What Was Today’s Key Take Away

Today, after the bell, Alcoa announced that its Q3 profits rose 40%
from the previous quarter. Although these results certainly bode well for
company shareholders, the numbers have wider implications for the overall US
economy and stock market. The reason is that a significant portion of Alcoa’s
profits came from higher commodity prices, which, in turn, confirms that the
run-up in industrial metals is indeed demand related. This also means that
pricing power is returning to corporate America, which should continue to help
earnings move higher in the months ahead. 

One of my favorite measures of industrial activity is the Journal of Commodities
(JOC) industrial metals index (which is comprised of
copper, nickel, zinc, aluminum and lead). Today, the index closed at a three-year high.
Although some of the strength can be attributed to a weaker US
dollar–commodities are US dollar denominated, and when the dollar weakens,
foreign buyers take advantage of higher purchasing power–the uptrend since last
year has remained intact despite oscillations in the greenback’s value.

This trend in the JOC index bodes well for
equities since, as Alcoa’s earnings confirm, it is a sign that industrial
activity is firming up– industrial metals are an integral component in the majority of
durable goods. And, demand for durable goods typically increases alongside
corporate profits, which makes sense since, companies usually invest in new
equipment to manufacture additional goods to meet increasing demand. As can be
seen in the charts below, there is a strong correlation between the JOC index and
forward earnings and the S&P 500.

Edward Allen