WSJ: Time to Brace for Trouble as Profits Debacle Starts
- From: mugglefuggle@xxxxxxxxxxxxxx
- Date: Mon, 6 Apr 2009 02:35:27 -0700 (PDT)
The Wall Street Journal
ABREAST OF THE MARKET
April 6, 2009
Time to Brace for Trouble as Profits Debacle Starts
By DAVID GAFFEN
What's wrong with this picture?
Earnings season is here again, and it's going to be dismal. Yet the
markets are zooming into this period on the heels of the most
aggressive four-week rally in more than 70 years.
So, even though pretty much every investor acknowledges just how ugly
things are, they could be setting themselves up to be disappointed.
And, if the past eight years are any guide, they probably will be.
Investment research group Bespoke Investment Group LLC in Harrison,
N.Y., looked at all earnings seasons going back to mid 2001 and found
that investors who bought the Standard & Poor's 500 on the first day
of the season and sold on the last day would have lost 26.6%. By
contrast, those that did the inverse would have garnered a return of
7.1%.
The numbers look particularly pertinent this quarter, considering that
the Dow Jones Industrial Average has gained about 21% in the last four
weeks and the S&P 500 is up an impressive 23%.
The last two earnings seasons, which admittedly played out during
times of intense market distress, have seen the S&P 500 decline by
8.53% and 9.32% respectively, Bespoke's research shows. The first-
quarter reporting period unofficially begins with Alcoa's results on
Tuesday and draws to a close six weeks later, when Wal-Mart Stores
gives its numbers on May 14.
[S&P 500 performance during earnings season]
Analysts are expecting earnings will decline 37% from the year-ago
period. All 10 groups in the S&P 500 show a year-over-year profit
slide, a uniform decline that hasn't happened in the 10 years Thomson
Financial has been tracking such data.
The key to keeping the stock rally going won't so much be whether
first-quarter earnings meet or beat those expectations. Instead, the
gains will be more dependent on what company executives say about the
second, third and fourth quarters.
"What everybody is hanging their fundamental hopes on at the moment is
the compilation of less-worse information," said Linda Duessel, equity-
market strategist at Federated Investors. "We want to hear that we
fell off a cliff, and we're done falling, maybe."
What companies say may very well determine whether stocks can pull out
of their 18-month slump -- the Dow industrials are still down 43% from
their October 2007 peak -- and turn the recent bear-market rally into
a legitimate bull run. The Dow closed at 8017.59 on Friday and the S&P
500 ended at 842.50.
The recent market rally has been predicated on hopes that the spate of
stable economic data, along with a few optimistic comments from
corporate executives, are a harbinger of better demand and improved
profits later in the year.
Investors were treated to a few glimmers of hope early in March,
including the spate of announcements from banking executives such as
Citigroup Chief Executive Vikram Pandit and Bank of America CEO
Kenneth Lewis, both of whom stated that their struggling franchises
had earned profits in January and February. Those comments were among
the catalysts for investors to return to the market, particularly to
the banking stocks, which have outperformed the broader market since
the bear-market low hit on March 9.
The financials component of the S&P 500 is expected to show a 40% year-
over-year decline in profits. Some will again report losses.
Citigroup, for instance, is expected to lose 33 cents a share,
according to Thomson Reuters, but that compares favorably with a loss
of $1.02 a share a year ago.
The enthusiasm displayed by Messrs. Pandit and Lewis was somewhat
tempered several days ago, however, when Mr. Lewis, along with J.P.
Morgan Chase's CEO Jamie Dimon, noted that March had been a more
difficult month. Investor confidence in the banking sector has
increased, but investors have been burned before. So any signs that
the banks are still struggling will test that faith.
Elsewhere, various reports on industrial production, housing, real
estate and manufacturing suggest that the economy has at least
stabilized. If companies in other sectors of the economy can point to
renewed activity, through signs of improved order flow or shipments,
it will help fuel the recent optimism.
"The question is, do companies make some significant forward-looking
comment that's much different than expected, and what do we hear about
business activity in April?" said Jim McDonald, chief investment
strategist at Northern Trust in Chicago.
The early signs are mixed. Housing figures have improved, but
homebuilders Lennar and KB Home have already reported continued
losses, and KB Home said it doesn't anticipate a meaningful
improvement in market conditions for the rest of the year.
Investors will be particularly attuned to the results from companies
that serve as bellwethers for global demand as various world powers,
including the U.S., Japan and China, attempt to jump-start economic
growth through fiscal stimulus and the reduction of interest rates
through monetary policy.
Sectors seen as proxies for economic growth include the materials,
energy and industrial sectors, which are expected to show year-over-
year declines in profit of 81%, 57% and 40%, respectively. Investors
will be looking at companies such as Caterpillar, which surprised
investors in January with news of 20,000 layoffs and buyout offers for
an additional 25,000 U.S.-based employees. In March, the industrial
giant announced plans to lay off another 2,500 workers. Manitowoc last
week said trends in its crane business are softer than expected, and
it withdrew forecasts for 2009.
A spate of similar commentary during earnings season from these
sectors, along with technology, would curb investor enthusiasm.
"Another downturn in both industrials and financials could be a
negative surprise," said Mr. McDonald.
For the year, S&P 500 operating earnings are forecast at $62.36 a
share, according to S&P, a gain of 26% over 2008, when profit was
$49.49 a share. Depending on the forecasts delivered in the next few
weeks, that number may be ratcheted down.
Since investors have already been exposed to such a run of pessimism
ahead of earnings, it leaves open the possibility that the market
could advance further if earnings clear a lowered bar. After an
electrifying four weeks, that prospect seems much less likely.
"What we're going to look for is for the S&P companies to say, 'We
think that the first quarter was the worst one, and things should
start to improve now,'" Ms. Duessel says.
"Otherwise," she says, "we're all going to start to get sad again,"
and the S&P could fall toward 660 or 600.
http://online.wsj.com/article/SB123896411461990545.html
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