Crystal Balls Are Mostly Cloudy on Wall Street

Wall Street analysis, never an exact science even before terrorists took aim at the country's financial epicenter, is starting to resemble pure divination in the wake of the attacks.

"We're all searching for the best thoughts we can find," said Chuck Hill, director of research at First Call/Thomson Financial. "Analysts' best estimates are better than none" at all.

With war looming and economic uncertainty on the rise, investors wonder how much faith they should have in analysts' forecasts. Following a profit warning from Ford (F) on Sept. 14, for example, analysts that cover the automaker came out with third-quarter estimates that varied widely -- from a loss of 10 cents a share to a loss of 25 cents a share. The consensus is now for a loss of 16 cents a share, according to Thomson Financial/First Call. Before last week, analysts were expecting a profit of 10 cents.

"The numbers are going to be noisy," said Kent Womack, a finance professor at Dartmouth College. "Forecasting is going to be less precise than it used to be, since we don't know what is happening with the economy."

Part of the problem is that the companies themselves aren't always sure what's happening. "I feel inadequate in forecasting the impact of the attack on our business," said George Pipas, a sales analyst at Ford. "I may sound like I don't know much, but in my lifetime, I've never seen two jets crash into the World Trade Center."

The paucity of available information complicates analysts' jobs. Brent Thill, a software analyst at Credit Suisse First Boston, lowered his 2001 earnings estimates on 11 software companies last week, among them Siebel Systems (SEBL) and PeopleSoft (PSFT), without any guidance from the firms.

"It's pretty complex. Ninety percent of the companies I cover haven't made any public announcements," Thill said. Even when the top brass speak, research analysts have to parse their words. Thill added: "Management will try to be optimistic, but as an analyst you've got to set yourself apart and be realistic."

Thill's priority is to figure out who's still buying. Software companies typically close a lot of business in the last month of a quarter, but with customers hit hard, two weeks of the sales cycle might be gone. Among the sectors thought to make postponements are insurance and financial services companies.

"You have to find out what happened to demand, if it's been delayed or if it's disappeared," said Gary Cooper, a leisure analyst at Banc of America Securities. Among the companies he covers are Mattel(MAT) and Harley-Davidson (HDI). Cooper is taking a wait-and-see approach, and so far hasn't made any changes to his recommendations.

How long the spending slowdown will last is unknowable. "The duration and geographical extent of this malaise will be determined by likely -- but unpredictable -- subsequent political and military events, as well as the status of the job market, which had already appeared shaky," reported the retail research group of Goldman Sachs in a note to clients on Sept. 17.

Not knowing whether the country is going to war, or if the economy is sliding into a deep recession, has hampered analysts' abilities to predict the price of equity. There's no course in business school that prepared them for the current situation.

"Analysts are doing the best they can," said Dartmouth professor Womack. "They're not doing a worse job than they did two weeks ago. It's just that the job they have to do is harder."

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