Alcoa Inc. (NYSE: AA) is going to be a case study for how strange this new earnings season is going to be.  The company is not describing a recession.  It is also describing a period of extreme choppiness, and choppiness that is not coming to a rapid end tomorrow.  The company missed earnings expectations and it (of course) blamed a signficant deterioration of the European markets. 

Alcoa’s earnings were $0.15 EPS versus $0.22 EPS expected from Thomson Reuters.  This is $172 million in income from continuing operations, which is up 182% from a year ago (Q3-2010) and down 27$ from the sequential quarter before (Q2-2011).

Revenues were also up 21% from a year ago to $6.42 billion, but this is a sequential decline as well by 3%.  Alcoa generated $489 million in cash from operations and its cash on hand is now $1.3 billion.

Again, it is Europe that was given most of the blame.  We have seen comments from Alcoa and other market participants that aluminum prices have fallen precipitously.  The company claims that most markets continued to grow despite the weakening alumina prices during the quarter.

Alcoa is still (another ‘of course’) maintaining that the aluminum market will double in size by 2020 and it noted that its 12% growth for 2011 will have a slower pace in the second half.  Surely, we knew that by now.  The company even called itself “well prepared for whatever lies ahead” and called itself a “confident company in a nervous world.”

What is interesting is that China was mostly talked up rather than down.  The Aerospace segment is called having an eight-year backlog and the trend of auto regulations causing lighter cars is making that sector strong.  Demand for aluminum cans in Europe, China, and the Middle East is also offsetting flat to declining markets in the United States.  Europe and the United States are keeping a cap on building and construction growth with China’s non-residential strength offsetting weakness.

Alcoa has given no formal guidance.  The company is not describing a recession and that is important.  It is equally important that it is describing a market that is slow enough that it may look and feel recessionary to many.  The bias looks exactly within our expectations: A CHOPPY EARNINGS SEASON IS COMING!  If you have seen the headlines over the last sixty days, it feels obvious.

The stock closed up 2% at $10.30 today, but the 52-week range was $8.45 to $18.47 and its stock has bounced from under $9.00 in just the last few trading sessions.  To show just how bad things have been right before the last huge bounce, Alcoa was above $16.00 just three months ago.

We do not believe for a moment that anyone should have expected this $0.22 estimate to have been met nor can we be surprised about any of the mixed comments pointing to a low-growth or even no-growth market.  The earnings estimate was $0.26 EPS a week ago and $0.29 EPS a month ago.

The after-hours reaction has shares down over 4% at $9.87 but it is genuinely difficult to stomach that investors were really expecting much more on the side of good news.

We have long said that the markets have lost their ability to find equilibrium.  Tee efficient market theory is dead.

In after-hours sympathy, shares of Century Aluminum Co. (NASDAQ: CENX) are down over 4% after rising 3.5% on the day.

JON C. OGG

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