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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 |

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