Potential fundamental driver of Alcoa's stock bottoming. [AA]

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I've been posting quite a bit of info and chart analysis on individual stocks of late.  This is simply because I currently find it entertaining to do so right now as opposed to so many posts being about all the signs of the coming collapse of the debt Ponzi.  I think there is still a lot of risk there but I also think people are no longer completely unaware of the danger and of the massive corruption and constitutional oversteps being made by our government in order to keep the Ponzi plate spinning a bit longer (and make no mistake, that is the one and only reason for all of the security, etc.).  I'll stop well short of saying "my work is done" but in fact a lot of the things I have been writing for the past 6 years (including private emails before the start of this blog) have now shown themselves to be reality.  So at this point I think either people have already "gotten it" or they never will until it slaps them in the face.  In any case, I enjoy charting stocks so I will likely be doing more of it in these pages.

Having said that, it's my view that stocks are highly speculative in general and worthless on an individual basis unless they:

• pay a dividend which represents a "fair" return on your money (i.e. something more than the real rate of inflation in order to compensate you for the potential of fraud, acts of God, etc. that can happen to any company).
• are not highly indebted with no path to earning their way out of it.
• provide some important value to the economy.
• the companies they represent have some fundamental reason why they will be continuing to provide increased perceived value going forward.
• are supported by businesses that have fundamental tail winds instead of fundamental headwinds.

Of these, the last one is potentially the most nebulous so I will use the example of Intel Corporation.  Early on, Intel's products were easy enough to manufacture cost effectively that my insider contacts at Intel have commented that Andy Grove used to boast that it was like "printing $20 bills".  While the technology was very complex, once you got it right computer chip manufacturing lent itself very nicely to cost effective mass production.  Part of this was because the technology at the time was so new that advances (mainly the shrinking of die size) were not difficult to envision or impossible to implement.  Also, expectations were low at the time and the demand was high (and growing rapidly).  Chip fabrication plants used to cost $1 billion.  Intel had a huge tailwind such that Intel's Gordon Moore could confidently predict a doubling of transistors per area every 18 months.  It worked out so well for him that it was dubbed "Moore's Law".

Fast forward to today.  Intel is coming up against fundamental physics in terms of gate thickness and feature size that the cost of its next generation fabrication plants are rising exponentially.  At the same time, most customers are already happy with a 2.0-3.0 GHz computer for doing most of thing things that are commonly done with them.  There will come a time when people again start caring (meaning "willing to pay up for") big steps up in processing power but we are now in a consolidation period and perhaps the next big step up uses a completely different computer architecture (like IBM's new AI chip that forms neural networks that mimic human brain structure).  I like to think of it as the "Watsonification" of humanity - a time where computers will be smarter than humans.  In any case, Intel no longer has it easy.  The tail wind has collapsed and could even be turning into a headwind in the form of rising manufacturing costs.

And so now back to Alcoa Aluminum.  Few people ever look at the very long term charts but for me they are very telling.  Observe AA's all time chart below.  What you see is the telltale chart of a monster bubble.  I stop short of calling it a mania because there is a huge difference between a bubble

and a mania IMO.  A bubble is where something of very important value becomes ridiculously overvalued and then comes back down to Earth over time.  With a bubble, the underlying asset always had good value, it was just that the markets were allowed to overvalue it massively (usually as a result of the use of debt).  If the asset underlying a bubble were to completely die off and not be available to the public anymore, it would cause great disruption in the economy.  So the asset would either be bought out or somehow put back into service with a lower cost structure minus the debt.

A mania is similar to a bubble in many ways which is why most people equate them.  But they differ in one very significant way: the asset underlying a mania does not have any real value to society or to the economy.  With a mania, the ending price always falls below the starting price.  Tulips were clearly a mania in the 1600s.  They are so unimportant to society and to the economy today that most people have never held a tulip bulb in their hand and many have never seen one in person.  Pet rocks are the same thing.  Manias are nothing but hype that has been piled onto a vapor and thus once they collapse they cannot be reblown.

Bubbles, however, can be reblown because circumstances change and a new spin of an old story can be made up and sold to people.   Look at the roller coaster ride of Advanced Micro Devices and of Netflix and many others.  The market has great difficulty valuing these assets for whatever reasons but they continue to operate through the low because they do have underlying real value to the people (that is to say, to the market).

In the case of Alcoa Aluminum, the massive stock price value rise from 1980 to 2000 was clearly a bubble.  Look at the exponential climb of the share price during that time!  Everyone got herded into 401ks and 401ks got invested in commodity producers like Alcoa.  Now that the air has been let out of the shares and an ending diagonal is forming (and might well already have bottomed), most of the speculation is out of the shares and profits are starting to grow.  Inflation will be a tail wind to an indebted commodities refiner like Alcoa.  Another big tail wind that I just found out about is Ford's plans to make 2015 F150 truck frames out of aluminum.  This change will result in a 700 lb reduction in vehicle weight. 

Coupled with other improvements in order to meet 2020 government mandated fuel economy requirements and the result will be a 25% increase in MPG.  With high fuel costs this is what is needed in order to drive truck sales going forward.  Ford sells more trucks than anyone and Ford did not BK during the great recession.   Once Ford transitions to aluminum frames, everyone else will have to as well.  That's a huge tailwind for Alcoa.  Keep in mind that 2015 really means "for sale in early 2014" in the truck industry and the stock market is forward looking.  The AA chart seems to be bottoming right now as it factors in big revenue increases and probably big dividend increases going forward for AA.  I think the chart pattern and the fundamental tail winds of the coming inflation and the need for more efficient vehicles make AA worth a very close look for those looking for a longer term buy and hold.