Alcoa Leads The Way This Earnings Season
The Dynamic Wealth Report
January 12, 2009
What Earnings Season Means For Your Portfolio
It’s that time of the year again. The most important time for Wall
Street - earnings season. Every 90 days a new earnings season starts. Just like clock-work. Every publicly traded company reports financial
results.
I’m going to be watching Alcoa very closely. But more on that in a
moment.
Shareholder-owners take a few moments to evaluate corporate performance. Management teams are graded. Business models evaluated. Financial
performance is analyzed. Analysts look at market share, revenue growth,
operating margins, earnings.
Which companies are performing… and which are found wanting? (That’s the
big question.)
An important part of earnings season is what happens in the markets as
the reports come in. Understanding how the markets react to earnings
news is just as important as the earnings themselves.
This earnings season is particularly important. It’s going to set the
tone for the rest of the year. And it’s this “market tone” that will
help (or hurt) our expectations.
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See, these earnings are going to tell us a lot about the
future direction of the market.
The way I see it we have one of two possible outcomes… earnings are
either good or bad. The likelihood of anyone posting truly “good”
numbers is very slim. Earnings expectations have been cut back, growth
rates trimmed, and many companies are forecast to lose money.
The more likely scenario is for poor earnings this season.
Investor expectations have been adjusted down dramatically. Unemployment
is at record levels, the economy is crumbling (GDP is down again) and
consumer confidence is falling. Corporate revenue is certain to be down
year over year. And that means weak margins and anemic earnings growth
rates. We may even see a record number of companies posting losses this
quarter.
Any way you slice it, the earnings news won’t be great.
The key for us is going to be how the market reacts to the news.
If we see the market moving higher on bad news it’s a very positive
sign. It tells us that despite the horrible results, expectations were
worse. And that’s good. It means the market expectations have moved to
one extreme, and the market should climb as expectations normalize.
If this is the case, it could be a sign the market has bottomed (or close
to it). This means you can confidently start buying stocks again.
There is a very scary scenario however.
The truly frightening scenario is earnings are worse than expected.
Despite earnings being adjusted lower, results are still worse. That
means expectations will get worse… and the market will sell off.
A reaction like this tells me the first half is going to be a rough one. We’ll see the market fall further. If you see this happening, don’t be
afraid to continue hedging your portfolio. Continue buying puts, selling
calls, and monitoring closely your core positions.
So, what’s Alcoa’s role (and why am I watching them)?
Today Alcoa (AA) is set to announce earnings. They’re always the first
major company to report... more often than not they serve as a barometer
for the companies that follow.
Just a few days ago Alcoa pre-announced. They said business was weak,
and management was working to conserve cash. They were slashing costs,
cutting production, slowing capital spending, and cutting more than
13,500 jobs. That’s not all, They were also freezing salaries and
divesting non-core businesses.
The announcement wasn’t pretty.
But it sets the stage for their earnings call today. I’m anxiously
waiting for the news… and more importantly to see how the market reacts.
It’s this news that could set the stage for the rest of the year.
That’s why I’m watching Alcoa so closely today… and you should too.
•
Mobile Telecom Industry (Up 16%)
Over the last month the Mobile Telecommunications Industry had rallied
more than 16%. Sprint (S) is leading the industry higher with a bounce
of about 33% last week. A big number no doubt, but the stock’s trading
at less than $3 per share.
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