Ahead of Wall Street - July 10, 2012

Zacks

Tuesday, July 10, 2012

Today’s trading action will reflect the modestly improved sentiment on Spain following decisions by Euro-zone finance officials on Monday that are perceived favorable to the country. There is no substantive change on the ground, but these day-to-day sentiment swings do have a bearing on the market and today’s trend is relatively on the favorable side.

The market may also like some aspects of Alcoa’s (AA) quarterly report after the close on Monday and try to project that to the coming earnings season. It may be premature if not altogether erroneous to draw any firm conclusions about the health and quality of corporate profitability from Alcoa’s results, but some optimism may nevertheless be warranted.  

If Alcoa’s results are a sign of things to come in the second quarter reporting season, then we can probably afford to be a little less anxious. I am not referring to the aluminum giant’s in-line ‘adjusted’ earnings, but rather to management’s positive outlook for the coming quarters.  The company sees  aluminum prices rebounding in the back half of the year, driven by what they see as supply deficit and demand momentum in the key automotive and aerospace end-markets.

The price of aluminum has been hit hard by concerns about global growth; the same force that has been pushing down the prices of all other commodities. Alcoa and the aluminum space has some unique attributes that differentiate them from the broader commodity producing space. But overall, what’s good for aluminum is also good for a number of other industrial commodities. And it is in that context that Alcoa’s results Monday could be considered a modest positive for the broader basic materials sector.

Earnings expectations have been coming down steadily in recent weeks (Alcoa met expectations that had come down by 50% in the past month) for all sectors, including basic materials. It may be premature to say that perhaps expectations have come down more than they needed to, as was the case in the first quarter, but Alcoa’s report does improve the odds of that possibility. We will know more about the quality of this earnings season in the coming days. But given how far expectations have fallen in the run up to the reporting season, it will not take much to come out ahead of them. 

In corporate news, Advanced Micro Devices (AMD) pre-announced a lowered outlook, citing difficult conditions in Europe and China. Negative pre-announcements and weaker guidance have been a prominent attribute of this earnings season, with a number of major companies citing Europe and China for their woes. Wolverine Worldwide (WWW), the apparel and footwear maker, came out with weaker than expected results this morning.

Sheraz Mian
Director of Research

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