(UNEDITED)

Earnings pre-announcements started last week with a few companies announcing sales would be lower than forecasted due to SARS. The SARS theme continued this week when Eastman Kodak announced results would be lower than previously forecasted. The leading photographic film company slashed its second quarter earnings guidance by more than 50%. The company said sales of film in China during April and May dropped by nearly half compared to last year. The company added that U.S. sales fell 8% during the same time as digital photography is gaining popularity.

The New York Times announced on Wednesday that profits will be lower than expected. The publisher of the New York Times and The Boston Globe said revenue related to travel was adversely affected by "SARS and geopolitical instability" along with a weak retail environment along with a "difficult job market." Costs were also higher than anticipated due to "higher newsprint prices and increased benefit and compensation expenses."

Several trucking companies have announced second quarter earnings will be lower than analysts' estimates. Part of the weakness was attributed to pricing pressure in the industry due to overcapacity. The trucking companies also reported lower than expected shipping volumes. USF Corporation slashed its second quarter EPS guidance from a range of $0.40 - $0.50 to a range of $0.24 - $0.34. This weakness seems counter intuitive since the economy has been showing signs of strengthening. The easiest explanation is that companies are working off excess inventory and are not ordering replacement stock. Otherwise, these companies are simply not executing. On Wednesday, Federal Express announced it will implement a 5.9% general rate increase effective June 30. That might answer the previous question.

Two of the biggest electronic retailers reported earnings this week. Circuit City reported a $0.21 loss per share, and after massaging all the extraneous items out the loss was $0.16 per share, which was almost eight cents less than Wall Street expected, but much worse than the penny loss per share last year. Promotions involving are having a dramatic influence on the electronic retailer. Sales fell 9% from last year, but the combined amount of account receivables and its retained interest in securitized receivables ballooned 68%. The company announced it is considering the sale of its credit card division due to poor performance. The big downside to that is, any purchaser will not run the business as a loss leader, which could hamper sales at Circuit City down the road. Some of Circuit City's weakness is due to the strength of Best Buy. Excluding the Musicland operations, which Best Buy describes as "a painful and expensive lesson in the consequences of a strategic mistake," sales increased 11% from the first quarter 2002 led by 2.2% growth in same store sales. Operating margins contracted by 70 basis points to 2.4% as promotional activity, increased deprecation and the "deleveraging impact of a modest comparable store sales gain." The company expects business to pickup in the second half as sales are expected to increase by 11% to 13% for the fiscal year ending January 2004.

Apparel manufactures may have a difficult quarter as retailers laden with excess inventory defer ordering new merchandise. VF Corp, which brands include Lee and Wrangler, announced that earnings would fall short of previously announced guidance. Instead of profits being flat to down 5% for the second quarter, the company announced "earnings per shares could decline by approximately 20 to 25%. Sales could be down 5% to 7%, instead of flat." During the conference call VF Corp. said the weakness was attributed to "the inventory reductions that are being taken by our customers" and "we see is a very difficult environment with apparel sales particularly slow, and that's especially in seasonal items."

Payless ShoeSource announced that "the disappointing sales trends seen in May have persisted through the first two weeks of June." The company blamed, "The unseasonably cold weather." It sounds like a retail war is breaking out. Payless added that it "expects the market to be increasingly promotional as retailers act aggressively to clear their seasonal product. Payless intends to defend its market share and clear spring and summer merchandise through a series of promotions and more aggressive markdowns." This gets to the crux of retailing right now. It will be very difficult for retailers not to get pulled into the promotional fistfight.

Delphi, one the leading auto parts suppliers, cut its estimates for North American vehicle production this year from 16.6 million units to 15.8 million. In cutting production estimates the company said, "Key indicators do not suggest a short-term improvement in the market environment. Consequently, we believe our outlook for the year should account for the likelihood of continued sluggishness in the global economy."

Tribune Company announced its revenues increased 3% from year ago levels. Tribune noted strength in department stores, high-tech, auto manufactures, financial and entertainment. The weak labor market pulled down classified advertising. Help wanted adverting revenue declined 17% from last year.

The economic news this weak confirmed trends that have been in place. Housing remains strong and the strength in building permits indicates that it will not be abating anytime soon. May housing starts jumped 6.1% to a 1,732,000 annual rate, almost erasing the 6.3% decline in April. Economists expected housing starts to come in at a 1.7 million annual rate. Most of the strength in housing starts came from the Midwest, which was up 14.0%. Building permits also increased more than economists predicted. May building permits rose 3.7% to 1,788,000. This was the highest rate this year and surpassed the 1.72 million median estimate.

The strong housing market is clearly causing prices to rise in most areas of the country, but the low mortgage rates have kept monthly payments from eating away too much disposable income for the majority of homeowners. A study by the Joint Center for Housing Studies of Harvard University found that 30% of Americans spend more than 30% of their income on housing. This was the highest percent of homeowners with "affordability issues" since it started tracing housing data 20 years ago. Even more concerning is that almost 15% of households are spending more than half their income on shelter.

The CPI report on Tuesday along with the stronger housing data may have spoiled the Fed's plan to lower interest rates by 50 basis points. The CPI index was unchanged in May, but the core CPI increased 0.3%. The component measuring shelter jumped 0.6% in May, the largest increase since January 1991.

The latest Manpower survey revealed that companies are not in a hurry to expand payrolls. Only 20% of companies anticipated adding workers during the third quarter, this compares with 9% planning on reducing staffing levels. The most optimistic industry was mining, which was also the only industry that saw improvement in hiring from a year ago and the second quarter. Education and public administration was the most pessimistic, which confirms other data that shows the state and local governments starting to thin their payrolls. While the survey confirms the general feel of the labor market, it should be noted that the survey was conducted in early April, before the fall of Baghdad and at the height the SARS.

For all those armchair economists out there trying to figure out how the enormous trade deficit is not playing a large role in causing the US dollar to weaken can take solace in the comments from Larry Yost, chairman and CEO of ArvinMeritor, the largest maker of heavy-truck axles. During an interview with Bloomberg Yost commented:

And I just can't understand how our economy has gone as long as it has with the deficits that we have had and how that hasn't manifested itself in foreign exchange changes to the extent that we are now seeing in the weak dollar before. It just has to come about one way or another, and if all others fail, it has to be reflected in the exchange rations. And of course that's on of the major reasons in my mind why the trade cap has started to narrow a little bit

A common thread running through many of the pre-announcements is the notion that the misses are being caused by external factors. SARS and weather have been some of the most popular reasons for poor performance. According to First Call negative preannouncements are running two-to-one over positive preannouncements compared to last year, but lower than the 2.6 ratio from the first quarter. The technology sector is faring a bit better with a ratio of 1.75. Unless the earnings misses are not as substantial as last year, it appears investors are overlooking any weakness in second quarter earnings in anticipation of better earnings during the second half and next year.