Tuesday, July 12, 2011

Pumping Aluminum

Alcoa Inc. AA reported that they doubled their quarterly earnings last night and predictably the Wall Street cheerleaders are pumping the results beyond anything meaningful. In reality it is aluminum doing the heavy lifting for Alcoa.
“The market should be pleased that Alcoa is still showing these strong year-on-year trends, and that we did not see them retrench on a quarter-over-quarter basis on the net income line,” Jorge Beristain, a Greenwich, Connecticut-based analyst at Deutsche Bank AG, said,

Alcoa is as addicted to unsustainable doses of stimulus crack as the broader market. Everyone should be warned to be ready for the hangover when the party is over. Instead the media continues to focus on selective bright spots and half truths.

The shares advanced 45 percent in the past 12 months, the third-best performer in the Dow Jones.
Quite a bounce after 90% crash from $50 in 2007 to 5 dollars a share in 2009.
The cost of goods sold -- excluding selling, general administrative and some other expenses -- increased 25 percent to $5.25 billion on rising prices for electricity, fuel oil, caustic soda and carbon products.
“We’re growing both margins and profitability faster than revenue,” Chief Financial Officer Chuck McLane said on a conference call with analysts yesterday. “We’re taking firm actions to combat energy and raw-material inflation.”
Makes you want to stand up and cheer doesn't it? Chief Financial Officer Chuck McLane should consider a career in poetry instead of business. The reality is that they are not controlling inflation rather they are profiting from it.

The company buys raw aluminum at a lower price, manufacturers something with it, then sells it later when aluminum itself is at a higher price. Of course the higher cost of aluminum is factored into the final price. They are not idiots are they? This is inflation and it is what commodities do during inflation, they increase in price. So, Mr. Chief Financial Officer Chuck McLane instead of pumping Alcoa, sing praises to the Fed for printing money.

The entire stock market has and will and can you to benefit from inflation as long as the Fed continues to print money. But just as with Alcoa Inc. the increasing price of stocks reflects nothing more than a decreasing value of money. It has nothing to do with anything that Alcoa Inc. did or is capable of doing. But anyone who still thinks that Alcoa Inc. is recovering should take a hard look at it's historical chart below.

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