About that Goldman downgrade
The excellent Seeking Alpha blog questions the Goldman Sachs downgrade of Cat last Friday. The writer concedes the point that Caterpillar is going to get hit by slower capital expenditure spending in the coming year or so, but it also throws a lot of cold water on GS’s calls on the commodity market, which was clearly driven to absurd heights by speculators — too much money chasing too few options and futures contracts — rather than significant increases in demand for the underlying commodities.
How much faith should we put behind these estimates? It’s a simple question, and borne out of no disrespect for Goldman. There are plenty of smart folks over there, and to say that it’s been the toast of the industry for the past decade is quickly becoming a cliché. Goldman deserves credit for being early on the calls for rising oil in 2007, and for accepting recession conditions in the U.S. this spring.
That being said, it sure was swept up in the tight supply, global-growth fed theory of higher commodity prices this summer, and overshot way big and way late. Now it has set its 2009 estimates for aluminum and copper below the current spot prices ($1525 for aluminum on the LME in the front month, and $3232 for copper) which many (including myself), contend have oversold due to the same forces that drove prices up so high in the first place.
Exec. summary: Demand and China and India — and a strong global brand — will most likely save Cat’s bacon. Read the comments for more juicy dis of Goldman Sachs. Loved this one:
Isn’t it crazy when after a stock has had a long ride on the downside and has about bottomed out, that the rating agencies and brokers, (like Goldman, etc.) then wake up and all of a sudden decide that the stock should be down graded. Is this stupidity or a phony ploy to drive the stock lower since they have shorted it. It is probably both and this is what has allowed cynics to believe that the market is rigged, especially against the public.
The market’s rigged against the public? Say it ain’t so, Joe!
Also at Seeking Alpha: Blogger Dr. Duru summarizes downgrades across the construction sector. Interestingly:
I have to agree that continued declines in oil prices (and commodities in general) will undermine the buying theses for infrastructure stocks. But with the gears of reflation spinning frantically across the globe, I remain more interested in looking for buying opportunities in this sector than selling (shorting) ones. If the charts of these infrastructure plays eventually break down, I will consider such action a reinforcement of the economic danger implied in the current acceleration of job losses in the U.S.
As the Doc always notes: Be careful out there.
This piece in the Wall Street Journal (subscribers only, alas), buys the GS party line, but notes one interesting detail:
Caterpillar counts about 50% to 60% of its profits from the mining and energy industries, according to the Goldman Sachs analysts, and they said the commodity downturn is likely to hurt the company until 2010.
True enough, but low commodity prices are generally good for the economy over the long haul, and more tractors get bought in up economies than down ones.
And a note for options cowboys: a Cat straddle.