First to the "great news" - Alcoa "beat" estimates - 66 cents versus 65 cents. So the seals cheer "better than expected". It's a joke. 90 days ago Alcoa was expected to do 77 cents, 60 days ago that was lowered to 75 cents, 30 days ago it was lowered to 73 cents, and JUST A WEEK AGO it was 68 cents. So they would of missed ALL these estimates. Only in the past few days (by miracle - not) the analysts were "guided" to push their numbers to 65 cents, and TA DA - we can have the seals crying with joy over the "better than expected" number. YEE HAW Cowboy.
Other reality checks?
- Soaring energy costs and inflation in raw materials have eaten away at Alcoa's profits in recent quarters. "The energy situation along with the inflationary pressures on many materials has increased the cost of aluminum refining and aluminum smelting by 20 to 35 percent between 2005 and 2007, and we would expect a similar rate increase this year," Chief Executive Klaus Kleinfeld said on a conference call.
- Alcoa Inc.'s second-quarter earnings fell nearly 24 percent - Net earnings were $546 million, or 66 cents per share, compared with $715 million, or 81 cents per share, in the same quarter last year, the company said.
I cannot stress how you, as an investor, must read past the headlines. I do realize (and it drives me crazy) that a lot of people only read the headline and like lemmings a horde of buying orders comes in as long as Reuters says "beat expectations" - that's the "game" - and we are the guilty party as investors for creating this - it's all about "beating the numbers" - nothing long term matters. Everyone sits on their online brokerage account waiting for that press release at 4:10 PM, with the "analysts estimates" memorized, the "whisper number" memorized, and ready to hit buy within 9 milliseconds of the headline crossing the wire if the "number is beat". Or vice versa if not. Or loading up ahead of earnings and pulling down the arm of the machine - Joker... Joker... Joker (those who do not watch 1970s game shows have no idea what that reference means). And hope it spins jackpot for us! The adrenaline rush - yeah! That's not gambling is it? hah.
So companies have to play along - CEOs pull out all the stops to make sure they don't disappoint on a 90 day rolling basis (90 days means nothing other than on Wall Street - it is a very short amount of time to judge a business). They have stock options to worry about after all - so they press the envelope to make sure the numbers are made one way or the other. (see it's all ingrained in the entire system). Stocks move many times up 20% or down 20% simply on that "magic headline". It is a sad state but that's what "earnings season" has become. And this is why (for newer readers) you will see me cut back on almost every position going into its earnings - it's a gamble. And it's not even a gamble that makes sense - companies skyrocket on nothing more than currency gains or "1x adjustments" that mean nothing to their long term business, while other companies get smashed for "spending on Research & Development" (how DARE they think long term if it costs them to not beat the numbers by the 'appropriate' amount this quarter) or "guiding for 68% growth when expectations were for 72%". And just like that, a real fundamental story can implode in your face to the tune of 25-30% in after hours, for no good reason. Not worth the risk.
So the headline we all wake up to today is Alcoa is a beast, and its shares were up 5% early today- they beat their number; Fast Money traders rejoice. The reality is, this is a company that is not doing well - in my eyes. Expect a lot more charades like this, in this - and every earnings season. The only positive is sometimes you can pick up good companies the market has smashed in the mouth because the "headline" was not what the lemmings were hoping for. But that's a hollow victory when every day in earnings seasion is a literal mine you could be stepping on if the "headline" is not what the lemmings want.
Short lemmings
6 comments:
how are you able to keepup with the market and update the site.great!.kudos..
I remember you saying that you have a fulltime job. I was wondering how could you manage.?
Pure talent
A lot of the posts I now right in the evening or morning and just schedule them to hit during the day.
Today I was off, but most of my posts will be clustered in groups that are real time.
I am trying to just type up the trades during the day but in crazy days like we've had of late it is hard to not be watching a lot.
Generally I check in every hour, look at my watch lists and see if anything interesting is going on. Since I don't smoke it replaces my smoke break ;)
I eat at desk or don't eat lunch, come in early and go late. Then take work home. I'm on the computer all day for work anyhow.
But hopefully this arrangement is not for much longer.
right = write.
Also, let's face it, aluminum sales are affected by auto, home and aircraft products... And each is being pummeled by the market. That's bad short term.
Saudi Arabia is building an aluminum smelter to rival all others.. That's bad long term.( Not to mention the issue of oil consumption in Saudi Arabia as they use oil for electricity and aluminum takes a **lot** of electricity.)
There are other factors that affect aluminum right now as well.. China has placed restrictions on aluminum smelting and they charge a megawatt per hour penalty against the industry if they exceed their usage.. That would seem to be a plus... Temporarily anyway...
Thx jegan ;-)
well this is exactly what i was worried about. i thought rising aluminum prices (and an anticipatory breakout of prices) would help them battle rising inputs, sort of like the ferts where the prices are accelerating more so than the inputs. clearly that is not the case. what will be the true test is if alum prices do breakout and yet they still are seeing margin contraction, then they're really up a creek.
Hi Jegan
The point of the story was not really aluminum. It was, beware of the reality behind the "beats".
j.,
you have to find companies who can raise prices quicker than input costs are rising - otherwise you have a crushed profit margin. Expect a lot of profit margins in our "food and energy only" inflation environment.
The danger now becomes inflation leads to deflation.
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