January 27, 2009

Global Market Comments for January 27, 2009
Featured Trades: (CAT), (CCTYQ)

1) The performance of heavy equipment maker Caterpillar (CAT) is one of the best leading global economic indicators out there. Poor earnings have taken the stock behind the woodshed for a severe whipping, taking down from $85 to $32. So when CEO Jim Owens says that 2009 will be the company's worst year since WWII, with sales plummeting from $51 billion to $40 billion, traders in all markets take note. Owens believes that global confidence is shot, prompting them to freeze or cancel capital projects with the speed of a mouse click. But Caterpillar believes that the worse 2009 is, the better 2010 will be. He is a strong believer of the FIFO theory, that since the US was first into recession, it will be the first out. In a year, stabilized credit markets will spark an explosion in restarted capital projects. This will take hold just as stimulus infrastructure projects in most major countries break ground. Business should recover sharply.

CAT.png picture by sbronte

4) With the US consumer on life support, China watchers are competitively ratcheting down their forecasts for growth this year. I thought I was the uber bear, expecting real GDP of only 5%, versus a consensus of 8%, and an actual rate of 13% a year ago. Now I find that I am being underbid by analysts predicting only a 2% growth rate for the Middle Kingdom. Layoffs, bankruptcies, and a real estate crash are accelerating there, and it is clear that the country is facing its worst economic crisis since Deng Xiaoping adopted capitalist ways in 1978. This scares people, because in the last crisis during the Cultural revolution of the sixties and seventies (I was there), 50 million died. Not good for commodities.

5) High end discretionary retailers are at the epicenter of the consumer spending meltdown, with jewelry taking the biggest hit. Sales are down 30-70% and with the peak Christmas selling season now behind us, companies will have to cross an eleven month desert until the next cash inflow. Until then, they will have to live off of credit lines for working capital. While these were abundant a year ago, they are not to be found now. Friedman's Jewelers is in liquidation, Shanes Company is in chapter 11, and Zales is on life support. The disease is metastasizing to all types of discretionary spending as the Great Emptying of America's malls accelerate. The liquidation of Circuit City Group (CCTYQ) is the writing on the wall. Can wine sales be far behind?


Just in case you didn't have enough reasons to lie awake at night tossing and turning, here is another one. There is a hulking great 800 pound gorilla sitting on the floor of the New York Stock Exchange right now. Past stock market crashes in the thirties and the seventies produced market price earnings multiples of seven. Today it is 11. Does this mean that the Dow has one last 40% down leg left in it before we bottom out? That would take us to a 5,500 Dow, or a 570 S&P 500. Maybe the old PE benchmarks have been rendered meaningless by zero interest rates. Maybe so many single digit stock prices and trough earnings are skewing the numbers. Or, maybe nothing makes any difference anymore, and everything is just driven by the sentiments of attention deprived traders on steroids. But if I am right, look for a few more weeks of Obamaphoria supported stock prices, followed by a long, frightening plunge in the down elevator. The tipoff this is coming is all the discussion about ex-Merrill Lynch CEO John Thain's $35,000 commode, and Citicorp's new $50 million private jet. These people aren't talking about how wonderful stocks are right now.