Alcoa is out with earnings and some headlines are proclaiming that it is initiating the current earnings season with a bullish report.
It is that sort of tripe that keeps me comfortable that you can put contrarian stock sentiment measures aside and take a longer view. The media continues to be on the side of the stock promoters. Let's see what's bullish here. Alcoa reported 13 cents a share, supposedly a surprisingly good number compared to alleged consensus of 11 cents. Why was this a "surprise"?
Per Yahoo! Finance, AA's current estimate was 12 cents. One week ago, it was 14 cents. Two months ago, it was 19 cents.
On July 1, 1983, AA sold for half the current price (adjusted for splits). Maybe that's a quadruple after dividends. That comes out to 5 1/4% annualized. In contrast, buying an equivalent grade corporate bond of the same duration would have yielded, say, 14% annually. Turning the arithmetic around, $2.91 invested in a zero coupon 14% bond would have matured at $100 in the same 27 years (excluding tax for all the above).
In further contrast, gold averaged about $420/ounce in 1983 and averaged around that on July 1, 1983. At $1200/ounce today, that's a 3.96% compound rate of return. Some bubble.
The stock market is less expensive than it has been many times in the past 12 years, but the fundamentals of the economy appear worse as well and stocks remain expensive by most historical criteria ("operating earnings" is a meaningless bogus statistic). The public has very recently begun turning against stocks, but for this to have happened despite all the free publicity the "market" has going for it is a meaningful happening. As there was in 1921, 1932-3, 1974 and 1982, there may come a time where stocks are undervalued by multiple objective and historical criteria.
Given an annual production of over $160,000 per family of four, there is no overall problem with a no-growth economy, given that the truly needy are cared for. The current imbalances argue for less and less concern for prices of financial assets such as Alcoa stock and more for a balanced, sustainable financial and economic framework.
Until the country moves a good deal closer to rational debt loads and limits or eliminates speculation in toxic and generally useless financial derivatives, I believe that the overall trend in the economy and the stock market tends toward the bearish. Touts claiming that Alcoa "beat" consensus earnings and thus happy days are here again do us a disservice.
Copyright (C) Long Lake LLC 2010
Showing posts with label Alcoa. Show all posts
Showing posts with label Alcoa. Show all posts
Monday, July 12, 2010
Thursday, January 15, 2009
The Dow and the Economy
Let us look at the Dow Industrials that have reported earnings so far and what they indicate about the economy.
First, Alcoa reported. 'AA' lost money. Its working capital position is not strong. The stock continues to sell above tangible book value, and since it is a mature but money-losing company, with the economy definitely worse this quarter than last quarter, it is very possible if not likely for the stock to decline below tangible book, which is obviously declining due to the losses.
Next, J.P. Morgan Chase (+ Bear, Stearns Washington Mutual etc.) reported. Absent a one-time gain related to the WaMu acquisition, and other net gains such as $627 MM from dissolution of a joint venture (Paymentech) 'JPM' lost money. Tangible book value is about $18 per share, $8/share less than the stock price. Given the fragility of the financial system, the uncertainty of the value of Tier 3 assets, the certainty that this quarter will stink, the likelihood that the entire year will stink, it is easy to see the stock trading down to or below tangible book value. (The entire concept of a financial company having "tangible" assets is oxymoronic.)
Last, Intel announced virtually break-even earnings today. The stock has gone nowhere for over 12 years. Given prevailing risk-free interest rates in the late 1990s, it is clear that the stock was, with benefit of hindsight, drastically overpriced then. The Company trades at over two times sales per share. Sales growth has lagged nominal GDP for a decade or more. So, even the largest and most successful semiconductor company, which has destroyed its main competitor AMD, can't even grow sales as fast as nominal GDP. One can look for this stock to gradually trade down close to one times sales per share. The stock is $13-14 per share. The long-term chart shows 8-9 years of lower highs. The dividend was increased recently, just as operations were tanking. AIG did the same thing. That didn't reward shareholders well. This stock can go flat to down for years to come.
SUMMARY:
Here are 3 relatively well-run companies. All are large and highly cyclical. Alcoa and JP Morgan Chase are very old companies and Intel acts old and mature. None of them have any pizzazz. There is nothing new. These companies are reflective of the economy as a whole. It's creaky. They are at best marginally profitable going forward, smoothed over an "average" economic cycle.
Right now, things remind me most of the US economy in the early 1930s. There were 2 years, 1932 and 1933, when I believe that corporate America had no net profits. Could the same thing happen again? Oil companies are not going to make much at current oil prices and gasoline volumes; financials and GM are disasters; and Intel and Alcoa are collectively perhaps break-even going forward. Presumably IBM, HP and P&G will save the day, but Citi, BofA, and GM could lose many tens of billions of dollars.
The pattern is that unlike Intel's optimism that after the recession, there will be strong growth, I think that the U.S. is in a secular slow-growth phase. Corporate America can't keep promising growth year after year, not deliver it, and expect its stock price not to reflect the reality that this is a slow-growth economy at best. This is a Japan post-bubble flat-to-down stock price scenario if it is not a fast-crash 1929-32 scenario.
Copyright (C) Long Lake LLC
This could be Great Depression 2 from a profit standpoint.
First, Alcoa reported. 'AA' lost money. Its working capital position is not strong. The stock continues to sell above tangible book value, and since it is a mature but money-losing company, with the economy definitely worse this quarter than last quarter, it is very possible if not likely for the stock to decline below tangible book, which is obviously declining due to the losses.
Next, J.P. Morgan Chase (+ Bear, Stearns Washington Mutual etc.) reported. Absent a one-time gain related to the WaMu acquisition, and other net gains such as $627 MM from dissolution of a joint venture (Paymentech) 'JPM' lost money. Tangible book value is about $18 per share, $8/share less than the stock price. Given the fragility of the financial system, the uncertainty of the value of Tier 3 assets, the certainty that this quarter will stink, the likelihood that the entire year will stink, it is easy to see the stock trading down to or below tangible book value. (The entire concept of a financial company having "tangible" assets is oxymoronic.)
Last, Intel announced virtually break-even earnings today. The stock has gone nowhere for over 12 years. Given prevailing risk-free interest rates in the late 1990s, it is clear that the stock was, with benefit of hindsight, drastically overpriced then. The Company trades at over two times sales per share. Sales growth has lagged nominal GDP for a decade or more. So, even the largest and most successful semiconductor company, which has destroyed its main competitor AMD, can't even grow sales as fast as nominal GDP. One can look for this stock to gradually trade down close to one times sales per share. The stock is $13-14 per share. The long-term chart shows 8-9 years of lower highs. The dividend was increased recently, just as operations were tanking. AIG did the same thing. That didn't reward shareholders well. This stock can go flat to down for years to come.
SUMMARY:
Here are 3 relatively well-run companies. All are large and highly cyclical. Alcoa and JP Morgan Chase are very old companies and Intel acts old and mature. None of them have any pizzazz. There is nothing new. These companies are reflective of the economy as a whole. It's creaky. They are at best marginally profitable going forward, smoothed over an "average" economic cycle.
Right now, things remind me most of the US economy in the early 1930s. There were 2 years, 1932 and 1933, when I believe that corporate America had no net profits. Could the same thing happen again? Oil companies are not going to make much at current oil prices and gasoline volumes; financials and GM are disasters; and Intel and Alcoa are collectively perhaps break-even going forward. Presumably IBM, HP and P&G will save the day, but Citi, BofA, and GM could lose many tens of billions of dollars.
The pattern is that unlike Intel's optimism that after the recession, there will be strong growth, I think that the U.S. is in a secular slow-growth phase. Corporate America can't keep promising growth year after year, not deliver it, and expect its stock price not to reflect the reality that this is a slow-growth economy at best. This is a Japan post-bubble flat-to-down stock price scenario if it is not a fast-crash 1929-32 scenario.
Copyright (C) Long Lake LLC
This could be Great Depression 2 from a profit standpoint.
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