Okay, so the market had a fit yesterday. So what? Petulant children can act irrationally when they are afraid, think they want something, or are just generally in a bad mood. The market is behaving like a petulant child, as its economic fears are unfounded, what it thinks it wants is unnecessary (QE3), and the earnings report from Alcoa should brighten its mood. Yes, the latter “shocked” the analysts who predicted Alcoa would a) post a loss with declining forward guidance and b) it would mark the beginning of the “worst earnings season in years.”
Aluminum producer Alcoa Inc surprised Wall Street with a first-quarter profit after a loss in the fourth quarter of 2011 as global markets improved. It raised its 2012 global growth forecast for the aerospace market by 3 percentage points to 13-14 percent.
It is hard to imagine an earnings report that defied analysts’ predictions any more than this one did. And it is difficult to see how the market could take away from this report anything other than the global economy is slowly moving toward a major economic upturn.
We pretty much see growth in all global end markets,” Chief Executive Officer Klaus Kleinfeld told analysts on a conference call. “On aerospace, the market goes from strength to strength.” He said demand for aluminum in North America was strong in most industrial sectors except for building and construction.
Understand, aluminum is like copper – it is a structural staple of our modern world, and if the demand for the product is on the rise, guess what? Industry is consuming it and consumers are buying and using it in the form of trains, planes, and automobiles, as well as appliances, bed frames, small gadgets, and the list goes on.
Bridget Freas, an analyst with Morningstar in Chicago, noted it was the first time Alcoa had beat earnings estimates by a considerable margin for many quarters.
The best part of this report is the “surprise” it has generated, which points to a market problem I have mentioned many times before – creating a mindset with repeated nonsense. If you say it loud enough and long enough, it becomes the truth. The idea that the global economy is headed for a contraction is now part of the market mindset, and by all accounts of the last three months, and in the last week, particularly, it simply is not reality.
Releasing its monthly leading indicators survey, the OECD said that Japan and the United States continued to show strong signs of regained momentum. Emerging economies like Brazil, India, Russia and particularly China also showed more positive signals compared to last month’s assessment. The euro zone economy may have reached a potential turning point, though economic activity in major economies like Italy and France is likely to remain sluggish, the OECD said on Tuesday.
But I digress (sort of). Back to Alcoa and its report that should give the market something else to focus on other than an unnecessary QE3 and an employment report that will be revised upward.
A key for me [Bridget Freas] is the revenue number. To be able to keep your revenue constant when prices are down eases concerns that demand is weakening.
I don’t know if the rest of the earnings coming out will shock to the upside, or if they will bring the long-profitable earnings run of the S&P 500 to an end. What I do know is that Alcoa, a reputed bellwether stock of both the economy and the market, is telling us things are not as economically bad as the breathless media says, and, at least with Alcoa, its picture of economic reality is good, in fact, perhaps a shade better than what many talking heads would have us believe.
Alcoa said the improvement over the fourth quarter was driven by strong productivity improvements across all businesses. “China shows growth across all segments. A little softer but still good, good growth. The markets in Europe are hovering along,” Klaus Kleinfeld said.
Trade in the day – Invest in your life …
