An Important Warning About Earnings Season

Andy Snyder|April 13, 2021

Our message today is simple and short.

It’s an important warning.

As we go into the first earnings season of the year, we’re noticing a scary and dangerous trend. It could force unsuspecting investors to lose a lot of money.

Fortunately, there is a solution to the pain.

You see, as companies open their books and report their latest sales and profit figures, they’re going to do what they always do. They will compare the numbers with those from the same period last year – first quarter against first quarter.

But last year, of course, was a year like no other.

The first quarter was the start of it all. At one point, local police were pulling folks over just for going for a Sunday drive.

Comparing Q1 2021 with Q1 2020 is just plain silly… and yet it’s what so much of the financial media are doing.

Bad Math

What’s happening is creating a very skewed look of the economy and its markets.

One popular rag looked at auto sales in an article published this week. Things are booming, it concluded, as it said, “Cars are 2021’s version of toilet paper in 2020.”

GM, it reports, saw deliveries up 19% compared with those from the same time last year.

Toyota saw its Q1 sales rise 22%. Comparing only March, sales are up 87%.

Volkswagen, too, fell in line. Its sales rose 21%.

The writer – and, therefore, many, many readers – concluded that car sales are booming.

But doing a bit more research, we see there may be some bias in the reporter’s facts.

In 2019, for example, the economists at Cox Automotive reported first quarter sales of 17 million. In 2020, the shutdown in mid-March brought the Q1 sales figure to 15.2 million.

Given the bullishness of the figures above, we’d figure 2021’s Q1 sales would be off the chart.

They’re not.

Cox reports a sales pace of 16.1 million – still lagging 2019’s figures.

Toilet paper-like sales? Not even close.

Watch Out

We’re going to see a lot of similar reporting in coming weeks. We’ll see it from the car industry, retailers, homebuilders and manufacturers.

We’ll blame the lazy financial press for it. But they won’t be the only ones at fault. The top brass who get paid to push share prices up will certainly take advantage of the situation. Quarterly reports are sure to be light on explanations and real-world comparisons.

For investors, it’s dangerous.

They’ll get caught up in the hype and bid up share prices.

The politicians will take a victory lap as stocks climb higher.

Our target of Dow 100K will crawl closer and closer to reality.

But fortresses must be built on solid ground… not the soft sand of illusions. Volatility will rise, and prices will fall.

Again, the message is simple.

Be careful with what you buy. There will be good opportunities, but we must look beyond the headlines to find them.

Many folks won’t… and they’ll pay for it.