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Peter Canelo of Morgan stanley Dean Whitter in an nterview on CNBC at 7:05 was stating some of his views on why the sell off of the NASDAQ, he said "we are have seen a number of Y2K incidents and are seeing more...".

-- SR (, January 07, 2000

Answers January 7, 2000

Wall Street Remains Upbeat Despite Lucent Scare


Unexpected profit warnings from Lucent Technologies and Gateway sent shivers through the stock market this week, stirring fears that other heavyweight companies might also announce bad news in the run-up to the quarterly earnings season.

But analysts and buy-side professionals argue that the fears are overblown, noting that early indications point to exceptionally strong fourth-quarter profits as many companies begin reporting their results in the coming weeks. Among those being watched are Yahoo! , which is expected to report on Wednesday.

According to I/B/E/S International Inc, a research firm that tracks corporate earnings, 102 companies, or 71.8 percent, of the 142 companies that have so far issued announcements prior to scheduled earnings have warned of smaller profits or bigger losses than Wall Street has been expecting. Although that may sound high, the proportion of negative announcements is at its lowest level in five years, raising hopes for an outstanding quarter, said Joe Abbott, chief equities strategist for I/B/E/S.

"If the pattern holds, we would expect a positive earnings surprise of 4 percent beyond current forecasts," Abbott said. "We are very optimistic."

Of the companies that published preannouncements, 18 said their earnings would be better than originally expected and 22 said earnings would come in on track.

I/B/E/S said it expected the companies that make up the S&P 500 to have aggregate earnings of $13.55 a share, an 18 percent increase over fourth quarter 1998.

Some investment banks are even more bullish.

Arun Kumar, a senior equity strategist at Lehman Brothers, said he expects earnings growth of 20 percent among S&P 500 companies, with earnings reaching $13.87 a share.

"Every quarter some high-profile companies, like Lucent or Gateway, announce they will miss their targets, but I wouldn't extrapolate them into the general market," Kumar said, adding that the closer earnings seasons gets, the less likely companies are to issue any warnings.

Peter Miselis, a portfolio manager for Avatar Associates, said he also expected impressive results for the last quarter of the 20th century.

"Obviously there could be negative surprises, but the fourth quarter is shaping up as a solid quarter," he said.

Yet, while the overall picture may look good, several factors threaten to rain on the earnings parade, particularly in the technology sector.

Long a market darling, Lucent not only shocked the market with its announcement Thursday that it expected first-quarter earnings to fall below estimates, it also demonstrated how companies create landmines for themselves when they bend accounting rules in order to hide problems and meet earnings targets.

"The companies tell the sell-side analyst community we're going to grow by x percent each year, the analysts set the earnings estimates and then push the companies to meet them," said Brad Rexroad, an analyst with the Center for Financial Research and Analysis, an accounting watchdog firm in Rockville, Md.

"As in the case of Lucent, companies stretch to make the estimates -- this caught up with them yesterday," he added.

The problem becomes even more intense in years when the markets surge and companies are expected to follow suit.

Among the companies that are being watched is IBM , which issued a fourth-quarter earnings warning in October.

An IBM representative was not immediately available for comment. While the clocks may have advanced to January 2000 with hardly a peep from the Y2K bug, analysts are also still waiting to see whether the fears that plagued the market had any effect on corporate revenues.

Peter Canelo, U.S. investment strategist for Morgan Stanley Dean Witter, said it was still unclear whether Y2K fears would prove to have had any effect on fourth-quarter technology sales.

"A lot of buyers were not buying technology because of Y2K, but there was a lot of activity in November, which may have made up for the shortfalls in December," he said.

Y2K or no Y2K, Canelo said he expected "great" earnings growth of 12 percent to 15 percent for the technology sector in the fourth quarter of 1999.

But he said the market would remain skittish in the near term because of continued concerns about rising interest rates. Still, he remains bullish on technology stocks, projecting that they would be poised for a "rocket ride".

In the immediate future, traders said they expected to see a stock market rally followed by a profit-taking selloff as companies start to report their earnings.

"You'll probably have a slight run-up and then a selloff," said Bill Painter, a senior equities trader at Federated Investors. "Of course, if there are a couple more preannouncements like Lucent's this could be reversed. There are landmines."

-- LSRY2K (, January 08, 2000.

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