Investment Contrarians

What Caterpillar’s Warning Means for Your Investments

By for Investment Contrarians |

What Caterpillar’s Warning Means for Your InvestmentsWith the global economy continuing to limp along, we’re all looking for some signs of a rebound. GDP growth has been lackluster in the U.S., negative in Europe, and decreasing in China. After so many years with a weak global economy and trillions of dollars in monetary stimulus failing to provide the spark yet, GDP growth is still not able to accelerate.

An additional sign of the weak global economy are the comments made by CEOs of international companies. As they have operations in multiple locations, their infrastructures are usually quite adept at picking up on signs regarding the health of the global economy.

While many are hoping for a pickup in GDP growth, Doug Oberhelman, CEO of Caterpillar Inc. (NYSE/CAT), poured cold water on that theory. He recently commented in an article in The Financial Times that he believes the global economy is more uncertain now than in 2008, although he doesn’t believe the situation is as dire.

He commented about the increased level of uncertainty, especially in Europe and China. It’s always difficult for GDP growth to accelerate in a climate of uncertainty. With companies not even sure if the European Union will stay together, this makes planning almost impossible.

Oberhelman made an insightful prediction regarding GDP growth, believing that it will take at least five years before Europe has economic growth once again. This does not bode well for firms with a large exposure to that part of the world. While many investments have exposure to the global economy, Europe continues to be a huge worry for economists and business leaders alike. I would look closely at the level of European exposure a business has and pare back those allocations.

While the lack of GDP growth in Europe wasn’t a real shock, what did surprise Caterpillar was the drop-off in GDP growth for China. The company overestimated the country’s level of GDP growth and, as a result, now has far too much inventory in that region. Caterpillar announced that it is moving approximately 2,300 excavators from China to other parts of the global economy, including the Middle East and Africa.

For a company that has proven to be quite good at forecasting the global economy, such a misallocation is a surprise. This also means that the lack of GDP growth is far worse than the official numbers posted by the Chinese authorities, which isn’t really a surprise. We all know that those numbers are questionable at best, but it still is a worry, as China is a very important part of the global economy.

One additional worrisome sign is that the firm is able to meet its earnings targets, but is reducing revenue guidance. This means that the earnings targets will be met most likely through cost-cutting. The last thing the global economy needs is further job layoffs, but that is how many companies are meeting or exceeding their earnings guidance figures. If GDP growth does not accelerate soon, we could see many more firms laying off workers to meet earnings guidance estimates, putting further pressure on the global economy.

While this is just one company’s view of the global economy, I think it sends a strong message. In my opinion, I would continue reallocating investments away from Europe and China until some signs of GDP growth emerge. There’s no reason to try to call a bottom in the global economy; it would be better to wait in defensive names until positive signs of GDP growth are evident.

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  • Suelen

    My first 5/5 for some time. Phew, I was beginning to emrcbae my inner neoliberal tendencies Rodger, I think q.1 relates to practical, rather than theoretical, limits to govt spending. My reading of the question is that taxation, by reducing aggregate demand, allows space for the govt to spend without creating inflationary pressures. And I think 4 refers to crowding out of real resources, as opposed to financial crowding out.But I could be wrong, have to wait and see tomorrow..