Cat Stock Blog

BBC amasses the most-used terms in the current mess on Wall Street and beyond, from A to Z. Choice samples:

• Collateralised debt obligations (CDOs)
  A collateralised debt obligation is a financial structure that groups individual loans, bonds or assets in a portfolio, which can then be traded.

  In theory, CDOs attract a stronger credit rating than individual assets due to the risk being more diversified. But as the performance of some assets has fallen, the value of many CDOs have also been reduced.

• Credit default swap
  A swap designed to transfer credit risk, in effect a form of financial insurance. The buyer of the swap makes periodic payments to the seller in return for protection in the event of a default on a loan.
• Leveraging
  Leveraging, or gearing, means using debt to supplement investment.

  The more you borrow on top of the funds (or equity) you already have, the more highly leveraged you are. Leveraging can maximise both gains and losses.

• Ponzi scheme
  Similar to a pyramid scheme, an enterprise where - instead of genuine profits - funds from new investors are used to pay high returns to current investors. Named after the Italian fraudster Charles Ponzi, such schemes are destined to collapse as soon as new investment tails off or significant numbers of investors simultaneously wish to withdraw funds.
• Toxic debts
  Debts that are very unlikely to be recovered from borrowers. Most lenders expect that some customers cannot repay; toxic debt describes a whole package of loans where it is now unlikely that it will be repaid.

Left off the list:

• Taxpayers:
  Rubes who will pay for other people’s foolishness for the next 20 years

Up to a third of U.S. construction jobs may vanish this year, Associated Press reports.

About two-thirds of the nation’s nonresidential construction companies plan layoffs this year, with most expecting declines in business next year, according to estimates by the Associated General Contractors of America, which represents about 33,000 companies. About 4.1 million people are employed in the industry, meaning about 1.25 million jobs could be lost if the dire forecast come true.

But the group also estimated that a stimulus plan that included broad spending on state and federal public works and infrastructure projects could reverse the decline for construction companies. The overall construction work force could grow by up to 25 percent, according to the forecast.

Non-residential means business and government. Businesses are having a hard time scaring up financing, and local governments are running deficits from here to breakfast because of declining sales and property tax revenue.

I know a lot of people are fretting over the huge deficits Obama is about to run up, but in the face of news like this, it seems preferable to doing throwing up our hands and hoping for the best.

More on this: Government officials’ forecasts on construction spending.

This morning’s New York Times reports that office vacancies are up across the country, which is bad enough, but also that banks large and small are on the hook for commercial real estate investments gone bad.

Stock analysts say commercial real estate is the next ticking time bomb for banks, which have already received hundreds of billions of dollars in capital and other assistance from the federal government. Big banks — like Bank of America, JPMorgan Chase and Morgan Stanley — each hold tens of billions of dollars in commercial real estate securities. The banks also invested directly in properties.

Regional banks may be an even bigger concern. In the last decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. The proportion of their lending that is in commercial real estate has nearly doubled in the last six years, according to government data.

Just as home loans were pooled, then carved up and sold to investors as securities over the last two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities, according to Trepp, a research firm that tracks mortgage-backed securities.

Now that the market for those securities has dried up, borrowers cannot easily roll over the loans that are coming due.

Just to review: Caterpillar was chugging along fine last summer with its stock trading in the 80s till the meltdown in big banks blasted everything and everyone. Cat’s business didn’t change at all but its stock lost over half its value in a classic Wall Street panic.

Even if Obama buys a Cat D11 for every adult American, Cat’s stock will crater again if there’s another bank-driven financial meltdown. That’s what all investors are up against in this market.

All times ET
Monday

• 10 a.m. Construction spending (Nov)
• 2 p.m. Auto sales, truck sales (Dec)

Tuesday

• 10 a.m. Factory orders (Nov)
• 10 a.m. ISM services (Dec)

Wednesday

• 10:35 a.m. Crude inventories (Jan. 2)

Thursday

• 8:30 a.m. Initial unemployment claims (Jan. 3)
• 2 p.m. Consumer credit (Nov)

Friday

• 8:30 a.m. Average workweek, hourly earnings, non-farm payrolls, unemployment rate (Dec)
• 10 a.m. Wholesale inventories (Nov)

See Yahoo Finance’s page for what the market expects. Pretty much all of the numbers are considered likely to get worse, though the market may imagine it has priced in all this bad news already and decide to rally (the 40 percent shellacking we took last year is Exhibit A). It’s not like anybody will be surprised to learn November and December were train wrecks.

My prediction: those who try to outguess the market will be proved wrong. Except when they’re right.

This morning’s economic-malaise update:

December consumer confidence at all-time low.

Home prices post 18 percent annual drop in October.

Chicago Purchasers Index rises as costs plunge.

GDP down .5 percent in third quarter. From Marketwatch: “It’s the weakest quarterly growth rate since the first quarter of 2001. The economy grew 2.8% in the second quarter. … For the current quarter, economists are predicting a sharp decline in the neighborhood of 6.0%. This would be the biggest drop since the early 1980s. ”

Housing prices, sales plunge. From the Wall Street Journal: “Sales of existing homes, which include single-family homes and condos, fell 8.6% to a seasonally-adjusted annual rate of 4.49 million units in November, a 10.6% drop from a year ago, the National Association of Realtors reported Tuesday. Meanwhile, sales of existing single-family homes plunged 8.0% to a seasonally-adjusted annual rate of 4.02 million in November from 4.37 million in October, representing the lowest sales activity since July 1997.”

Consumer confidence up a notch because of falling prices. From Reuters: “The index was above economists’ expectations of 58.6, according to the median of forecasts in a Reuters poll. December’s final reading was the highest since 70.3 in September, and was also above the preliminary index reading, released on December 12, which was 59.1.”

States halting infrastructure projects. From the New York Times: “The American Association of State Highway and Transportation Officials has identified 5,000 transportation projects nationwide that lack the dollars to proceed. … More than 40 states are struggling with revenue shortfalls, and lawmakers across the country are cutting, taxing and pleading their way toward solvency. Fixing bridges, expanding highways and other infrastructure projects have faced the same fate as government entitlement programs, state jobs and other items.”

This longish report from the Associated Press notes that oil inventories are rising around the world and that OPEC’s ability to control prices via supply cutbacks has been iffy at best. The Organization of Petroleum Exporting Countries said last week it would slash production by 2.2 million barrels a day in its largest cutback ever, trying to stem the rapid price decline.

But oil trader and analyst Stephen Schork said in order for OPEC to adhere to its January quota, the cartel first must adhere to its November cut of 1.5 million barrels a day.

“Given crude oil’s weakness since OPEC’s announcement, it is safe to assume the market is a bit skeptical regarding the group’s ability to comply,” Schork wrote in his daily publication, The Schork Report.

Obscure factoid of the day: Cheapest gas in the United States is $1.37 a gallon in Cheyenne, Wyoming.

You’ll get a clue by checking out Architectural Record today. The site sports slick design and features pictures of the latest in way-cool building techniques, but it’s intuitive that because architecture is among the first phases of a construction project, the business should be a decent predictor of Caterpillar’s construction business. One intriguing item wonders if the Dubai Bubble is about to pop:

In recent weeks, delays have beset several massive projects there, according to several architects working in the area, and articles in The National, a United Arab Emirates newspaper. Dubai Waterfront, often referred to as Waterfront City, the 1.5-billion-square-foot development master planned by Rem Koolhaas/OMA, is moving much slower than anticipated. Completion of a detailed master plan for Palm Deira—a man-made, palm tree-shaped island—has been pushed back from this fall to late spring. And Palm Jebel Ali, another palm tree-shaped island, is being scaled back. Moreover, real estates prices are starting to drop.

“We are witnessing a global negative economic movement,” a spokesman for Nakheel, one of the country’s largest developers, told The National in mid-November. “The next few months will see a scaling back of activity around some of our projects.” Other developers are reporting layoffs. Damac Properties recently cut 200 jobs, sources say, while Omniyat Properties, a three-year-old company, let go of 60 employees.

Others quoted in the piece think things are going to be fine: I can’t help wondering who really wants to be in Dubai if oil is trading under $100 a barrel.

If you really want to get cheered up, check out AR’s recession roundup.

Previously: Non-Residential Construction Stumbles Badly.

Construction Equipment magazine’s annual construction outlook report for 2009 is grim:

Construction spending will continue its three-year decline through the third quarter of 2009, down 9.5 percent in current dollars and more than 20 percent after adjustment for project-cost inflation. The precipitous spending declines in residential construction will finally reach bottom in 2009, albeit late in the year. Heavy construction and nonresidential construction spending, on the other hand, will drop sharply in 2009 after years of robust double-digit growth.

Construction equipment users and their suppliers will face subpar economic growth until late in 2010, which means better pricing and availability. Supply conditions loosened at the end of last summer when the world commodity price boom abruptly reversed. Materials, labor, equipment and design resources will be relatively more available and less expensive during the next two years.

Lots of charts and graphs with this report; most all of them pointing downward. Take a look through and ask yourself again how cheap Cat looks these days.

Mining Weekly’s news feed included this Reuters story explaining the Chinese government is buying up excess metals for two reasons: 1) a bunch of China’s smelters have a bunch of it just lying around because demand is down; and 2) they can buy it up cheap because prices are so low.

At face value this is just another “oh the economy’s going to hell in a handbasket” story but if you dig a little deeper, it’s happy news for Cat in the long run because a) China is in effect putting a floor on the prices of a broad range of metals; and b) With all the surplus off the market, demand for mining gear ramps up more quickly when the economy turns around.