MarketView for October 9

Summary

It was a down day on Wall Street on Tuesday, led by losses in technology due to brokerage downgrades of Intel and other major companies and compounded by concerns over third-quarter U.S. earnings. Shares of Intel lost 2.7 percent to end the day at $21.90 after brokerage houses such as Robert W. Baird & Co cut their price target on the stock to $26 from $32, citing weak demand for notebooks.

The news triggered a sell-off of large-cap technology shares, including Oracle and Apple. Microsoft ended the day down 1.7 percent to close at $29.28 making the company the largest drag on both the Nasdaq and the S&P 500. Nine of the S&P 500's 10 sectors fell, with energy the one gainer for the day as crude oil prices rose sharply on concerns of a supply disruption in the Middle East.

Earnings warnings have left investors cautious after a rally that has driven the S&P 500 up nearly 16 percent so far in 2012, lifting it to an almost five-year high. Among other large multinationals that have warned about earnings, citing weak demand in Europe and China, are FedEx, Caterpillar and Hewlett-Packard.

The Street consensus appears to be that quarterly earnings for S&P 500 companies will decline about 2.3 percent from the year-ago period, according to Thomson Reuters data. At the close on Tuesday, the S&P 500 was 7.9 percent below its all-time closing high of 1,565.15, reached five years ago on this date.

About 5.8 billion shares changed hands on the three major exchanges, a number that was well below the daily average so far this year of about 6.53 billion shares.

Alcoa reported quarterly results after the bell and its shares rose to $9.20 in after hours trading, adding to the slight gain during regular hours. Alcoa ended the day at $9.13, up 0.1 percent, or 1 cent.

Shares of Netflix fell 10.9 percent to $65.53, reversing Monday's sharp gains after Bank of America Merrill Lynch cut the video streaming company's stock to "underperform" from "buy."

Baidu was downgraded by Credit Suisse to "underperform" from "neutral." Its shares ended the day down 6.8 percent to close at $106.49.

Note that a number of issues experienced sudden, large moves on Tuesday before resuming normal trading in the latest case of erratic activity in the stock market.

Alcoa Surprises

Stronger demand for aluminum products from airplane and automobile producers helped Alcoa chalk up third-quarter earnings that exceeded Wall Street's expectations, offsetting weak aluminum prices and worries about China's slumping economy. Boeing, Navistar International and other manufacturers have been using more engineered aluminum parts from Alcoa to lighten the weight of planes and trucks. Manufacturing bolts, wheels and other components for these customers is more lucrative for Alcoa than just supplying basic aluminum of which the price has dropped to near two-year lows.

The company posted a net loss of $143 million, or 13 cents per share, compared with a profit of $172 million, or 15 cents per share, in the same quarter last year, the company reported on Tuesday. Excluding charges for settlements with the Environmental Protection Agency and a joint venture partner in Bahrain, the company reported a profit of 3 cents per share. On that basis, it exceeded analyst estimates for a break-even quarter, according to Thomson Reuters I/B/E/S.

Revenue fell 9 percent to $5.8 billion, as a result of a 17 percent drop in aluminum prices from the same quarter a year ago, said Alcoa, which is traditionally the first S&P500 Company to report quarterly earnings.

Chairman and Chief Executive Officer Klaus Kleinfeld reaffirmed Alcoa's long-term outlook for aluminum, which is used for construction, auto and aviation manufacture, and beverage cans. He expects global demand to double between 2010 and 2020. However, he also acknowledged that there is still a lot of uncertainty, but said markets are showing signs of some positive growth.

"Markets seem to be driven more by headlines than fundamentals right now, but Alcoa remains focused on the things within our control", Kleinfeld said. "We're capitalizing on pockets of strong growth and achieving record profitability in our mid and downstream businesses."

Aluminum prices ended the third quarter at $2,112 per ton, about 14 percent lower than in the third quarter of 2011.

While its downstream businesses have performed well, Alcoa faces big challenges in its core businesses of mining bauxite and producing aluminum. Demand is strong in aerospace and transport, but other sectors, such as construction, have not recovered from the recession and over-supply in the industry has kept prices low.

Alcoa recently closed its aluminum smelter on the Italian island of Sardinia and put it up for sale, citing high power prices that made the operation uncompetitive. Early on Tuesday, the company announced it had settled a civil suit brought by Aluminum Bahrain. Without admitting any liability, Alcoa agreed to make a cash payment to Alba of $85 million payable in two installments. It will also supply Alba with raw materials under long-term contracts. Alcoa took a $40 million charge against its earnings for the settlement.