NEW YORK (Real Money) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
This past week, Kass backed his short recommendation on Caterpillar (CAT - Get Report), saying the company's capital allocation policy is one of the worst, although the media and analysts rarely take the company to task for it. Kass also dissected the Beige Book reading for January to mid-February, noting that it shows subpar economic growth which is already baked into the market.
Digging Into Caterpillar
As Jim "El Capitan" Cramer comments on Columnist Conversations, the read-through on Joy Global (JOY) is quite negative for Caterpillar. I put CAT on my Best Ideas list on Nov. 26, 2014, at $106 and I remain short (a breach of $80 per share seems possible now).
When Nabors Industries (NBR - Get Report) reported better-than-expected third-quarter earnings, CAT's shares surged and aided a broader market advance, accompanied by upbeat comments from the company. Here is an interview with CAT CEO Douglas Oberhelman in October 2014, another interview with him in December 2014, and an interview on "Squawk Box" the same month.
Caterpillar is one of the finest examples of a company that "over promises and under delivers." It is also a vivid example of (thoughtless) cheerleading by analysts and in the business media.
Wall Street rejoiced, and CAT's shares traded near $110 after the third-quarter report last November. There was little meaningful forward-looking analysis or questioning of the results at that time by most analysts or by the business media, which seems to worship the company's management (an "honor" that's little deserved).
Caterpillar is another example of a company that buys high (its share price) and sells low (or doesn't buy stock at low prices). Its capital-allocation policy is among the worst in corporate history.
Remember CAT as a possible template in the future when the media and others rejoice in financial engineering in the face of weak top-line growth.
I just witnessed someone who blew up in the Internet Bubble telling CNBC viewers (authoritatively) that we aren't headed for another bubble now.
I have seen everything now.
"Is that all there is?
Is that all there is?
If that's all there is my friends
Then let's keep dancing
Let's break out the booze and have a ball
If that's all there is."
-- Peggy Lee, "Is That All There Is?"
The Beige Book represented that domestic economic growth grew at a "moderate pace" in six districts, "modestly" in two, "slightly" in one, no change in another, "slowed" in one and "Boston noted that business contacts were fairly upbeat this period, notwithstanding the severe weather." But within retail, Boston Districts (along with NY) "reported that harsh winter weather negatively affected retail business."
On the flip side, "the Minneapolis District noted that some apparel stores had difficulty selling winter clothing due to a relatively mild winter in December and January."
Here are some other bullet points:
1) "Consumer spending rose in most Districts, and contacts were generally optimistic about near-term sales."
2 )"Manufacturing generally posted gains across the Districts, although at varying rates."
3) "The demand for nonfinancial services also grew moderately on balance."
4) "Home sales increased in most Districts, while reports on residential construction were mixed."
5) "Commercial real estate market conditions remained stable or improved across the Districts."
6) "Banking conditions generally improved, and credit quality remained largely unchanged."
7) "Agricultural conditions generally worsened, and oil and natural gas drilling declined."
8) "Payrolls remained stable or expanded across the Districts, and contacts noted employment gains in a broad range of sectors." (This could be a Fed "issue.")
9) "Wage pressures remained moderate and were limited largely to workers in skilled occupations ... service sector firms in the NY District noted increasingly widespread reports of wage hikes. Contacts in the Cleveland, Richmond and Kansas City Districts noted increased wage pressure due to the difficulty in attracting and retaining truck drivers. A staffing firm in the Chicago District reported some companies were also willing to raise rates for unskilled workers to reduce turnover, and contacts in the Atlanta District noted increasing entry level wages."
10) "Most District contacts cited only flat to slightly increasing prices."
U.S. economic growth is moderate -- perhaps at a +2.5% real GDP rate.
Again, I contend subpar growth makes domestic growth subject and vulnerable to almost any shock.
And, from my perch, the market has more than valued that subpar growth rate.