Tuesday, April 21, 2009
by Karim Rahemtulla, Investment Director, Smart Profits Report
This morning, Caterpillar (NYSE: CAT), the world’s largest manufacturer of construction equipment, reported its first quarterly earnings loss since 1992 - a drop of $112 million ($0.19 per share) on a 22% sales slump, versus a $922 million ($1.45 per share) profit a year ago.
While the news was hardly unexpected, it clearly tells us that this downturn will continue well into 2010. Heavy equipment sales are a leading indicator for future growth - and there is no better barometer than Caterpillar.
The company’s words and actions illustrate that. Citing a “high degree of uncertainty” about the global economy, CEO Jim Owens stated that, “It’s extremely difficult to know how our customers will respond during the remainder of 2009.”
As a result, Caterpillar slashed its full-year sales forecast to between $31.5 billion and $38.5 billion ($1.25 per share) - down from its $36-44 billion ($2.50 per share) projection just three months ago. Even if sales hit the middle of that range, it would be a 32% plunge from 2008 - the firm’s worst year since the 1930s, according to Reuters.
What does this harbinger mean for you? A lot…
The Leading Economic Indicators Are Looking Shaky
News like this means you should still keep some buying powder dry, because this market is likely to trade lower or stay range-bound for a while.
“But, Karim” (I hear you ask), “… haven’t you said before that the market is a forward-looking indicator that reacts 6-9 months before the economy turns?”
Yes, that’s true. This mechanism has proven itself time and again, without fail - and it’s still intact. But the current rally is not showing signs of the definitive move that we’re looking for.
Yesterday, for example, the Leading Economic Indicators index (LEI) moved lower. The LEI measures economic activity and projects activity by six months or so. It fell after rising the month before.
And two other sectors are struggling, too…
Energy And Raw Materials: Two Key Econo-Growth Sectors Under Pressure
When we’re talking about robust economic growth, two sectors that spring to mind as key drivers are energy and raw materials.
Companies within these sectors have a much better feel for the short-term economic pulse than conventional companies.
