Earnings Season Starts With a Thud

Earnings Season Starts With a Thud
April 9, 2008; Page C1

Earnings season has just begun and it is already off track.
Leading the parade of first-quarter earnings reports, the unofficial drum major, Alcoa, fell on its face Monday, reporting a worse-than-expected 52% profit slump. Chip maker Advanced Micro Devices and UPS, the delivery company, tumbled on top of it with warnings.
When the year began, the consensus analyst forecast was that earnings among companies in the Standard & Poor's 500-stock index would increase 5.7% from a year earlier, according to Thomson Financial. Now analysts see a 12.2% drop in earnings.
Among S&P 500 financials, earnings are expected to be down 60%.
Earnings for both the consumer-discretionary and consumer-staples sectors are expected to shrink. When the year began, profits for consumer-staples companies, such as food and drug makers, were forecast to rise 10%. Now they are expected to fall 1%. The consensus for consumer-discretionary, which includes home builders, has gone from an 8% profit increase to a 12% decline.
The materials sector is expected to report no quarterly growth, and expected growth rates for every other sector but energy have been cut to single digits.
If recent history is a guide, the Street still might be overly optimistic. S&P 500 profits fell short of analyst estimates in the third and fourth quarters of 2007, according to Thomson. Those were the first quarters since Thomson started keeping track in 1994 that reported earnings haven't beaten forecasts. That includes the earnings bust of 2001 and 2002.
Expectations might be so low for financials that they don't have more room to disappoint. With the economy apparently in recession, the spread of weakness to other sectors still has the capacity to surprise.
Putting Hard Numbers
On Bad Practices
Alan Greenspan is getting heat for fueling the housing bubble by keeping interest rates too low for too long. But there is a lot of blame to go around.
One research paper making the rounds points at the Wall Street practice known as securitization. Wall Street's eagerness to buy, bundle and resell home mortgages into securities created a tantalizing incentive for lenders to disregard the credit-worthiness of borrowers because the lenders dumped the risk after making the loans.
The paper, by Atif Mian and Amir Sufi of the University of Chicago Business School, studied mortgage origination in 2,920 ZIP Codes from 1996 through 2007. In places where lending rose sharply during the boom, they found mortgages were likely to be quickly sold by the originators. These places also were more likely to see home prices jump and, later, defaults.
From 2001 to 2005, the increase in mortgage securitization was 50% higher in ZIP Codes that turned heavily to subprime mortgages, than in other ZIP Codes.
In an interview, Mr. Mian says Mr. Greenspan bears part of the blame. Low interest rates made investors hungry for returns and willing to make risky bets on high-yielding subprime loans.
Still, that doesn't absolve lenders, or the rating firms that stamped mortgage bonds with triple-A ratings, or Wall Street banks that bundled loans into mortgage-backed securities and collateralized debt obligations and sold them to trusting clients around the globe.