Why I Am Skeptical About Recent Growth Numbers

One important reasons that I am skeptical about current forecasts of what third-quarter growth was and about the yet-to-be-revised numbers for first and second-quarter growth is that reports of corporate earnings do not "feel" like a healthy, recovering economy...

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WSJ.com - Markets Main: Selloff Is in Seventh Week As Profit Woes Hound Stocks | By ERIN SCHULTE | THE WALL STREET JOURNAL ONLINE

In a dirge-like chorus, analysts scaled back their hopes for a group of blue-chip names Wednesday, making for another bleak day on Wall Street and fresh five-year lows for the Dow industrials. The Dow Jones Industrial Average finished down 215.22, or 2.9%, at 7286.27. The S&P 500-stock index shed 2.7% to 776.76. Several bellwethers were buffeted by predictions that their earnings won't measure up, the latest indication that the economy isn't supporting much growth in corporate profits.

During the past few weeks, expectations for earnings gains have been narrowing. Amid a spate of profit warnings, analysts' third-quarter growth estimates for companies have fallen to 5.4% from earlier forecasts of 16.6%, according to Thomson First Call...

Selloff Is in Seventh Week
As Profit Woes Hound Stocks

By ERIN SCHULTE
THE WALL STREET JOURNAL ONLINE

In a dirge-like chorus, analysts scaled back their hopes for a group of blue-chip names Wednesday, making for another bleak day on Wall Street and fresh five-year lows for the Dow industrials.

The Dow Jones Industrial Average finished down 215.22, or 2.9%, at 7286.27. The S&P 500-stock index shed 2.7% to 776.76.

Several bellwethers were buffeted by predictions that their earnings won't measure up, the latest indication that the economy isn't supporting much growth in corporate profits.

During the past few weeks, expectations for earnings gains have been narrowing. Amid a spate of profit warnings, analysts' third-quarter growth estimates for companies have fallen to 5.4% from earlier forecasts of 16.6%, according to Thomson First Call.

"That is a much more significant downward revision than we usually see in a quarter," said Ken Perkins, research analyst at Thomson First Call.

Among blue-chip names, General Electric shed 5.8% after Morgan Stanley analyst Scott Davis cut his 2003 earnings estimate for the company, on which he has an "equal weight" rating, saying it could be headed for a "perfect storm" next year.

"What we are referring to is the potential that GE experiences a simultaneous decline in its three powerful macro platforms: long-cycle businesses, short-cycle businesses and GE Capital," Mr. Davis wrote in a research note.

Meanwhile, Merck shares slipped after Raymond James analyst Michael Krensavage said he expects the drug giant to report per-share earnings that are 5% and 9% below the average estimates of analysts polled by Thomson First Call for this year and next. He downgraded the stock to "market perform" from "strong buy."

Fellow Dow component Johnson & Johnson pulled back 3.9% after U.S. Bancorp Piper Jaffray downgraded the shares to "outperform" from "strong buy" based on valuation. Analyst Scott Davidson said the shares had surged 41% since July and that investors may be overlooking risks, such as softening sales for some drugs, litigation and increased competition in some areas.

Salomon Smith Barney lowered its earnings estimates and price targets on Caterpillar, citing deterioration in the construction equipment market. Salomon has an "underperform" rating on Caterpillar, whose shares lost 5.4%.

Also, Lehman Brothers cut its price target on General Motors to $38 from $41; the stock dropped 7.7% to $31.01. Lehman has an "equal weight" rating on the stock. Competitor Ford Motor saw its stock tumble again, falling 7.7% to its lowest level in more than 10 years.

Ford's bond pricing implied that they may fall to junk status, as risk-weary bondholders lighten up their positions in many of the biggest names. Ford is the largest U.S. corporate issuer.

Fears that the consumer is starting to wilt, potentially leading to lower car sales, is compounding the seasonal year-end pressure that has Wall Street brokers and dealers trimming their exposures to corporate bonds, market watchers said. Traders also said the potential for a downgrade of Ford by one of the credit-rating agencies was a factor behind the weakness.

Investors say a decline to junk status would be extremely problematic for Ford because the company's huge outstanding debts make it a poor fit in the much smaller high-yield market. Ford Motor Credit Co. had $165 billion in long-term debt as of the end of June.

Dominion Resources shares dropped 13% after it detailed plans to strengthen its balance sheet and reaffirmed its 2002 earnings view. The utility giant also said it will lower capital spending by a total of nearly $900 million over the next three years. Last month, Dominion reaffirmed its 2002 earnings expectations but cut its 2003 outlook because of higher expenses and plans to issue additional equity to strengthen its balance sheet. The Dow Jones Utilities Average was down 9.6% Wednesday.

Analysts said the market's hemorrhage could wane in coming sessions if earnings announcements are inoffensive.

"A lot of sell-side analysts are taking down their numbers ahead of earnings, and that's driving down the market. However, we could fall into a more normalized trading range in the coming days if there are no more earnings surprises or unexpected economic developments," said Stephen Carl, head of U.S. equity trading for The Williams Capital Group.

Wednesday's rout comes after a rare day of gains on Wall Street, as hopes for an end to a West Coast labor standoff helped to soothe investors. The Dow industrials finished up 1.06% at 7501.49.

Analysts said investors were anxious for a reason to buy stocks after driving down prices for six straight weeks and during the previous four sessions in particular. But conflicts abounded as wariness about earnings, the economy and the possibility of war with Iraq continued.

Investors' wide-ranging emotions were evident Tuesday as the market bounced around. The Dow industrials rose as much as 199 points in afternoon trading after dropping as much as 91 points earlier.

"People are looking for a rally after stocks have been knocked down so relentlessly," said Barry Berman, head trader for Robert W. Baird & Co. in Milwaukee. But "there really isn't any good news out there right now," he added. "The market has been selling off because of a weakening economy and consistent lowering of earnings forecasts. The market is looking for that to turn around, and that just hasn't happened yet."

Things are getting so bad that even prominent market bull Abby Joseph Cohen, chief market strategist at Goldman Sachs, ratcheted down her expectations for major stock indexes -- albeit to still-bullish levels. Major indexes would have to score about a 44% leap sometime in the next 18 months to hit her new targets.

Ms. Cohen, who said markets are undervalued but that investors are averse to risk, cut her Standard & Poor's 500-stock index target to 1150 from 1300 and her Dow Jones Industrial Average target to 10800 from 11300 in a research note to clients Wednesday.

She said the three main culprits for the market's risk aversion are economic uncertainty, investor anger and confusion over the recent spate of accounting and other corporate misconduct, and the volatile geopolitical environment.

In major U.S. market action:

Stocks pulled back. On the Big Board, where 1.83 million shares traded, 2,838 stocks fell and 469 rose. On the Nasdaq Stock Exchange, where 1.73 billion shares traded, 2,558 stocks declined and 896 advanced.

The 10-year Treasury note advanced about 1/2 point, or $5.00 for each $1,000 invested. The yield, which moves inversely to price, fell to 3.571%. The 30-year bond was ahead about 5/8 to yield 4.659%.

The dollar was weaker. It traded at ¥123.27, down from ¥124.32 late Tuesday in New York, while the euro rose against the dollar to 98.98 cents from 97.87 cents in the previous session.

Write to Erin Schulte at erin.schulte@wsj.com

Posted by DeLong at October 09, 2002 02:20 PM | Trackback