Whispers drive great earnings expectations

NEW YORK (Reuters) - "Whisper numbers" - unofficial corporate earnings forecasts usually higher than professional analyst estimates -- are becoming a major market-moving factor as U.S. third quarter earnings enter full swing.

While the credibility of these numbers is disputed -- they are often used by traders to talk up their own positions -- their influence is not in question.

After two prior earnings periods focused on corporate cost-cutting and damage control, investors are eager for topline growth following a recent explosive rally in stocks.

So for third-quarter earnings, Wall Street prefers the lofty numbers of market chatter over the more conservative estimates of companies and analysts.

"Investors have high expectations now and they are not going to just believe the official projections given out, and that's why whisper numbers are playing such a big part in the third quarter earnings," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

As investors react to quarterly reports with these figures in mind, some companies have seen shares fall despite posting profits that were better than market consensus.

Take Goldman Sachs Group (GS.N). Its shares dipped last week after third-quarter net income rose to $5.25 a share. That handily beat the forecast reported by Thomson Reuters I/B/E/S of $4.24 a share but fell short of whisper numbers placed as high as $6.00 per share.

IBM (IBM.N) shares also fell even after reporting higher-than-expected quarterly profit last week.

WHO ARE THE WHISPERERS?

Whisper numbers evolve into unofficial consensus estimates on what company earnings per share will be before the result comes out. On the eve of the announcement, the number goes around in the market like chatter.

While the official consensus is set by professional analysts who cover a particular company, whisper numbers come from the trading floor. The whisper number develops as traders poll each other on how much they think the earnings will be. It soon reaches investment and market strategists and even individual investors.

The market's rally is partially responsible for creating these high expectations, as investors conflate the euphoria of a 60 percent gain in major U.S. averages since March with high hopes for company reports.

"This is the polar opposite of what it was last year," said Jon Najarian, co-founder of Web site optionmonster.com in Chicago said. "Now with... the rise of 60 percent from the March lows (in stocks), the whisper numbers are extremely optimistic and thus, much tougher to beat."

LACK OF TRUST

Whisper numbers also exist because traders don't believe forecasts put out by companies and analysts that follow them.

Firms tend to give estimates that are at the low end of expectations, to give their shares a boost by easily beating the expectations during earnings season.

Analysts, too, have played things cautiously, and it shows in the percentage of upside surprises. Of the 122 companies in the S&P 500 that have reported earnings so far, 76 percent have exceeded analysts' expectations, according to Thomson Reuters I/B/E/S. The historical average is closer to 60 percent.

"At this point, people know that Wall street analysts don't want to fight or upset the companies with the estimates they give out. For a while, people believed but they started questioning with so many of them exceeding expectations," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

Prominent companies yet to report this week include 3M (MMM.N), American Express Co (AXP.N) McDonald's Corp (MCD.N) and Microsoft Corp (MSFT.O). (Additional Reporting by Doris Frankel in Chicago, Editing by Andrew Hay)