Earnings Warnings will Knock the Market Around Some More

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Earnings Warnings will Knock the Market Around Some More

Tuesday, April 3, 2001 By John Crudele

The stock market is entering what could be the most dangerous part of this year. And you probably thought that's what we just came out of. I wish I could give you some good news, but I'd be lying.

Here are the facts.

Companies will start reporting their first-quarter profits in a couple weeks. And it won't be pretty.

The U.S. economy probably grew - officially - at much less than 1 percent in the first quarter after a revised 1 percent increase in the last three months of 2000.

Wall Street has been adjusting corporate profits downward for months, and earnings for the 500 companies that make up the Standard & Poor's index are now expected to fall 8 percent in the first quarter.

That would be the steepest drop in profits since 1991, and the first quarterly decline of any kind in three years.

Worse, companies still have weeks in which to warn investors about profit shortfalls. And I/B/E/S, the Wall Street firm that monitors such things, tells me that another 200 to 250 companies could issue earnings warnings before the actual numbers start come.

And those warnings could come any day. So you should get rid of any idea that the stock market is currently in a safe zone where investors might be able to land a profitable trade or two.

The truth is that the last couple of weeks - as miserable as they turned out to be - were the safe period for stocks. With triple options' expiration in mid March and end-of-the-quarter markups by portfolio managers, the market has already gotten its artificial lift.

In fact, the 260 point rise last Tuesday in the Dow was caused mainly by end-of-quarter buying by professional money managers, who must close their books three settlement days before the quarter's calendar end. And the market indices were aided last Friday by the quarter's end on the calendar.

Even with those two artificial stimuli, stock didn't have much of a bounce. Why? Because the pros know that too many things are trying to drag stock prices down.

First problem: Stock prices are still too high.

Even if you believe the most optimistic earnings forecasts to which Wall Street is still clinging, the Nasdaq could still decline to 1,200 from its current level of 1,783; the Dow would be fairly priced by historical standards at 6,000 (now 9,778) and the Standard & Poor's 500 index should be at 700 (now 1,145) - if historical levels were the judge.

Will the market go that low? Only the Almighty knows.

When will stocks hit bottom?

I wish I could tell you. It is especially impossible to say since the economy is so unclear.

What is the economy doing?

It's probably already in a recession, despite what the government's numbers are telling us. This is complicated, but I'll try to explain.

The GDP growth - like the 1 percent expansion in the fourth quarter - is an after-inflation figure. So, if the government is understating the rate of inflation, then it is overstating the level of growth.

This column has already documented the number of tricks that Washington has been using to keep inflation lower. While that practice may seem harmless enough - except to us nit-pickers - the artificially lowered inflation figures are causing the government to report economic growth that is better than it really is.

In fact, inflation could be understated by as much as 2 percent, which would mean that the economy actually declined 1 percent in the fourth quarter instead of having growth.

Check with any corporate executive, and they'll tell you that the economy felt like a recession in the fourth and first quarters. The expansion reported by the government was in Washington's imagination.

The one bright spot is that the government's numbers are meaningless to the Fed.

With pressure building from corporations and private economic statistics used by the Fed already reporting an impending recession, the Central Bank will continue to cut interest rates aggressively.

What's this all mean for investors? If you feel compelled to play the stock market, you had better be nimble and be willing to take losses.

http://www.prudentbear.com/boards/user/non-frames/message.asp?forumid=4&messageid=37506&threadid=37506

-- Carl Jenkins (somewherepress@aol.com), April 03, 2001


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