Stocks Vertical, Economy Flat
Just before noon today stocks went vertical, but why not. The HFT machines were trawling for all time highs and, in fact, hit the ultimate jackpot. Namely, they finally pushed the NASDAQ above the vertiginous heights (5132) it achieved back in March 2000 at the peak of the dotcom frenzy:
By contrast, a few hours earlier Caterpillar—-a true bell weather of the global economic predicament—-posted results which were most definitely horizontal.
Notwithstanding the usual “beat” on its manipulated ex-items profit number, the results were miserable. Total industrial sales were down by three-quarters of a billion dollars or 6% from prior year and the internals were worse.
To wit, sales in the Asia-Pacific region were off by 13% and were down by 12% in its Europe, Latin American and Middle East region. Within product categories the implications were even more ominous. While its resource/mining equipment shipments were down 9% from prior year and construction machinery sales were off by 7%, sales in its single largest segment—–oilfield, power and transportation—-were flat with Q1 2014. But that’s only because its dealers and customers are just now commencing what will be a huge cutback in purchases owing to the global oil industry collapse.
That Caterpillar’s corporate level results are sliding backwards and heading for worse should not be surprising. Its dealer retail sales have been heading south for 28 straight months and show no sign of reversing. And since Caterpillar corporate results are on the whip-end of its plant-wide dealer network, that shrinkage is now flowing into its sales and earnings, as dealers continue to reduce orders and destock their inventories.
So the real meaning in Caterpillars results is not the noise in its cents per share profits for the last quarter; its in the multi-year trend which strains out the leads and lags between its independent dealer results on the ground and its consolidated financials filed with the SEC.
On that score, the single most important number not in this morning’s report is the company’s LTM net income of $3.884 billion. It’s importance lies in the fact that it is virtually identical to net income of $3.831 billion recorded for the LTM period ending in Q1 2014; and also happens to be only a hair above the $3.6 billion reported way back in 2008—-CAT’s prior peak just before the bottom fell out in 2009.
During the interim, of course, reported net income soared at first and now has been steadily retracing from the LTM peak of $6.5 billion posted for the September quarter of 2012. But the bottom line is this: CAT is now back to where it started prior to the last bubble crash; and to where it was before the economies of the world put on another $55 trillion in debt in response to the madcap money printing of the central banks.
More importantly, during the roller-coaster 6-years in between, when its net income ranged between $800 million and the peak run rate of $6.5 billion, its average result was actually $3.6 billion. That is, the full cycle year average is exactly where it started and now stands.
Likewise, its LTM sales reported this AM were $54.6 billion and heading toward $50 billion for the full year 2015, according to management’s guidance. Not surprisingly, that outlook encapsulates the post-crisis cycle, as well. Sales during 2008 were $52 billion, and then dropped to $32 billion before peaking at $66 billion in 2012. Over the period, however, sales averaged $51 billion annually, or about precisely where the current year is forecasted to come out.
In short, on a cyclically smoothed basis, CAT has gone nowhere during eight years of the greatest money printing and EM investment boom in recorded history. And in that, there is a huge implication.
To wit, the confederated central banks of the planet have not shifted the world economy to a permanent path of ever high growth, prosperity and real wealth. Instead, they prevented the liquidation of unsustainable household and business debt in the developed world that had built up during the prior two bubbles, and triggered a thundering investment boom in the EM that was based on cheap debt and soaring securities markets, not sustainable demand for the mining, shipping, manufacturing, and distribution capacity that resulted.
In old fashioned times, they called that “malinvestment”. It meant that losses and economic waste would follow the artificial central bank driven boom. In particular, it implied that a capital spending boom would inexorably be followed by a prolonged depression in the capital goods sector. Indeed, the prototype for that was embodied almost precisely in the capital goods boom and bust cycle which occurred in the U.S. export-driven, global creditor economy of the 1920s and 1930s.
Needless to say, CAT is the poster child for the current global malinvestment cycle. The truth is that its booming sales during the interim between 2009 and 20013 reflected a massive and counter-productive build-up all around the planet of excess fleets of heavy mining, construction, energy and related equipment and machinery.
Accordingly, what lies in the future is just the opposite. There will be literally thousands of acres of idle Big Yellow machines parked all over the planet as the emerging capital spending bust gathers force and the global deflation emanating from China and the EM reaches full stride.
Needless to say, CAT’s earnings are heading south. Big time.
Yet during the artificial inventory and investment boom of the last six years, its C-suite did accomplish one thing: the company reduced its share count by 10 percent and disgorged $25 billion in stock buybacks and dividends over the last 10 years, thereby goosing its stock price and the value of executive options.
All the while that CAT’s stock was taking a ride on the central bank driven boom train, management had nary a word to say about the sustainability of the mining and construction booms in China, Australia and Brazil on which its results temporarily feasted. After periodically traveling to Washington to lobby for more free enterprise, they apparently never had a second thought as to how its opposite—–red capitalism in China—had managed to generate such astounding growth and fat order books among its dealers.
Indeed, that is doubly ironic because the nation’s storied engineering powerhouse and capital goods supplier is today run by a finance major. That China is one giant economic and accounting house of cards, however, he clearly doesn’t get.
Instead, Doug Oberhelman mainly functions as a CNBC bobble-head once per quarter—-dispensing absolutely bogus propaganda about a glorious future of endless growth. In fact, his company has been ridding a bubble that is now cracking all around the C-suite in Peoria.
It is no wonder the casino is deranged. The gamblers are going vertical—even as they bid up company results that are pinned on the horizontal line and soon heading sharply south.
Reprinted with permission from David Stockman’s Corner.
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