Warnings About Warnings

Warnings About Warnings

Warnings About Warnings

Moneybox
Commentary about business and finance.
Sept. 19 2000 1:40 PM

Warnings About Warnings

There are eight seasons on Wall Street. "Earnings season," of course, comes once a quarter and has for a few years now (although the obsession with quarterly results is, in the grand history of the markets, a pretty recent development). There's no official start or stop date, but it's the period when a slew of companies reveal whether or not they met the "expectations" of analysts who track them. Earnings season even has its own logo on CNBC.

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I think it's now safe to say that the nonstop Street news cycle has definitively added "warnings season," which also comes four times a year, to its calendar. Warnings season is basically the period (shortly before earnings season) when companies that have already figured out that there is a disparity between what Wall Street expects and what they're actually going to report can fess up early--or "preannounce," as they say. The preannouncement doesn't have to be bad news, but it's the bad news that investors tend to remember, and to live in fear of. This is why it's called warnings season and not "happy little surprise season" or "everything's fine season."

IBES International, a firm that tracks corporate earnings, has noted that the percentage of companies with negative preannouncements in this quarter is actually lower than normal. Nevertheless, warnings season seems like a bigger deal this time around than ever before.

Sometimes the pessimism seems warranted. One of the factors bugging the markets these days is how the weakness of the euro is negatively affecting the earnings of multinationals, so it seems only natural for that pessimism to wind its way through shares of DuPont and Colgate-Palmolive and Gillette as each steps forth to say: Yep, it's hurting our earnings.

Other instances in this warnings season are harder to parse. The market-wrap-up coverage following one of last week's down days cited the negative preannouncement of Maytag as big factor. Maytag? Since when is Maytag a bellwether? Other culprits whose shortfall announcements have been given curious weight have included TRW, an auto-parts maker and something called SpeedFam-IPEC Inc., which makes computer-chip equipment. I understand the logic of extrapolating a sector's health from the actions of a single company, but the idea that tech stocks in general were punished partly because of the alleged woes of SpeedFam, which has a market cap under $400 million, seems hard to defend.

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But since Labor Day, this market has seemed primed for bad news. Consider Oracle. The company's actual earnings announcement last week happened to come right in the middle of the current warnings season. Its net income soared, and at 17 cents a share crushed Street estimates of 13 cents. But the market found the bad news: The firm's applications software business, which analysts had expected to increase revenue by 57 percent, instead grew a mere 42 percent. The stock fell about 8 percent. Is that a fair response to Oracle's numbers? Or is it the reaction of a market in that, for whatever reason, seems intent on seeing the glass as half empty? 

"Warnings season" may be of limited usefulness if you want to evaluate a stock by the actual strength of the company's underlying business. But it seems to have come into its own as a new feature of the treat American trading narrative. That is, it's something else for Main Street stock obsessives to agonize over--another chance to know how it feels to "trade like a pro." Having fun yet?

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