Gathering New Information about Stocks, Health, and Sports

          With the big aluminum giant ready to report earnings on the 10th of October, Alcoa (AA) hopes to bring favorable numbers to a company that should indicate how the Dow Jones should be behaving and whether the recent rally is true or not. The problem concerning Alcoa however is how the futures market has been reacting over the previous month or so. Possibly, the commodity of aluminum is not affected as other future trading products such as oil or natural gas, but nonetheless aluminum over the past six months has been falling relative to its high prices a few months ago.
         The theory I propose of the equity market in relation to the commodity market can be attributed to how the prices of certain commodities affect the economy. When prices of commodities such as zinc, copper, nickel, or aluminum go down, there becomes a serious issue of the simple theory of supply and demand. The reason for this drop should be attributed to the availability of products remaining in the market centered on that commodity. When you are given times when unemployment seems to have reached its lowest point and layoffs are inevitable coupled with the fact that demand side inflation has pressured prices to extreme levels resulting in unfavorable desires to purchase such products, trouble seems to bloom. It’s true that decreases in the price of oil may negate some of this negative consumerism, but once oil prices are restored back to its original prices due to inventory cuts or a cold winter season, there should be a tremendous effect upon production, prices, and eventually earning reports for commodity based companies.
         Some investors may read such a sentiment and argue that when commodity prices fall, there should be a positive relationship for producers who incorporate such commodities. While such an argument is favorable, I see a different kind of relationship between the two variables where commodity prices are dependent upon companies rather the opposite way. My evidence for such a sentiment can be attributed to the recent recession the United States had a few years ago. During this time shares of Alcoa fell nearly 50% when aluminum prices where not at their best marks. However following the recession, Alcoa regained that 50% loss into a 100% gain following strong economic growth and higher prices. Higher prices not only were attributed to marketers of the corporation but higher prices of aluminum as well. As more consumers obtaine jobs and desire more products designated around aluminum, commodity prices of such a natural resource rose almost a proportional 100% signaling the economy was strong do to higher demand for commodities.
         Such a correlation looks to extend today with prices of aluminum trending towards the downside. With a sideways movement of Alcoa over the past few months due to poor fundamentals and unfavorable economic data recently, look for a trend to appear with Alcoa shares looking at the downside. The results may not be apparent in Alcoa’s results this quarter due to a lag factor, but in the next coming months look for Alcoa shares to drop because of a decrease in the desire for commodities which should have a negative affect for shareholders of this Dow component.

-Dennis Biray
October 7th, 2006