The stock market has been looking for its canary in the coalmine, that perfectly reliable indicator for what’s coming down the pike.
Clearly, many investors are focused on the Fed and QE3. If the Fed starts buying fewer bonds — or “tapers,” as it’s now called — interest rates will rise and stocks will fall. Others focus on Congress and the government. Another round of brinkmanship over the budget or ObamaCare could extinguish all confidence in the economy.
Analysts are watching earnings growth while economists are poring over the housing market and the unemployment rate… but I think I think I’ve found the perfect canary in the coalmine: Caterpillar (NYSE: CAT).
For months now, Caterpillar has been showing that its growth in emerging markets, especially Asia, was on its deathbed.
In January, as the stock market was taking off on an historic run, Caterpillar reported that it had been duped out of $580 million by a Chinese company it had acquired.
Then in April, Caterpillar missed earnings and said that earnings for the rest of 2013 would not be good. The CEO said, “… our revised outlook reflects a sales decline of about 50% from 2012 for traditional Cat machines used in mining…”
That’s right, a 50% decline in mining machine sales.
But wait, it gets worse…
Also in April, Caterpillar reported that U.S. retail sales fell 18%. Then in May, U.S. retail sales fell another 16%.
In June, U.S. retail sales were down only 10% — but sales in China were down a whopping 28%.
Those numbers prompted one of the world’s best at making money from falling asset prices, Jim Chanos, to call Caterpillar his very best short idea.
Another analyst put a $28 price target on the stock. It currently trades around $84.
Yesterday, Caterpillar reported that U.S. sales fell just 1% in July. Getting better? Not really… July sales in the Asia/Pacific region fell 28%.
What’s Next for CAT?
Now, Caterpillar is widely considered to be a well-run company and a proxy for global growth.
As China emerged as a real global power, and emerging markets surged from the commodity boom between 2002 and 2007, Caterpillar stock tripled from $20 a share to $80. And as stimulus money washed the globe after the financial crisis, Caterpillar made another stunning run from $30 a share to over $100.
Today the stock is only off around 15% from its 52-week highs. And frankly, I’m surprised. Given what’s going on in emerging markets around the world and what Caterpillar has reported about its own business, I’d expect the stock to be a lot lower.
And the fact is I think Caterpillar will be lower, because the situation in the emerging markets does not look like it’s improving…
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Indonesian inflation is running above 8%, and its stock market is plunging.
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JPMorgan just cut Brazilian growth estimates from 1.5% to just 0.3%. Brazil’s currency has fallen to a four-year low, and stocks are down around 40% in 18 months.
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India’s currency is collapsing, and economic growth is slowing dramatically.
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Thailand’s economy just went into recession.
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Taiwan expects to export less because of the weak global economy and has lowered its GDP forecasts.
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The World Bank said Malaysia is at risk of recording its first current-account deficit since 1997.
Hmmm… 1997… Why does that sound so familiar?
Is It 1997 All Over Again?
In the 1990s, they were the Asian Tigers: Thailand, Indonesia, Malaysia, South Korea — their economies were cooking, growing 8%-12% a year. Foreign money flooded in to profit from what was being called the Asian economic miracle.
It wasn’t a miracle. It was just a liquidity bubble that would eventually, inevitably, pop.
In the span of just a few months in 1997, all of these currencies collapsed. And the ripple effect pushed the Dow Industrials down 11% (from 8,060 to 7,161) in four trading days. That would be like waking up next Monday and seeing the Dow at 13,397.
Now, I’m not saying that the stock market is headed for a crash based on an emerging market liquidity crisis. After all, history doesn’t repeat. But it does rhyme.
And that’s why I believe Caterpillar’s problems with emerging markets are a real and significant indication that all is not well in the global economy.
As the chief economist at Kotak Mahindra Bank Ltd. in Mumbai, India, recently told Bloomberg: “The emerging Asia story is crumbling and dollar is once again the king.”
America Still Rules
I’ve been telling my Wealth Advisory readers to focus on domestic American stocks for the last 18 months.
And that has been the right call. We bought Bank of America at $9.10, Starbucks at $45, and Boeing at $62… and we’ve banked 57%, 56%, and 75% gains on those great American stocks.
So far this year, The Wealth Advisory portfolio is up 23%.
One of the biggest reasons for our success is that we’ve limited direct foreign exposure — and turned our focus to the U.S. economy.
Back in March, I told Wealth Daily readers to buy Bank of America at $11. It’s around $14.50 today, good for a 27% gain since March.
Bank of America remains one of my top picks. The company is expected to grow net earnings from $4 billion to $10 billion for the full year 2013.
And CEO Brian Moynihan is on record saying he wants to return 30% of capital to shareholders. If we extrapolate that out, we could be looking at a dividend of $0.75 a share by this time next year.
And don’t worry… I won’t be recommending Caterpillar any time soon.
Until next time,
Until next time,
Briton Ryle
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
