The Daily Interview: First Call/Thomson Financial's Equity Strategist Joseph Kalinowski

The back half of 2000 looked like something out of Apocalypse Now, with disastrous and explosive information taking chunks out of stock prices and devastating entire sectors. The price of crude soared to new highs, while the outcome of the presidential election was thrown into a state worse than limbo -- Florida. The U.S. economy was grinding to a screeching halt, and all while company after company warned of lower-than-expected earnings.

Joseph S. Kalinowski Equity Strategist First Call/Thomson Financial

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Regulation FD -- the Securities and Exchange Commission's new rule that requires companies to end selective disclosure -- helped kick open the floodgates, with the fourth-quarter preannouncement season shattering records for the number of comments made prior to the earnings season. Now that the smoke has cleared, the Federal Reserve has intervened and made a dramatic 50-basis-point cut to rates, George W. Bush is firmly entrenched as president and markets have stabilized a bit, let's take a look back at the one issue left unresolved (the horror ... the horror): Reg FD and its impact on earnings.

And who better to break down the effect of Reg FD on the market than Joseph Kalinowski, equity strategist at First Call/Thomson Financial, a company synonymous with earnings.

TSC: What exactly is Regulation FD and when was it started?

Kalinowski: Oct. 23, the Securities and Exchange Commission passed a ruling basically saying that companies have to publicly disseminate any guidance or any material information. Of course, earnings fall under that category.

TSC: So that means the public and analyst community get that at the same time?

Kalinowski: They get it simultaneously, yes. Should there be an error in which the companies mistakenly disclose material information to the analyst community, they have within 24 hours to publicly disseminate it.

TSC: And who was responsible for Reg FD?

Kalinowski: It was largely through petitions from the individual investor. The individual investing community claimed that they were not privy to certain information, and again earnings would be part of that. In the past, if companies didn't expect to make current forecasts, they'd maybe hold a conference call with the analysts and discuss going forward what they expect, [from] which the analysts would then siphon out what they thought was important, and then, through the analyst, it was released to the clients or the investing public.

TSC: So, essentially, people who were trading on their own wanted to get the information at the same time as the analysts to make their own decisions.

Kalinowski: Exactly.

TSC: Now, after that went into effect, the markets got all this information -- a ton of preannouncements. How large was that?

Kalinowski: It's very early. The regulation was just passed, so we don't have too much data. We'll know much more in the next year or so. I can just tell you this past preannouncement season, or as we call it, the confession season, is definitely the busiest confession season we have ever seen. We collected over 1,300 total preannouncements, which by far eclipsed some of the past quarters.

TSC: Is this something that's going to keep happening if the American economy improves?

Kalinowski: That's an excellent question. You can argue: Are all of these preannouncements due to a slowing economy or are they due to the fact that the companies have to come out and publicly disseminate their information? Largely, it has to do with both. But I'm probably leaning more to the fact that it has something to do with a slowing economy; there's a lot of information that needed to be put out there. Obviously, the expectations were so high at the beginning of 2000 and everything slowed down to a screeching halt all of a sudden. So there was a lot of information to put out there, but I do believe that the Reg FD contributed to the amount of preannouncements that we've seen. And I suspect going forward that we'll see a little bit more than we have seen historically.

TSC: If Reg FD had not gone into effect, and you didn't have all these companies talking about their future publicly, would people be unprepared for the downturn? Did this help give the Fed a leg up on seeing exactly how fast the American economy was slowing?

Kalinowski: That remains to be seen. I'm not quite sure if the Federal Reserve looks at this preannouncement data. I'm sure it's just one small spot in the entire spectrum of tools they use to judge monetary policy. I don't think Reg FD opened everyone's eyes that we're headed for an economic slowdown. It's quite obviously in the cards, judging from all the economic variables that we've seen.

TSC: Has Reg FD greatly changed the way that people go about their business now? Or is this not a big deal?

Kalinowski: If you look at the way the market's been performing -- and again, it's a hard comparison because we've had such a severe economic slowdown -- it seems like volatility has increased, which would make sense. In the past, if a company had news to report, they'd give it to the analysts, in turn they'd act as a buffer in releasing the information to the public. Whereas now the public is just receiving all this information in abundance and it may have them react -- maybe overbuying, maybe overselling certain securities. So, I think going forward, at least in the short term, you'll see increased volatility until the investors actually learn how to read all this new data that they're subject to.

TSC: Because you have this huge glut of information that happens before earnings, do you think that the confession season will rival earnings season?

Kalinowski: The confession season has become very important. It definitely gives a gauge for the upcoming reporting season. In terms of the abundance of information, this is just the natural selection of things. I think without the regulation being put into effect, the market would have moved this way with the advent of the Internet; there's a huge increase in the flow of information. Companies were voluntarily holding Webcasts from their conference calls. Given time, I think it would have evolved into this, maybe the regulation just pushed it along a little faster.

TSC: Can you name any companies that got burned by Reg FD? Ones that said things they normally wouldn't have said if this wasn't in effect?

Kalinowski: It's very tough to say: Companies that were eager to abide by the law and to publicly disclose everything that they had on hand. Say, for instance, a company that preannounced five or six times during the course of the year -- like a Xerox (XRX Quote - Cramer on XRX - Stock Picks) or a Lucent (LU Quote - Cramer on LU - Stock Picks). If they had to come out and make a public statement or give guidance when they were unsure of what to expect within the next couple of months ... it may have forced them to come out again and readjust those downward guidance.

TSC: You had a lot of people, like Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) and Sun Microsystems (SUNW Quote - Cramer on SUNW - Stock Picks), who warned for the first time ever. Was that due to Reg FD -- or because they were going to do it anyway -- or because it's too early to tell?

It's too early to tell. The economic slowdown and the way that consensus forecasts have come down over the past month, especially within technology, are some of the most severe I've seen. Ever. So, there's definitely a slowing economy. With both Reg FD and a slowing economy coming at you all at once, it's tough to decipher which action is cause and effect. Do you know what I'm saying?

TSC: Definitely. What do you see for 2001 evolving with Reg FD?

Kalinowski: I hope the worst is out. I think fourth-quarter earnings season was really an eye-opener. Companies were giving a lot of downward guidance, and let's hope they were conservative with their guidance so they'll meet their 2001 forecasts. It remains to be seen.

The first-quarter confessional season, which is coming at the end of March, is going to be the pivotal period of the year. This is when companies will give concrete evidence of what to expect in 2001, especially the second half. Again, with the companies reporting now, they're giving a little bit of forward guidance, but it's very murky. I don't think a lot of companies know what to expect in the first quarter, so when they close the books for the first quarter and they actually have a grasp of what's going on, the first-quarter confession season is going to be pivotal for the remainder of the year.