Alcoa earnings on deck, but focus on FedEx and UPS

I have been looking forward to the Alcoa (AA) earnings report, due out later today, because of what it suggests about the economy.  As the economy bottoms, the fortunes of cyclical companies that are leveraged to the overall state of the economy turn up.  As Alcoa is the first company to report every earnings season and it is an cyclical basic industries company, its earnings report have been seen as an economic bellwether for some time. But is this set to change?

Alcoa Inc, whose results are traditionally viewed as an indicator of the country’s economic health, is expected to post a third consecutive quarterly loss this week.

But many on Wall Street no longer see the aluminum producer’s numbers as a bellwether portending either a deeper recession or an easing of the global downturn.

"It’s a large company in a major industry and it is the first to report, so it gets special recognition," said Joseph Battipaglia, a market strategist at Stifel Nicolaus & Co in Yardley, Pennsylvania.

"But it’s only telling you about the health of the aluminum industry and that’s not very good right now.

"FedEx and UPS are better signs of a change in direction," he added, referring to the two largest U.S. shipping or package-delivery companies. "I wouldn’t take what Alcoa says as a significant indication of how the American or global economy is faring."

Battipaglia said that even if Alcoa — the first member of the Dow Jones industrial average to release earnings — reported an upsurge of orders on Wednesday, it was no real sign of a turnaround. Most customers let their inventories go down in recent months, he noted, and were now restocking while aluminum prices are relatively low.

Battipaglia’s comments are significant for two reasons.  First, there is the fact that we may well be seeing an inventory-induced uptick in the economy right now.  It is far from clear that the economy has bottomed in a sustainable way.  I made this point in my recent post, “ISM: Is this the mother of all inventory corrections?.”To be sure, I do think the economy is bottoming and that a technical recovery will ensue late this year or early next year. However, I am willing to entertain the notion that a balance sheet recession for U.S. consumers has created conditions in which this view could turn out to be optimistic.

The second reason I believe Battipaglia is on to something is that UPS and FedEx (FDX) are more representative of overall economic conditions these days. In my post “If FedEx is losing money, you know the economy is in bad shape” I said we should worry about what FedEx’s numbers are saying about economic growth in America.

Last month I said that June was significant for two reasons.  First, we are going to get our first test of data that could disappoint, which would spell trouble for an overbought market. But, just as important, we need to watch the industrials because there is going to be no sustainable recovery unless these cyclical companies are leading the way.  If the recent awful earnings report from FedEx is any indication, this sector is still in a world of hurt.  The Globe & Mail has a good take on how this is shaping up.

So, certainly look toward the Alcoa earnings report today for signs of economic direction.  However, keep in mind that we have already seen FedEx’s numbers and they are not good. UPS reports on 23 Jul 2009.  Let’s have a look at what those numbers are telling us as well.

Source

What does Alcoa’s expected loss mean for the economy? – Reuters