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(B)(N) AA Alcoa Incorporated

July 9, 2013

Drama. The “earnings season” is upon us again and Alcoa Incorporated stepped up to the plate yesterday and despite its valiant efforts at re-structuring and re-focusing its business (The Associated Press, July 8, 2013, Weighed down by restructuring costs, Alcoa posts $119 million 2Q loss, still tops expectations) and powerful prognostications of a brilliant future merely delayed (The Street, July 8 2013, Cramer: Yes, Alcoa Remains a Bellwether), the market has dropped the price of the stock by minus (5%) from $8.30 two weeks ago to $7.90 today and one doesn’t really see what would stop it from re-testing the annual low of $7.60 or less in the future. Please see Exhibit 1 below.

The Well-behaved Capital Market
Courtesy: Envato

Moreover, all of this “excitement” creates enormous volumes in the stock as 10 million to 50 million shares have changed hands on many days in the past month, depending on the “news” or “rumour” of the hour that shapes it and creates a striking force.

It’s also noteworthy that the company that’s trading for $7.90, today, and a market value of $8 billion, is almost exactly the same company that was trading for $17 and a market value of $18 billion two years ago.

And then, of course, there’s the Alcoa Incorporated that was trading for $40 in May of 2008 and $10 by December, and $5 by March thereafter.

In contrast, our concern is not what was (volatility) or what will be (earnings) but what is and the only price that is, is the price of risk, or Risk Price (SF), which is currently $12 and slowly declining. Please see Exhibit 1 below.

We know that when the stock price is trading at or above the price of risk, then “risk seeking” investors are willing to hold the stock at that price, or higher, because they think that it is more likely to go up than down, or be “worth” more, than less; and “risk averse” investors are willing to hold the stock at or above the price of risk because they think that the stock price is unlikely to go lower, and more likely to gain in value rather than lose in value. For information on the theory, please see our Posts, The Price of Risk, August 2012, and The Nash Equilibrium & Its Stock Price, October 2012.

It’s a subtle distinction and not measurable at the brute force level of volatility (by the numbers) or earnings response which are (obviously) after the fact and too late for most investors, and have no provable connection with investment success (although one can make a few bucks now and then, and the issue becomes one of keeping it).

On the other hand, the price of risk is a plausible (or defensible) takeover price, so that for $12 per share (a +50% premium to the current stock price), or $12 billion in cash, we ought to be able to buy this company, and take it off the market, from which it obtains no benefit in any case.

Exhibit 1: (B)(N) AA Alcoa Incorporated – Risk Price Chart

(B)(N) AA Alcoa Incorporated - July 2013

(B)(N) AA Alcoa Incorporated – July 2013

Alcoa Incorporated produces and manages primary aluminum, fabricated aluminum, and alumina combined and participates in mining, refining, smelting, fabricating, and recycling. Its products are used in aircraft, automobiles, packaging & defense, among others.

(Please Click on the Chart to make it larger if required.)

From the Company: Alcoa Incorporated engages in the production and management of primary aluminum, fabricated aluminum, and alumina. The company operates in four segments: Alumina, Primary Metals, Global Rolled Products, and Engineered Products and Solutions. The Alumina segment engages in mining of bauxite, which is then refined into alumina. The Primary Metals segment produces aluminum. The Global Rolled Products segment engages in the production and sale of aluminum plate, sheet, and foil. The Engineered Products and Solutions segment produces and sells titanium, aluminum, and super alloy investment castings, forgings and fasteners, aluminum wheels, integrated aluminum structural systems, and architectural extrusions, as well as hard alloy extrusions. Its products are used in aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications. The company has operations primarily in the United States, Australia, Spain, Brazil, the Netherlands, Norway, France, the Russian Federation, Hungary, Italy, the United Kingdom, China, and Germany. Alcoa Incorporated was founded in 1888, has 61,000 employees, and is based in New York, New York.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2006) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks. Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™“
Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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