Why do whisper numbers speak so loudly?

Analysts berate them. Accountants scrutinize them. Traders worship them.

Whisper numbers--the unofficial corporate earnings forecasts--have grown from insider information into a market-moving phenomenon.

"They've become incredibly influential in just one year," said Tim McAdams, president of San Jose, Calif.-based Pacific Online Trading and Securities. "I went to breakfast this morning, and my waiter and busboy were trading stocks, talking about whisper numbers."

Whisper numbers will take center stage this week as two events converge: Earnings season will reach a full boil, as the markets remain hypersensitive following last week's historic drubbing.

Tech companies scheduled to announce quarterly earnings this week whose whisper numbers are generating a lot of buzz include America Online, IBM, Intel and Apple Computer. Microsoft, the source of more whisper numbers than any other company, will announce earnings Thursday.

Although experts say the average follower of whisper numbers is an individual investor who primarily trades technology stocks from a home or office computer, these armchair forecasts have an inordinate effect on share prices.

Shares of Yahoo, the top Internet portal, fell nearly 9 percent April 6 after the company's first-quarter earnings failed to match the forecast at TheWhisperNumber.com. Yahoo reported earnings of $63.3 million, or 10 cents a share--a penny above the official First Call/Thomson Financial analyst estimate but below the 12-cent whisper number.

Yahoo is not alone, as most major tech companies' shares have risen or fallen sharply after exceeding or falling short of the whisper numbers.

While their influence is not disputed, it's unclear why whisper numbers speak so loudly to investors.

Originally, the numbers were last-minute revisions that analysts did not include in their official reports but instead "whispered" to their best clients when a company was about to beat earnings. The first published reference to whisper numbers came in 1994, according to a 1999 Purdue University study.

Initially, investors perceived whisper numbers as the most accurate barometer of whether a stock would take off after an earnings surprise. But few had access to the insider tips, which often came from analysts' sources in the financial departments of companies they covered.

That changed with the popularization of the Internet. In the past two years, a slew of Web sites dedicated to whisper numbers have made them accessible to millions of people.

More recently, mass media have begun citing whisper numbers. The Bloomberg News and Reuters services routinely include whisper numbers in reports and articles that often get picked up by mainstream newspapers and magazines.

"They're becoming the credible number," said Paul Hauck, co-founder of WhisperNumber.com. "There really is no way to make a well-formed investment decision off the consensus number."

Hauck said that numbers posted on WhisperNumber.com, which is owned by Internet Financial Network, are accurate at least 60 percent of the time.

According to the Purdue study, whisper numbers are on average 4.9 percent above reported earnings. Analyst consensus numbers are on average 6.1 percent below reported earnings.

Naysayers chime in
Despite their popularity, not everyone is fond of whisper numbers.

Critics say they're a half-baked collection of data from random people unqualified to make forecasts. They say whisper numbers are prone to manipulation by inside traders, short sellers and others with nefarious intent to inflate or deflate the stock over the short term.

Whisper numbers These 10 tech companies will report earnings this week. The First Call consensus estimate is followed by the whisper number as it appeared yesterday on WhisperNumber.com.
Company	First Call	Whisper
Novellus Systems	$0.39	$0.39
America Online	0.09	0.08
RealNetworks	0.04	0.05
i2 Technologies	0.05	0.05
IBM	0.78	0.89
Intel	0.69	0.70
Qualcomm	0.24	0.25
Lucent Technologies	0.22	0.25
Apple Computer	0.81	0.82
Microsoft	0.41	0.43

In fact, online services purporting to offer whisper numbers are not necessarily using data whispered by analysts, but rather electronic postings from anyone who wants to provide a forecast.

WhisperNumber.com, for instance, uses proprietary mining software that finds unofficial earnings forecasts from a trove of Web sites, electronic bulletin boards and financial articles. The software aggregates the data, and employees discard multiple entries from the same person, wildly off-base forecasts, and anything else that doesn't seem legitimate.

No special financial skill or trading experience is necessary for an estimate to get mined and incorporated into a whisper number.

WhisperNumber.com's founders admit that tracking the numbers is not an exact science, but they say that their numbers have become increasingly in line with reported earnings.

"For every 100 messages we see, there may be one bad egg," Hauck said.

Stanley Levine, director of quantitative research at New York-based First Call, said he no longer refers to "whisper numbers" at all because the concept has evolved as a different entity. First Call dubs them "hissper numbers."

"The original concept was a nudge-nudge, pst-pst thing," Levine said. "The new whisper numbers are really an enhanced consensus."

Regardless of the name, conservative investors bristle at the thought of buying or selling stock on the basis of a popular consensus.

"With the analyst forecast, you've got a company standing behind the number. The anonymity (of whisper numbers) makes it scarier," said Susan Watts, assistant professor of management at Purdue and co-author of the study, published in the Journal of Accounting and Economics.

"If I used them, which I don't, I'd use them with caution," Watts said.

Analysts don't like whisper numbers, either. Many resent the implication that their numbers are overly conservative and that their more accurate numbers are whispered to elite clientele.

"I put it all in black and white in the quarterly preview," said Melissa Eisenstat, executive director of New York-based CIBC World Markets. "We'll be very honest whether we think the company will beat the consensus number."

Heightened expectations
Mark Corcoran, technology analyst with D.A. Davidson & Co. of Portland, Ore., blamed whisper numbers for inflating investor expectations to a ridiculous degree. Overly rosy expectations, he said, were in part to blame for the month-long slide of tech stocks, which culminated with Friday's market collapse.

Paul Hauck, co-founder of WhisperNumber.com, discusses the proliferation of whisper numbers on the Net.

"If whisper numbers are saying 30 percent earnings growth year after year and they don't hit that target, the stock gets killed and no one wins," Corcoran said. "My druthers would be to eliminate whisper numbers."

Analysts' estimates are often conservative because they are intended for long-term investments such as pension and mutual funds. Day traders, however, are looking for more timely information that can help them wring money from quick moves in or out of a stock. These short-term investors have a significant influence on stock prices, having accounted for 11 percent of Nasdaq volume during the first quarter of 1999, according to Hambrecht & Quist--and their ranks are growing.

Whisper numbers may also highlight ethical questions beginning to take shape in the analyst community.

Because investors only reward companies that exceed analyst expectations, firms often prod analysts to slightly reduce their expectations. Several analysts have complained that companies threaten to withhold information if they don't comply with these official corporate "guidelines."

"Many of the analysts don't have the standalone independence to say what they feel," said Fred Dickson, a 30-year analyst and director of research at Branch, Cabell & Co. in Richmond, Va. "It's become a very, very sophisticated game between the companies and the analysts."