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Results roll into Wall St. Spiking oil prices unnerve investors about earnings; Corporate results pour in By Staff Writer Catherine Tymkiw October 15, 2000: 8:15 a.m. ET
NEW YORK (CNNfn) - If last week's roller-coaster ride on Wall Street seemed nerve racking, hang on folks. Earnings season kicks into high gear this week and there's plenty of evidence to suggest that the market is going to be in for a bumpy ride.
Just about every negative pre-announcement last week sent the major stock indexes tumbling and unnerved investors who worried that any slowdown in revenue growth would cause them huge losses.
Toss in a rising crisis in the Middle East, which sent crude oil prices spiking to near 10-year highs, and you had all the makings of a bear market. But then, just as it looked like the market was throwing in the towel, investors returned to the market with a vengeance Friday, sending stock prices soaring.
With 48 companies due to report third quarter results this week, analysts said investors will be reading earnings reports carefully to see if the market can maintain its positive momentum.
"The overwhelming key will be, as companies report, it won't be as much about what they report but what they have to say about the fourth quarter and 2001," said Bill Meehan, chief market analyst at Cantor Fitzgerald.
Throwing a wrench into the mix is the escalating violence in the Middle East, which has sent oil prices surging again. Higher oil prices stir fears of inflation, which in turn erodes corporate profits.
"With the price of oil moving up and the tension in the Middle East would suggest that the possibilities of a recession are increasing in terms of inflation," said Peter Cardillo, director of research at Westfalia Investments. "The Fed's number one target is to keep inflation under control. If energy prices continue to accelerate then the Fed doesn't need to raise interest rates because the economy is going to slow anyway."
Two key economic reports, due this week, may lend a hand in soothing investors' worries about the pace of the economic slowdown. Cardillo said the only way he thinks the Federal Reserve would make a move to cut rates would come if the economy heads into a deep recession.
"Unless you see substantially weaker growth and low core inflation, if energy prices remain high and the labor market remains tight, there are a lot of people who expect the next Fed move to be an ease," said Meehan.
Wall Street's wild gyrations
Heightened concerns about revenue growth, sparked by a slew of results warnings, sent U.S. stocks into turmoil last week.
The Nasdaq surged nearly 8 percent Friday to end the week at 3,316 while the Dow rose 1.6 percent to 10,192. For the year, however, the Nasdaq is still down almost 20 percent and the blue-chip index is off 11.4 percent.
"People are still in love with technology," said Meehan. "There are enough signs now that the market is oversold and we could get a bounce but it will be limited. It's really a traders market except for individual opportunities."
Enter the earnings
Corporate results for the third quarter have started coming in and more are still to come. Thus far, 67 of the 500 companies on the S&P have posted results and beat expectations by 3 percent, according to First Call/Thomson Financial.
The pre-announcement season was not taken in stride and investors shunned the negativity. Just last week, warnings from Williams Sonoma (WSM: Research, Estimates), Lucent Technologies (LU: Research, Estimates) and Home Depot (HD: Research, Estimates), sent investors into a selling frenzy.
"Once again the punishment of missing or pre-announcing earnings has been overwhelming on companies management," wrote First Call research analyst Anthony Crooks, in a research note. "The strong growth in earnings recently and the trend towards managing expectation has produced a larger than average number of companies beating expectations."
Several technology companies are due to report, along with 14 Dow firms so investors have their work cut out for them.
"I still expect the third quarter to be respectable but that's a thing of the past," said Westfalia's Cardillo. "But what happens in the fourth quarter (is the question)."
With the spotlight on earnings, there is little on the event calendar. Merrill Lynch will be hosting a technology conference in Hong Kong from Monday through Wednesday, Salomon Smith Barney will hold it healthcare conference in New York from Monday through Wednesday, and the SemiCon Southwest 2000 event will be taking place in Austin, Texas on Tuesday and Wednesday.
Of course, investors will be gearing up to watch the final presidential debate between George W. Bush and Al Gore, which is taking place on Tuesday in St. Louis.
CPI, housing starts on deck
With most analysts expecting no change to interest rates by the Federal Reserve's monetary policy-making body, there are still two meetings to go. Investors will keep a close eye on economic data to gauge whether or not the Fed will make a move on rates.
After six interest rate hikes since June 1999, most of the incoming economic data has been pointing to a slowing economy. This has calmed some of the skittishness harbored by investors who worried that more rate hikes could hurt their investments.
On the economic front this week will be reports about consumer spending habits, reflected in the Consumer Price Index (CPI), and housing starts.
The CPI, the nation's most closely watched inflation gauge, is used by the federal government to make cost-of-living adjustments in Social Security payments and other benefits.
According to analysts polled by Briefing.com, the CPI for September is expected to rise to 0.3 percent from a revised negative 0.1 percent in August. The core CPI, which excludes volatile food and energy prices, is expected to remain unchanged at 0.2 percent.
In the week's other key economic report, housing starts are expected to come in at an annual rate of 1.555 million, according to analysts polled by Briefing.com. This compares with 1.531 million reported in August.
Housing starts, or the beginning of construction on residential units, are an important predictor of consumer purchasing, due to the need to furnish new houses with appliances and furniture.
"Even though the Fed has tightened, it's not done a whole lot in the way of weakening the housing market," said Cantor Fitzgerald's Meehan.
Oil price hikes reared their ugly head again last week as violence erupted and escalated in the Middle East. Against the backdrop of an already nervous market, investors are becoming increasingly worried that rising crude oil prices could cut into corporate profits.
"The (tension and the higher oil prices) are going to stress the global economy with stock markets coming down, it's going to really cut back the wealth effect, we'll see it in Europe and other oil-importing countries," said Dan Ascani, president and director of research at Global Market Strategists.
"If war breaks out, consumers may tighten up spending, and it's ahead of the holiday season. Plus we've had this huge markdown in stocks. So with the election just weeks away and war drums beating, people are going to be confused about spending," he added.
In New York, oil for December delivery rose as high as $36.90 last week after at least five U.S. sailors were killed in a possible terrorist attack on a Navy ship in a Yemen port. An escalation in the recent violence between Israel and the Palestinians also affected oil prices.
"If oil prices continue to rise and there's an escalation of the situation in the Middle East, the question would come up, are we headed for some type of OPEC embargo and where would that send prices," said Westfalia's Cardillo. "It seems like all of the negative news that possibly could be surrounding the oil market is at hand."
-- Martin Thompson (firstname.lastname@example.org), October 15, 2000
I look for the roller coaster to continue for the next few weeks, before we get a clearer picture.
-- Chance (email@example.com), October 15, 2000.