Many analysts and commentators have used the quarterly results of Alcoa (NYSE:AA) in attempts to paint the economy as rosy and recovering. Freeport-McMoRan Copper & Gold (NYSE:FCX), on the other hand, should give us a more accurate measure, as aluminum prices reveal something different, as they remain low, indicating demand remains down.
Copper is a better indicator, as it spreads across a number of industries in a much large way, and in that regard Freeport will offer a more accurate picture of how the economy is going.
But what has to be taken into consideration, as in Alcoa, is the cost-cutting measures associated with quarterly results.
While these are good steps for a company to take, and should be aggressively attacked even in the best of economic conditions, they can give a false economic indicator if you're simply measuring it by earnings per share, which while good for investors and the company, do nothing to reveal the true condition of an economy.
Demand is the bottom line, along with supply, and that will be revealed by the price of any raw material. It's as simple as that.
So when companies and economic commentators throw around all their analysis and numbers, just look at one: the price of the commodity being talked about.
If copper prices rise, that means there is increased demand which supply is having a hard time keeping up with. That is what determines the actual economic conditions, not earnings per share, which can be increased through cost-cutting measures and selling off of assets, without demand for the actual raw material increasing.
So with Alcoa, their numbers weren't related to the increase in price of aluminum, and that shows demand is still down or there's too much supply That will be the same with copper in relationship to Freeport.
If Freeport has solid earnings per share, it's because of good management in cutting costs, not because the economic conditions are improving. That assumes the price of copper remains down.
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