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Surge in earnings warnings likely to continue

A one-two punch of a slowing economy and a new federal regulation has resulted in a surge in earnings warnings, and there's no end in sight.

A one-two punch of a slowing economy and a new federal regulation has resulted in a surge in earnings warnings, and there's no end in sight.

The number of earnings warnings has surged 75 percent ahead of the same time last year, according to research firm First Call/Thomson Financial. Within the tech sector, warnings have jumped 60 percent from last year.

Making matters worse, investors who have had their holdings battered are not likely to get any near-term respite.

"The retail, automotive and home furnishing industries have all been hit hard with this economic downturn," said Chuck Hill, a First Call spokesman. "I think these (earnings) warnings will continue to be high in the first quarter and, at the earliest, bottom out in the second quarter."

A host of large tech companies have issued warnings in the past several weeks, spanning computer makers Compaq Computer and Gateway to chipmakers Intel and Advanced Micro Devices.

Microsoft also issued a surprise warning last week. The company, based in Redmond, Wash., said its second-quarter revenue and profits are likely to be less than Wall Street's expectations, given a slowdown in consumer and corporate PC spending.

Meanwhile, eToys, a notable e-commerce player, also joined the list on Friday. The Los Angeles-based online toy store announced that its fiscal third-quarter revenues are expected to fall short of analysts' estimates by a whopping 50 percent. The company is also seeking a buyer because its cash is expected to run out by late March.

"There is still some risk ahead, clearly. But how many companies are left to preannounce?" said Bryan Piskorowski, a market strategist for Prudential Securities.

Market watchers cite a number of issues that are driving this unusually heavy stream of warnings: an economic slowdown, which is affecting sales throughout the PC industry; a decline in online advertising; and a new regulation that requires companies to disclose the same information to the public that Wall Street analysts receive.

Piskorowski noted that preliminary warnings not only went up because of a slowing economy, but also because of the Securities and Exchange Commission's new Regulation FD.

The rule, the name of which stands for "fair disclosure," requires all companies to issue important information to the public at the same time. Previously, regulators were concerned information was being doled out to favored analysts or large investors on a selective basis, with individual investors often the last to hear about news--good or bad--that could affect a stock.

"Regulation FD is not the sole reason for the preannouncements, but it's definitely contributed to a number of them and the volatility of the stocks," Piskorowski said.

The regulation's influence may have been muted, except that it went into effect just as the slowing economy was about to take a bite out of revenue at many companies.

Analysts estimate earnings will grow 7.3 percent this quarter, a far cry from the 21.3 percent growth last year. In the tech industry, revenue is expected to climb 8.9 percent, compared with a 14 percent increase last year, according to First Call.

"Although tech is expected to have 9 percent growth in the fourth quarter, it's expected to drop to 8 percent in the first quarter and 4 percent in the second," Hill said. "Tech has fallen off a cliff, and this will hurt the aggregate earnings growth."