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Better Than Expected
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Alcoa kicked off the earnings reporting season after the closing bell yesterday.

The big question all day, one that weighed on the minds of the market and the traders was, would Alcoa’s first quarter earnings be ‘better than expected?’

First quarter expectations have been lowered dramatically and declining profits are projected for the seventh straight quarter in the first quarter of 2009.

Alcoa, the first of the Dow big names to report earnings, offers a good indication of the state of the economy and the direction of earnings for the rest of the quarter. The stock was trading down just one percent, prior to the closing bell, in hopes they would not surprise to the downside.

Consensus for the first quarter was either a loss of fifty-four cents or fifty-six cents depending on which projection was used. That compared with a first quarter profit of forty-four cents the same quarter in 2008.

There is a quietly hopeful expectation that first quarter earnings will be ‘not as bad as expected,’ the mantra of the bulls during the recent 20 plus percent run up in the markets over the last four weeks. But there is an underlying fear that things are worse than hoped.

That fear is real considering the fourth quarter of 2008 was the first time the S&P 500 reported a quarterly loss in their history. Alcoa’s earnings would be an indicator of the fate of the S&P 500 quarter.

The US’s largest producer of aluminum products reported a loss of fifty-nine cents per share on revenue of $4.15 billion. That was three cents less than the best estimate and a loss of $497 million for the quarter. Not the start the market hoped for. A 36 percent decline in earnings at Alcoa does not bode well for the reports for the rest of the season.

The lack of guidance from so many of the major corporations further clouds the picture that may be unfolding. So what should the market expect for the next five weeks? It is difficult to predict what will happen considering the uncertainty in so many sectors.

Discretionary is expected to decline over 100%, before excluding auto sales, and the materials sector is pegged to have losses of up to 81 percent. Homebuilders could lose $600 million this quarter.

But, besides homebuilders, the real question mark in the new ‘not as bad as expected’ economy is financials.

Homebuilders have manipulated information for several quarters and anything more than and expected loss of $600 million would be damaging in this economic environment.

But no sector has been less transparent and more manipulative than the financial sector. It would be no shock if the financial’s reported earnings well below market expectations. The financial sector has become predisposed to issue falsities and misrepresentations to bolster their stock prices. Past statements from CEO’s at AIG, Freddie and Fannie, Merrill Lynch, Lehman Brothers, and others teeter on the edge of criminality.

Earlier statements in this quarter by Citigroup’s Pandit, Bank of America’s Lewis, and JP Morgan Chases Dimon of profitability in the quarter were conveniently extracted near the end of the quarter with statements that March was bad and even worse than expected. Are they setting the stage for a weak quarter after making positive statements which helped drive the stock prices up?

John Thain made positive comments about the health of Merrill just days before they reported a loss of over $11 billion. It was another six months before Thain was fired.

It is quite possible the Big Twelve Banks will report losses exceeding $40 billion, a figure that would be devastating to the markets and expose the need for more transparency. But it would give us a clearer picture of how bad the economy really is.

So what does the earnings report from Alcoa tell us? Prepare for a quarter that is worse than expected. Then if it is ‘not as bad as expected’ there will be considerably less pain and hope for the future.


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Alcoa kicked off the official earnings season with results for the first quarter. Alcoa’s results generally set the tone for the quarterly earnings and this first quarter report was less than stellar. It was submitted to the New York Times on April 7, 2009.

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