What Mr. Market Has Told MeAlcoa's ( AA) earnings are apparently so meaningless that perhaps the SEC should consider banning the company from issuing them. Obviously, this is said tongue in check. But hello, people -- Alcoa's earnings were initially billed as a "solid beat," the stock popped and then realty set in that there is more behind an "expected" 1% production cut (thanks, China). The stock closed lower, leaving me to wonder -- as I hypothesized last week -- about the third-quarter health of companies that placed orders with Alcoa. It also had me wondering whether weakening corporate fundamentals will see stabilization by the fourth-quarter earnings season in January 2013. To purchase Alcoa shares on a dip, or most industrials with similar business models and exposure to Europe and China, it's a both a physical and a mental bet that the severity of sales pressure and fleeting cost/expense leverage will level off. Pardon me if I don't want to drink the Kool-Aid yet.What commenced as a medium-sized snowball has picked up speed and size, as seen in commentary and actions by executives. Come take a tour of the fun tidbits I grabbed on Wednesday.
Honest Abe's Early-Innings Earnings-Season Lesson ListI'm totally all for buying a stock -- when I can remove a couple of these talking points from the Honest Abe list.
- View with skepticism the opinion that China's economic growth will reaccelerate in the fourth quarter. The reads I am receiving is that China is becoming worse, and there is no benefit in consumer demand or business demand from infrastructure projects or liquidity injections.
- If you could find a "Yum-Yum" stock, by all means grip it and rip it. Yum! Brands (YUM) had a bunch of intangibles that converged that propelled its stock price, including concerns on McDonalds's (MCD) hurting sector sentiment and uber worries on food inflation. To be a "Yum Yum" stock, the company has to have unjustified skepticism on its fundamentals derived from clear (emphasis on clear) sales and leverage catalysts.
- The dot-connecting is largely skewed toward avoiding potential disasters, rather than unearthing opportunities. By this I mean that the commentary has been so poor, and earnings downgrades so alarming, that the search is on to exit companies that will trumpet these same tunes, as opposed to buying companies that may be doing decently.
- Yum! Brands is the early outlier; earnings news is being sold.
- Not one company I know of has mentioned anything related to the latest Federal Reserve efforts, but they've definitely intensified the rhetoric on the fiscal cliff -- most notably in Wal-Mart.
- You will lose money earned in the summer rally if you fail to think on a granular level with regard to China. If growth is slowing, there is a big chance a company you own is not pushing through price increases, is discounting more merchandise, and is not moving as much product at cheaper prices as it hopes. This triggers a chain of events that impacts near- to medium-term operational performance. A good example is why a company like Caterpillar (CAT) would be cutting production -- its inventory is not in line to demand trends, and that inventory has to be worked down.