Earnings season is crawling toward us again. There’s little reason to expect cheering news this quarter. But US companies may be looking at much better numbers fairly soon. The consensus is there’s more trouble to come. But Lynn Carpenter says we can expect a turnaround mid-2009.

This from Investor’s Daily Edge:

Most companies have been releasing the bad news little by little. But now, holding back bad news could mean they push it into a quarter where recoveries will start. And that could undercut the image of progress they will want to create then.

Sooner or later, product that hasn’t sold and never will has to be confessed. Sooner or later, those loans and accounts receivable that are hopelessly overdue have to be acknowledged. Those aging plants and stores that need to be closed have to be written off… the cost of casting an ousted CEO into early retirement must be revealed.

If a company looks at all the “unusual and non-recurring” problems and decides to take one huge write-off now – the big bath approach – in many cases, the reaction is no worse than it is if they take a smaller write-down. Once the problem is exposed, analysts and smart investors know there’s more to come. So, why not get it all out of the way at once. Everything is supposed to be uphill from there.

Plus, taking one big bath, where a company writes off every loss it can muster, serves an even better purpose. It pushes earnings numbers to the floor, every comparison after that will look like a huge improvement- unless the business really stumbles.

In favor of showing a little bit of the problem and doing it slowly is the hope that a little trouble only draws bored yawns amid all the other stories of companies with bigger problems. It is also possible that by the time the next installment of write-offs is due, the business itself has improved so much it overshadows the bad news.

These questions go on every quarter, but they have assumed much greater importance recently.

Analysts are braced for big write-offs. Pay attention to “operating” earnings this season.

That’s because “earnings” come in various flavors. Reported earnings follow GAAP (generally accepted accounting principles). They include write-offs.

“Operating” earnings don’t.

The difference can be substantial, and it’s probably going to be larger than usual this season. I am bracing for a “big bath” season.

But one other thing hinges on these numbers… what exactly is the real P/E ratio when the earnings come in multiple varieties?

Source: The Odds on a Big Bath Earnings Season Rise this Quarter