It didn't start out ugly. When I awoke at 4 a.m., we looked to be a pretty strong mode: dollar lower, oil flat, futures positive.
But everything seemed to go bonkers in Europe all at once, perhaps because the auto industry continues to roll over on fears that the Volkswagen (VLKAY) rigging could extend to other car companies and 70% of Europe revolves around the sale of cars. Next thing you know, by six a.m. they are down 1% so we are down 1%, in keeping with the adage that we reflect whatever's worst in the world right now.
And then it just got horrendous when Caterpillar (CAT), a big Dow Jones stock, announced a pretty shocking shortfall of $1 billion in sales on a $49 billion basis and, more importantly, layoffs of perhaps as many as 10,000 people because of that shortfall and weakness in a number of end markets.
CAT was bizarrely honest about things, pointing out twice in its release that this is the third consecutive year for down sales and revenues and that at this pace 2016 could be the first time in its 90 year history that CAT's had down sales for four years in a row.
That's an astonishing fact, given that CAT's been through a heck of a lot of downturns as well as the Great Recession and the Great Depression.
Yet it makes sense, plenty of sense, because CAT is at the epicenter of the old mining and manufacturing economy. In fact, the weaknesses stem from end markets in construction industries, resource industries and energy and transportation, which is really the big old three of what drives world growth.
Now, how surprising was this announcement, given that Caterpillar's stock has been in a one-way motion ¿ down -- ever since peaking in February of 2012, when China first started making noise about economic weakness? Caterpillar's one of the few American companies that has done fabulously in China because of its natural resources bent, particularly coal.
The world, however, has turned against coal, and it's not coming back. CAT has so much invested in material handling machines that line up with coal, and this business is contracting far more quickly than anyone thought possible even a few years ago.
CAT also dominates in the machines needed to extract heavy oil from the ground, the kind of oil that doesn't make sense to product at $45 prices. So that business has been going away too, as oil stays lower longer and it seems to only be getting worse because credit's become hard to come by for the service companies to buy these big machines.
The clincher, though, comes from construction equipment, which had been the lone bright spot in this troika and many thought was actually getting better. But, like the autos, the "getting better" was taking place domestically, and the rest of the world has been getting worse.
CAT's just recognizing the new realities. Its weakness confirms the tremendous declines in value in such varied stocks as Deere (DE), United Rentals (URI) -- a huge buyer of CAT equipment -- Cummins (CMI) for engines, Terex (TEX) and Manitowoc (MTW) for cranes. It also dovetails with the tremendous selloffs in all things mining, whether it be coal or iron ore or copper, which is why I have urged everyone to cut back on anything related to those industries.
What do you do with CAT? Historically, I would say when things get this ugly you need to be thinking of buying, not selling. However, I think that CAT's revenue forecast of only $48 billion, down $1 billion from before the announcement, is way too optimistic given the horrid backdrop -- one, by the way, that doesn't seem to faze those who endlessly call for rate hikes.
That means its plan to take out $1.5 billion in costs annually simply won't offset the decline and even down 28% with a plus 4% yield the stock remains a sell. That's despite the fact that the company still produces the best big machines on earth.
Sometimes, though, it just doesn't matter if your clients don't need them, and that's certainly the case with the big yellow marvels that Caterpillar supplies the world.
Click here for fresh technical analysis on CAT. The charts suggest 25% downside.