10/8/2012
By David Silver, Research Analyst

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It is one of our favorite times of the year, and lucky us, it happens four times throughout the year.  This marks the unofficial beginning of earnings season, with Alcoa (AA) leading the way tomorrow after the bell.  The aluminum giant is expected to report earnings of $0.01 per share, which is down from the $0.12 that was projected three months ago.  The stock has actually beat the Street in the past two quarters and came in line with expectations during the December quarter of 2011. Alcoa still provides the building blocks for many industries around the world; auto manufacturers, beverages, and airlines, but it doesn't hold the clout it used to.

Alcoa had previously been looked upon as a bellwether, not just for how earnings season would proceed, but also for the economy as a whole. Internal mishaps and some mismanagement forced Alcoa out of that bellwether role.  This week, JP Morgan (JPM), Costco (COST), Yum Brands (YUM) and Wells Fargo (WFC) all report earnings, it will be these companies that have a wider reaching effect.  YUM reports on Tuesday with Alcoa, and the Street expects earnings to climb 17% to 97 cents per share, with revenue up 11.3% to $3.64 billion. The big question here is China; Nike (NKE) was pressured last month because of a lackluster international result.  YUM got a shout out from David Einhorn, but it all boils down to China.  Next up is Costco, which reports on Wednesday.  COST has been one of the best performing stocks in the retail sector. Finally, to end the week, JPM and WFC will give a look into financials and the housing market.  I personally like to see individual companies (not government or trade group reports) for the true health of an industry. 

The economic data has been relatively weak, and even with QEfinity a significant bounce is unexpected.  The question is, have expectations come down far enough to make another easy hurdle for companies to jump over?  Stocks are cheap by fundamental standards, but it now becomes about expectations.  Can management teams temper expectations while also appearing positive about a rebound?  This is the first quarter that the S&P is expected to see earnings decline (compared to the previous year) since the third quarter of 2009. The government sees the economy growing at 1.3%, but overall, analysts are expecting companies to see earnings decline. 

David Silver
Wall Street Strategies