Earnings season began with Alcoa reporting its results yesterday. Traditionally, it’s the report from this aluminum giant and the Dow Industrials member that marks the start of the season – and this time, the season certainly did not start with a high note.
Alcoa earnings disappointed – the largest U.S. aluminum producer’s profit trailed estimates, despite strong metal prices. High energy prices were one of the main culprits.
Higher energy prices were also behind the widened U.S. trade deficit reported for the month of November. The lower dollar helped U.S. companies to sell abroad; the overall increase in exports was achieved for the seventh month in a row. The size of the increase, 0.9 percent, to $138.2 billion, reflected increasing overseas demand for food and American-made automobiles and semiconductors.
Signs of recovery, however, are still few and far apart. The recently released minutes of the December Federal Open Market Committee meeting indicate that even the Fed isn’t confident in the strength of the recovery.
While the members of FOMC agreed that economic growth was strengthening, and that downside risks to the outlook for economic growth had diminished “a bit further”, the securities purchase program was still a major discussion topic. A few FOMC members observed that, in the future, purchases may need to be expanded, while only one member of the committee saw enough improvements in the financial markets to warrant scaling back large-scale asset purchases.
Clearly, we are not out of the woods in terms of economic recovery, not by a long shot. With the employment-to-population ratio at a 25-year low and aggregate hours of production having dropped more than during the 1981-1982 recession, we have a long road ahead. And with stock prices having recovered since last March, we are now at a critical junction. Banks still aren’t lending to any great degree and consumers aren’t motivated to spend.
China, the world’s engine of growth, is trying to prevent overheating, and has raised reserve requirements for its banks. With GDP growth expected to exceed 10 percent for the fourth quarter of 2009, China is now poised to post the fastest growth rate since at least first quarter 2008. We expect China to continue produce demand for materials and the inflationary environment will likely generate more investment demand for gold as well.
The earnings season will likely generate many trading ideas for our subscribers and we plan to be actively trading in what we expect to be a volatile season. In the meantime, here’s a recap of our current trades.
