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October 29:  Market Risk ? US Equity Markets Likely To Fall As
Earnings Estimates Keep Dropping
Location: New York
Author: Tim Jones, RiskCenter Correspondent
Date: Tuesday, October 29, 2002


US stock gains over the last three weeks have been impressive,
with the S&P 500 rising 16% last week.  This gain is unlikely to
continue this week, as stocks are at risk from the fact that
fourth quarter earnings estimates are deemed as too optimistic.

In the week just ended, stocks gained for a third week. The S&P
500 Index and the Dow Jones Industrial Average advanced 1.5
percent, while the Nasdaq Composite Index rose 3.4 percent.  The
gains last week came about largely due to better-than-expected
results by major companies such as Microsoft Corp. and Bank of
America Corp.

A survey of analyst estimates compiled by Thomson First Call
revealed that earnings growth in the last quarter of 2002 for
companies in the Standard & Poor's 500 Index is forecast to
almost triple from the July to September period, seen as somewhat
unrealistic.

"The fourth quarter is in jeopardy," said Owen Fitzpatrick of
Deutsche Bank Private Banking. "Expectations are still high."

To comprehend the real effect of earnings estimate on stock
movements, shares of Texas Instruments Inc., which makes chips
for mobile phones, and health insurer Cigna Corp. tumbled last
week as they cut forecasts for fourth-quarter profits.

The quarter earnings season for third quarter is nearing an end
after almost three-quarters of the S&P 500 published results.
Companies due to report earnings this week include Procter &
Gamble Co., Electronic Data Systems Corp., Exxon Mobil Corp. and
ChevronTexaco Corp.

This week, shares of automakers will be under scrutiny. Sales at
General Motors Corp. are expected to drop by 36%, 31 percent at
Ford Motor Co. and 22 percent at DaimlerChrysler AG's Chrysler
unit from a year-earlier record month, according to a forecast by
Luckey Consulting Group Inc.

October 2001 was the first full month that US-based automakers
offered interest-free loans to revive demand after the Sept. 11
terrorist attacks. Automakers report sales on Nov. 1.

The stocks market will also be watching and reacting to economic
data, including gross domestic product and unemployment figures.
"We're starting to live from economic data point to economic data
point," said Cliff Fox, who helps manage $2.1 billion at Columbus
Circle Investors in Stamford , Connecticut .

The GDP report is expected to show the economy grew at a 3.6
percent annual rate in the three months ended September. In the
last three months of 2002, economic growth may slow to a pace of
2.2 percent, according to this month's consensus estimate of
economists surveyed by the Blue Chip Economic Indicators.

Some investors said that slowdown may prompt more companies to
fire workers before the year-end. The unemployment rate in
October is estimated to have risen by about 5.8 percent, from 5.6
percent the previous month  "Companies recognize that the
recovery is farther out than before," said James Abate, who helps
handle $17 billion at Global Asset Management Inc. "That will
increase the likelihood of one-time charges," which may put a
drag on fourth-quarter earnings.

Economic indicators aside, the trend of earnings estimates
starting to decline is alarming. Analysts expect fourth-quarter
earnings for the S&P 500 to rise 17.3 percent, according to First
Call, down from the 19.9 percent increase projected on Oct. 1 and
the 22.9 percent prediction on Sept. 1. This may keep going down
as the quarter moves along.

Article at:
http://www.riskcenter.com/cgi-bin/article.pl?id=5685