Balance-Sheet Blues May Hit Stocks

The economy is picking up steam and more corporate earnings are beating expectations.

Who cares? Not Wall Street.

Instead, balance-sheet blues are expected to drive stocks lower in this holiday-shortened week.

"A company could have great earnings numbers, but any whiff of accounting problems and bingo, it's all over," said Andrew Abrams, who manages hedge funds at CWH Associates Inc. "Right now, you can't own stuff and sleep well. You can only go to bed and say 'Wow, I hope I made the right decision.'"

Just look at shares of NVidia Corp., which tumbled 8 percent on Friday after the graphics chip manufacturer said regulators were probing its accounting, even after the company posted quarterly profits that more than doubled and raised its financial guidance for the fiscal year.

"Every time someone breathes the wrong way, the market reverses itself," Abrams said.

For the past week, the blue-chip Dow Jones industrial average gained 1.6 percent — the best week for the Dow so far this year. The broad Standard & Poor's 500 index finished the week up 0.73 percent. On a slightly downbeat note, the technology-heavy Nasdaq composite index fell 0.75 percent, marking the Nasdaq's third consecutive down week.

Still, there is some hope that earnings releases from industry bellwethers this week could help overcome the stranglehold accounting jitters have on stocks.

Tuesday, the first day of stock trading after the Presidents' Day holiday, brings results from Wal-Mart Stores Inc., the world's largest retailer, and Medtronic Inc., the world's largest medical device company.

Other companies expected to report include Aetna Inc., the largest U.S. health insurer; Ciena Corp., an optical networking firm, and utility group PG&E Corp. PG&E's unit, Pacific Gas & Electric Co., filed for bankruptcy last April after racking up billions of dollars in debt as a result of California's failed attempt to deregulate its power market in 1996.

"If they can show that the light coming at the end of the tunnel isn't a train, investors will reward these types of companies," said Tim Woolston, a fund manager for Boston Advisors Inc.

Wall Street also will get fresh data on the U.S. economy, including reports on consumer prices and weekly jobless claims.

Weekly jobless claims, previously overlooked because they were considered too short-sighted, are now in the spotlight.

"People are trying to get incremental data points to support a positive view," said Eric Wiegand, a fund manager for Credit Suisse Asset Management's private-client group, which oversees $6 billion. "Still, because of accounting issues, we're still in a holding pattern."

Profit Warnings Relent

The busiest stretch of the fourth-quarter earnings season wrapped up last week, with 450 companies in the S&P 500 reporting financial results. About 56 percent of those companies beat analysts' forecasts. That's better than the average of 53 percent throughout the 1990s, according to market research firm Thomson Financial/First Call.

At the same time, about 26 percent missed forecasts. That's less than the 29 percent historical average — another sign the economy may be getting back on track.

The improvement comes as companies and analysts have backpedaled from the overly exuberant forecasts that characterized the last decade.

Now Wall Street is flipping through corporate books in search of what next quarter will bring. The news isn't all bad.

Five companies are warning investors the firms will miss financial forecasts for every three that say they'll beat the Street. That's better than the historical four-to-one ratio, First Call said.

"Companies and analysts have cut and slashed forecasts over the past two years as they reined in over-optimistic forecasts and they're closer to the mark than they have been in a number of years," said Joseph Kalinowski, chief analyst at First Call.

Waiting for Good News

For a sustainable stock rally to take hold, though, investors say they must see definite signs the economy is recovering. They need the cloud of accounting woes to lift.

Wall Street will look for the U.S. Consumer Price Index, the main inflation gauge, to signal whether there is an inflation risk. Analysts predict the price of a basket of consumer goods rose 0.2 percent in January. During all of 2001, the CPI rose only 1.6 percent — the smallest gain since 1998.

Weekly jobless claims will also be dissected. Last week's report from the Labor Department showed an improving labor market, adding to optimism the recession may be loosening its grip.

The number of American workers seeking unemployment aid fell by 8,000 to a seasonally adjusted 373,000 in the week ended Feb. 9. That was below the 378,000 claims economists in a Reuters poll had forecast.

In addition, the four-week moving average, considered a more reliable measure of employment conditions because it irons out weekly fluctuations, fell to 376,000 from 381,500. That was its lowest level since the week ending Aug. 11, last year, and marked the fourth straight weekly decline.

Economists' forecasts for this week's report are not yet available.

In the war between accounting woes and improving economic data, the balance-sheet blues are winning. Shares of International Business Machines Corp. tumbled on Friday over concerns about how it accounted for an asset sale.

"Money managers shoot first and ask questions later," Wiegand said. "They want to avoid controversy."