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Dow's 10,000 point spotlight also highlights flaws

NEW YORK: Timing may not be everything, but in financial markets it often counts for a great deal.

Indeed, within hours of the Dow Jones industrial average's assumption of its new perch atop the 10,000-point pedestal, a rush of news flooded forward -- much focusing on disappointing upcoming earnings -- that would have delayed the milestone.

For some, the warnings of soft sales at companies ranging from Dow component Coca-Cola Co. KO.N to flower distributor USA Floral Products Inc. ROSI.O only confirmed that too- optimistic investors have tended to ignore red flags in the area of corporate earnings while bidding up stocks.

"I have been uncomfortable with the stock market as far as earnings go for quite a while," said Edgar Peters, chief investment strategist at PanAgora Asset Management Inc.

Not all the news has been bad. General Motors Corp. GM.N shares gained fractionally on Tuesday after company executives told analysts they were comfortable with GM's ability to match Wall Street expectations this quarter.

And the fact that earnings growth has slowed from recent years is hardly news. Indeed, the third quarter of 1998 saw profits at U.S. corporations fall versus the prior year for the first time since 1991. Although growth has been restored, it is nowhere near the levels of the stock market's percentage gains.

"The fact is, we've had several quarters now where earnings have been mildly disappointing and it hasn't spelled doom and gloom for the market," said Charlie Crane, chief market strategist at Key Asset Management.

Analysts say a more intense market spotlight is unlikely to suffer flaws as gladly.

Until recently, a steady decline in interest rates has helped make up the difference, allowed analysts to justify higher valuations that more than offset earnings worries and arguably made false geniuses of some prognosticators.

"If you look back at the people who called the market right last year, nearly all of them got it right for the wrong reason," by basing their views on expectations of strong profit growth, he said.

For those hoping interest rates will again bail out the market, however, the tide has begun to turn in recent weeks and some say rates are heading higher soon.

Prudential Securities chief economist Susan Hickok, in a report released on Monday, sees yields on the benchmark 30-year U.S. Treasury at 6.0 percent by the end of June. Currently 5.6 percent, the yield had been below 5.0 percent earlier this year.

"Essentially our outlook for the economy is more optimistic and our view on inflation more pessimistic than most on Wall Street and in corporate America," Hickok said.

Compared with global market peers, the U.S. stock market appears attractively priced versus corporate profits, noted Lehman Brothers U.S. stratgist Jeffrey Applegate.

Applegate, in a report examining market valuation and earnings back to 1973, pegged the United States' share of the global equity market capitalisation at 49 percent, compared with a 46 percent share of profits on an operating basis.

In contrast, Japan's share of the global equities market in 1988 was 48 percent versus just a 16 percent share of profits.

Another point made by strategists is that the stock market is by nature a forward-looking mechanism and there are reasons to believe next year will bring some improvements.

"Several quarters ahead, the U.S. economy looks like it's still going to be OK," Crane said. And Asia, while still struggling, appears past its worst days, he noted.

Some of the most recent profit warnings show continued pressure from Asia and make clear the need in some quarters for an economic turnaround in the region.

Electronics maker Harris Corp. HRS.N and commercial laser maker Spectra-Physics Lasers Inc. SPLI.O both cited weakness in Asia as a reason for their forecasts that profits in the current quarter would fall short of Wall Street expectations.

Perhaps more unsettling, particularly for Dow watchers, were Coca-Cola's comments released moments after Monday's market close that weak international demand would hold first quarter world soft drink sales below year ago levels.

Coke shares opened sharply lower on Tuesday and fell $4.50 to $62.69 in early afternoon, a loss that contributed about half the 37 point decline in the Dow, which stood at 9970.

Coke's disclosure came as a shock even to analysts fully familiar with the company's international woes.

Calling the announcement "a major surprise," Salomon Smith Barney analyst Jennifer Solomon said she was particularly taken aback by weakness in Europe, where sales look to be down, and North America, where growth failed to meet expectations.-Reuters