Earnings forecast impacts investors

Financial Strategies: Column by Patricia Kummer

Posted 1/29/09

There is an air of anticipation on Wall Street. Will the new administration over-shadow the dismal fourth-quarter earnings? Has the expected bad news …

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Earnings forecast impacts investors

Financial Strategies: Column by Patricia Kummer


There is an air of anticipation on Wall Street. Will the new administration over-shadow the dismal fourth-quarter earnings? Has the expected bad news on retail sales for December and corporate earnings already been baked into the stock prices? This will be an interesting few weeks as many new things unfold — some very positive such as a new stimulus plan, and some very negative.

There will likely be a lot of news based on earnings at S&P 500 companies, now expected to have tumbled 20.2 percent in the fourth quarter of last year from the year-ago period, according to Thomson Financial. The ratio of negative to positive pre-announcements has jumped to 3.6 to 1, its highest level since 2001, during the last recession. The results are not only financial companies as the earnings weakness has spread to many sectors of the economy. Now seven out of 10 sectors of the S&P 500 are expected to post negative growth.

Earnings revisions have been coming down about 4 percent to 5 percent per month showing the dramatic change in expectations. (S&P, Bespoke, and TheStreet.com)

There are widespread concerns about many companies’ ability to hit revised revenue and earnings guidance, for example Intel which reduced guidance twice before reporting earnings. Revenues were down in 2008 as much as they were in 2001 on a percentage basis, and management expects the business to recover in the second half of 2009 after customers reduce inventory in the first half.

Firms in traditionally defensive sectors, such as health care, consumer staples, and utilities are the only ones expected to have posted any profit gains during the fourth quarter.

Dr. Jerry Webman, OppenheimerFunds economist, states in his 2009 outlook that despite the difficult recession, a significant broad expansion is unlikely this year. “Lest we get too negative, I want to be perfectly clear that, although I am not forecasting robust growth in 2009, I do believe that the most intense parts of the economic and financial market downturns are moving behind us. As a result, I do believe that 2009 will be a better year for investors than was 2008.”

Nonetheless, Webman states, this will be a year of economic stabilization but not a return to business as usual. This is not 2003. We won’t resume big consumer spending or see rising home prices anytime soon. Strapped consumers are likely to continue tightening their belts and repairing their balance sheets in the face of rising unemployment and still-tight credit conditions.

The challenge for corporate America will be to grow revenues in a de-leveraged environment, which may be difficult for businesses who historically borrow to expand. Instead, businesses will likely shelve spending plans and draw down inventories until the outlook for the consumer improves.

Over time I believe consumers will continue to reduce debt and increase their personal savings, and confidence will improve. In the short-term unemployment will likely rise, a typical trend at the tail end of a recession. This could result in a continued cycle of rising defaults leading to more bank write-downs leading to tighter lending conditions. Improvement is unlikely until this vicious cycle is halted.

With businesses unable to break the cycle the federal government has stepped in with leverage and cash the private sector could not muster. The Treasury can borrow when you and I can’t, and the Federal Reserve can expand its balance sheet and lend when the bank on Main Street won’t. However, the revision of TARP and the new stimulus plan is designed to help. Recapitalizing banks and creating good credit flow along with jobs creation may go a long way to break the downward cycle and turn the economy around.

Webman states that fortunately for investors, you do not need robust economic growth to generate returns in 2009. Given the fear gripping the markets, only modest improvements in economic activity will be required to move careful investors closer to their financial goals.

Excerpts taken from Dr. Jerry Webman 2009 economic forecast.

Patricia Kummer has been an independent certified financial planner for 22 years and is president of Kummer Financial Strategies Inc. at 8871 Ridgeline Blvd. in Highlands Ranch. She is a financial consultant offering securities through SagePoint Financial Inc., and Investment advisory services through KFS Inc., a registered investment advisor not affiliated with SagePoint Financial Inc. She welcomes your questions at www.kummerfinancial.com. The views expressed are not the opinion of SagePoint Financial Inc. and should not be construed as an offer to buy or sell any securities. Investing is subject to risks including loss of principal invested. Past performance does not guarantee future results.



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