The Q2 earnings season began with aluminum company Alcoa and rail freight operator CSX reporting on Monday. The stock market reacted jubilantly to the news. Careful examination however indicates there is very little reason for economic optimism based on these releases.
On the surface, comparisons looked good versus the Q2 2009. However, Q2 2009 was right off the Great Recession bottom and it would be almost impossible not to do a lot better. Alcoa's (AA) revenue was up 18% and CSX's (CSX) was up 22%. A 44% increased in metals freight shipments by CSX were seen as verification that Alcoa should be doing better. Automotive shipments by CSX were up 63% by volume year over year and vehicle manufacturing requires a lot of aluminum. It all looks really good as long as you don't look any further.
New car sales were in the dumps in Q2 2009 with only around 9.6 million vehicles sold. By Q3 2009 however around 11.5 million vehicles were sold (thanks to Cash for Clunkers), so comparisons next quarter are going to be difficult for both CSX and Alcoa. Approximately 11.2 million vehicles were sold in the U.S. in Q2 2010, but sales dropped 11% between May and June (the usual seasonal drop is 3%). So it looks like the summer will be weak for auto sales and sales for Q3 2010 will possibly be much lower than the previous year's level. This can only negatively impact next quarter's earnings for both Alcoa and CSX.
The market also got excited about Alcoa's revising its global demand forecast up 10% to 12%. While this would certainly be good news if it happens, traders seemed skeptical based on the action in the stock. Alcoa peaked in January and has been trading in a bearish pattern since mid-May. The stock is up only a very modest amount so far today. After a six-month drop, a more enthusiastic reaction should be expected on good news.
The stock market is supposed to look forward at least six months. Earnings are backward looking. They are only significant to the extent that the underlying trends that created last quarter’s earnings continue to hold. There is a lot of reason to believe that this will not be the case. Big government stimulus programs are fading and the economy is weakening, not strengthening as it was a year ago.
Disclosure: No positions
Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21 |
