Let the Spin Games Begin
By Bill Meehan
7/16/01 9:23 AM ET





Friday's big news was that China will host next summer's Olympics, but those games are
of far less importance to most Americans than the ones played among the capitalist pigs
every three months. And this week kicks off in earnest the quarterly fun and games with
numbers season, as companies and analysts go into full spin mode.

Of course, the economic data reported on Friday were also big news, but neither the
announcement from the Olympic Committee, the gubmint or the University of Michigan's
consumer sentiment index amounted to much action on Wall Street heading into the
weekend (although China-related shares got a quick pop). That the Producer Price Index
fell on lower energy prices, sentiment ticked up again and retail sales ex-autos declined
mattered little to traders looking forward to second-quarter earnings reports. However,
more important will be whether the future looks any clearer or brighter than it did three
scant months ago.

With most of last week's gains chalked up on Thursday, the bulls begin this week
optimistically, because the major market measures edged a bit higher on Friday.
However, the weekly gains were accomplished on breadth that was only modestly
positive, and the number of new lows on the New York Stock Exchange increased to the
highest level since the week ending April 6. The"good news" reported by tech giant
Microsoft (MSFT:Nasdaq - news - commentary) helped send tech stocks higher, but the
number of 52-week lows exceeded the number of 52-week highs on the Nasdaq. Intel
(INTC:Nasdaq - news - commentary) and IBM (IBM:NYSE - news - commentary) will be
the focal points Tuesday and Wednesday, respectively. Given that mighty GE's (GE:NYSE -
news - commentary) revenue fell 3% last quarter -- the first decline since 1987 -- it will be
interesting and informative to see how traders respond to companies far less revered or
predictable than GE.

With the Fed either done slashing short-term rates, or approaching the end of its very
aggressive easing cycle, the game will now almost exclusively be ruled by improving
economic data and the outlook for earnings growth. With rates down by 275 basis points
and the economy flooded with liquidity, the economy should begin to show signs of
firming by the end of the year. However, with layoff announcements exceeding 777,000 in
the first half and rising due to the need to aggressively cut costs, the question is whether
consumers can continue to carry the load alone. Those job cuts were 26.6% greater than
the number in all of 2000. Yes, consumer sentiment stopped plunging, good news for
certain, but the reading reported Friday was just 2.2% higher than its recent low made in
February.

In any case, with overseas economies slowing -- or in the case of Latin America, looking
increasingly dire -- can one reasonably make the case that the domestic economy is on
the verge of a powerful upward thrust? It doesn't seem likely, and the strong dollar,
combined with rising wage and benefit costs, make expectations of almost 20%
earnings-per-share growth for the S&P 500 seem ludicrous. Yes, comparisons will be
easy, and no longer having to write down goodwill will add about $3 in earnings to the
S&P, but most tech companies are unlikely to see the type of bottom-line growth analysts
expect until well after demand begins to pick up. There's simply too much capacity to see
utilization rates improve enough to drive pricing much higher. And the same can be said
for many other economically sensitive industries.

We're certain to see restructurings,"nonrecurring" charges and pro forma results galore,
so the spinmeisters will be working overtime. But this week also brings more than the
usual economic data, which begin today with the release of May business inventories. Mr.
G will make his semi-annual trek to Capitol Hill on Wednesday. Many pols are miffed
about the Fed's slow response to the economic downturn, and his reception by the House
Financial Services Committee is unlikely to be as cordial and congratulatory as in the
past.

With the major market measures in the midst of an assault on their downtrend lines, the
action over the next few days could be very telling. Well-positioned investors should
continue to sit on the sidelines and traders should play the game from the short side, with
a focus on tech and relatively tight stops. Traders should probably play small until we get
a sense of not only what companies and analysts say, but also how the market reacts. Let
the games begin.

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