Holiday Lull Could Bring More Warnings

Expect some corporate fireworks in the days after the Fourth of July holiday as companies seize the last chance to push out some bad news before the second-quarter earnings season begins in earnest next week.

Companies already have issued more than 688 warnings about second-quarter results. Still, traders expect more in the next few days as the dragging economy has slammed profits more than expected and the holiday lull offers the opportunity for bloodletting when many are at the beach.

“The second quarter was really bad and I think there will be a number of pre-announcements through the end of the week,” said Uri Landesman, who helps manage $250 million for AFA Management Partners.

There’s reason to worry. Companies in the Standard & Poor’s 500 index are expected to report that earnings fell 17.4% in the second quarter from the year-ago quarter, according to First Call/Thomson Financial. That’s the worst quarterly performance since the third quarter of 1991, according to First Call.

Investors expect that companies will take these last few days before the quarterly reporting season to dump the last bits of important information. The time before earnings reports start trickling in is called the “confession period.” The remaining days of this week are particularly popular since many investors have taken the week off. Stock markets were closed early Tuesday and all day Wednesday.

“If you have bad news to share, why not do it when no one is around to ask irate questions?” Landesman said.

Traders at Northern Trust Co. were so convinced more warnings were coming, they spent some of their trading day Tuesday speculating which companies would be next, said Kevin Connellan, head trader at Northern Trust, which oversees $390 billion.

After exchanges closed early Tuesday, software maker Compuware Corp. said it expected revenue from its Professional Services Division to be about 3% less than analysts’ forecasts for the period ended June 30. At the same time, Compuware said profit will top expectations by about 10%.

Not all announcements will be bad news, said Joseph Kalinowski, equity strategist with Thomson Financial.

Of the 1,009 corporate statements so far this quarter 788 have been warnings, but that’s fewer than the same period last quarter. At the same time, companies have issued more positive news, he said.

During the first quarter, 70% of a record 1,036 corporate statements were negative.

In addition, good news has made up 16% of the statements this quarter, more than the 14% last quarter.

“There are more negative pre-announcements on the horizon, but it’s safe to assume the worst in terms of confessions are behind us,” Kalinowski said.

Some investors aren’t buying it, though.

Landesman said he expects more bad news this week, which “means that we’re still going to get burned.”