INVESTMENT NEWS & TRENDS

Fall in Corporate Earnings Removes Market Cushion

Up until the third quarter, the usual spate of bad economic news has been cushioned somewhat with good news in corporate earnings. The analysts reasoned that as long as top corporations were making money and growing, the market could find solace in that the economy, on the whole, would prosper.

Well, you can toss out the cushion. With almost all companies having reported their third quarter numbers, the verdict is in: Earnings have actually declined for the first time in over five years, according to Thomson Financial. "Negative news has been dominant in the financial and consumer discretionary sectors, which have seen earnings fall by around 20%," reports Bob Dole, chief investment officer at Black Rock.

Sure, there have been some bright spots, as there always are. Technology, healthcare, industrials and consumer staples companies announced growth in the midteens. Besides utilities, all groups were up or down by at least 12%. But aggregate third quarter profit by S&P 500 companies was off 4.4% from a year ago.

Missed Expectations Hurt Stocks

To make matters worse, investor relations executives have had to announce missed earnings expectations more often than analysts can take without turning on their stock. In this kind of environment it’s difficult for firms to convince the Street to take a hard look at their long-term strategy. The average S&P firm missed analyst expectations when it announced earnings by 2.1%, according to Thomson. That is one large negative "surprise" to swallow.

Analysts now believe that earnings will grow by less than 3% in the fourth quarter.
What’s more, there are worries that early earnings projections for 2008 may be too optimistic.

The hope for investors is that corporate America will show its resiliency and get back on the earnings track. But the market does not appear to have high expectations which, in itself, may be a good thing. Perhaps future surprises will come in positive.

Top Advisors Make the Case for More BRIC Exposure

Investors may be under the impression that they have sufficient funds allocated to the emerging markets. So, why, you may ask, should you invest more in the highly touted BRIC countries, Brazil, Russia, India and China?

The answer lies in the distinction between "mature" emerging markets (South Korea, South Africa, Taiwan and Mexico) and the "true" emerging markets, according to a report by State Street Global Advisors, "Why Invest in BRICS." Many broad investment vehicles combine both types of emerging markets. Yet BRICS typically have smaller stock market capitalization compared to their economic size and carry greater risk.

Mature Emerging Market Countries Get Most of the Fund Attention

The mature emerging market countries behave more like developed markets. They have higher market capitalizations to gross national output ratios. "When these two types of emerging markets are combined in broad emerging market vehicles, the mature emerging markets countries comprise nearly half of the weight of the entire fund, even though their share of world gross domestic product (GDP) is less than one-fifth that of the BRIC markets," point out State Street researchers.

The result is that investors in broad emerging market funds are underweighted in BRIC countries as measured by their growth potential.

According to data from the Word Bank, BRICs GDP growth for 2006 averaged 7.6% and is expected to average 7.3% in '07. By contrast, GDP growth for the G-7 countries (Canada, France, Germany, Italy, Japan, U.S. and UK averaged 2.5% in 2006 and will average perhaps 2.2% in '07.

According to forecasts, by 2050 BRIC countries will likely replace some of the G-7 nations as the world's largest economies. China could be number one, India number three, Brazil number five and Russia number seven.