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December 7, 2000

New Earnings Warnings Guide Stocks Lower
By Kristen French, The

Back To Reality ... Weiss comments

NEW YORK - The phantom of economic recessions past descended upon the market again this morning following the most recent bout of earnings warnings. Tuesday's record-breaking rally seemed like oh-so-distant a memory.

Optimism generated Tuesday about a year-end-rally was first tested yesterday by earnings warnings from Apple and Bank of America.

Then mobile-phone firm Motorola announced this morning it won't meet already lowered fourth-quarter sales or net guidance. It also said it will likely lower its outlook for 2001 soon. It was off 7%.

There was also some pretty bad news out for software behemoth Microsoft, which saw its earnings targets cut by Goldman Sachs this morning to $1.88 from $1.91. Microsoft was losing 7% in early trading.

Motorola's warning was just one more sign that it's going to be a nasty earnings confession season, as more and more companies are finding that lowering earnings estimates once is not enough. Motorola first lowered its financial estimates the fourth quarter and next year about two months ago. At that time, it blamed the weak euro for its troubles.

It can't do that this time around. Today the euro is trading at an 11-week high as currency traders bet on the relative weakness of the U.S. economy vs. European economies.

Second warnings like these are particularly worrying because they indicate how off the mark projections from analysts and companies have been -- and will likely continue to be. Tuesday it was Apple that warned a second time and last week it was specialty chipmaker Altera. That pressure from warnings isn't expected to let up, as fourth-quarter confession season -- that pre-reporting time when companies warn if they expect to miss targets -- doesn't usually even start until the second week of December. Earnings tracker I/B/E/S is projecting this quarter's earnings confession season will be the busiest since the firm started collecting their confession data in 1996.

Apple and Bank of America, which yesterday warned about an earnings miss, had already broken the boom of optimism brought on by Federal Reserve Chairman Alan Greenspan's soothing words on Tuesday. The warnings reminded investors what had them selling in the first place -- receding demand for technology and worsening credit quality. And they revived fears that a recession looms somewhere on the horizon.

And, lest we forget, the elections debacle rages on. Today brings a possibly decisive Florida high court hearing, while a federal appeals court yesterday rejected Bush's call to bar any future recounts. Meanwhile, trials in Tallahassee are entering their second day, where judges are being asked to throw out thousand of absentee votes, mostly for Bush.

We've been saying since before the election debacle started that, regardless of who is awarded the Presidency, company earnings reports will continue to disappoint investors. Every day, more and more companies join the list of dismal performers. Yesterday, Apple and Bank of America topped the list, today it's Motorola. And the outlook isn't improving.

The U.S. is mired hip-deep in a general economic slowdown and getting in deeper all the time. Companies can no longer simply blame the weak euro or the high price of oil for poor earnings. Worldwide demand has dropped off a cliff. Lines of credit have dried up for all but the best companies. Tight credit means businesses can't borrow to expand and keep growing.

Fear of a looming recession is spreading -- and warranted. In fact, if wage pressures continue to build and energy prices continue to skyrocket, recession coupled with inflation is a dead ahead.

A new President or even the Fed lowering interest rates won't improve the bottom line for companies in the coming quarters. No matter how low the rates go, no one will rush to lend money to Amazon.bomb or other "new economy" companies that can't seem to make a profit and have little or no hopes of paying their debts.

We've already seen former "must-have" stocks lose 50, 70, or even 90% of their value. Soon, we may see a parade of once-solid companies doing a death march into bankruptcy court. That's when the "R" word will REALLY rear its ugly head -- and panicked investors will yank their money out of the market with a vengeance.

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