Profit, accounting concerns may slow rally
By Scarlet Fu
Bloomberg News
NEW YORK — U.S. stocks may end a three- week rally on concern more companies will disclose accounting irregularities before a government deadline Wednesday for certifying financial reports.
"There is going to be a high state of anxiety — the issue of what earnings are made of and where they're going is still in a state of flux," said Wayne Nordberg, who helps manage $3 billion in assets at Ingalls & Snyder in New York. "This is an issue that's not going to go away."
Nordberg said he's been buying shares of utilities and companies with high dividend yields. While power traders such as Dynegy Inc. and Williams Cos. have been among the biggest losers this year, utilities including Cinergy Corp. and KeySpan Corp. have gained in 2002 and have dividend yields greater than 5 percent.
The past week, all three indexes rose in the same week for the first time since May. Some investors bet U.S. stocks have bottomed after almost 2 1/2 years of declines. The Dow Jones Industrial Average added 5.2 percent and the Standard & Poor's 500 Index rose 5.1 percent. For both, it was the biggest weekly advance since September. The Nasdaq Composite Index rose 4.7 percent, the first weekly gain since June 28.
Certification deadline
WorldCom Inc.'s disclosure on Thursday that it found an additional $3.3 billion in accounting irregularities renewed concern that more companies will discover similar misstatements before they're required to vouch for their earnings.
The U.S. Securities and Exchange Commission rule requires chief executives and chief financial officers of the top 947 publicly traded U.S. companies to certify the accuracy of their financial statements on or after Aug. 14.
Of the 705 companies with an Aug. 14 deadline, only 14 percent had done so as of Aug. 8, according to Thomas McManus, equity strategist at Banc of America Securities.
"There are going to be a few more hits," said George Foley, portfolio manager at Glenmede Trust Co., which handles $15 billion in assets. "I'm not so sure it's over yet or priced into the market."
Returns
After net withdrawals from stock mutual funds the past two months, some individuals may be anticipating a rebound. T. Rowe Price Group Inc., which manages about $149 billion, has had net deposits in its stock funds so far in August, according to spokesman Steven Norwitz.
A move by the Federal Reserve toward cutting its benchmark rate from 1.75 percent, the lowest in four decades, may make stocks more attractive by lowering returns on fixed-income securities and slicing companies' borrowing costs.
Gains may be short-lived. The S&P 500 has dropped about 33 percent since the first of 11 Fed cuts in January 2001.
"If they say words like, `we'll do what it takes to avoid a double-dip recession,' that will make markets move," said Stanley Vyner, chief investment officer of international investments at ING Investments LLC in Scottsdale, Arizona, which has assets of about $25 billion. "It's a catalyst for more volatility and not a recipe for feel-good."
Earnings slow
Of the 67 economists polled by Bloomberg News, two expect a cut. The central bank will probably signal a slowing economy has replaced inflation as the main threat to the recovery, a shift that would set the stage for a future rate cut. Wall Street firms including Lehman Brothers Inc. forecast the Fed will reduce its 1.75 percent overnight lending rate this year.
Second-quarter earnings from companies in the S&P 500 rose 0.9 percent in the second quarter, according to Thomson First Call. For the third quarter, earnings are likely to rise 12.1 percent, down from the original forecast of 16.6 percent on July 1, according to a First Call poll of analysts.
Reports due next week on retail sales, housing starts and a preliminary consumer confidence survey may provide insight into the resilience of consumer spending.
Retailers, S&P shuffle
Wal-Mart Stores Inc., which said this week its earnings may exceed forecasts, will disclose results Tuesday.
"The outlook the retailers will provide may be something that people will hang their hats on," said Robert Fetch, who helps manage $2 billion in small-cap stocks at Lord, Abbett & Co. "I don't think it will be inconsistent with what other companies have told us: a decent April and May but then a drop-off in June and July."
Monsanto Co. may get a boost before the agricultural products maker is added to the S&P 500 after the close of trading Tuesday.
Monsanto will replace Palm Inc. Shares of companies added to the S&P 500 often rise and those removed often fall, as managers of about $800 billion in funds seeking to match the index's performance adjust their holdings.
