Update Cummins (CMI)

It’s not just what Cummins (CMI) told Wall Street analysts on September 13; it’s also that the company said it at all.

I mean Cummins knows there’s a global slowdown going on and yet the company’s CEO and COO got up and said that Cummins would hit $30 billion in annual sales in 2015, up from $18 billion today and a 14% compound annual growth rate. And that EBIT (earnings before interest and taxes) margins would expand to 18% from 14.5% today. And, the capper, that earnings per share would hit $20 in 2015.

That makes today’s share price of $97.56 equal to a 2015 price to earnings ratio of 4.87. You’ve got to wonder why the stock climbed only 6.9% on the news that day. (Cummins is a member of my Jubak’ Picks portfolio http://jubakam.com/portfolios/ )

If you suspect that they’re putting something strange in the water out there in Columbus, Indiana, you’ll be reassured to know that Cummins can actually make a logical case for this optimism. Read more

It has now become the bullet train wreck with a bullet.

The July 23 collision of two bullet trains on the Beijing to Shanghai line killed at least 40 people. That’s disaster enough.

But the wreck has turned into a huge setback in China’s drive to become an exporter of complex technology products. It has raised major doubts about China’s ability to innovate and exposed connections between official corruption and the questionable safety of China’s technology.

The wreck couldn’t have come at a worst time in China’s campaign to be seen as a technology innovator and not just a technology imitator. The country had filed for more than a dozen international patents for its high-speed train technology. The European and Japanese companies that had joint-ventured with China when the country began building its high-speed rail network cried foul. China had simply slapped some new paint on their technology, they said. Not so, China countered, our high-speed trains are based on major Chinese innovations. And as proof China pointed to the increased speed of its trains. Instead of the 200 kilometer an hour top speeds of the European and Japanese trains, China’s trains could run at speeds of up to 300 kilometers an hour.

Nonsense, European and Japanese manufacturers countered. China had just taken existing technology and increased the speed of its trains by cutting safety.

The wreck on the Beijing to Shanghai line certainly gives weight to those European and Japanese claims. But the continuing investigation into the causes of the wreck is turning up even more troubling questions about whether China’s economic system and its flagship companies can deliver world-class technology. Read more

Are stocks cheap yet? Not if the economy is slowing, these numbers say

Trying to figure out whether the U.S. stock market after the stunning decline of the last month is a bargain or not?

James Mackintosh’s “The Short View” column in today’s (August 23) Financial Times lays out in very clear terms one way to answer the question.

After a month of selling the Standard & Poor’s 500 Stock Index trades at just 10.3 times projected earnings. That’s below the forward price-to-earnings ratio in March 2009, the post-Lehman Brothers bottom. (The average since 1985 is 15.)

But that’s only cheap, Mackintosh points out, if projections for future earnings are accurate.

Right now forecasts by Wall Street analysts are calling for earnings of $108 a share for the 500 stocks in the S&P index. That’s higher than earnings on the index in 2007.

But in 2008 forecasts (and then actual earnings) plunged as the economy fell into recession.

A similar drop to that from 2007 to 2008 in today’s forecast earnings—which is what investors could expect if the U.S. economy dipped back into recession–would put the S&P 500’s price to earnings ratio at 17. That’s not cheap but rather expensive in comparison to the long-term average of 15 since 1985.

A 20% drop in forecast earnings—the rough equivalent of an economic slowdown instead of a recession—would put the price-to-earnings ratio of the S&P 500 at 13. That’s below the average of 15 but not really very cheap given the degree of economic risk that an investor is taking on right now.

Today’s rally in Japan on news that could have been worse suggests stocks may have fallen too far

Here’s the question that global stock markets are grappling with now: If global economies are slowing, stocks should get marked down in price. But by how much?

This morning’s economic data from Japan and the reaction of the Tokyo stock market suggests that the August sell-off may have gone a bit too far.

The news certainly wasn’t good from Japan. Gross domestic product fell at a 1.3% annualized rate in the second quarter.  That’s the third consecutive quarterly decline: Japan is most definitely back in recession.

But GDP fell more slowly than the 2.5% drop projected by economists as spending on reconstruction efforts after the March earthquake and tsunami started to offset some of the damage from the event itself and a slowing in exports caused by a stronger Japanese yen.

On the news the Nikkei 225 stock index was up 1.4% as of the August 15 close in Tokyo. Read more

At the moment U.S. Treasuries are the safe haven of choice.

And so, strange as it may seem, is the U.S. dollar.

Let’s take the currency piece of this first. The U.S. dollar is up against strong currencies such as the Canadian and Australian dollar, and the Swiss franc. The logic on the Canadian and Australian currencies is that a slowing global economy will hurt these commodity-exporting economies enough to end any prospect of interest rate increases. In the case of the Swiss franc the concern seems to be that the Swiss central bank has decided to intervene to weaken the currency in order to save the country’s exporters from further pain.

The dollar is still expected to decline by the end of the year with Wall Street investment strategists surveyed by Bloomberg predicting a 1% decline in the currency in the fourth quarter. But that’s a huge shift from the results of Bloomberg’s July 12 survey when strategists were projecting a 2% decline.

In the bond market, U.S. Treasuries remain the favorite bet of investors fleeing volatility in global financial markets. The Federal Reserve’s promise last week to keep interest rates at their current extraordinarily low levels through 2013 was an open invitation to use Treasuries as a shelter from risk. After all, the Fed’s statement removed any risk to Treasuries from an increase in interest rates.

Last week Treasury prices rose and yields on the 10-year Treasury fell to a record low of 2.0346% on August 9. Even the U.S. Treasury’s auction of $72 billion in notes and bonds wasn’t enough to move yields significantly higher.

The next event that has the power to change the balance in the currency and bond markets is the Tuesday, August 16, meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel. Topic A, B and C will be how to stabilize the euro and European financial markets. Last week France, Spain, Italy, and Belgium all imposed bans on short selling. Such a ban smacks of panic and while the markets may welcome any stability the move brought to shares of hard-hit European banks, investors are now looking for some assurance that the ban is only a temporary measure set to be replaced by a long-term plan for the euro.