When Inflation Wreaks Havoc on Earnings

Earnings season is coming up again, with Alcoa (NYSE: AA) kicking it off on April 11. It will then be followed by J.P. Morgan (NYSE: JPM) on April 13, with many more to come.

While inflation was of no concern in the last earnings season, it looks to be quite different this coming earnings season. Even though the Fed said there was no inflation, some companies seemed to think differently. For starters, Nike (NYSE: NKE), before most companies were openly concerned about inflation, cited rising commodities cost, labor, and transportation cost as risks to its future earnings in its December 2010 earnings report. In that sense, Nike did not disappoint investors, as it dashed investors' hope again in its latest earnings report on March 17 citing higher costs, pushing its stocks down ~9% after the report. Besides Nike, Carnival Corp (NYSE: CCL), the cruise operator, also cited rising fuel prices and itinerary changes due to turmoil in Middle East and North Africa on March 11 as the reasons to cut its earnings outlook.

The Fed would like investors to believe that all is well on the inflation front, but it's getting harder and harder for investors to stomach that. The market may be bouncing well even though Middle East's turmoil or Japan's nuclear crisis are far from over, but investors need to be vigilant on this upcoming earnings season for companies, particularly those not in high growth modes or not having high margins that are sensitive to food or oil prices. To protect themselves, investors should consider buying put options, or even lessening their exposures before their invested companies report earnings.

Daniel Ho is the founder of 10xreturn.com, a financial portal providing financial information and market statistics for investment professionals.