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Surprise! Preannouncement Storm Clouds Have a Silver Lining

Reg FD-inspired guidance is likely to be so conservative as to overstate the carnage.

The preannouncement deluge just keeps on coming. One day it's

Lands' End

(LE) - Get Lands' End, Inc. Report

issuing yet another warning, the next it's


(MRK) - Get Merck & Co., Inc. Report

saying all is fine. One day it's



falling short of estimates, the next it's


(SYY) - Get Sysco Corporation Report

saying its numbers are on track. Improbably, even


(MSFT) - Get Microsoft Corporation Report


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getting into the act.

But that doesn't mean the end is nigh.

According to


, there have already been 415 preannouncements -- companies saying that their results will be better, worse or in line with analysts' expectations -- in the fourth quarter. That's nearly 170 more than normal and, mind you, the preannouncements usually don't even get started until mid-December.

"This is by far going to be the heaviest confessions season we've seen since we began collecting the data in the fourth quarter of 1995," says I/B/E/S equity strategist Joe Kalinowski.

It's not just the slowing economy that's making this happen. In fact, only about 60% of the preannouncements have been negative, compared to an average of 80% in past seasons. In normal times that would be a pretty good sign, suggesting that actual earnings would surprise to the upside. These are not normal times, but there is indeed a very good chance that

S&P 500

earnings will grow at a significantly quicker clip in the fourth quarter than the forecast 6% -- for some not-so-obvious reasons.

The short answer to why there have been so many preannouncements this quarter is Regulation FD, the new

Securities and Exchange Commission

guideline that bans selective disclosure -- the practice of telling only certain people, such as analysts, about important information. Before FD was enacted in late October, rather than going through the public process of warning that earnings were not up to snuff, a company would often just quietly tell analysts that their numbers were too high. Soon thereafter the estimates would be mysteriously lowered, and that was that. Earnings warnings were not generally heard until midway through the last month in the quarter not only because companies often don't find out they have problems until late, but also because that's when companies go into their quiet periods ahead of earnings. Guiding only a select group of people down on earnings during the quiet period was strictly illegal -- just like it always is now.

The new, Reg FD environment may be one of the reason that we've lately seen so many stocks

act fairly well on the back of warnings: The market understands that what it's seeing is the normal guiding-down process that goes on during an economic slowdown.

In this context, a warning is only a venial sin. But that does not change the fact that warning twice, a la



in recent quarters, is still a cardinal one. Same with warning and then missing the lowered estimates. And you have to think that companies are plenty aware of this.

So what do they do when they have to warn? They get extremely conservative about their prospects, slashing revenue and earnings forecasts so that they can easily beat estimates even if in the remainder of the quarter business slows more than they reasonably expect. The upshot is that when earnings season comes around, don't be surprised if companies beat the numbers handily.