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02.12.2000 16:58

-- To find a reason for the tumble in stocks in recent weeks, look no further than Wall Street's profit estimates.

As companies including Gateway Inc. and Altera Corp. warned that their quarterly results will disappoint investors, analysts have cut their earnings forecasts at the fastest rate since Russia's debt default shook international markets in 1998.

On Oct. 1, analysts expected profit from companies in the Standard & Poor's 500 Index to rise 15.6 percent in the fourth quarter from a year ago. Two months later, that estimate stands at 10.3 percent. The earnings forecasts for technology companies have been slashed even more -- analysts at the beginning of the quarter expected 29 percent profit growth, and they now expect half that.

``There's no question we're seeing the trimming of fourth- quarter forecasts much more than we normally do,'' said analyst Ken Perkins at First Call/Thomson Financial, which tracks analysts' forecasts.

Analysts' average estimates usually fall about 3 percent over the course of a quarter, according to First Call data. At the current rate, ``It's possible we could see it come down into the single digits,'' Perkins said.

As companies tell analyst to cut their profit estimates, the stock market reflects the lower forecasts. For the week, the Nasdaq Composite Index fell 8.9 percent, the S&P 500 lost 1.9 percent and the Dow Jones Industrial Average slipped 0.9 percent. The Nasdaq has slumped 35 percent year to date, the S&P 500 is down 10.5 percent and the Dow is 9.1 percent lower.


Analysts were overoptimistic, investors and strategists say, though the extent of the decline took the entire market by surprise.

``There was a lot of built-in hype, particularly in the tech stocks,'' said Edward Trumpbour, who helps oversee $300 million at Brandywine Asset Management in Wilmington, Delaware. ``The economy is slowing pretty dramatically, and there's only a month to go in the year.''

Trumpbour and colleague James Clarke added to their holding of Abercrombie & Fitch Co. on Thursday. Shares of the clothing retailer dropped 26 percent after the company said November sales fell.

Many more companies are likely to post disappointing results in coming quarters as the economy continues to slow, said Charles Pradilla, SG Cowen Securities Inc.'s chief investment strategist.

``The forecast cuts are simply reflecting the new reality,'' he said. ``The great majority of the Street and (investors) was overly optimistic before we started to get hard evidence that the economy was slowing more than expected.''

As the Nasdaq falls, money managers are building up their cash holdings. Cash at U.S. stock funds jumped 10.2 percent in October from the month before, according to the Investment Company Institute. For the second month, the $19.9 billion cash increase was more than the net amount investors put into U.S. stock funds.

``In other words, all of the new cash flowing into U.S. equity funds since September is now sitting on the sideline,'' wrote Charles Biderman, president of research firm TrimTabs.com, in a report.

The drop in analysts' estimates may signal an end to the market's decline and put some of that cash back in the market, some investors said.

Analysts' profit estimates ``typically fall the fastest right before the bottom,'' said Larry Seibert, who helps oversee $2.3 billion at Barrett Associates. ``Analysts jumped off the PC stocks'' after Gateway's announcement this week, he said. Gateway was already 60 percent off its February high by that point.

Seibert has been buying shares of Yahoo! Inc. and Network Appliance Inc. Yahoo is now ``reasonably valued'' he said. Shares of the No. 1 Internet-search directory trade at 87 times recent earnings, compared with 110 times for the Nasdaq 100 and 25 times for the S&P 500.

Semiconductor Shares Fall

Semiconductor and computer-related stocks posted the biggest declines this week after Gateway and Altera Corp. warned of disappointing results.

No. 2 personal-computer seller Gateway, which sank 43 percent for the week, said fourth-quarter sales and profit will fall short of forecasts because of weaker holiday sales.

The announcement fueled concern about slowing sales throughout the industry. International Business Machines Corp. lost 4.3 percent for the week, Hewlett-Packard Co. fell 9.5 percent and Dell Computer Corp. slumped 24 percent.

Altera dropped 17 percent after the No. 2 maker of programmable computer chips said slowing demand means sales in the fourth quarter and next year will be lower than expected.

Retail stocks were the biggest gainers in the S&P 500. November sales at stores open at least a year rose as the retailers slashed prices to lure shoppers. Wal-Mart Stores Inc. jumped 13 percent, Target Corp. gained 11 percent and Sears, Roebuck & Co. climbed 9.4 percent.

Next Week's Earnings

Companies expected to report quarterly earnings next week include fiber-optic equipment maker Ciena Corp., grocer Kroger Co. and Litton Industries Inc., the U.S. Navy's third-largest shipbuilder.

On Friday, the government will release employment and wage- growth figures for October. The report may give investors clues to whether the labor market is tight enough to spur inflation.

Profit warning
02.12.2000 17:06

The labour report on Thursday will be crucial.
02.12.2000 17:36

THE WAY EVERYBODY'S hoping for capitulation, you'd think it was something really delicious. Far from it. Capitulation, to market experts, refers to the explosive selling climax that comes when investors, battered by losses, finally give up and rush for the exits.

So why are people hoping for such a rout? In a bear market, a capitulation signifies that the market has finally hit bottom — meaning stocks are ready to go back up.

Technical analysts have a precise definition of capitulation, based on the appearance of several market indicators. The question everyone's asking is, was Thursday's brutal morning sell-off really this bear market's final capitulation?

One sign analysts point to is heavy downside volume — that is, when the overwhelming majority of trading comes on downticks in stock prices. That's a signal that most investors are ready to bail once certain levels are reached.

On the Monday before Thanksgiving, when the Nasdaq plunged 5%, downside volume exceeded upside volume by a ratio of 8 to 1. That's nothing compared to the 25 to 1 ratio that Tim Hayes, technical analyst and the global equity strategist at Ned Davis Research, considers the telltale sign of a true bottom. Now for the bad news: As rough as Thursday's trading session was, downside volume on both the Nasdaq and the New York Stock Exchange was just 3 to 1.

Another technical indicator is the number of new 52-week lows set in a single day. On Thursday, the Nasdaq hit 737 new lows and the Big Board reported 231. Again, Hayes says that's not good — or bad — enough. On Oct. 8, 1998, the day the market bottomed out from the Asian Crisis, the Nasdaq posted 1639 new lows, marking the beginning of a significant rally. "It doesn't need to be [that] extreme, but we haven't even gotten near these levels," Hayes says, "which makes me think it's going to get worse."

Michael Burke, editor of the Investors' Intelligence newsletter, looks beyond the number of 52-week lows. He checks to see whether those new-low stocks end the week with a gain. When everyone has thrown in the towel and a lot of stocks bounce back by the end of the week, an inflection point may have been reached, he figures. If the gains don't appear by Friday, however, "there's not enough capitulation," he says.

Burke's much-looked-for indicator didn't arrive on Friday, as the huge rally, rebounding from Thursday's plunge fizzled out in the last two hours of trading. The Nasdaq Composite Index, which surged 152 points early in the day, ended up just 47.36 to 2645.29. The Dow Jones Industrial Average, also gave up a triple-digit gain, to post a 40.95 point loss to 10373.54.

Many analysts also look at a few "sentiment" indicators, such as the Investors Intelligence Sentiment Index and Market Vane's survey in its Bullish Consensus newsletter. The Investors Intelligence Sentiment Index is a weekly survey of 130 investment newsletter writers that ascertains whether they're bullish, bearish or looking for a correction (in other words, long-term bullish, short-term bearish). Right now, "People are much more optimistic than we would expect them to be," says Burke. "That can be a contrarian indicator. If newsletters are overly optimistic, that's a bad sign, while overly pessimistic is a good sign." The latest results revealed that 55% of newletters were bullish — "much more than might be expected with what's going on with the elections." When the next results come out on Wednesday, we'll know how Thursday should be perceived according to this measure.

Market Vane's survey, meanwhile, queries daily 50 to 80 traders of Standard & Poor's 500 futures' contracts. Market Vane president Rich Ishida found a lot of negative sentiment in the most recent survey, taken on Thursday — which, he says, could be considered a positive sign for the market. Just 23% of the people surveyed were bullish, according to Market Vane, its lowest level since Oct. 18, 1999, which was the start of a stunning Nasdaq rally. It also reached a low of 23% on May 26, the start of the summer rally, then climbed to 56% by early September, when the market began to fall back. "Basically," he said, "the market is oversold. But that doesn't mean it can't go lower."

The Flood Becomes a Trickle

Data from Jan. 1, 2000 to Oct. 31, 2000
Source: Trim Tabs

Legendary floor trader Arthur Cashin of Paine Webber has witnessed many days like Thursday — and he's certain we haven't seen true capitulation yet. "[Investors] aren't throwing [stocks] out the window yet, but it could [happen] on Monday," he says. "In 1929 and 1962, and other years, you saw increasing volume and share price erosion on a Thursday and nothing exceptional on Friday. Then over the weekend they reviewed the bad news, and on Monday they threw in towel."

Will this be the case on Monday? According to these technical analysts, it's a definite maybe.

02.12.2000 18:15

Morsomt hvis mr. Cashin får rett, med en tiltagende panikk utover dagen på mandag, med Nasse ned +10 prosent.

Da er det bare å låne til pipa og laste opp (gode) it-aksjer på OB på tirsdag, og lene seg tilbake og vente.....

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