plant and equipment declined for the first time since 1991. In another sign of distress, the department said orders to factories for big-ticket durable goods, items expected to last three or more years, fell for the first time in five months, by 1.7 percent in October. Economist Sung Won Sohn of Wells Fargo & Co. said profits declined during a quarter of strong growth because companies must pay higher wages to attract and retain qualified workers, but can't raise prices because of overseas competition. Illustrating that lack of pricing power, the Commerce Department said a price gauge tied to the GDP increased at a tiny 0.8 percent annual rate in the third quarter, the smallest in 35 years. With economic growth slowing next year, most businesses won't be able to offset the narrower profit margin with higher sales volume, Sohn said. "The bottom line is the fundamentals just do not support the market's bubble," he said.