Bullish on Alcoa [AA]

I'm looking around at many factors and I see that inflation is starting to creep into things.  The rising interest rates are the canary in the coal mine and they are accompanied by what I believe to be the coming bottoming in metals after a large deflationary smack down.  Another way to look at this is via the stock charts of commodities producers.  Look at Alcoa's chart.  I think 2009 lows was a 3rd wave bottoming, that the subsequent bounce was wave 4 and now the chart is working out the 5th and final wave down.

The EW justification for this chart interpretation is twofold.  First, the move from 3 to 4 is a clear a-b-c retracement sequence, not a 1-2-3-4-5 impulse sequence.  So I do not think that the 2009 low was the end of a full 5 wave large scale move.  I think it was just a massive 3rd wave.  Also, look at the chart action now.  AA is clearly forming an ending diagonal.  Ending diagonals happen at the end of long trends and they suggest that a significant trend change is in the cards.   Finally, and this is not a done deal yet but the odds are quite high that it will work out like this, I see a failed 5th formation in progress that will result in a very bullish inclining double bottom.  In other words, red 5 will not likely be lower than red 3 was.

Alcoa is not an especially good company.  It is not especially smart or innovative or cost effective.  It's sort of a plodding commodities processor.  The only way for this chart to play out like I think it will is if we start seeing significant commodities price inflation.  In other words, Bernanke's feckless spending and years of exporting dollars to the rest of the world begins to come home to roost as others figure out how to conduct business without the USD as an intermediary.  It is baked into the global debt Ponzi scam that this will happen some day and the only question is the timing.  Bernanke recently talked about tapering and the market had a heart palpitation.  Imagine if he actually did anything along those lines!  It would likely result in a global depression.  The US isn't just propping up its own economy with funny money, it's propping up the whole global debt Ponzi.

It should also be noted that the past few years of smack down  in commodities shares has made AA stock a relative bargain (if you think that any shares have any value and if you think that traditional valuation metrics have any merit).  Several of the stats are in "Prechter Territory" as predicted by his book," Conquer The Crash":  At the current price of $7.86 per share, the forward PE is 11,  price to book is 0.62 (low!), price to sales is 0.35 (OUCH! That is low!).  In other words, the markets have priced Alcoa at what it is: a plodding commodities processor in a deflationary environment.  Couple that with large debt (nearly $9 bn) to cash (only $1.5bn) along with a pathetic 1.5% dividend and it's no wonder why the shares are this low.  But significant inflation will be a friend to Alcoa.  It means rising prices and it means paying back debt with devalued dollars.  Alcoa's recent earnings have been reflecting business improvement.  They were profitable last quarter and quarterly earnings increased 58.5% year over year.  It is no coincidence that solar bottomed recently.  They were always a canary in the inflation coal mine IMO.   Alcoa is about to make those who understand the cyclic nature of things a nice chunk of change.

Aluminum is so ingrained into our society that we need Alcoa.  At today's price and with that ending diagonal chart in place, I think it is a very good buy today with the intent to hold for the next 2-5 years.