Wed, OCT 12th, 2011
While Alcoa is not in our portfolios, the company’s quarterly report marks the unofficial start to the corporate earnings season. As such, it offers Albion an early insight into global industrial demand. As Alcoa came out of the Q3 blocks yesterday, the excitement from spectators quickly receded to disappointment as this esteemed bellwether came up hobbling with an ACL injury. Regrettably, this type of ACL – Anxiety, Concern and Loathing – cannot be quickly treated by a physician, rather its remedy lay in the hands of policy makers and by extension the business and consumer sentiment they create.
Admittedly, the print wasn’t all bad as Alcoa sported a topline beat, 56% year-over-year earnings growth, while reaffirming full-year global demand guidance, which included sanguine remarks concerning China. Nevertheless, earnings did miss Street expectations and were coupled with critical management commentary explaining the quarter’s softness. Taken together, it revealed the severity of the ACL damage. But what was its cause? In a word, Europe.
On the call, management stated explicitly that aggregate demand in the July-through-September period was clearly infected by European *choose your adjective: anxiety, concern and loathing.* Alcoa’s chief, Klaus Kleinfeld, said the company did not see the usual September pickup in demand among European manufactures who ordinarily ramp up production after their summer vacation season. He blamed that air pocket on worries about the region’s debt markets. Undeniably, these macro concerns weighed on aluminum prices hurting Alcoa’s business.
At this point, it seems lack of confidence is paramount to market fundamentals; it’s as if the world is trying to worry itself into recession. It’s a question of survey data [i.e. sentiment] negatively touching the real economy. Survey data is, and has been for some time, dismal, but the real economy has held together. The key question is: does the underlying economic data weather the storm, or does the negative tone stress other sectors as it did for Alcoa. As in any race, there is more than one runner – we will see over the coming days and weeks if the same ACL injury befalls other corporate contestants. It’s an important event to watch, both in terms of sentiment and the crucial role it plays in financial markets.
Like this quarter’s earnings, Albion’s blog is just getting off the starting blocks. We truly hope you enjoy and find useful the fruits of our effort. In our perpetual quest for quality economic and investment research, I’m off to trek across China to better-study the present business climate enhancing our investment perspective. I will soon report on my findings.
Jason Ware, MBA
Market Strategist, Analyst
(801) 487-3700; (877) 487-6200