Here's Where Things Get Really Ugly for Caterpillar
The pillars of support continue to crumble underneath the heavy-equipment maker.
After reporting some horrible numbers over the past year, heavy-equipment manufacturer Caterpillar (NYSE: CAT) looked like it finally bulldozed its way out the deep hole it dug. Shares have climbed nearly 25% above their 52-week low, helped along by higher sales of power systems even while dealer retail sales of heavy equipment continue their global decline. But now comes the part where the other shoe falls.
Actually, shoes have been falling all over the place, but now is when they will leave the deepest scar on Caterpillar. With the U.S. coal industry under assault, China's economic "miracle" is coming unglued, sending prices for both copper and iron ore tumbling and imperiling the entire mining sector.
Trade data released this past weekend showed Chinese exports collapsed more than 18% in February from the year-ago period; this is compared to analyst expectations of a 7.5% increase and down from the double-digit growth export achieved in January. The world's second-largest economy is entering a much worse tailspin than many previously believed possible.
In response, copper prices plunged to a seven-month low yesterday as inventories surged higher, raising concerns that not only is copper mining in trouble, but that China's financial markets are about to unravel -- the red metal is used as collateral to make loans to companies and investors. The falling price could create a domino effect that causes a call for covering the debt to be issued, leading to dumping copper stocks and further pressuring the price.
Similarly, iron-ore pricing recently dropped to its lowest level since last June leading to a similar ripple effect throughout the mining industry. Shares of BHP Billiton (NYSE: BHP) fell 2.7% yesterday and are down almost 9% from the recent high hit just weeks ago, while Rio Tinto (NYSE: RIO) declined 2% on Monday and is down more than 12% since hitting a 52-week high in late February. Sure, there was some exaggeration in the trade data due to Chinese New Year holidays, but the numbers still suggest a substantial weakening of the world's second-biggest economy that carries global ramifications.
And nothing good for Caterpillar, either. BHP and Vale (NYSE: VALE) have both been reining in their capital expenditures. BHP recently sold its position in its Australian Jimblebar iron-ore mine and Vale, the world's biggest iron-ore miner, has cut its capital expenditure program for the third year in a row. Rio Tinto has also slashed its budget by $3 billion to $11 billion for 2014.
With miners sharply pulling back, a move that may not be enough in light of current events, we could see further cuts imposed. Joy Global, which is more exposed to coal's curtailment than Caterpillar (two-thirds of its sales coming from coal miners), reported last week that first-quarter revenue plunged another 27%, with original equipment sales cut in half. Bookings, which were down 19% in the fourth quarter, dropped another 16% in the first.
China accounts for about 28% of Caterpillar's Asia-Pacific region sales, or 6% of total revenue, about double what it did the year before. The heavy-equipment maker placed more emphasis on the country to bolster sagging sales elsewhere; now that the underpinnings of the Chinese economy are buckling the risk to Caterpillar grows exponentially, especially because so much of the rest of the global economy relies upon China.
Caterpillar's stock may have bounced higher because it was so undervalued, but I think the cycle has run its course and a potential collapse in China may cause the next falling shoe to squash its shares once more.
Just like I said, it was in the CC from the company.
Do your homework before calling people liars, dummy.
Chris Lau , Contributor
It's during the earnings call:
"In this regard, 2014 and 2015 show slower growth in activity levels than earlier anticipated. As oil companies budgets are re-allocated, the entire spending complex tends to slow down. In turn, demand for offshore drilling assets is being pushed into 2015-2016. For importantly this down turn is not driven by the claiming oil price, prior cycles for long down turn have impost by the [indiscernible] and supply and demand fundamentals."
With this company you never know if it's hedge funds or JF himself through Heman Holdings that's working against you.
Definitely remain cautious !
If I could not produce anything to back up my comment, then I could accept you calling me a liar.
You can always comment back to the SA article writer and call him a liar.
Bet you ain't got the balls to do that.
O you wanted the entire SA article. I see. I can give it to you.
Are you saying my post was not copied from a SA article?
Audio never asked for the complete article so I think you are also mistaken.
Hemen Holding Ltd. is a private company based in Limassol, Cyprus. This company is ultimately controlled by trusts that have been established for the benefit of billionaire Norwegian-born Cypriot shipping tycoon John Fredriksen and his family.
At the beginning of this year, Hemen Holding owned 28% of the total outstanding shares of SeaDrill Ltd. (SDRL) This holding made up approximately 63% of the value of Fredriksen’s entire portfolio at the time. At the end of February, Hemen Holding sold off sufficient shares to reduce its ownership stake to 23% of SeaDrill. The main purpose of this sale was to enable the Fredriksen Group to have a slightly more diversified investment portfolio. The company also wanted to free up cash to aggressively pursue investment opportunities in the commodity shipping sector. This sale reduced SeaDrill’s proportion of Fredriksen’s total portfolio from 63% to 58%.
As part of this deal, Hemen Holding sold put options against the shares that it sold. Thus, Hemen’s exposure to SeaDrill remained the same for the 90-day average duration of the put options. Hemen’s exposure to SeaDrill had the potential to change depending on whether or not the sold put options were ultimately exercised.
The put options that were sold by Hemen have now begun to be exercised. On June 14, 2012, SeaDrill announced that at least some of the options have been exercised and that Hemen has elected to take possession of physical shares of stock in lieu of cash. The company will be increasing its position in SeaDrill by 600,000 shares per day on every trading day between June 14 and June 27, 2012. Over that period, Hemen will increase its position in SeaDrill by a total of 6 million shares. This will give the company a total ownership stake of 24.6% of SeaDrill’s total outstanding shares.
Could this create upward pressure on the stock?
Prior to Hemen’s stock sale at the end of February, SeaDrill shares were trading hands at prices around their all-time high of $42.34. The shares were climbing in value throughout the entire month of February and hit the all-time high on February 29, 2012.
SDRL February 2012 Chart
Source: Fidelity Investments
On February 29, Hemen announced its sale of 24 million SeaDrill shares. The stock price fell immediately following that announcement and has not returned to those levels since. This has naturally caused many investors to believe that Hemen’s stock sale was the major cause of the share price decline. The idea does make some sense.
Although the reason for Hemen’s sale was diversification, the news of a major shareholder and insider (Fredriksen is the chairman of SeaDrill) selling off a large number of shares could have introduced some uncertainty into the market. Investors may have wondered if there was more to the story or if the sale could have been due to an internal problem at SeaDrill. The sale was due solely to the aforementioned desire for liquidity and diversification and there was no internal problem that the markets were not already aware of but the fear was still very present and very real.
If Hemen could generate a large decline in the share price by selling stock then could it also do the opposite? On the surface, the idea would seem to make sense. After all, if reducing the major holder’s stake would reduce the stock price then naturally that same major holder increasing that stake would increase the stock price. But there are other factors to consider that may not make this true.
First, Hemen Holding sold off many more shares than what it is reacquiring through the exercise of the put option. Hemen sold 24 million shares and will only be buying back six million shares through the announced transaction or only a third of what was sold. Hemen sold put options for a total of 24 million shares though so it is possible that the remaining 2/3 of the total 24 million shares sold will be reacquired when those options expire.
Secondly, these shares are not necessarily being acquired through the open market so there is not necessarily going to be the buying pressure that might be expected. Hemen Holding is not acquiring its shares via purchases in the open market. Instead, Hemen will be obtaining its shares through the exercise of put option contracts with Goldman Sachs (GS) that Hemen has elected to be settled by physical delivery. The question then becomes where Goldman will get the shares that are delivered to Hemen. The bank could conceivably purchase the shares in the open market and then turn around and sell them to Hemen. This would indeed result in the expected buying pressure on the stock. There is no reason why this should be expected though. There are several ways that the bank could obtain these shares that do not involve the open market. For example, Goldman could purchase the shares through any one of several dark pools.
Investopedia defines the term dark pool as,
The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is represented by block trades facilitated away from central exchanges.
Also referred to as the ‘upstairs market,’ ‘dark liquidity,’ or ‘dark pool.’
The dark pool gets its name because details of these trades are concealed from the public, clouding the transactions like murky water. Some traders that use a strategy based on liquidity feel that dark pool liquidity should be publicized, in order to make trading more ‘fair’ for all parties involved.
Dark pools allow institutions to avoid publicizing their trades and thus avoiding market impact. Therefore, if Goldman uses dark pools to obtain the shares that it sells to Hemen then there will not be the buying power that would be expected. There are other ways that Goldman could acquire the shares without using the open market. So, there is no guarantee that Hemen’s acquisition of SeaDrill’s shares will create buying pressure in the market.
On the other hand, Hemen’s purchase may restore some of the confidence that the market may have lost due to the company’s February stock sale. If indeed this is the case, then SeaDrill may see some gains in the coming week as the confidence returns and investors begin buying shares of SeaDrill due to their newfound confidence. This could create the buying pressure on the stock that Hemen’s purchase itself may not. In this case, the stock is likely to be pushed up by the buying pressure from the newly confident investors.
So you criticize me for posting SA article info and then proceed to do it yourself.
Check the CC transcript as I vaguely remember reading something to the effect that business could remain weak until end of 2015.
The key words in your post are ( some signs ) and ( asking about ) doesn't mean much, and is not substantially different from what SA said in my post.
Copied from latest SA article.
The current bidding activity for the rigs that will drive this growth is lower than the levels set in 2012, however. This could jeopardize the growth potential of this market, should this trend not reverse itself. This is one reason why Seadrill expects that the market will strengthen after a lull that lasts until the end of 2015 at the latest.
JF says this weakness in this business might last until the end of 2015.
That should be enough to tell you that shares will probably remain on the weak side and could even weaken further. That's a bad sign.
That should tell people that this weakness will last a while.
The big money knew this was coming and has been unloading shares for quite a while.
Like most of you I'm content to hold my shares, collect the dividends and buy more on occasion.
I have a feeling, for what it's worth , that analysts are under estimating AB and that we will be closer to 2.00 this year, maybe even over that.