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Correction to This Article
Earlier versions of this article misidentified the company where Mike Tarsala is a managing analyst. The correct firm is Reuters Squawk Box. This correction has been reflected in the text below.

Bracing for a Storm

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By Thomas Heath
Washington Post Staff Writer
Thursday, October 23, 2008

Earnings season, that quarterly ritual when companies report their financial results, is a little over two weeks old. And while the view in the rear-view mirror isn't terrible, the road ahead looks dismal.

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The economic contagion that has withered the financial sector appears to be fast spreading across much of the U.S. corporate herd. Several stalwarts of American business, be it chemical giant DuPont, mining conglomerate Freeport-McMoRan Copper & Gold, technology concern Texas Instruments or the Merck pharmaceutical firm, said their profits fell over the late summer months as the financial crisis heated up.

Many are now bracing for the likelihood that the world is spinning into a prolonged recession.

"Every company, whether they are losing money or whether they have huge profits, they are buttoning down," said Mike Tarsala, managing analyst at Reuters Squawk Box. "They are staying with easy things, like cutting the travel budget, cutting costs and shoring their balance sheets the best they can. They are preparing for a storm."

Overall, companies appear to be earning about 11 percent less in profit than they did last year at this time, according to Peter Buchanan, senior economist at CIBC World Markets. That's less than the 19 percent drop in earnings the companies reported for the quarter ended June 30 compared with 2007, but it's of little comfort.

"That looks good on the surface, but the real issue is what people are going to be saying next year," Buchanan said.

Indeed, many companies have reined in their forecasts for the coming months; some said the outlook is so uncertain they would not hazard a guess.

Alcoa launched earnings season two weeks ago with a report that its profit had been halved from a year earlier as demand waned and energy costs increased, forcing the aluminum maker to suspend a stock buyback and delay some reinvestment in the company. Alcoa's stock has taken a beating this year, dropping 76 percent from its 52-week high.

DuPont, Freeport-McMoRan and Texas Instruments all reported lower profit for the quarter ended Sept. 30 compared with the corresponding period in 2007, helping drive down their stocks as well as the rest of the market.

More bad news came yesterday. Citing declining sales of some key drugs, Merck reported a 28 percent slide in third-quarter profit and a plan to cut 7,200 more jobs. Meanwhile, Boeing, the Chicago-based aerospace firm, reported a 38 percent decline in profit last quarter amid a machinist strike.

Boeing is being whacked on several sides. Besides its machinist strike, it has seen repeated delays in its next-era 787 Dreamliner passenger airliner. The company has inventory it bought at the peak of the commodity price boom that is sitting in storage because of both the strike and a worldwide pullback in air travel, said Art Hogan, chief market strategist at Jefferies & Co. Boeing yesterday also said it may soon provide financing to credit-strapped customers so they can buy the company's jets.

Tarsala said the most telling fact he gleaned from recent company statements was from Wal-Mart, the world's biggest retailer. One executive said stores had seen a spike on the sale of baby formula on paydays. That told Tarsala some Americans were cutting back not only on consumer goods but on basic necessities.


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