The wreckage of Wall Street’s single-car crash continues to attract rubber-neckers, now that we know that the driver’s blood alcohol level was off the charts. But it might be time for investors to move on.
The seasonality of business is comforting at times of market stress. The prospect of a fresh round of quarterly corporate reports and outlooks plus the springtime annual meeting season present, if nothing else, a welcome diversion from the latest embarrassment among the world’s most highly paid bankers.
It’s comforting, in a nostalgic sort of way, that the egregious level of executive pay will, once again, be the centerpiece of shareholder activism during the annual proxy voting process that begins in a few weeks. The need to shame the princes of capitalism is never-ending, as recent events have proved.
As to the coming quarterly financial reports, the task for investors is more complex. First-quarter results among various industry sectors are expected to vary widely.
According to Thomson Financial, analysts who tracked the banking industry are forecasting a 49 percent drop in first-quarter earnings by the banks and investment firms in the Standard & Poor’s 500 index. Reuters Estimates puts the decline at 40 percent.
Despite the recent hollowing out of equity values in financial stocks, the sector still accounts for a major portion of S&P 500 market capitalization. In addition, profit among basic materials producers, such as Alcoa, are expected to have shrunk from a year ago. Likewise for so-called consumer discretionary stocks, such as Target.
On the flip side, energy producers and technology companies are expected to report double-digit increases in first-quarter profits.
Putting the sectors together, analysts predict S&P 500 profits in the first three months of the year fell 7.9 percent, according to Thomson Financial, and 5.5 percent, according to Reuters Estimates. At the moment, analysts expect the year-over-year slump to end in the summer.
Aside from this conventional earnings expectation game, the first-quarter earnings reporting season will be distinguished by two special issues.
First, we now know that the Enron accounting scam of seven years ago has been standard operating procedure in the banking business. Overstating profitability and capital footings through creative accounting is endemic on Wall Street. With each quarterly report, banks will edge reluctantly toward full disclosure.
Investors would do well to apply similar skepticism to all companies they own. A move to weaken accounting standards in the name of global competitiveness has been under way for several years. Efforts continue in the Bush administration and many corporate executive suites to water down post-Enron accounting reforms known as the Sarbanes-Oxley rules.
Restoring global confidence in U.S. markets and business practices demands tough standards, not a slide to the weakest common denominator among the national accounting principles.
Second, with banks constrained in their ability to lend, the health of non-financial U.S. corporate balance sheets is a vital piece of information for investors. In recent years, many companies have had enough cash on hand to act, in effect, as their own banker.
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The current economic slowdown might have eroded balance sheets even in healthy sectors, such as energy and technology. If so, the ability of companies to grow internally or distribute cash dividends could be impaired. If dividend cuts spread beyond banking to non-financial stocks, the recent optimism among investors could turn sour quickly.
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Earnings growth estimates of S&P 500 sectors
For 2008 first quarter %% SECTOR PERCENT CHANG Basic materials -7% Consumer cyclicals -10% Energy 29% Financials -40% Health care 7% Industrials 8% Consumer staples 9% Technology 12% Telecom services 6% Utilities 7% %% SOURCE: Reuters Estimates
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