Written by Nathan White, CFA

 Photo by FourthFloor

Isn’t it ironic that the credit crisis induced market crash occurred just before earnings season?

Bad timing?

Well, that’s the humbling mechanism of the market in fine form. There is nothing like a bear market and a recession to give companies cover to lower expectations. Therein lays the silver lining with the current situation.

I believe that times like these give companies cover to bring out all of their dirty laundry. 

Take a look at the management comments on earnings reports that are coming out and you will see some common themes:  “Business has deteriorated due to an uncertain economy, business has been good, but due to the uncertain economic situation we are unable to forecast the future…, due to the current economic environment…, due to the factors beyond our control…, etc.”

At times like these all companies, good and bad, justified or not will take this “opportunity” to lower expectations while performance is low.

Some of it comes in the form of write-offs and charges that wouldn’t come during good times and some of it in the form of lowering guidance going forward.

It’s the “everyone is doing it” mentality of the herd.

Once earnings season is over and everyone’s expectations are rock bottom, what then?

This lowering of expectations is a crucial component of the bottoming-out process and could take a few more months to pan out as the majority of society starts to feel the repercussions of the recessison first-hand. However, once all of the bad news is priced the market usually has no where to go but up.

Another positive note:  companies come out of a recession leaner, meaner and more efficient.

Stay tuned…