June 11, 2001

Earnings Fall Once Again

Investors finally may be coming to their senses about company earnings. We've warned for quite some time now that earnings will not pick up before next year at the earliest. This quarter and at least the next two look to bring further disappointments to investors.

As we've said, additional rate cuts by the Fed and tax rebates from President Bush will do little to spark a 180-degree turnaround in the economy and will not boost corporate earnings. Three hundred dollars is a drop in the bucket compared to all of the money investors lost in the last market tumble, and it is certainly little compensation to a laid off worker. This is not going to make Americans feel wealthy again, nor is it going to make investors go on a spending spree.

Interest rates have already failed to spark a recovery. It has been nearly six months since the Fed rate cuts began, and most economic data are getting worse, not better. In an effort to boost their bottom lines, businesses have cut capital spending. The result: Earnings STILL disappointed investors AND the lack of new products and the latest equipment will most likely delay a recovery. And, like most Americans, businesses are in debt up to their eyeballs. They can't afford to take out more loans, or they'll be heading straight to bankruptcy court.

Investors may finally be getting it. But perhaps they don't realize just how bad it could get. We all know that many companies manipulate their earnings reports. Using such things as "pro-forma earnings" and "goodwill" accounting gimmicks, companies often paint a rosier picture for shareholders than is actually the case. But the slowdown has gotten so bad that companies' enhanced earnings are dismal.

Just think what will happen when shareholders discover how bad the actual earnings are.

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