Alcoa Stock-To-Aluminum Price Ratio At Recent High Level

Tyler Durden's picture

As everyone is waiting for Alcoa's stock price report later today, it is worth noting that the company's Stock Price-To-Aluminum Price ratio has hit a one year high: the last time this relationship was at 0.78, the stock proceeded to plummet almost straight line to its low reading of 0.4. Granted, last time around China did not have a rampaging multi trillion credit bubble. Yet the stickiness of aluminum prices has been troubling: Alcoa's top line may be a key determinant of how this earnings season progresses, and is precisely what most pundits will be focusing on.

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Steak's picture

Its just one guy's opinion, but I don't think earnings will matter one iota in the context of this market.  As long as the CEO makes vague prognostications of a bottoming out in a couple quarters then the income side of things can take a seat.

This chart definitely adds some helpful perspective on just how rediculous valuations have become. 

Second derivatives piss me off.

Gilgamesh's picture

Over/Under on the words "bottom" and "cautiously optimistic" in the release and CC?

lizzy36's picture

depends on length of total release.

but i am going to guess that either or both words will appear in every 3rd sentence.

Steak's picture

Oh I think they're gonna go for gold on this one.  They have a fledgling consumer electronics segment I'm sure they'll talk up to no end.  With regard to cars all they have to say is "clunkers" and analysts will pee their pants with excitement.  And on their outlook, in July they used the phrase "hand to mouth" to describe the industry.  So any upgrade of that assesment will likely lead to Kudlow spontaneously climaxing on air and Leisman giving Summers a hand shandy (its their personal version of a high-five).

So with that said, I'd give 10-1 odds AA is quite rosy in their outlook.

ghostfaceinvestah's picture

I appreciate this site for all it does, and for pointing out the disconnect between valuations and fundamentals, but like everything you need to get the timing right.  You are correct, fudamentals don't matter now, as they didn't in 1999, or 2007.

But they will.  the stock market is in a bubble today.  It may not look like a bubble, at S&P 1000, versus a high of 1500, but it is in a bubble.  And that bubble will continue to inflate as long as the Fed pours rocket fuel into the fire.  They still have another $500B to print through March to buy MBS.  that is a shitload of money.  Before this, that would have been an enormous annual deficit, and the Fed is just going to print it.

But once the Fed is done, look out below, you are going to have a chance to short this bubble the likes of which you haven't seen since March 2000.  think shorting the NASDAQ at 5000.

The higher it goes from here, the more years you are going to be able to add onto your retirement time, because it will just fuel the way down.

I rarely bet on the stock market, but I am getting giddy thinking of the short opportunity that is going to come when the liquidity dries up.

Anonymous's picture

Has anybody checked the cost side?
Aluminum making takes a lot of electricity, the ore, the plant and labor. If the input cost fell even farther then the price of the product the valuation could make sense.

Translational Lift's picture

Approximately 31% of all aluminium produced in the US comes from recycled scrap. Scrap aluminum requires only 5% of the energy used to make new aluminium.

Gilgamesh's picture

Don't have the link handy, but I believe I saw a >30% cut in input costs.

ghostfaceinvestah's picture

Don't worry, they will drop prices further and make it up in volume, just like the dot-coms did.  Maybe they will be able to "monetize" the "eyeballs" on their website.

Such fundamental valuation as yours has no place in a liquidity-fueled asset bubble like today's stock market.

Bearish Spirits's picture

Didn't China come out several days ago and declare they were done stockpiling aluminum for the near-term?  I honestly thought that would hold Alcoa down, along with its schizo cousin CENX.  I guess not.

This reeks of a dump on anything other than great earnings news.  Such as this stalwart member of the Dow 30 actually producing a profit.

Last I saw, expectations were for -.11/share.

TumblingDice's picture

I think companies know that as long as they reach for the moon for their Q4 and 2010 Q1 earnings, they should be fine.

Yossarian's picture

Shouldn't it be stock price per unit of aluminum capacity to aluminum price?  Or mkt price per unit of production versus aluminum price? 

Anonymous's picture

Let me know when AA gets down to $6 again and I'll scoop up some more.

Anonymous's picture

There will be words found somewhere that will make it 'better than expected' ......yawn, same old, same old rubbish!

THE MOGUL's picture

Something to consider is an Aluminum ETF, which is coming to the market!

check it out:



Anonymous's picture

BREAKING AA EARNINGS REPORT LEAK: "The birds are singing... little children are happy... the skies are sunny and blue... babies are cooing... peace is in the world... buy... buy... buy!"

That might as well be in the report since whatever it says, the idiots will BUY, BUY, BUY!

Carina's picture

Revenue down 33% yoy and capital expenditures on track to be reduced 50% - GREEN SHOOTS!

Bearish Spirits's picture

They beat in positive territory!  Green shoots!  Don't ask questions about how they did it.  Weak dollar?  China stockpiling?  Job cuts?  Doesn't matter.  Dow +200 and party on...

Anonymous's picture

Yes, but the eyes are on QoQ revenue numbers, and Alcoa's revenue improved in Q3 compared to Q2. Bam! Oxidizer is in the line.

This earnings season is going to be bullish, but I would not suggest that you can expect to milk an uptrend in indexes for the duration of this season. You have to bear in mind that much of the possible positive has already been priced in, but that hardly means that the market P/E can't go up from here, given the liquidity and (tentatively) positive general sentiment (excluding my perspicacious self). Also bear in mind that the Treasury element of QE is wrapping-up this month. True, the GSE/MBS portion will continue through Springtime, but that element of QE is not 'cash neutral' like Treasury purchases. MBS purchases will act to depress mortgage rates, but they will not add liquidity to equity assets in the direct manner Federal Reserve Treasury purchases have done.

Thin, thin ice below DXY 76, as over-the-horizon ruminations begin to gnaw within restless noggins on pillows in the darkness.

Inflation? Of the fleeting asset-related sort, yes. But, more broadly, concerns of excess bank reserves fueling inflation are not well-founded. Banks are keeping that to themselves as they brace for continued RE loan losses, etcetera, etcetera, etcetera.

Anonymous's picture

Check out the volume and price run up 30 minutes before the close. Lots of lucky guesses??????

alien-IQ's picture

From Alcoa earnings release. What most stuck out for me:

"Revenues for the first nine months of 2009 were $13.0 billion, compared to $21.2billion in the first nine months of 2008. Income from continuing operations for the first nine months of 2009 showed a loss of $719 million, or $0.78 per share,
compared with income of $1.2 billion, or $1.40 per share, in the first nine months of 2008. The nine months of 2009 showed a net loss of $874 million, or $0.95 per share, compared to net income of $1.1 billion, or $1.35 per share, in the first nine months of 2008. "

In other words...YOY it was a train wreck. The stock should soar now.

bugs_'s picture

"Less Worse" has been supplanted by "Surprisingly

not awfull".

Whizbang's picture

Leading to our new term: Suprisingly not as worser.

Anonymous's picture

What was truly awful with Alcoa numbers was volume shipped, which was down nearly 5 % compared to Q2. The only reason bottom lined improved quarter on quarter were higher prices and cost cutting.

Moreover, the reduction in volume of aluminum shipped is also an indicator that the GDP may not have improved as much in Q3 as economists expect.

Icarus's picture

Not the only reasons: You forgot their -22.4% effective tax rate in Q3.

reading's picture

Nobody cares why.  I am officially converted.  Tomorrow I will buy every piece of *hit stock I can find and never think about it again.  They all say it.  The market will not go down, not ever too many managers chasing performance.  Y-o-Y be damned it's time to go all in...


Finally, a captcha question that didn't require a calculator

Anonymous's picture

So they are close to losing money with every trade, but their trade volume is falling?

what a bargain!

Anonymous's picture

Staggering vols pre announcement but I presume ZH you are investigating that with extreme fine tooth comb unlike other public bodies that sit on the fence for years

Keep up the good work... we NEED you!

Anonymous's picture

I have been sitting on quite a bit of aluminum for well over a year now.

I was a bit upset of the actions from China last year when Aluminum prices started sky rocketing.

China ramped up new production to get in on the profits,which had drove down aluminum prices for months.
Though they are starting to recover due to the vast majority of aluminum stocks right now are being stored by investor's and aren't committed to buyer's at this point.

It's sort of a sock it back atcha deal towards China.
Letem produce new aluminum at a higher energy cost(than for recycled aluminum) China started making huge production decreases because of expenses,now prices are recovering though demand may still be down from high end industries such as cars it will come back around.

Aluminum usually spikes a few times in a decade,it's hit once in a really good way,so maybe China learned something last time around.

Jacking up production isn't the smartest thing in the world,stability is.

When it went down to late 80's and mid 90's prices in the latter millenium it's very sad.

All I know is that I'm willing to simply keep sitting on it until fair prices are reached.