Alcoa's red ink sets scene for earnings season

Alcoa gave Wall Street an unsettling initial glimpse into the earnings season Monday as it reported a quarterly loss of $1.19 billion.

The bellwether company, the first component of the Dow Jones industrial average to post results, said quarterly revenue sank 19 percent to $5.7 billion from $7 billion in the year-earlier period.

Alcoa's loss highlighted the impact of the weakening world economy on key aluminum markets, such as the construction and auto industries.

Prices of the metal, used in everything from cars and aircraft to window frames and beer cans, have fallen steeply along with other commodities since last summer.

Similar themes may sound throughout the economy in coming weeks.

As Wall Street rode an 18 percent rally in the Standard & Poor's 500 index from late November to early January, a lot of experts were saying investors had become immune to bad news.

Now, that faith is about to get tested. During the next three weeks, companies will close the books on 2008, releasing their results for the fourth quarter and full year. Conventional wisdom says the numbers will be dismal.

Analysts are forecasting that earnings growth rates for the S&P 500 companies will fall 15.1 percent for the fourth-quarter and 11.1 percent for the year, according to Thomson Reuters.

Those expectations are down sharply from only months ago. Per-share earnings for the companies in the S&P 500, excluding costs like write-offs, are expected to be $16.19 for the fourth quarter. That's well below the $23.18 forecast at the end of September.

But most of that has been anticipated by investors. What they want to know, and what may drive the market, is what companies say about 2009. That could be very bad news.

"We're going to have a disastrous earnings-reporting season," said Art Hogan, chief market strategist at Jefferies & Co. in Boston. "There's no historical comparison to the magnitude of how bad this earnings season is going to be."

Last week one marquee company after another warned business is even worse than expected:

• Wal-Mart Stores cut its fourth-quarter forecast after holiday sales fell short of what the nation's largest retailer had expected.

• Intel reduced its fourth-quarter revenue projection for the second time. The world's largest maker of computer chips said revenue will fall $500 million short of expectations.

• Time Warner, parent of People magazine, CNN and the Warner Bros. film studio, said it will lose money this year, largely because of a $25 billion write-off on the value of cable, publishing and AOL assets.

So far, investors aren't panicking. The S&P 500 fell 4.5 percent for the week, but months ago distressing news from corporate leaders would have sent stocks plummeting. But some experts warn that stocks could stumble if enough bad news saturates the market.

Robert Doll, chief investment officer of global equities at BlackRock in New York, said fourth-quarter numbers "hardly matter" because companies are likely to cram as many losses as possible into these results.

"There will be lots of attempts, I think, to do the write-offs necessary to clean the books for 2009," he said.

This is a typical maneuver to make the results a year from now look better. Analysts and investors typically have a short memory and reward companies that show year-over-year profit growth, even if the starting point is distorted.

The numbers for the fourth quarter won't look good alongside any yard stick. Seven of 10 of the industry groups that make up the S&P 500 index are expected to post lower earnings.

The only gains are expected in consumer staples, health care and utilities. Wall Street expects earnings growth rates of 4 to 6 percent in these businesses because consumers still need shampoo and toothpaste, they still get sick and still have to pay to power and heat their homes.

Job cuts, a weak housing market and the 38.5 percent drop in the S&P 500 index in 2008 have forced many consumers to give up unnecessary purchases.

That hurts retailers, restaurants and hotel chains that depend on people wanting to spend extra money. Earnings growth among consumer discretionary companies is seen falling 56 percent from the fourth quarter of 2007.

Materials companies in businesses such as mining and steel making are also suffering from plunging commodity prices and slumping demand for raw materials. Earnings growth is expected to fall 69 percent.

Wall Street knew the fourth quarter was going to be lousy. In September, the brokerage Lehman Brothers Holdings collapsed and the government bailed out insurer American International Group. That essentially halted lending and the stock market plunged.

Fearful consumers and businesses then became less willing to spend.

Al Goldman, chief market strategist at Wachovia Securities in St. Louis, expects the economy won't hit bottom until this summer and that earnings won't begin to improve until the end of 2009.

But he said the poor numbers coming from companies won't shock the stock market like the financial turmoil of the fall did.

"Everybody expects them to be terrible and at least when they come out they're on the table and they're history," he said, referring to lackluster results. "Confidence is still razor thin and so it's not a one-way street, but basically the mood is improved."