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Midday Musings: Bright Spot in the Murky Earnings Picture

The number of earnings warnings in the fourth quarter dropped both sequentially and year over year.

SAN FRANCISCO -- Earnings season is upon us, and with it comes intense scrutiny on corporate results by analysts, reporters and investors, as well as some confusion.

Earnings results do not occur in a vacuum, a fact often lost on new investors. It's obvious to more sophisticated players, but whether a company's results beat analysts' expectations isn't enough to determine how the firm's stock will trade immediately thereafter.

How the stock fared in the days prior, the trend in those analysts' expectations before results are released, and what the company says on its conference call all must be taken into consideration. Again, this isn't revelatory stuff, but it bears repeating, judging by the emails from perplexed shareholders that arrive every quarter around this time wondering why XYZ's stock didn't rally after its earnings beat Street estimates.

That said, the expectation is that "there is now a light at the end of the earnings tunnel," according to Chuck Hill, director of research at Thomson Financial/First Call.

Out of 1350 fourth-quarter preannouncements recorded by First Call, 596, or 44% were of the warning/negative variety. While that's still higher than long-term patterns, it compares favorably to 632 warnings in the fourth quarter of 2000, or 53% of total preannouncements, and to 782 warnings, or 62% of the total, in the third quarter of 2001.

"Not only do the statistics show a meaningful positive change in the pre-announcement and revision patterns, but the tone of company comments and analysts' reports has become much more positive as well," Hill said. "This upturn in the stats and tone means the necessary prerequisite for an upturn in earnings has been met, and that the upturn is near at hand."

Of course, the proof is in the earnings pudding, and Hill contends that consensus estimates remain too high for the first half of 2002 and, by extension, for the full year as well.

Earnings disappointments from



, cautious comments about revenue by

Check Point Software

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, and



, as well as an earnings restatement by

Dollar General

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further suggest the earnings-upturn story hasn't jelled just yet.

Each of the offenders was down at midday, but the broader market side-stepped any negative spillover effect, proving that earnings may move the market, but not to the exclusion of other factors.


Thus concludes another edition of the Midday Musings, which is a feature we're experimenting with. While bearing the same name as's

former midday market update, this version puts the emphasis on musings: As in, quick thoughts on issues moving the market, updates on various gurus, and an occasional peek at my regularly scheduled offerings after the close.

As always, reader feedback is welcomed.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.