Hope Springs Eternal
Fourth quarter earnings are mostly behind us and most investors are glad 2001 is over. 2001 will go down as the worst year for earnings since 1991. According to FirstCall, S&P 500 earnings declined 22.4%, of course this is pro-forma earnings. S&P calculates fourth quarter "as reported" earnings fell by 35%. The rest of the earnings estimates I reference are from FirstCall, so I will defer to their earnings today. Fourth quarter estimates started out last February forecasting a 16.9% GAIN. Remember the second half recovery was supposed to be the second half of 2001, not 2002. Estimates deteriorated as the year progressed. The tables below show how estimates have declined for the fourth quarter according to FirstCall.
|Fourth Quarter 2001 S&P 500 EPS Estimates|
Earnings estimates for the fourth quarter were not only coming down before September 11, but were already forecasting negative growth. It is not surprising that the negative trend for the fourth quarter has also happened for earnings estimates for the first quarter of 2002.
|First Quarter 2002 S&P 500 EPS Estimates|
These estimates are likely to come down even further. FirstCall is forecasting that first quarter results will be down about 16%. Earnings announcements from companies this week lend considerable credence to FirstCall's estimates. Companies as diverse as Ciena, General Mills, DaimlerChysler, American Standard, Lear, are among those that have warned this month for either the quarter ended or the current quarter. By the looks of the Cisco trades going off on Instinet, it appears Cisco didn't exactly inspire a lot of confidence going forward. Hope does exist, at least for now, for the second quarter and for the full year. Estimates for the S&P 500 have dropped by about two-thirds, but are still positive for the second quarter:
|Second Quarter 2002 S&P 500 EPS Estimates|
Going all the way out to the third quarter analysts are as optimistic as ever.
|Third Quarter 2002 S&P 500 EPS Estimates|
Estimates for 2002 forecasts S&P 500 earning to climb 17.7%. FirstCall thinks the results will be an increase of 6.4%. Below is the table of FirstCall's own estimates verses Wall Street estimates for 2002.
As earnings estimates come down throughout the course of 2002, investors are likely to start "compressing" the multiple on which they value earnings. The latest worries about accounting are equally likely to place strain on valuations as investors start to question the validity of current, past, and future earnings.
Credit is starting to tighten across the economy. The Federal Reserve survey of bank loan officers showed 45% of banks tightened credit for businesses with more than $50 million in annual sales and 42% of banks did for smaller companies. None of the banks in the survey eased credit standards for businesses. Also this week, Tyco announced it was drawing down its bank credit lines, since it cannot obtain funds in the commercial paper market.
The layoff report from Challenger, Gray and Christmas threw some cold water on the recovery story. Layoff announcements increased 32% to 212,704 in January from December. January's layoffs was the third highest total in the 9-year history of the report. Ford was over 16% of the total for the month. The outlook does not appear to offer much relief. John Challenger commented, "there have been indications from major companies that significant workforce reductions may be announced in coming weeks and months."
Bill Gates does not see a "V" recovery this year. "I don't see any big uptick in this year. Japan certainly won't be, and the U.S. won't be" he said, speaking at the World Economic Forum over the weekend. Last year "a lot of sobriety" returned to the markets, but Gates thinks the "somberness will stay and I think it's healthy." Gates believes investors are still underestimating the risks that remain.
Consumers have started to back-off the spending spree of the fourth quarter. You might remember, the GDP report showed that personal consumption grew faster than any of the previous six quarters, and spending on durable goods was the most in 15 years. The Bank of Tokyo-Mitsubishi retail report showed sales fell 0.7% last week after rising 0.2% the previous week. Likewise, Instinet's Redbook Average showed January sales increased 3.9%, but said sales weakened in the last week of the month. Retailers have continued to heavily discount inventory throughout January and even into February. Most retailers have a January ending fiscal year, so we will soon learn just how big of a toll the heavy promotions had on the bottom line. Anecdotally, one of the analysts here noticed that Dillard's was heavily discounting merchandise this weekend, 25% off already discounted items (25%-75%) across the store. One example was $230 cashmere sweaters for $80.
More analysis of the Denver commercial real estate market was in the paper this week. No new occupancy information, but local experts are predicting it will take up to four years to get back to an equilibrium vacancy rate of 10%.
The first quarter of this year will be very interesting. The bulls are convinced that the economy has or in process of bottoming and will focus their attention on earnings, and accounting, going forward. I'm not as convinced that the economy has seen the worst. It is highly likely that the fourth quarter was inflated due to September 11 and heavy promotional activity by retailers. It appears there could be several negative shocks for the bulls in the first quarter. First, earnings could continue to be guided down. Second, the economy could start to "double-dip." And this accounting mess that is rearing its head now will not be cleared up until investors dig through company 10-Ks, which will not be filed until the end of March. And who knows what investors will find once they start combing though those filings.