WASHINGTON, January 9, 2013 – The market has a positive tone this morning, allegedly due to an in-line earnings report and optimistic 2013 estimates by Dow Jones Industrial component, aluminum giant Alcoa. The company stated in its report after yesterday’s market close, that it is looking for aluminum demand around the world to increase by one percentage point this year—7% to be precise, up from last year’s 6% increase. If this seems like a small percentage increase, remember that we’re talking about huge tonnage here.
So why is this so significant? For a number of reasons, most of them moderately sensible to silly. Alcoa’s quarterly earnings report is the first major company earnings report to come out in each earnings cycle. The Alcoa report, which typically comes out after the market close (4 p.m. EST) on a Tuesday at the beginning of each quarter, is thus scrutinized—and most likely over-scrutinized—in that it’s regarded by some in the LFM (Lamestream Financial Media) as a bellwether for the cascade of quarterly earnings reports that follow, all of which are part of what the punditocracy calls “earnings season.”
Not to belabor the point, but Alcoa has, for years and years, been what analysts call a “serial disappointer.” For heaven’s knows how long, Alcoa has reported either lower, flat, or slightly up earnings each and every quarter, almost never producing numbers that will impress. Worse, many of this company’s flat-to-up earnings reports are tangled up in language which, when parsed in detail after copies of their reports are released, generally conceal within clever verbiage yet another un-promising report, sort of like most of the happy talk that comes out of Washington these days.
Which brings us back to the main question here: why in the Sam Hill do analysts and other talking heads put so much weight on one mediocre company’s quarterly report when it’s proven, for many a year, to be almost entirely meaningless when you’re trying to analyze the big business picture?
Beats us. But there are at least two reasons, lame though they may be. In the first place, analysts have been playing this game from what seems like time immemorial. It’s become a tradition, in spite of the fact that Alcoa’s numbers don’t mean a whole lot to the investing universe any more.
Second, and certainly more important, Alcoa is in some ways an economic bellwether for the manufacturing sector which is why it’s in the DJI average in the first place. The modern world may be built upon steel, but aluminum contributes a heck of a lot, too, given its lightweight and versatility in everything ranging from automobile manufacturing to home construction components. If Alcoa suddenly announces one quarter a significant increase in its output of aluminum and aluminum products, well then, that must mean the economy is picking up, which is in turn good news for the bulls.
Problem is, Alcoa the company (as opposed to aluminum output per se) has been a horribly managed company for years and is only now beginning to benefit, black ink-wise, from cutbacks in its overcapacity including the shuttering of unprofitable aluminum mills and layoffs, alas, of workers who are no longer needed in said plants. The entire aluminum industry has been plagued by overcapacity (just like GM’s auto business in Europe), and the only way to end the overcapacity is to close it down, or—if one can—sell it to someone else and let that be their problem, not yours. Like GM and its Opel unit, Alcoa dithered for years before doing this, and its profitability and stock price have suffered for it.
In any event, all this makes things somewhat interesting if you consider Alcoa (AA) a turnaround candidate. But it hardly “sets the tone” for an entire earnings season, given that few companies these days are as involved in basic industries any more as is the American aluminum giant.
That said, however, pundits will report, and markets will react to Alcoa’s quarterly Tuesday-after-the-close quarterly earnings reports, so we have to roll with this. The market is up today “because of Alcoa’s upbeat earnings report” you’ll read. But the real reason the market is up today—after a couple of days of steady, nasty, low-volume selling—is because big investors, hedgies, and above all, HFTs have gotten bored with this direction and decided today was a day to buy. Citing Alcoa as an excuse—and remember, HFTs trade primarily on headlines, fake or otherwise—traders are taking the market up, at least a half hour before noon today EST. And that’s all there is.
Meanwhile, there’s always fun and manipulation. We followed in a couple of earlier columns, the smooshing of one of our own holdings, energy MLP Legacy (LGCY) after a fall-quarter secondary stock offering. We finally concluded that a whole bunch of holders and or HFTs used the offering as an excuse to dump it and then hammer it down at the end of the 2012 4th quarter for whatever reasons they might have had. As we predicted, LGCY seems to have bottomed out at the tail end of December and is now starting to recover. So we feel better about the stock now and continue to hold it.
On the other hand, we are now seeing similarly weird action in Holly Frontier (HFC), a moderately sized American oil refining company. The stock was on a tear in the 4th quarter of 2012 and we jumped in to a modest position, which, happy for us, continued its ascent. Until…until roughly seven trading days ago when the stock started suffering from daily, big volume, sledge-hammering selling attacks, recovering a few minutes here and there only to get brutally beaten again and again. Typical drops have been 1-3% per day, in spite of the fact that most analysts seem uniformly positive about the stock’s 2013 chances in spite of what may be a slightly soft 1st quarter.
Either that quarter is going to be really, really soft. Or someone is playing games. Insider sales of the stock picked up somewhat, at least in late December. But that only stands to reason as anyone holding stock options with gains would have wanted to dump them before the new, punitive tax regime they fully expected actually kicked in in 2013—which it has. But the ruthlessness of the selling here has one wondering whether one or more big hedge funds or HFTs have been shorting this puppy, perhaps with insider knowledge of a disappointing number to be reported next month.
In any event, it’s this kind of volatility in a respectable stock that’s keeping small investors out of what’s become an increasingly unregulated Wall Street crapshoot. We have seen this kind of activity in stock after stock with no apparent reason. The folks—or machines—that are doing it are having a lot of fun and, we suspect, nifty profits as well, while the Feds, as usual, are asleep at the switch.
If even a tenth of our key laws were closely observed in this country, we wouldn’t be in half the trouble we’re in. But nobody wants to jeopardize his or her career to blow the whistle or tell the truth, and so we remain mired in an investment environment where old wives’ tales like Alcoa’s earnings, or newer games like organized and/or naked short selling go unhindered. And there it stands. Government of, by, and for the people seems to have vanished without a trace, replaced by crony capitalists and the politicians that they own.
That’s a sobering thought as we begin our new trading year. But it also appears to be an unwelcome constant, so we’ll need to figure out a reliable way of countering it in 2013 so we can make some money.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Any positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
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