Profits in U.S. Probably Fell Again, Led by Citigroup, Merrill

By Meg Tirrell

July 7 (Bloomberg) -- Profits at U.S. companies probably shrank for the fourth consecutive quarter, the longest losing streak since 2002, as Citibank Inc. and Merrill Lynch & Co. suffered more losses from the collapse of the mortgage market.

Earnings of Standard & Poor's 500 Index companies may have dropped 11 percent in the second quarter from a year earlier, according to data compiled by Bloomberg. Profit fell 16 percent in the first quarter, 23 percent in the fourth quarter of 2007 and 2.5 percent in the third.

Financial industry profits probably plunged 60 percent, according to Bloomberg data. Banks and brokerage firms worldwide have posted more than $400 billion in writedowns and credit losses tied to the housing slump since the start of 2007.

``It continues to be financial stocks and write-offs in the credit market,'' said Tim Ghriskey, who oversees $2 billion as chief investment officer of Solaris Asset Management LLC in Bedford Hills, New York. ``That's the issue out there, really, in terms of earnings.''

The last consecutive profit declines spanned five quarters and ended in March 2002, as the U.S. was emerging from an eight- month recession. A drop in second-quarter earnings would be the first for that period in seven years.

The S&P 500 fell 3.2 percent in the latest period, extending its losing streak to three quarters, the longest since the nine months ended September 2002. The index dropped 8.6 percent in June, the most since September 2002. It declined 13 percent in the first half.

Growing, Except Financials

Excluding the financial industry, U.S. earnings may have increased 7.1 percent, according to Bloomberg data.

``If you exclude the financials, you're actually seeing an economy that, while not robust, continues to grow,'' Ghriskey said in a July 1 telephone interview.

Energy company profits probably increased 25 percent, the most of any industry, Bloomberg data show. The group, including Exxon Mobil Corp. and Schlumberger Ltd., made up almost half the income growth reported by S&P 500 companies in the first three months of 2008 as crude oil prices surged past $100 a barrel. Oil topped $145 July 3.

Estimates for second-quarter profits at Citigroup and Merrill Lynch were cut by analysts at Goldman Sachs Group Inc., Sanford C. Bernstein & Co. and Oppenheimer & Co. in the last two weeks on expectations of additional writedowns from the U.S. subprime mortgage market collapse.

Goldman Report

``The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought,'' Goldman analyst William Tanona said in a report June 25.

Citigroup, the biggest U.S. bank, may post a second-quarter loss of 20 cents a share excluding some costs, the average estimate of 14 analysts surveyed by Bloomberg. The company recorded profit of $1.24 on the same basis a year earlier. Merrill Lynch, the third-biggest U.S. securities firm, may have a loss of $1.30 excluding some costs, the average of 18 analyst estimates. That compares with a $2.24 profit in the year-ago period.

Profit at companies that depend on consumers' discretionary spending may have tumbled 24 percent, led by the automobile industry and retailers, according to the Bloomberg data. Tax- rebate checks aimed at stimulating spending may have come too late in the quarter to have their full impact, Ghriskey said.

`Tapped Out and Burned Out'

``The average consumer is tapped out and burned out,'' billionaire investor Wilbur Ross said in a Bloomberg Television interview July 1. ``By the time November comes, there's only going to be two issues: jobs and houses.''

U.S. employers cut 62,000 jobs in June, the sixth straight monthly decline, the Labor Department said July 3. Unemployment held at 5.5 percent after rising the most in two decades in May.

June sales plunged 18 percent at General Motors Corp., 21 percent at Toyota Motor Corp. and 28 percent at Ford Motor Co., the three biggest auto retailers in the U.S., as consumers facing $4-a-gallon gasoline bypassed fuel-thirsty trucks in favor of small cars.

J.C. Penney Co., the third-largest U.S. department-store chain, said June 25 it will open fewer stores next year and reduce capital spending, citing ``challenging'' times for consumers. Analysts predict J.C. Penney's profit for the second quarter, ending in July, will sink to 38 cents a share before some costs, the average of 17 estimates in a Bloomberg survey. A year ago, profit on the same basis was 78 cents.

``There is little driving consumer spending other than staples,'' Michael Niemira, chief economist of the International Council of Shopping Centers, said in a July 1 statement.

As rebate-check spending ebbs in the second half, economic stability will depend at least in part on banks, according to Ghriskey.

``Do banks begin to lend more, take the chains off their lending practices to help the economy begin to grow again?'' he said. ``We're not looking for a huge amount of economic strength in the second half, but we are looking for stability.''

To contact the reporter on this story: Meg Tirrell in New York at mtirrell@bloomberg.net.