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Recession round-up

Trust me, it’ll make you stronger in the long run.

Durable goods orders decline

The 2.6 percent drop was worse than economists had forecast, a Commerce Department report showed today in Washington. Excluding automobiles and aircraft, orders decreased 3.6 percent, also more than anticipated. The Labor Department said separately that the number of Americans collecting jobless benefits soared to a record 4.776 million.

Today’s reports reflect efforts by companies from General Motors Corp. to Caterpillar Inc. to downsize amid a pullback in both domestic spending and demand from overseas. The Federal Reserve yesterday warned that a prolonged global downturn may push the U.S. to the brink of deflation.

“Economic Tsunami” for job seekers

In all, more than 11 million U.S. workers are unemployed, a 48 percent jump from a year ago.

The numbers translate to roughly four job seekers for every one job opening in the United States, according to Heidi Shierholz, an economist at the Economic Policy Institute, a Washington-based think tank.

The grim job picture cuts across nearly every sector, she said. “There are literally millions of workers unemployed with no hope of finding a new job,” she said.

Time magazine checks in on how things are going in Peoria:

Many in Peoria are preparing for the worst. Pierre Serafin, co-owner of UFS, a discount store here, says customer foot traffic has remained steady, although average sales are down 10% from a year ago. Because fewer people are buying homes, there’s less of a need for appliances. The handful of folks buying refrigerators are trading down from stainless steel to the less expensive “stainless mist,” which, Serafin says, “looks almost like stainless steel.”

How many other P-town natives remember when that store was called Unclaimed Freight?

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Tom Mangan posted at 9:26 am January 29th, 2009 |

Bleak outlook for construction and heavy equipment

ENR.com reports that industrial firms are writing off 2009 and hoping for better days next year.

“I think any kind of turnaround is going to be slow,” says Rich Carlson, vice president of Minnesota-based Carlson Tractor and Equipment Co. His company had a poor 2008, and 2009 is not looking so good, either. “I think the hope is that it doesn’t get any worse,” he adds.

Gerry Couch, president of King of Prussia, Pa.-based Modern Equipment Sales and Rental, is supportive of the proposed stimulus package but has questions about how it will be implemented. “I do believe [the stimulus] will make a difference, but not in 2009,” he says.

Meanwhile, Bloomberg foresees an ugly Monday when Caterpillar reports its earnings. Between the lines you can read a suggestion that Cat’s GDP forecast from the third quarter was a bit optimistic.

Caterpillar Chief Executive Officer Jim Owens, who holds a Ph.D in economics from North Carolina State University, suggested he may update the company’s economic forecast next week that he gave in October. Owens gave a tentative estimate of less than 2.5 percent gross domestic product growth for 2009, according to the company’s third-quarter earnings release.

“The first two quarters are going to be rough,” said Bill Batcheller, who helps manage $650 million in assets, including Deere and Caterpillar shares, at Butler Wick & Co. in Youngstown, Ohio.

“Still, if Caterpillar sticks with the 2.5 percent estimate they gave for GDP growth, that implies they expect a really strong second half,” Batcheller said.

It’s going to be fun Monday: either Cat surprises to the upside and squashes all the short sellers, or surprises to the downside and squashes everybody else. Or a third option: Cat successfully manages Wall Street’s expectations better than those poor blighters at CNH, whose stock got blasted by over a third yesterday, and not much happens and we keep muddling along. The latter will be the least sexy of the bunch, but might be preferable to the whiplash collars the other results induce.

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Tom Mangan posted at 10:02 am January 23rd, 2009 |

Slight uptick in construction spending in October

Reuters reports that while the construction outlook in December was butt-ugly, it wasn’t quite as bad as it was in November.

The Architecture Billings Index rose to 36.4 in December, from 34.7 in November, according to the American Institute of Architects. Any reading below 50 indicates a decline in billings.

All the industry sectors tracked by the group remained below 50, as did all four of the geographic regions. A measure of inquiries for new projects fell to 37.7, a historic low.

“The inability to get financing for construction projects is a key reason that business conditions continue to be so poor at design firms,” AIA chief economist Kermit Baker said in a statement.

Note that while the plunge in mortgage rates caused a tidal wave of applications, I’m told over half of them are being rejected.

As yesterday’s sell-off demonstrated, the credit crises has not gone away.

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Tom Mangan posted at 6:47 am January 21st, 2009 |

Sector-by-sector breakdown of Democrats’ stimulus plan

Engineering News/Record has perhaps more than you’ll ever need to know about the stimulus plan (considering it’s final form will look like a pancake run through a meat grinder after Congress gets done with it). Lots of digging and scraping happening there, but also:

Native American housing block grants, repairs, rehabilitation, $500 million

Bureau of Indian Affairs, infrastructure (schools, dams, roads, detention and law enforcement facilities) $500 million

Indian Health Service, facilities $550 million

Hmm, do I detect a whiff of Indian casino contributions?

And then there’s

Home weatherization assistance $6.2 billion

National Park Service infrastructure maintenance $1.7 billion

NIH campus modernization, $500 million

I wish my 20 years of observing the wheels of government in motion gave me more confidence that these billions will be spent wisely.

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Tom Mangan posted at 11:03 pm January 20th, 2009 |

Must read: Warren Buffet on our economy’s Pearl Harbor, and Barack Obama’s fitness for duty

CNBC provides a transcript of a conversation between Warren Buffet and Tom Brokaw. Choice excerpts, in case you missed it on TV:

BROKAW:

Is Barack Obama the right commander in chief for the economy?

BUFFETT:

He’s the absolute right commander in chief. That– you know, that’s another thing the American people seem to do, occasionally, is that we elect people that are right for the times. You know, whether it was Lincoln, Roosevelt. And– and I would say Obama– you– you couldn’t have– anybody better in charge.

BROKAW:

But why is he right for the times?

BUFFETT:

Well, he’s– he– he’s smart, he’s got the right values, but he also– he understands economics very well. He’s cool. He’s– he’s– he’s analytical. But then, when he gets it all thought through, and he’s fast– he can convey to American– the American people what needs to be done. Not to expect miracles. That it’s gonna take time. But that we’re gonna get to the other end. And– and I– I– I don’t think there’s anybody better for the job than– than– the president-elect.

BROKAW:

Do you think that the American taxpayer, or the American consumer, will have learned anything about proportion as a result of this experience? Because we have been on a binge.

BUFFETT:

Yeah, we’ve been on a binge.

BROKAW:

And I count myself on that by the way.

BUFFETT:

Yeah, well– well, you look like a guy that’s been on a binge, actually. (LAUGHTER) No, I think– the– most people won’t. But some institutions will. And– and some will learn it whether they want to or not. But– but the– most people have a propensity to spend what they– what they make and maybe a little more.

And– and the trouble is they– they’ve had a friendly bartender, you know, in– in terms of this binge. And I think– I think the bartender is going to, been sobered up materially. And some of the rules about how many drinks he can serve and all of that– (LAUGHTER) will be tightened up somewhat.

So I– I– I do not think we will see a repeat of the factors that led to this soon. We will see bubbles though again in the future. Human nature, you know, greed and fear will keep– continue to exist. And– and– and we will have other bubbles, and they won’t be exactly like this one. But they won’t– you won’t see this particular type repeated for quite a while.

Let us hope.

Reading a transcript is a bit choppy but it’s worth slogging your way through.

(Hat tip to Paul Kedrosky’s Infectious Greed for the link)

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Tom Mangan posted at 10:45 am January 19th, 2009 |

Overview of proposed economic stimulus package

Zacks Investment Research offers a detailed overview of the stimulus package introduced last week. It covers the expected “Caterpillar will benefit” angle but also explores a raft of other ways the money will be spent. I liked this part:

Aid to Those Hit Hardest – $106 Billion:

This includes $43 billion for extended unemployment benefits, $39 billion to help those laid off keep their COBRA health benefits, $20 billion to increase food stamps and $4 billion to increase some social security benefits.

These sorts of expenditures are among the ones with the most ‘bang for the buck’ in terms of stimulating the economy. People who are really on the ropes financially are likely to spend the money quickly, which will increase the number of jobs in the economy.

Most econometric studies have found that these sorts of expenditures result in more than $1.50 of economic activity for every $1.00 spent. This is in addition to the obvious humanitarian benefits.

“Humanitarian benefits” rank as “nice to have” but far down on the priority list. Gotta love coverage written for the investor class.

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Tom Mangan posted at 9:22 am January 19th, 2009 |

Caterpillar’s infrastructure prospects, continued

Last week the market told us Caterpillar’s prospects for cashing in on infrastructure investments were overblown. Nevertheless, a lot of people of a more bullish bent think otherwise. A few examples:

  • Forbes: “Stocks like Caterpillar, which makes construction machinery and could benefit from a wave of new federal projects, will bear watching.” (This article offers a nice preview of the week to come, by the way).
  • Taipan Publishing Group: Have you ever seen the movie Brewster’s Millions? It’s a classic 80s comedy in which Richard Pryor, a minor league baseball player, has to blow 30 million dollars in thirty days – without telling anyone why – in order to inherit $300 million more from an eccentric relative. The use-it-or-lose-it provision made me think of Brewster’s Millions… perhaps updated here as Obama’s Trillions. In order to meet the stimulus-driven desires of Washington, the states are going to have to shovel this road-and-bridge cash out the door, pronto. You can almost hear the CEOs of the big construction companies doing a Homer Simpson: Woo-Hoo!” (Nice list of Cat’s companions in the scrum for Obama bucks)
  • TreeHugger: “A lot of this ethos of infrastructure-equals-jobs comes from the 1930s when you put a lot of guys to work digging ditches and shovelling gravel. And we don’t do that any more.” “You can’t just take unemployed people off the street and have them build roads and overpasses,” he said. Much new funding may well wind up being spent on new machinery rather than hiring, he added. “You might as well just send a cheque to Caterpillar in Illinois.” ” (Also at TreeHugger: Meet Ray LaHood, the Congressman from Caterpillar.“)
  • Architectural Record: “As drafted, the plan calls for roughly $550 billion in spending and $275 billion in tax cuts over two years. The plan would have a major impact on construction: By Engineering News-Record’s calculation, about $135 billion of the spending portion of the plan would go toward construction. Additionally, construction firms would benefit from the plan’s tax incentives, which includes an extension of a provision that allows small companies to write off the costs of equipment and other capital purchases in the year those items are purchased.” (Excellent overview of the Democrats’ stimulus package at this link)
  • Fairness obliges me to point out this note about a surge in the volume for Caterpillar put options last week. (Puts are an option to sell a stock at a certain price; they gain value as a stock falls because they theoretically allow a shareholder to sell a stock at an above-market price. Options also are immensely risky because there is always a strong chance of losing your entire bet).

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    Tom Mangan posted at 8:21 pm January 18th, 2009 |

    Wells Fargo Construction Forecast: Ugly

    Wells Fargo (my banker, incidentally) produced a nifty PDF outlining its annual survey of construction industry sentiment from the people actually doing the constructing. One of its nifty stats is its Optimism Quotient — which hit an all time low when the study was conducted in October/November 2008 in the midst of the worst market crash in 80 years.

    Since many more respondents see activity decreasing than increasing
    in 2009, the Wells Fargo Optimism Quotient (OQ) fell to its lowest level
    ever at 42 – down from 80 in last year’s Forecast and continuing a fouryear
    decline from its peak of 109 in 2005. The OQ is based on responses
    to questions about local construction activity for the coming year. This
    year’s lower score indicates that many fewer respondents think 2009
    construction activity will increase than think activity will decrease.

    Industry Leaders See Improvement (Far) Ahead

    While 2009 shapes up to be a challenging year, most contractors (73%)
    and equipment distributors (63%) who foresee a decrease in activity
    see a turnaround coming 12, 18 or 24 months from when the survey
    was taken in October and November 2008. The largest share of these
    distributors (28%) and contractors (29%) predict that improvement will
    come 12 months from now; 18% and 21% respectively see improvement
    18 months from now; and 20% of distributors and 28% of contractors
    anticipate a turnaround 24 months from now.

    The report notes that most survey participants expect to buy used equipment rather than new this year, but it also notes that most have old machines needing to replaced.

    Even with their 2009 acquisition plans, for the third year in a row
    contractors report that the average age of their principal equipment will
    increase. For the first time in our Forecast, contractors are using equipment
    that, on average, has been in service for more than a decade. The need to
    eventually replace aging equipment may be creating a pent-up demand
    that could affect future purchasing plans.

    What does all this mean for folks in the market for Cat stock? Presumably, the markdowns will continue until orders pick up again sometime next year. BennieS, the most frequent commenter at the Cat message board, who’s been watching Cat since the 1970s, figures it’ll go down to about $30 and give everybody lots of indigestion for an extended stretch, but will eventually recover as it has so many times before.

    I have no specific advice beyond never playing the stock market with money you can’t afford to lose.

    (Hat tip for the Wells Fargo report to Construction Pundit.)

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    Tom Mangan posted at 9:37 am January 16th, 2009 |

    Non-residential construction expected to plunge this year

    The good news just keeps washing over the Caterpillar watchers this morning:

    The American Institute of Architects sees such construction activity falling 11 percent this year and another 5 percent in 2010, it said in its semiannual industry forecast. The group cited falling company profits and the lack of credit to finance projects.

    Spending on hotel construction is expected to decline by more than 20 percent this year and another 12 percent next year. Construction of retail, office and industrial facilities is seen falling by double digits this year, with the rate of decline slowing in 2010, the AIA said.

    “This is not expected to turn around anytime soon, and it’s likely to get worse before it gets better,” AIA Chief Economist Kermit Baker said in a statement.

    Institutional categories, such as churches, schools and healthcare facilities, are forecast to post smaller declines this year.

    Safe to say that in a bear market, nobody believes in Santa Claus after the 15th of January.

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    Tom Mangan posted at 9:22 am January 14th, 2009 |

    Infrastructure bubble coming?

    Why wait for the bubble to inflate before predicting it will pop? Perhaps I’m a victim of my Caterpillar tunnel vision, but the relentless flogging of infrastructure stocks these days has me wondering. After all, a huge uptick in infrastructure spending will cause a vast boom that lasts until the spigot of borrowed government money runs out. Then the boom turns to a bust.

    I have to wonder if Cat isn’t a bit bubbly already: A half-decade of consecutive annual increases in sales and profitability — one record quarter after another for years on end — strikes me as an unsustainable uptrend that is bound to be corrected (little voice in my ear says “what part of down from 80 to 40 in the past six months have you failed to detect?”)

    Generally I will try to avoid empty speculation of this ilk, but I thought it would be fun to deflate a bubble that doesn’t even have any air in it yet.

    As long as I’m on the subject, you might enjoy this two-part Seeking Alpha profile of infrastructure-related ETFs. Also: Investopedia profiles Cat and its competitors.

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    Tom Mangan posted at 9:10 am January 12th, 2009 |