Alcoa Leads The Way This Earnings Season

| January 12, 2009 | 0 Comments

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.

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.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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