An L-Shaped of a Recovery

Macro Man was pleased to receive plenty of kind feedback on yesterday’s little hip-hop effort, though somewhat chagrined to see that “California Love” is apparently now considered “old school.” Speaking of old school, “Going Back to Cali” was suggested as an alternative source of inspiration…..hmmmmm…..I don’t think so.

Anyhow, we finally started to get some signal yesterday with the release of Alcoa’s earnings after the close last night, which apparently means the return of sweetness and light. True, Alcoa’s earnings losses were somewhat smaller than expected, which, for an aluminum producer like AA, might appear to have implications for the global economy.

At the risk of facing accusations of viewing the world through blood-tinted spectacles, Macro Man is skeptical. Last quarter saw an unprecedented action from the Chinese to support ally prices via unprecedented import activity. The chances of a repeat performance would appear sketchy. Moreover, even with this demand and price boost rom China (presumably to keep Chinalco afloat), Alcoa’s revenues barely budged….even though Q2 is seasonally their strongest revenue quarter. In fact, y/y revenues actually fell from 40% in Q1 to 44% in Q2.

So it would seem that the vast bulk of the surprisingly small losses was down to cost-cutting, a fact apparently confirmed in last night’s statement. So you’ll have to pardon Macro Man if he views Alcoa’s “triumph” as a micro issue, not a macro one. From his perspective, that revenue curve looks decidedly L-shaped.

(edit: Alcoa lost $142 in shutting money-losing operations, which has somehow been magically wiped from the headline EPS figure. If you add that back in, the actual loss per share was worse than expected. If only Macro Man could wipe the losses from closed, unprofitable trades from his headline P/L, this job would be a helluva lot easier….)

Earlier in the day yesterday, European asset markets were impacted by a “massive” rise in German industrial production (3.7% m/m), which comfortably exceeded expectations. While that certainly confirms the end of the production free-fall, it hardly suggests an imminent growth phase. Indeed, an index of the actual IP index shows a) that the May blip barely registers, and b) that up and down changes in monthly production are the norm.

A stabilization in demand, which appears to be the new bullish theme, doesn’t actually imply growth of a V or a W shape. It actually implies an L…..which is hardly good news, and far from what is priced. It’s an interesting coincidence, but two banks yesterday presented Macro Man with research that Asian equities are pricing in an ISM reading of between 55 and 60. That’s a hell of a lot of good news (and growth) that is already in the price.

And despite today’s Alcoa-inspired bounce and skepticism from many quarters, the head and shoulders patterns in a number of markets continue to work. Given the optimism embedded in prices and Macro Man’s view on the likelihood of an L-shaped recovery, he looks for further downside in risk asset prices.

Finally, it’s worth noting that today sees an announcement from one of the few CBs in a tighter spot than the Fed….the Bank of England. Inflation has consistently exceeded expectations, and a prior raft of better-than-expected activity data has recently receded into sharp declines. Oh, and the fiscal situation is worse than that in the US, and administered by a government that’s now utterly bereft of credibility.

The market seems to ecpect a £25 billion extension of QE, with a risk that the BOE requests an increase in the size. Macro Man has no real view on the outcome, but it should make for interesting viewing. At the very least, it should take the market’s near-term focus away from West Coast rap….

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