Cat Stock Blog

An interesting piece by Lauren Tara LaCapra at The Street.com digs a little deeper into the consequences of pushing interest rates so low. The big fear is that we “turn Japanese” and interest rates in the zero range do no good. This part near the end struck me:

Some predict that, in light of the heady reward potential, investors will once again warm to equities and private debt. When that time comes, the current trends are certainly setting up a massive opportunity for those who manage to jump in at the right moment to reweight holdings just before yields and prices reverse. But, of course, bottom-seekers bet wrong much of the time, and there’s no telling what might happen in the intervening months.

For now, investors are willing to settle for paltry returns on safe government debt, much more of which will be issued in the coming year to fund Uncle Sam’s costly plans to shore up the economy.

“You never want to stand in front of the Fed. They’re going to be successful in what they’re doing,” says Paul Mendelsohn, chief investment officer with Windham Financial Markets. “It’s not going to happen overnight, and it’s going to be a little more painful than people think it’s going to be, but it’s going to happen. The question is what’s going to happen after that.”

Indeed. Sending interest rates too low after the dot-com crash caused the housing bubble that got us into the much deeper doo-doo we’re in today.

Some people fear hyperinflation from all this money raging from the Fed’s spigot, but this piece notes that deflation is far worse.

A lot of inflation is bad, but a little is healthy because it encourages people to buy now in fear of higher prices down the road. Even a little deflation is scarier because it encourages people to sit on their cash and wait for lower prices down the road (kinda like what happens to the stock market after it’s just lost 40 percent of its value or the houses in your neighborhood are all down by a third).

Wait a minute, isn’t a widening trade deficit supposed to be bad too? Here’s the thing: the trade gap is narrowing because the price of oil is collapsing along with U.S. demand for other imported necessities from around the world.

Analysts said the global slump will hurt big exporters such as Caterpillar Inc. and other heavy equipment manufacturers that had been enjoying rising export sales because of a construction boom, particularly in Asia.

“We are seeing manufacturing production plunging this quarter and a big driver of that decline is the drop in foreign demand,” Gault said.

Normally a low dollar helps Cat and the other big machinery companies, but it strikes me that it helps primarily if its overseas customers are already in a buying mood.

Cat’s standing as the world’s numero uno earthmoving concern will see it through this downturn, but the short-run outlook doesn’t look good.

Reuters reports that the American Institute of Architects’ monthly Architecture Billings Index fell from 36.2 in October to 34.7 in November. Anything under 50 reflects crumbling demand for architects, which spells trouble down the road for potential construction projects.

“With mounting job losses, declines in retail sales, and travel cutbacks, the need for new commercial facilities has dropped considerably recently,” AIA Chief Economist Kermit Baker said in a statement.

“What’s just as troubling is that the institutional sector — schools, hospitals and public buildings — is also beginning to react to tighter credit conditions and a weakening economy.”

Well, maybe Obama’s Billions will fix all that. Let’s hope.

The U.S. Federal Reserve has fired almost all its interest rate bullets, setting new target interest rates below 1 percent for first time since the 1950s. The big however:

The move, which affects the rate at which banks lend their reserves to one another, was widely expected and to a large degree symbolic. Demand for interbank loans has been so low that the actual Fed funds rate has been far below the target for a month and hovered at barely 0.1 percent in the last several days.

With its move, the central bank implicitly acknowledged that recession is more severe than officials had thought at their last meeting in October.

The main thing that worries me is that we are barely at the beginning of the recession and the Fed is almost out of ammo. We’re in for rough sledding if this cut and the stimulus packages can’t turn things around.

The New York Times notes that oil and gas projects around the world are being canceled because of the collapse in oil prices. This chart tells the tale:

Credit: TradingCharts.com

Classic boom and bust pattern.

Last year the story was we were running out of oil. This year the story is what we going to do with all this oil nobody wants? The spike in prices earlier this year had little to do with the supply of oil and everything to do with the supply of oil futures contracts — oil demand had inched up a few percent, but oil futures demand went through the roof because so many other investments were going south: Oil was merely the last bull market to give up the ghost before the bear took over. The massive deleveraging of the past couple months wiped out everything in its path as Wall Street players craved cash at any cost.

Falling oil prices drove inflation to a record low in November, the Times reports. The problem with the oil crash is that it has infected other commodities, many of which must be carved from the earth’s crust with Cat equipment. Cheap fuel helps Cat, its suppliers and its customers cover their energy costs, but if nobody wants the aluminum, steel and other earthly stuff most deeply implicated in Cat’s business, Cat has problems.

This is the crux of the Cat downgrade at Goldman Sachs last week. Cat’s stock looks cheap (Jim Cramer calls it a buy under $40) but its prospects are cloudy in a slowing global economy that’s punishing demand for drilling and mining.

(More on the consumer price index numbers at CNBC.)