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July 9, 2001
Second quarter will be year's worst for corporate profits: analysts
A trader rests his chin in his hand as he works on the floor of the New York Stock Exchange, last Friday afternoon. (AP/Richard Drew)
TORONTO (CP) - A slow economic recovery in Canada and the U.S. and a slew of earnings warnings have analysts predicting the second quarter will be this year's worst for corporate profits - and investor confidence.
"Canada has a pretty important energy sector, so we're going to be buoyed by that," said Mario Angastiniotis, senior economist with Standard and Poor's MMS. "But we're not going to avoid the pounding from the technology side of things."
The prelude to that pounding has already begun, with global high-tech leaders announcing profit warnings or otherwise lowering expectations both in Canada and the United States.
Nortel Networks Corp. made headlines last month when it announced it expects to report a loss of $19.2 billion US in the second quarter - by far the biggest three-month loss in Canadian corporate history.
JDS Uniphase Corp., another high-tech giant, is also expected to fare poorly, after it announced in June that its sales for the quarter will be $100 million less than previously expected because of continued weakness in telecom spending.
Most companies release second-quarter earnings in mid-July and since corporate profits are the key driving force in the marketplace, the impact of a profit-weak quarter could seriously affect investor confidence.
This chill effect was evidenced recently when brokerage powerhouse Merrill Lynch & Co. warned that its second-quarter earnings will be significantly lower than expected - dragging down the financial-services sector on the Toronto Stock Exchange.
The brokerage said revenues from stock and bond trading were particularly weak, indicative of feeble investor confidence in light of poor corporate profits.
"You can see a buyer strike going on here, in a sense of 'why buy today?' " said Brian Acker, chief investment officer at Acker Finley Inc.
"I think the market is telling you every day that it's looking beyond (the fourth quarter) now for a recovery," Acker added.
S&P's Angastiniotis was a bit more optimistic but also didn't predict a runaway rebound.
"It's going to be a slow dredging out from the bottom," he said.
"I think, given the slow pace of recovery in the U.S., the third quarter is going to be compromised as well."
To make things worse, the high-tech sector is just one of several which are announcing dismal profits.
In the U.S., Federated Department Stores, owner of Bloomingdale's and other big retail names, jolted the market last week by marking down its profit expectations by about one-third.
In the automotive sector, DaimlerChrysler is restructuring its Chrysler arm, which lost $1.2 billion US in the first quarter.
However, the Canadian energy sector has remained healthy. For example, Calgary-based Suncor Energy Inc. said Thursday that higher production and lower taxes will translate into second-quarter earnings 25 per cent higher than in the first quarter.
That's because oil and gas prices have stayed solid in the first six months of the year, slipping only in the past few weeks, Angastiniotis said.
However, this might mean the energy sector in the next three months "may not be as rosy as it was in the first or second quarter, but still relatively healthy," he said.
Meanwhile, all the earnings gloom provides the perfect climate for bottom-feeding - buying stocks when they're undervalued - says Fred Ketchen, managing director of equity trading at Scotia McLeod.
Says Ketchen: "People who want to buy stocks ought to live by the principle of 'buy low, sell high,' rather than the other way around."
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