Five Things to Watch in Earnings Season
- Good, Bad and Ugly: Some grocery store chains and online retailers like Amazon will have a good quarter, but earnings elsewhere will be miserable. Banks have ugly loan loss provisions.
- Finger Pointing: Companies doing poorly will blame everything on Covid19. Reality is a major slowdown had already started. One can see it in the Cass transportation reports and at numerous retailers.
- Uncertainty: Forward guidance will be iffy.
- Beat the Street Games: There is nothing unusual about this one. It happens every earnings season. Companies guide analysts lower so they can then "beat" expectations. Many companies will miss this quarter because Covid19 struck suddenly. They will try again next quarter.
- Kitchen Sink: In the kitchen sink phase, companies admit all that is bad and then some.
Ugly Loan Losses
Bloomberg reports Bank of America Joins Rival Banks in Setting Aside Billions for Loan Losses.
Bank of America Corp. followed two big rivals in setting aside billions of dollars for loans likely to sour amid an almost total U.S. economic shutdown.
Profit plunged 45% as the company allocated $4.76 billion for loan losses, the most since 2010, as businesses and households reel from the coronavirus pandemic. The bank joins competitors JPMorgan Chase & Co. and Wells Fargo & Co., which posted their highest provisions in a decade Tuesday. Citigroup Inc. made a similar move Wednesday.
Finger Pointing and Blame Games
Certainly Covid19 had a major impact but a huge slowdown was already underway. Manufacturing, oil, retail stores, car sales, and shipping were struggling.
Numerous shipping indicators already pointed lower. For example, the Cass Freight Index Showed Economic Weakness Way Before the Pandemic
Kitchen Sink Phase
In this phase, companies admit all the bad and then some. Corporations even toss in things that aren't bad.
It's likely too early for a major outbreak, but some overly optimistic companies may misjudge things and expect things will rebound faster than they will.
Cisco provides an outstanding example. In 2001 Cisco wrote down routers and other equipment as worthless. Earnings estimates plunged even as the recession ended. The routers were not worthless. Cisco sold them padding profits in a massive beat the street scheme for quarters to come.
Business as Usual
This earnings season and the next will pretty much be the same as before but with an added Covid19 blame game phase and ultimately another doozy kitchen sink phase.
The goal, as always, is to guide earnings as low as possible (or delay income to smooth things out as Cisco and GE always used to do) to allow companies to beat the street in subsequent quarters.
There will be a lot of misses this quarter, and as long as companies are going to miss, they may as may as well make it as ugly as possible, especially when they have the perfect excuse.
Companies doing really well will strive to smooth things out for as long as they can.
Expect the same monkey business, just a bit more of it and you won't be far off.
Mike "Mish" Shedlock