Fin - Breakout - US

Gauging the Market’s Field Position as We Head Into Earnings

Jeff Macke
Breakout

With earnings season kicking off to much hype with this evening's Alcoa (AA), Matt Nesto takes a contrarian position on the hype and gives you the real earnings start point, as well as a look at the market's field position going into this reporting period.

Nesto comes out of the gates swinging by utterly dismissing the significance of Alcoa, both in terms of size and impact on markets. Those waiting with baited breath to hear how things are going in the aluminum biz should take heed that Alcoa has a market capitalization of a mere $19 billion. That's about the same size as Estee Lauder (EL), half the size of Walgreens (WAG) and 1/3 the market cap of my beloved Ford (F). Add it up and Alcoa, despite being up 25% YTD, is at best a glimpse at commodity demand and at worst utterly irrelevant.

Looking for more interesting or important reports? Rest up for Wednesday when we hear from JPMorgan (JPM) before the bell. On the docket for later in the week are Google (GOOG), Hasbro (HAS) and Bank of America (BAC). Nesto and I agree that SuperValu's (SVU) off-the-radar report Thursday evening will be more important than you may think. The Minnesota grocery giant is well-run and on the front line of commodity price increases, giving us our first good glimpse at consumer behavior.

And what has the much-vaunted approach of record prices at the pump meant to stocks since gas prices peaked in early July of 2008? As it turns out, for all the hemming and hawing about the economic headwind of gas, the impact on stocks has been nil. A look at the charts shows gas and stocks trending higher on roughly the same slope for well over a year.

So those who believe a rise in gas prices is a per se negative for stocks are likely to be disappointed. Does the price at the pump weigh on confidence? Certainly. Is there ample evidence the consumer is slowing? Yup; I saw an example of this just yesterday at the more or less empty local mall. Gas, crude, etc. are all tightly correlated to the economy, but causation in terms of impact on stocks is unclear at best.

Bottom line: Ripping commodities are both a headwind for the economy and a sign of economic growth. Drawing the conclusion that the market is a short based on gas being pricey has been a losing trade for long enough to give pause to those looking to short the tape based on commodity ramping.

Gas prices may matter to stocks at some point, but I wouldn't trade stocks off the seemingly inevitable peak in pump prices.

What are your thoughts on earnings? We want to hear from you, so send us your questions and comments at breakoutcrew@yahoo.com.

View Comments (4)