Ed’s Daily Notes for April 9th   Leave a comment

Reuters (via Yahoo Finance): Alcoa earnings beat estimates after special items, shares rise

Earnings season kicks off:

Alcoa Inc reported a decline in first quarter adjusted profit on Tuesday as aluminum prices dropped. But earnings came in ahead of analysts’ expectations, and the aluminum producer’s shares rose in trading after the bell.

After-tax operating income rose in the company’s “engineered products and solutions” segment, which sells cast metal products like auto parts, to $189 million from $173 million.

“The news was certainly better than the street anticipated. The top line was slightly below estimates, but the bottom line was significantly better,” said Stephen Massocca, fund manager at Wedbush Morgan in San Francisco.

Beating expectations and having a good quarter are two different things:

Net loss for the first quarter was $178 million, 16 cents a share, compared with net income of $149 million, or 13 cents, a year earlier.

Excluding $276 million in restructuring charges and other special items, earnings fell to $98 million, or 9 cents a share, from $121 million, or 11 cents. Sales fell to $5.45 billion from $5.83 billion.

Analysts had been expecting earnings of 5 cents a share on revenue of $5.55 billion, according to Thomson Reuters I/B/E/S.

Personally, I wouldn’t touch Alcoa. And while Alcoa doesn’t usually match what everyone else is doing earnings-wise, it certainly doesn’t bode well either. Their reduced revenue means one of two things: Either their customers are making a lot more money than they are, or demand for aluminum has decreased.

The Big Picture: Enquiring Minds Want to Know: Is David Malpass Correct about Fed Tapering?

The article above is a bit long, but a must-read to understand what the Federal Reserve’s QE program’s impact is on the economy. A must-read for all investors.

To summarize (although you should still read the article): As the Fed withdraws QE, banks and finance companies will have more incentive to invest in the economy, although they will also have less incentive (and free money) to invest in the equity markets. The equity markets won’t be getting the “steroids” they have had for the last few years, even as the economy turns around (hopefully). The article does mention the regulatory aspect, and how it could hold banks back from lending. Basically, we can expect the equity markets to keep from ramping up like they have over the last few years of QE, but we still have an unknown factor in whether the banks will or can lend, as well as whether the economy can take advantage of whatever the banks will/can do.

My basic rule of thumb is to assume the middle road. Since the worst case is the banks won’t lend or the economy won’t borrow, and the best case is banks lending hugely and the economy zooming, I would expect some lending to happen, and we get moderate growth. The problem is that economic growth takes time to form, which will mean the equity markets will lose their juice for a period of time, only to come back when the economy shows life. The problem is predicting this time frame: I would expect to see results roughly 6 months after the end of QE (since most Fed moves take about 6 months to show up in the economy), approximately early in 2015. But this is speculation on my part, with plenty that could go wrong.

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