Corporate Profits...

Earnings season has kicked off. Expectations for total
yr/yr profits performance for the Sep. Q are the most
subdued for a good several years, with analysts having
circled this Q up as the worst momentum-wise months ago.

For earnings expectations, Q3 results are normally quite
important. It is now October, and analysts have to get more
serious about company earnings potential for the new year
ahead. That's an annual rite. And this year, there is more
on the line since the Sep. Q is widely seen as the bottom
in yr/yr earnings momentum with acceleration in profits
growth foreseen from now clear through 2008.

My top line overview for US only sales is about 4% yr/yr
for Q 3. This suggests some margin pressure and the likelihood
that a number of companies will report mildly down earnings
prior to share buybacks and gimmicks. The smaller cap. companies
with only US operations would be the most vulnerable. Companies
with a hefty export book of products or services will do much
better, as will the larger firms with substantial foreign
operations. About 30% of total US profits is now earned abroad,
and there are a number of SP500 companies with better than 50%
exposure. There will be additional positive leverage to foreign
operations in the quarter as the USD averaged about 80 compared
to 85 last year. Basic industry scored moderate sales growth,
but has nice leverage from continuing pricing power, and has
also exhibited more stability in performance than in many years.
Tech and capital goods are expected to have improved. Oil lifting
profits continue to accelerate, but integrated producers are
experiencing poor refining margins. Financial service revenue
growth for the quarter will surprise to the upside, but as has
been well documented, many providers will show large loan losses
and writeoffs related to subprime.

As discussed last week, the indicators suggest slower global
growth ahead, and it may be difficult for the broad market
to benefit from rising oil and materials prices as well as a
falling USD, as these variables, though positive for sector
earnings and relative performance, are inflationary and are
negatives for earnings capitalization overall.

A positive stock market environment for 2008 may well require
stronger and more balanced US economic growth along with
expanding foreign operations. Such is not in view yet, and
is a critical reason for keeping a strong short term focus.