Is Alcoa a Bellwether for the U.S. Economy?

It is becoming pretty tough to answer yes to this question, especially after Alcoa's Q2 earnings release.

We won't go through the earnings results as everyone is aware that they came in better-than-expected, driven by cost reduction and strong demand in China. Another pleasant surprise was the Company's revenue figure, which was nearly $300MM higher than what the analysts were looking for.

With that said, from a macro standpoint, nearly everything else mentioned on the call was negative. It appears that the Company's well-being is in China's hands. We do not view the better results as a signal for an economic turnaround in the U.S. anytime soon.

According to CEO Klaus Kleinfeld, global aluminum demand projection for 2009 has not changed. It remains at -7.0%. However, without China, that figure slides down to -10.0%. The Company's projection for various end markets is provided below:

click to enlarge

Source: Alcoa analysis

Obviously, when it comes to North America, we're not seeing any good news in the table above. And who knows how significantly this could change in 2010, given the lack of consumption, unemployment, and higher savings; all of which are indications of no demand, resulting in less manufacturing and construction.

China is the only region in which Alcoa expects to see some growth. According to Kleinfeld, the fact that China's stimulus plan has strong infrastructure components, or is "shovel ready", is helping Alcoa. In addition, given China's average domestic savings rate of 40%, the government is pushing the Chinese to lower that rate, open credit card accounts and consume. Unfortunately, that is not the case with us, nor can we afford to do that.

Kleinfeld did mention that the automotive industry in the U.S. may be stabilizing in 2H09, but then again, we do know that such stabilization is nothing but inventory replenishment, demand for which is not yet clear. And we must say this may also be partially driven by the 'cash for clunkers' government policy, which will not positively impact auto demand in the long-run. As a reminder, June auto sales (announced last week) came in below expectations, below 10.0MM and below sales in May.

Overall, even though Alcoa's Q2 results beat expectations, we do not view it as an indication of a turnaround in or stabilization of the U.S. economy. Cost reduction and strong demand from China were behind those results. We do not yet see significant increase in consumption, stabilization of the unemployment rate, decline in savings rate nor an end to the deleveraging that nearly every household continues to execute.

Disclosures: None

Comments

[apppro:]

Maybe yes, but probably no. However, it's more important to realize that it may (at least for today) be the bellwether of the entire market psyche, or should I say sickie.

This market is so overrun by shorts and negative Nellie’s, and is truly in need of repair. Maybe AA can accomplish that today.

Jul 09 07:25 AM

[boisterousbob:]

It is a good note to be cautious of AA's earnings.

I do have one quibble, and not just because of this article I hear these comments repeatedly and don't understand them:

'cash for clunkers' government policy, which will not positively impact auto demand in the long-run.

This is self evident, this program is designed to help us through the recession not the long run. Why even bother to point this out, are you arguing that demand for vehicles will never recover?

Jul 09 08:32 AM

[Old Trader:]

Although Alcoa (and aluminum) can be considered a canary in the coal mine for the overall economy, copper seems to be an even better "leading indicator". It will be interesting to see how the earnings, and more importantly, forward guidance, if any, for the major copper miners pans out.

Jul 09 09:05 AM

[TCK:]

The Alcoa "earnings" was a 454 million dollar loss for the quarter !

It was better than expected due to cutting costs. Not sure how this can be "spun" into a positive for the economy ?

Jul 09 09:53 AM

[KIT:]

450 Million loss for the whole year was once called a disaster


On Jul 09 09:53 AM TCK wrote:

> The Alcoa "earnings" was a 454 million dollar loss for the quarter
> !
>
> It was better than expected due to cutting costs. Not sure how this
> can be "spun" into a positive for the economy ?

Jul 09 10:48 AM

[Ali Mogharabi:]

That was the whole point of the article.


On Jul 09 09:53 AM TCK wrote:

> The Alcoa "earnings" was a 454 million dollar loss for the quarter
> !
>
> It was better than expected due to cutting costs. Not sure how this
> can be "spun" into a positive for the economy ?

Jul 09 10:56 AM