The Overnight Report: Waiting For Earnings

This story features ALUMINA LIMITED. For more info SHARE ANALYSIS: AWC

By Greg Peel

The US quarterly earnings season “officially” begins with Alcoa – the first Dow component cab off the rank. Last night Alcoa was due to report immediately after the close, which traders suggested was the reason why the market went nowhere. The Dow closed up 3, the S&P gained 0.16% and the Nasdaq lost 0.26%.

However, it was not a flat line all day on Wall Street. The Dow had gained 124 points by lunch time, driven on by a report in the Wall Street Journal which suggested troubled Washington Mutual – one of the largest “thrifts” in the US, which concentrate on financial services for consumers and SMEs – was about to receive a cash injection of US$5bn from a private equity consortium led by Texas Pacific. WaMu shares have traded in a 52-week range of US$44.67 to US$8.72, but last night shot up 28% on the rumour to close at US$13.15.

Texas Pacific – remember them? The group was involved in or sniffing around every other buyout deal in Australia in FY07, before suddenly the credit crunch hit and it seemed private equity LBOs would be put back in their box and returned to the shelf once more, just as they were in 1992. Private equity buyouts, and indeed all M&A activity, has since plummeted across the globe. Buying out a company with leveraged debt became no longer a viable trade. However, private equity never actually went away, it just returned to using cash and limited debt to make smaller purchases. That’s what has happened in the case of WaMu – allegedly.

Not that WaMu is a small purchase. And indeed, this week has seen a sudden jump in proposed M&A activity to some US$40bn+, which is greater than the whole 2008 total to date. With the Fed guarding the goal square, corporate activity now feels more confident in offence.

So WaMu was simply a positive indicator for the market last night, such that the Dow (which does not include WaMu) could find reason to rally. However, reality was soon to bite.

While the official earnings season may start with Alcoa, some companies have already reported. Last night coal miner Arch Coal provided its guidance – an announcement hotly anticipated given recent indicators that the global price of coal will not double, as previously thought, but triple to US$300/t. However, Arch disappointed the market by providing guidance of US$2.00-2.50 per share in the second quarter – a figure that was not only below expectation but uncomfortably wide to boot. This announcement proved a sudden reminder that stock performance is all about earnings, and that Alcoa’s result was coming up. The Dow fell all the way back to unch.

Ahead of Alcoa, analysts have already been reducing their first quarter earnings expectations for the market. Reuters Estimates was forecasting 4.7% growth back in January, but by last week had revised that to an 8.1% fall. Last night they revised the figure again, to an 11.8% fall. This number includes a 61% loss of earnings in the financials sector. If the broad market generally falls short of Street estimates this season, a pall of pessimism will descend over stocks. The recession will be seen as here, and potentially as here for a while.

However, if earnings can match the Street, it’s a case of all the bad news is out. And if they beat the Street – look out. However, it is not just first quarter earnings but second quarter guidance that will be significant. A Street-beating result will be overlooked if guidance is for dark times ahead. After all, many traders (and the Fed) have long been looking for a recovery toward the middle of the year (and as such the stock market should lead the reality by at least three months).

So it was up to Alcoa. The aluminium giant reported a 50% decline in earnings in the first quarter, affected by surging raw material costs and a weak dollar. Nevertheless, on an expectation basis the result was mixed. EPS was low at US44c against US48c consensus, but sales were higher at US$7.4bn against US$7.2bn consensus. Alcoa shares had already dropped 4% during the trading session, so when the announcement came in after the bell the shares then quickly went nowhere. It was not a disaster.

Shares in Aussie aluminium specialist Alumina ((AWC)) – Alcoa’s 50% partner in the AWAC joint venture – have been pushing up this last week or so on a higher aluminium price. They may see some weakness today on the Alcoa result, but should not fall out of bed. The aluminium price also pressed higher last night.

Commodities in general were strong last night, despite a slightly stronger US dollar index. The focus at present is on copper, as speculative fund buying strengthens on an increasing belief supply restrictions are going to send the red metal on a run. All base metals with the exception of nickel posted stronger official closes on the LME, before slipping slightly in later trade. Copper is poised just below the psychological level of US$4.00/lb as the world tosses up between global slowdown talk (demand) and vanishing inventories (supply).

Oil continued its latest surge last night, jumping US$2.86 to US109.09/bbl. The move was driven by comments from OPEC which implied there would be no production increases forthcoming as global demand was easing. It’s a pity this easing doesn’t show up in the oil price. (OPEC has been peddling this line for months now, which strengthens the argument that OPEC producers have no scope to increase production anyway). OPEC also suggested it saw no reason to hold an extraordinary production meeting ahead of the next scheduled meeting in September.

With oil jumping, and given a follow-through from Friday’s weak job numbers, gold managed to add another US$7.60 to US$921.30/oz. The Aussie dollar rose moderately to US$0.9260.

The SPI Overnight was up 4 points.

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