Now that earnings season is in full swing, how many people understand what the numbers mean and how they could impact exchange traded funds (ETFs)?
Earnings reports and guidance from public companies will have to incorporate a hodgepodge of maladies affecting the economy such as the deepening financial crisis, banking sector, automobile industry, and unemployment, writes Scott Rothbort for The Street.
In this earnings season, investors should be aware of five things in particular:
The duality of job cuts. It is expected that more companies will cut jobs and this will make the companies leaner and more efficient, but the cuts will occur on the back of diminished demand and profitability.
Diminished returns to shareholders. Liquidity issues will hinder companies from issuing new stock repurchase authorizations and dividends in many companies are likely to be slashed. It is noted that either corporate dividends will fall or Treasury yields will climb.
Write-offs. Corporations will revalue assets with the possibility of companies taking fervent stances on writing off assets and taking losses. This may occur en masse either systemically or by sectors depending on business conditions.
Guidance. Typically, first earnings season is a time when companies provide guidance for the first quarter and for the year. It is noted that this time around the estimates will be so-so at best and well below expectations. If a company goes with a no-guidance policy then expect a negative short-term reaction in stock prices.
Margins matter. Don’t gloss over profit margins this earnings season. Retail margins are expected to decline after unenthusiastic holiday sales. Commodity prices have dropped and companies that rely on commodities for product inputs will benefit and their margins are expected to grow.
Anticipate which companies will cut back on dividends, have positive or negative margin growth, and state write-offs or layoffs.
- WisdomTree Total Earnings Fund (EXT): down 6% year-to-date. This fund measures the performance of earnings-weighted companies in the United States.