What happens if things are getting better? What happens if the world's gaining momentum? That's what's we're starting to hear and few are listening. I know I am, though.
How about some evidence? I always tell you to listen to the Alcoa (AA) conference call because aluminum has so many uses and Alcoa's reach is so broad that you get a better read on the economy than any brokerage house is going to give you.
As I wrote last night, we got a remarkable picture of a world on the move. CEO Klaus Kleinfeld's always talking about the aluminization of autos, as aluminum becomes the go-to metal, replacing steel in many car parts, expected to be at 20%-a-year pace until 2020.
So we can stipulate that Kleinfeld knows cars and trucks of all kinds. His statements about autos in the U.S. were incredibly bullish, strong demand ahead just like we've had behind us.
Much more important, though, were his remarkable reads on trucks in Western Europe and China. For example, Europe's auto production is rising at 4%. Its auto exports are expected to increase 4.8% vs. 1.9% last year. Registrations are up 9.9% year to date. China's running hot. It's got a 5.2% production increase year over year and sales up 9.3% year over year, with -- get this -- a 34% increase in crossovers and SUVs. These are staggeringly good numbers, much better than anyone's talking about.
Trucks, which are a sure sign of commercial activity, are even better with registrations in Western Europe up 18.4% and production up 9.4% year to date. China? How about this? Truck sales are up 25% year over year and 14.1% year to date. Production's on the rise, up 25.8% year to date.
That's eye-popping. Is anyone even talking remotely about that kind of increase? The conference call got even better, as CFO William Oplinger noted: "Chinese demand growth at 6.5% is largely driven by Chinese government stimulus in the property market. However," he goes on to say, "we've also seen improved electrical use and strong demand in the transport and packaging sectors."
No wonder the Baltic Freight Index, which I use to gauge Chinese growth, has almost doubled in the last few months. No wonder the copper companies like Freeport McMoRan (FCX) have started acting better. No wonder the iron ore companies like Cliffs Natural Resources (CLF) or Vale (VALE) or Rio Tinto (RIO) have been moving up smartly. This good news explains the mystery behind the explosive move in one of the world's most shorted cyclicals, Caterpillar (CAT) , which now seems to be breaking out of the tight $70s range that's trapped it for four months. Emerson (EMR) and Eaton (ETN) are both on the move.
Oh, and in the last few days we've seen the stocks of the European automakers start to fly. That's fabulous news for two markets that are supposed to be on death's door, particularly for Europe where the banks are signaling a recession and the ridiculously low interest rates on government debt indicate the equivalent of a depression. Maybe the bonds are just plain wrong? Maybe interest rates should be higher and the banks are in better shape than we think except for those that were simply irresponsible? I think that could be the case and Brexit didn't do as much damage as we thought.
As good as the news on autos and trucks might be, the most spectacular forecasts were saved for aerospace. While it is true that there's a lull right now in orders, as there's some very big changeovers going on in engines and there's a softening of demand for wide-body jets, all of that should disappear in the second half of this year, Kleinfeld indicated on the call. Here's what matters: "We do see a very robust commercial jet order book, over nine years of production, solid airline fundamentals."
Kleinfeld looks at cancellation rates, which he said stand at 0.6%, lower than last year, indicating the lull is indeed temporary, and then he forecast double-digit growth in 2017. That's amazing. No wonder General Electric (GE) , Honeywell (HON) and United Technologies (UTX) keep hitting records. It's right, they should be. (General Electric is part of TheStreet's Action Alerts PLUS portfolio.)
Needless to say, Alcoa is splitting into two companies later this year. Until last night's numbers, I figured you keep the highly valued segment, the one that makes all those airline and auto parts, and you sell the pure commodity biz. But with this kind of strength, including the news that China's in short supply of bauxite, which Alcoa produces more of than any entity in the world, I think you buy the stock and hold on to both pieces!
What else could be better than expected?
Last night, I talked about how it would be very difficult to have a continuously stronger market without airline participation. Right on cue this morning, United Continental (UAL) announced a stronger-than-expected passenger revenue number, which is a shocker because all we've seen for ages is numbers slashes. The result? This laggard group just soared today, a remarkable move, with United Continental advancing more than three points on the increase, American (AAL) rallying three points, too, and Delta (DAL) flying $1.74. Could the lull here be related to terrorist activity in Europe that, for the moment, fortunately seems to have died down? We've needed this group to have a rally. It's finally happening with the transports positively on fire!
Or how about the turnaround in the fortunes of the disk-drive companies? Last night, Seagate (STX) shocked people with a guide up in its forecast. This stock has been a one-way ticket to Hades. Sure, you could argue its guide up comes after multiple earnings and revenue slashes. But that's shortsighted. The fact is that average selling prices for disk drives, a real commodity, are going higher, not lower. That could mean a sign of decreased supply but it also has to be a signal of increasing demand. Can you imagine if demand for devices turned? That could impact an awful lot of stocks.
Finally, there's oil. As I have said, I don't think the oil market's calling the tune anymore. But it sure helps that, once again, the market roughly held the $45 level. That's allowing for monster runs in the whole group, which never really sold down during last week's dip. You've made fortunes if you bought any of the secondaries from the bedraggled oil companies and you've done terrifically in natural gas.
However, what really matters to me is that we are headed into bank earnings season and we seem to forget that it wasn't just the net interest margin decline that has been hurting these financials. It's the resumption of bad loans, the possibility that they are on the hook for tens of billions of dollars in bad loans and won't be able to return more capital in the form of buybacks and dividends.
Ever since banks reported, oil has almost doubled. Every time oil nears $50, many oil companies sell oil in the futures market to raise cash. Any bank that wanted to cash out on its loans has had ample opportunity. This huge worry that had everyone on edge just a few months ago no longer has the negative stigma that hurt the banking group so badly. Sure, it would be much better for these companies if the Fed raised rates, but strong employment growth and a lack of new bad loans is a pretty strong combination for a very cheap group.
Now I know that we will have plenty of people who will say, oh Jim, come on, it's another fake-out. Others might say it's all propped up by central banks. I say the low interest rates at last might be working and China and Europe might be joining the U.S. in some decent growth. It's something that would be entirely unexpected, and even as it no doubt will lead people to conclude the Fed has to raise rates soon, the fact is that Alcoa has started this earnings season not with a whimper, but with a bang, and maybe that's what this big move in stocks is really signaling.
