Updated from 3:16 p.m. ESTThe first earnings season of 2009 has commenced with the traditional kick-off by Alcoa ( AA). Related: AA Preview: Have We Seen a Cyclical Bottom? and Alcoa Loss Exceeds $1B in Fourth Quarter Since Alcoa last reported on Oct. 7, 2008, the market went into a tailspin. We saw the economic and financial crisis deepen as the U.S. Government enacted programs to support the banking and automobile industries. Unemployment took a nasty turn for the worse and fourth quarter GDP is expected to decline dramatically. All of these issues will factor into the earnings reports and guidance that public companies will provided to investors over the next several weeks. So what can we expect and be cognizant of this earnings season? Here are five. 1. There are two sides to job cuts. Many companies have already announced job cuts. In fact, a week before Alcoa's scheduled earnings release, the company announced that it would reduce its global workforce by 13% or about 13,500. Expect more companies to join the job-cutting bandwagon. This will have two different implications. First, the good news: The companies will be leaner in the future. Now the bad news: These cuts will happen on the back of diminished demand and profitability. Related: 'Good News' on Jobs Is Bad News for Stocks and Cramer: Forget Jobs Data -- It's a Technical Market (Video) 2. Returns to shareholders will be slashed. This will take two forms. First, despite falling stock prices, the emphasis on staying liquid during a credit squeeze will result in fewer companies issuing new stock repurchase authorizations. Second, dividends at many companies are in danger of being slashed. While some companies like General Electric ( GE) have already "protected" their 2009 dividend, many other companies will be seeking to cut dividends. This will be a result of dividend yields that have risen as stock prices fell in 2008 and mounting pressure on certain boards of companies which have received TARP and other government sponsored bail-out programs to retain more cash.
Furthermore, corporate dividends are richer relative to "safe" Treasury yields, implying that either corporate dividends will fall or Treasury yields will rise. Given the economic backdrop and actions in Washington, it is likely that dividends will fall. Many financial companies are expected to slash their dividends, with Bank of America ( BAC) being the most likely candidate. 3. Get ready for more write-offs. As corporate restructuring plans accelerate, companies will increasingly revalue assets. We could see the "kitchen sink" effect kick in, which is when a company takes an aggressive stance on writing off assets and taking losses. Kitchen sink quarters tend to occur en masse either systemically due to economic conditions or by sector, due to business specific conditions. An example would be the huge write-off and charges that were taken in the aftermath of the big three hurricanes -- Katrina, Rita and Wilma -- in the fourth quarter of 2005. This occurred for oil and gas companies that had Gulf of Mexico operations, such as Chevron ( CVX) and Entergy ( ETR). When you tune-in to the latest quarterly earnings, be prepared for a much broader-based kitchen sink effect. 4. It's guidance time. The first earnings season of the year is typically the period of time when most companies that provide guidance will do so for the first quarter and the entire year. To the extent that companies provide guidance, expect those estimates to be tepid at best, with plenty of companies forecasting EPS and revenues well below current analyst estimates. Furthermore, there is a growing amount of public corporations that have decided not to provide guidance. Just last month, Costco ( COST) elected not to provide hard guidance to investors and analysts. I expect this trend to continue. Unfortunately, when companies switch to a no-guidance policy, there is typically a negative short term reaction to the stock price. However, that anomaly will dissipate after quick-finger traders have completed their assault on the stock.
5. Margins matter now more than ever. This earnings season, profit margins are something that we will have to keep a very close eye on. I see two major trends taking place in terms of gross margins:
In retail, we have had one of the slowest holiday selling seasons in many years. Retailers have had to take dramatic markdowns in an effort to generate sales in what was also a shorter holiday selling period than in the past year. As a result, we should expect retail margins to decline year over year. Still, there could be one positive consequence of all the retail markdowns: reduced inventories. Commodity prices have fallen dramatically after soaring for the last few years and hitting all-time highs last summer. As these prices have fallen, companies that rely on energy, raw materials or food stuffs for product inputs will benefit and their margins should expand. However, be on the lookout for companies that got caught over hedging their commodity costs and are stuck with higher cost contracts. General Mills (GIS) which reported in December is a great example of a company with margins that suffered due to poor hedging decisions.