MarketView for October 11

Summary  

After the best five days for the S&P 500 in more than two years, Wall Street took a bit of a breather on Tuesday as the major equity indexes wandered between gains and losses throughout the day’s trading activity. Markets have been reacting to news from the euro zone where officials are trying to contain a debt crisis that threatens large European banks and global financial stability and this is unlikely to change over the next two to three weeks.

The focus now will shift to earnings season, which began unofficially with Alcoa's report after Tuesday’s close of regular trading. The recent economic indicators have shown signs of slow growth and now the Street is waiting to see how this has affected company profits.

Materials stocks fell throughout the third quarter on worries about global growth slowing. Alcoa gained 2 percent to $10.30 in regular trading but is down 35 percent since the beginning of the third quarter.

After the market closed, Alcoa said third-quarter earnings increased from a year ago, but earnings and revenue slipped from the second quarter as economic growth slowed from the first half of this year. After the close, Alcoa, the largest domestic aluminum company, fell in after-hours trading to $10.03 after it posted results. During the past week, Street analysts have lowered their consensus earnings estimates for Alcoa, citing a precipitous drop in metals prices in recent months sparked by global economic concerns.

A delay in a key vote by Slovakia on expanding the euro zone rescue fund kept investors cautious. Later in the evening it became apparent that the vote failed and it also caused a possible shift in power because attached was a no confidence rider. Looking at the tally, 16 of 17 euro zone states have ratified a pact to increase the size and powers of the European Financial Stability Facility bailout fund. Only Slovakia has voted no.

Any more delays in coming up with a plan intended to head off crisis could give the market an excuse to sell-off. Stocks have reached the top of a recent range, hitting resistance around 1,195 on the S&P 500. Another area of resistance is seen at 1,215. Meanwhile, Apple gained 3 percent to close at $400.29, providing some support to both the Nasdaq and the S&P 500. The company sold 1 million iPhone 4S units in the first day of pre-ordering.

About 6.90 billion shares were traded on the major equity exchanges on Tuesday, well below the year's daily average so far of 8.03 billion shares.

Alcoa Reports Lower Earnings

Alcoa, the largest domestic aluminum producer, reported after the close of regular trading on Tuesday that slowing economic growth sent aluminum prices lower, hurting Alcoa’s third-quarter earnings number and sending its shares down in after-hours trading. CEO Klaus Kleinfeld had warned the Street of weak economic conditions through the year, particularly in Europe, "as confidence in the global recovery faded."

As a result, aluminum demand from the automotive, industrial products, construction and packaging sectors declined during the third quarter, with only the aerospace and transport sectors growing.

Third-quarter earnings increased from a year ago, but was lower than the second quarter and fell short of Street expectations, which had already been lowered because of a slump in global metal prices. Chief Financial Officer Chuck McLane said worries about Europe's debt crisis had prompted customers there to reduce orders, but Kleinfeld said such fear was unfounded.

"We've seen strength in many of our markets, despite the sharp slowdown in Europe that hurt our sequential results and I'm more concerned about lack of confidence than about market fundamentals.

"It almost looks like the world is worrying itself into another recession and that should not be allowed to happen," he told Street analysts on a conference call.

"I think the problems that we have today ... those fears, not a shrinking market, were the main reason for the weak quarter."

Kleinfeld said Alcoa stuck with its forecast for global aluminum demand growth of 12 percent this year, although it expected a decline in Europe, North America and Brazil.

But that decline will be made up by strength in emerging markets and he increased the growth forecast for China from 15 percent to 17 percent.

Alcoa, the first Dow component company to report third-quarter results, said net earnings were $172 million, or 15 cents per share, compared with $61 million, or 6 cents per share, a year earlier. The company indicated that income from continuing operations was also 15 cents per share, but down from 28 cents per share in the second quarter.

Alcoa said revenue rose 21 percent to $6.4 billion from a year earlier, but was 3 percent lower than the second quarter of this year as metals prices slumped sharply. Aluminum prices fell almost 20 percent in the third quarter on global economic concerns and Alcoa's share price fell 41 percent during the same period.

In his call with analysts, Kleinfeld blamed the price drop on, "very offensive short-selling going on by speculators. "They are betting against aluminum as a proxy for betting against the global economy," the CEO said.

Still, aluminum prices could easily rebound if the sentiment around the European economy shows any improvement, analysts said, which would immediately benefit Alcoa.