If the economy is so terrible, why are machinery stocks relatively strong?
Oddly enough on a day, August 31, when investors are again feeling nervous about growth, machinery stocks are showing relative strength. Among the standouts Caterpillar (CAT), Joy Global (JOYG), Bucyrus (BUCY), and Deere (DE).
This group has been through a day much like this not so long ago. On August 12 the same stocks were up—with the exception of Caterpillar, which was down slightly. Caterpillar (CAT) was the catalyst for the strong showing that day by the sector. On the morning of August 12 the company announced that it would triple the production capacity of its U.S. excavator lines and add 500 more employees with the opening of a few plant in Texas. Caterpillar said that plant will be operation in mid-2012.
Now, of course, Caterpillar’s optimism about its business may be completely misguided or wildly early, but it echoes news from other machinery companies: If your customers are other companies with long-lead times between breaking ground on a mine or an airport or a communications network and having them go into use, then you’re actually seeing an increase in business. That’s been the story at a company such as Cummins (CMI) and at Intel (INTC).
Today, August 31, the catalyst looks to be earnings from Joy Global due before the open tomorrow. The thinking among analysts is the company will beat modest expectations for the current quarter and then predict strength for the fourth quarter, which is typically the strongest of the year.
One stock that isn’t in today’s list of leaders but that will be a major beneficiary of this trend is Komatsu (KMTUY.PK), the world’s second largest construction-equipment maker.
China is creating bank capital out of thin air–and that’s not good
You’ve got to give China’s most recent effort to increase the capital of China’s largest banks big points for chutzpah.
That’s not exactly an endorsement for these banks as investments, however. Or of the soundness of China’s troubled banking system.
On August 24 Central Huijin Investments, which is the domestic arm of the government’s sovereign investment fund China Investment Corp., sold $6 billion in bonds in the first of a series of bond sales designed to raise $27 billion that Central Huijin will then invest in the country’s big state-controlled banks. The goal, laudable in itself, is to increase the capital reserves at these banks.
Got lots of cash? How about clubbing your competition with the green stuff? That’s what HP seems determined to do to Dell
On the surface, bidding $2 billion for a company that hasn’t made an operating profit in the last five years looks nuts.
Dig deeper, though, and the battle between Dell (DELL) and Hewlett Packard (HPQ) to buy data storage company 3Par (PAR) doesn’t look nuts. It’s looks insane. Sales are projected to hit all of $235 million for the year that ends in March 2011. Earnings before interest, taxes, depreciation, and amortization (EBITDA) are projected at just $21 million.
On August 28 Hewlett Packard bid $2 billion for 3Par, topping Dell’s previous bid, which topped Hewlett Packard’s previous bid, which topped Dell’s bid. Dell proposed paying $1.5 billion for 3Par. The latest bids come to roughly 95 times EBITDA for 3Par.
Aren’t these companies certifiable?
Well, if you’re even asking that question you don’t understand where we are in the economic cycle and how that’s driving company strategy in the technology sector.
This isn’t an age for valuation when companies carefully figure out how to get the best value for the cash they’re about to spend.
This is the era of Cash as Bludgeon. Cash rich companies are looking to club their poorer competitors over the head with dollars. At worst, the result of this spending will be a competitor unable to climb off the canvas for years. At best, this spending might be able to crush a competitor forever.
Put the Dell/Hewlett Packard contest over 3Par into competitive context and it starts to make sense, in spite of the insane valuation awarded to 3Par.
Update HSBC (HBC)
It’s by no means a done deal—nothing is in South Africa these days—but Nedbank, the South African bank majority owned by insurer Old Mutual (OML.L), is HSBC’s (HBC) deal to lose.
HSBC beat out rival Standard Chartered (SCBFF.PK) for the right to hammer out a formal offer to acquire South Africa’s fourth largest bank over the next two months. I think HSBC will pull it off. Old Mutual own 51% of Nedbank and the insurer is a motivated seller because the company is selling assets to pay down debt. HSBC won’t be able to gain 100% of Nedbank’s outstanding shares because South African law reserves a percentage of shares for black investors. But the company should be able to gain the 70% of shares that it has said will let it achieve it strategic goals.
And what are those goals?
First, but not foremost, HSBC wants to gain a foothold in Africa’s largest economy.
The return of worries about the PIIGS weighs on the euro
Good news: Ireland isn’t Greece.
Bad news: Ireland isn’t Spain, either.
At least that’s what Standard & Poor’s concluded on August 25 when it cut the credit rating on Ireland’s sovereign debt one step to AA-.
S&P is worried that the cost of re-capitalizing Ireland’s banks is going to be higher than estimated. The company raised its estimate to $63 billion. That’s a more than 42% increase from S&P’s former estimate.
On the downgrade the spread on Ireland’s sovereign debt rose to a record 3.32 percentage points above the yield on the benchmark German 10-year bonds. In comparison the spread on Greek sovereign debt stood at 8.83 percentage points and the spread on Spanish debt stood at 1.83 percentage points.
Ireland had the largest budget deficit in the Euro Zone in 2009 at 14.3% of GDP. That’s projected to fall to 11.7% in 2010. Standard & Poor’s projects that Ireland’s net government debt will hit 113% of GDP in 2012.
Despite those high figures, Ireland gets a credit rating seven steps above Greece’s junk bond rating because the country’s economy is much closer than the Greek economy to returning to global competitiveness after the government imposed a draconian program of spending and wage cuts. And the Irish political environment looks like it will give the government more room to turn the country around in comparison to Greece.
On the other hand, the credit markets are drawing a big contrast between the lax pre-crisis regulation of the banking system in Ireland and the relatively solid regulation of Spanish banks. Spanish regulators had required banks there to increase their reserves as housing prices soared and that has limited the damage to the Spanish financial system.
The downgrade doesn’t come at a good time for Ireland or for the euro.
The country sold 400 million Euros to 600 million Euros in short-term debt on August 26.
And this is the third bit of bad news for the euro in the last week or so. First, Hungary has dug in its heels about making the budget cuts it promised in exchange for a European Union bailout. Second, Axel Weber, head of Germany’s Bundesbank, said that the European Central Bank will have to keep its emergency lending programs in effect longer than expected–until the first quarter of 2011. And now, third, Ireland’s downgrade reminds investors that while growth in the center of the Euro Zone (Germany and France) has been robust, the economies of the periphery remain troubled.
