Editor's Note: Welcome to Curtain Opener, a new feature by Marek Fuchs, a former stockbroker turned journalist. Curtain Opener previews the big events, looking at all the strains of thought and conventional wisdom that traders and the media will likely attach to them. The goal is to separate what might hold validity from what is auto-think or silly thought -- mistakes in the making to be avoided at all costs.
By Marek Fuchs
Aluminum giant Alcoa (AA) reports its fourth-quarter results after the stock market closes Tuesday, which means it will be all systems go for earnings season. What else does it mean? That’s a little harder to parse out, but we can rest assured that too many flapping their gums about Alcoa’s earnings on television and beyond will mislead us in ways both big and small.
First up, be wary of those tossing around words such as “barometer” and “harbinger.” For the past 50 years, Alcoa has typically been the first Dow component to report earnings, which weighs them with a significance that, at this point, is largely misplaced.
“6 reasons Alcoa means everything,” barked a headline from a Jim Cramer column in the run-up to Alcoa’s third-quarter earnings, reported in July. Those numbers, as it would turn out, were lean, if a touch better than expected. Since then, Alcoa’s stock has essentially run in place, even as the market has done well. The economy, for its part, has improved slightly, though not enough to lift it meaningfully out of its fractured state. In other words, “meaning everything,” as the headline put it, might be the ultimate in overstatement.
The misplaced idea that Alcoa is “everything” is, in large part, a relic from mid-20th century America. These days, technology, healthcare and entertainment – not manufacturing – are America’s crown jewels. As Apple (AAPL), Hollywood and diabetes drugs go, so goes America.
Manufacturing amounts to only 15% of the national economy, with the sectors Alcoa peddles to a fraction of that. Its business is a complex ecosystem, with customers stretching from Europe to China. More important, it contains market structures that allow speculators to lap up excess inventory, holding prices temporarily in check even when supply outpaces market demand.
As such, business conditions at Alcoa can impact the larger economy with a lag that renders them fairly meaningless, at least as far as traders trying to pull immediate threads of thought out of high-profile earnings go.
Some things to keep in mind for Tuesday:
Alcoa earnings estimates have been cut 25% in recent months, down to a consensus of 6 cents a share from about 8 cents in October. The problem is, much of the media’s preview coverage of Alcoa’s earnings is already leaving this off. This works to a trader’s detriment. Earnings beats of recently trimmed numbers don’t mean as much or have as lasting an impact. By the same token, misses of freshly cut estimates imply that business is degrading at a quick pace or management has no bead on what is going on. Or both.
The media and traders stand to make another mistake. In harking back to the third quarter, a portion of the investing public is also going to forget – or downplay – the fact that that quarter’s loss was a function of one-time charges. Even when reporting the quarter originally, some of the media, in their headlines, framed it as a total washout. Excluding $175 million in charges, however, Alcoa earned 3 cents a share. If the third quarter was framed simply as a loss with no mention of the charges, sequential earnings -- "Alcoa swings to profit" -- might give traders a false positive.
Lastly, remember that, when it comes to Alcoa, you have to reserve judgment until you hear the conference call. Chairman and CEO Klaus Kleinfeld usually goes into much more detail in the conference call than his crew of flacks do in the earnings release. Last quarter, Kleinfeld spoke in depth about how lower inventories were getting stepped on by the fizzling international economy. In a high-profile move that shook faith, he cut forecasts on China from 7 percent to 6 percent growth.
In the final estimation, Alcoa’s earnings aren't entirely meaningless. But they're just one piece of a complex economic and earnings puzzle.
Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.