VERSACE: Worries of 2012 carry into earnings season

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ANALYSIS/OPINION:

We’re only a few weeks into 2013 and a number of concerns that held out attention last year are still commanding attention as we head into the gauntlet that is corporate earnings season.

Normally, the earnings season is a challenging one as traders and investors look to cross-check company performance and expectations. This time of year, it’s even more challenging because companies tend to issue a 12-month outlook. For example, when aluminum company Alcoa Inc. reported its December quarterly results, the management also projected that global aluminum demand would rise 7 percent in 2013, a little stronger than the 6 percent growth recorded in 2012.

With that in hand, many are trying to decipher where the company’s upside is coming from. That means looking at not only the industries served by the aluminum industry but also at corroborating indicators. What, for example, is the outlook for other metals? One that has a bright outlook in 2013 is copper. First, the economic rebound under way in China and several other emerging markets — Brazil, Vietnam and Indonesia among them — bodes well for incremental copper demand growth.

Second, domestic copper consumption looks to rise in 2013 given the rebound in both the housing and automotive industries. The National Association of Home Builders expects total housing starts to reach 932,000 in 2013, up from 774,000 in 2012 and 554,000 in 2009. This week’s 954,000 housing starts figure for December 2012 — 12.1 percent higher than November’s annual rate and nearly double the recession low of April 2009 — lends credence to the NAHB’s 2013 forecast. Turning to the automotive market, U.S. auto sales are now expected to reach 15.3 million units in 2013, up from 14.4 million in 2012, before they climb to 16 million in 2014, according to forecasting firm R.L. Polk & Co.

While it may be surprising to some, the average single-family home contains 450 pounds of copper. The average car contains 0.9 miles of copper wire, with the total amount of copper per vehicle ranging from 44 pounds in small cars to nearly 100 pounds in luxury and hybrid vehicles. Combine the copper content with the rebounding markets that consume copper and you have some of the reasons why I recently recommended the shares of Freeport-McMoRan Copper & Gold in my investing newsletter.

But it’s not all sugar and spice for 2013.

There are a number of headwinds that investors and the stock market need to contend with. At least for the near term, political wrangling will continue over the federal debt ceiling, even though according to the USDebtClock.org website, the country’s gross debt to GDP ratio stands at 105.8 percent. The last time we heard of a country’s gross debt to GDP reaching 105 percent, it was Greece.

The looming debt ceiling debate has reignited the dialogue on spending cuts and higher taxes. Over the last few weeks, ordinary Americans have opened their paychecks and found fewer dollars compared to just a few weeks ago, due to the expiration of payroll tax “holiday.” According to the Social Security Administration, the national average wage in 2011 was $42,979.61, and that incremental 2 percentage point tax translates to $72 less each month.

While that figure may not sound like a lot, we have to remember that consumer disposable income was already under pressure in 2012 and costs for other products, such as gas and food, are on the rise. In recent weeks, we’ve seen prices at the gas pump start to climb higher and, should the global economy rebound catch fire, odds are gas prices will climb further. Food prices are an issue and owing to the 2012 summer drought, they will continue to be a burden on the consumer’s wallet. Taken together, it’s hard to see a vibrant consumer sector in the near term.

With the consumer driving a significant part of the domestic economy, any pullback in spending could keep the domestic economy in a slow-growth gear.

Chris Versace is the editor of the PowerTrend Profits newsletter and ETF PowerTrader, as well as the host of PowerTalk. Visit them at ChrisVersace.com or follow him on Twitter at @_ChrisVersace.

About the Author
Chris Versace

Chris Versace

Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...

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