Legendary short seller Jim Chanos last night was vindicated in his call on Caterpillar. But everyone should pray he is wrong on China.
This time last week the Kynikos Associates founder, who last year sent Fortescue to the sin bin, sent shivers through investment circles when he pronounced Caterpillar to be the “wrong business in the wrong time” and that he was actively short selling.
Chanos is a clever trader. Not only does he usually get the trend correct, but he also loudly flags his intentions so that market momentum tends to make his calls a self-fulfilling prophecy.
Self interest aside, Caterpillar duly delivered last night when its earnings fell 43.5% in the second half, far worse than analysts expected.
The company said it was revising its world growth estimates downwards anticipating global growth to slip to about 2% this year.
It also pointed specifically to the tighter credit conditions in China, citing the more stringent environment as a “widespread concern in China” (see Byron Wein's Cool China breezes over Asia). It did, however, provide some upbeat forecasts on economic growth and industrial production, noting that while slower than previously they “should lead to more construction and commodity usage”.
The Caterpillar results come on the heels of yesterday’s HSBC flash June manufacturing survey, which stunned analysts who had expected a recovery from the previous month’s weak read of 48.2. Not only was the June result, at 47.2, contractionary, it indicated further deceleration in the sector and the worst result in almost a year.
The big miners are likely to come under pressure this morning and mining services companies are expected to feel further pain.
Seven Group, which has Caterpillar franchises in China and Australia through its WesTrac division, is likely to be tested given WesTrac provides 88% of revenue and 70% of Seven’s earnings while the likes of Worley Parsons, Monadelphous and others in the sector are expected to come under pressure.
A stronger US dollar, which pushed the Aussie lower overnight, also had a dampening effect on commodity prices.
Elsewhere, trouble plagued Newcrest is scheduled to deliver its quarterly production report. While there has been a strong recovery in the company’s shares in the past fortnight on the back of stronger bullion prices, anything negative in the report will be seized upon by investors and the company is likely to be punished.