Fatal Fear

This note was originally published at 8am on October 10, 2013 for Hedgeye subscribers.

“Failure is not fatal, but failure to change might be.”

-John Wooden


As I was walking from one client meeting to another yesterday in Boston, I think I changed my US stock market view at least 3 times. Government sponsored volatility does that to a simple “folk” like me. Isn’t it cool?


What isn’t cool is not changing your mind. Especially when the causal factor that is driving the market’s immediate-term volatility is either Congress or the Fed, the best plan is usually accepting that the plan is going to change.


Does Big Government Intervention in your markets A) shorten economic cycles and B) amplify market volatility? In our Q413 Global Macro Themes call tomorrow at 11AM EST, we’ll show you the trivial data that answers that question. #OldWall media “Fed” story count vs Volatility (VIX) has a positive correlation that will make Bernanke’s “price stability” fans cry.


Back to the Global Macro Grind


There’s no crying in risk management. So strap it on and keep moving out there. After watching this government gong show and changing my mind throughout the day, I ultimately opted to hit the buy/cover buttons into yesterday’s closing bell.


In other words, this is the first morning since Bernanke decided not to taper (September 18th) that I’ll be telling clients to buy-the-damn-dip. Unlike how I used to play this game (emotionally), this is purely a quantitative signal.


Other than salvation sent down to us from our overlords from upon high in D.C. (who will be saving us from themselves again), what’s changing this morning?

  1. US DOLLAR Index just v-bottomed off its long-term TAIL line of @Hedgeye $79.21 support
  2. US Equity Volatility (VIX) can easily snap @Hedgeye TREND support of 18.98
  3. US Equities (SP500) can easily recapture 1663 @Hedgeye TREND support of 1663

Yep, that’s about it. That (and US 10yr Treasury Yield holding @Hedgeye TREND support of 2.58%) is just about all this “ordinary folk” needs to see. Fading the false premise of a US “default” just puts a contrarian cherry on top.


But what shall I do if consensus sells the open and the VIX holds 18.98?

  1. I’ll sell

Nope, it’s not any more complicated than that. Remember, I’m just a paper trader newsletter guy who has to keep it simple as Zero Edge sells you some fear and Gold ads (gold nailed Fading Fear again btw - ZeroBid).


Context is always critical when making both asset allocation and net positioning decisions (I started the week net short). Don’t forget that buying US stocks here comes on the heels of a very basic pattern:


1.       Dollar Down

2.       Rates Down

3.       Stocks Down


Oh, and volatility (VIX) up +70% from its August low.


Government sponsored volatility crushes confidence. US stocks have been down for 11 of the last 15 days on that and the only “UP” days have come on moves like you are seeing this morning:

  1. Dollar Up (+1% in the last 48hrs)
  2. Rates Up (10yr Yield +10bps from the OCT low to 2.69%)
  3. Stocks Up (TBD from the 1-month closing low of 1655 SPY)

Again, “keep it simple stupid.” That’s what my old hockey coach used to tell me when I’d try the howdy doody on a defenseman (I had really bad moves) instead of just driving to the net and firing the puck.


“Again!” –Herb Brooks


I’m definitely not saying “this is it!” Only people that don’t timestamp would say something ridiculous like that. All I am saying is that after a 4% correction from the all-time US stock market high (1725 SP500), the reward in buying stocks is in its highest probability position (versus the risk) in 3 weeks. SP500 has +23 handles of immediate-term upside to 1679 versus 1651 support.


And that’s all I have to say about that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.61-2.71%

SPX 1651-1679

DAX 8508-8714

VIX 17.65-20.98

USD 79.79-80.81

Gold 1298-1317


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fatal Fear - Fed vs. VIX


Fatal Fear - Virtual Portfolio

ICI Fund Flow Survey

Takeaway: The shift from fixed income into equities continued last week with inflows into both stock fund categories and outflows across bond funds

Investment Company Institute Mutual Fund Data and ETF Money Flow:


Equity mutual fund flow snapped back after soft trends after the gridlock in Washington recently with a $2.9 billion inflow for the 5 day period ending October 16th, a reversal from the prior week's outflow of $3.1 billion. Total equity mutual fund trends reflect the shift from fixed income and into stocks with a $2.5 billion weekly average inflow thus far in '13 versus 2012's $3.0 billion weekly outflow 


Fixed income mutual funds trends have been consistent with persistent outflows. This week's tally was another $5.7 billion lost in the category, an acceleration from the week prior's $2.5 billion outflow and now sending 2013's weekly average fund flow to a negative $687 million. This compares to the weekly inflow from last year in 2012 of $5.8 billion for fixed income funds


ETFs were a source of funds last week, with outflows in both equity and fixed income products. Passive equity products experienced outflows of $1.5 billion for the 5 day period ending October 16th with bond ETFs losing $1.7 billion during the same time period. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results


ICI Fund Flow Survey  - ICI chart 1



For the week ending October 16th, the Investment Company Institute reported the first simultaneous inflow into both domestic and world stock products in 4 weeks to the tune of $2.9 billion. This $2.9 billion inflow for the most recent 5 day period broke out to a $839 million subscription into domestic equity products, the biggest inflow in 5 weeks into domestic stock funds. The other portion of the equity inflow was into world equity products which booked a $2.0 billion inflow, the best result in 4 weeks for foreign stock funds. The equity category has been a tale of two tapes recently with domestic equity funds having had outflows in 8 of the past 14 weeks compared to international equity funds which have had inflows every week in the past 14. Despite this weak run in domestic stock fund flows, the year-to-date weekly average for 2013 for all equity mutual funds now sits at a $2.5 billion inflow, a complete reversal from the $3.0 billion outflow averaged per week in 2012.


On the fixed income side, bond funds continued their weak trends for the 5 day period ended October 16th with outflows accelerating week-to-week. The aggregate of taxable and tax-free bond funds booked a $5.7 billion outflow, just over double the $2.5 billion in investor withdrawals from the week prior. Both categories of fixed income contributed to outflows with taxable bonds having outflows of $3.8 billion, which joined a $1.8 billion outflow in tax-free or municipal bonds. The taxable outflow in the most recent period, was the worst outflow in 6 weeks and the muni redemption was the largest in 5 weeks. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $687 million weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.



ICI Fund Flow Survey  - ICI chart 2

ICI Fund Flow Survey  - ICI chart 3

ICI Fund Flow Survey  - ICI chart 4

ICI Fund Flow Survey  - ICI chart 5

ICI Fund Flow Survey  - ICI chart 6



Passive Products:



Exchange traded funds experienced soft trends last week with both equity and fixed income products booking marginal redemptions. Equity ETFs lost $1.5 billion in funds, an improvement from the $4.7 billion outflow the prior week. Despite these outflows the past two weeks within equity ETFs, the 2013 weekly average equity trends is averaging a $3.0 billion weekly inflow, an improvement from last year's $2.2 billion weekly average inflow.


Bond ETFs experienced another weekly redemption of $1.7 billion, the third week in a row of outflows and slightly worse than the $1.3 billion lost the 5 days prior. Including this most recent redemption within passive bond products, the 2013 weekly bond ETF average is flagging at just a $275 million inflow, much lower than the $1.0 billion average weekly inflow from 2012.



ICI Fund Flow Survey  - ICI chart 7

ICI Fund Flow Survey  - ICI chart 8



Jonathan Casteleyn, CFA, CMT







Joshua Steiner, CFA




TODAY’S S&P 500 SET-UP – October 24, 2013

As we look at today's setup for the S&P 500, the range is 26 points or 1.05% downside to 1728 and 0.44% upside to 1754.                                                 










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.18 from 2.20
  • VIX closed at 13.42 1 day percent change of 0.68%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Trade Deficit, Aug., est. $39.5b (prior $39.1b)
  • 8:30am: Jobless Claims, Oct. 18, est. 340k (prior 358k)
  • 8:58am: Markit PMI Prelim., Oct., est. 52.5 (prior 52.8)
  • 9:45am: Bloomberg Consumer Comfort Index, 10/20, prior -34.1
  • 10am: Jolts Survey, Sept., est. 3.765m (prior 3.689m)
  • 10am: New Home Sales, Sept., est. 425k (prior 421k)
  • 10am: Freddie Mac mortgage rates
  • 10am: Fed open board meeting on quantitative liquidity rules
  • 10:30am: EIA natural-gas storage change
  • 11am: Kansas City Fed Mfg Index, Oct., est. 2 (prior 2)
  • 11am: Leading Economic Indicators, Sept., postponed (pr. 0.7%)
  • 11am: U.S. announces plans for 2Y, 5Y and 7Y note sales
  • 12:45pm: BoE’s Carney speaks at event in London
  • 1pm: U.S. to sell $7b 30Y TIPS


    • Senate, House out of session
    • 9am: House Energy and Commerce meets on Patient Protection and Affordable Care Act implementation



  • McKesson to buy drug distributor Celesio for $5.4b
  • BofA’s Countrywide found liable for defrauding Fannie, Freddie
  • RR Donnelley to buy Consolidated Graphics for $620m
  • ING Groep raises $974m selling U.S. unit shares at $29.50
  • Fed set to open proposed bank liquidity demand to public comment
  • Boston Scientific to cut 1,100- 1,500 jobs over next 2 yrs
  • Apple fends off $248m demand by Wi-Lan in patent suit
  • Hewlett-Packard is said to be seeking to sell mobile patents
  • YouTube said to plan subscription music service rivaling Spotify
  • AT&T exceeds earnings ests. after adding more subscribers
  • Symantec rev. forecast falls short as turnaround dents sales
  • China’s manufacturing strengthened more than est. this month
  • Credit Suisse 3Q profit misses ests.
  • Volcker rule hedging exemption said disputed by Gensler, Stein
  • Pinterest funding led by Fidelity values startup at $3.8b
  • Sotheby’s faces shareholder calls to sell property, WSJ reports
  • Google experiments with banner ads in search results: NYT
  • Time Warner in agreement to distribute Al Jazeera America: NYT


    • 3M (MMM) 7:30am, $1.75 - Preview
    • Alaska Air (ALK) 6:01am, $2.14 - Preview
    • Alexion Pharmaceuticals (ALXN) 6:30am, $0.79 - Preview
    • AllianceBernstein  (AB) 7:02am, $0.39
    • Altria (MO) 6:58am, $0.64 - Preview
    • Autoliv (ALV) 6am, $1.34
    • AutoNation (AN) 6:15am, $0.77
    • Avnet (AVT) 8am, $0.88
    • Ball (BLL) 6am, $0.93
    • Boston Scientific (BSX) 7am, $0.09 - Preview
    • Bunge (BG) 6:30am, $2.23
    • Cameron Intl (CAM) 7:30am, $0.83
    • Celgene (CELG) 7:20am, $1.54 - Preview
    • Cenovus Energy (CVE CN) 6am, $0.48 - Preview
    • Coca-Cola Enterprises (CCE) 7am, $0.80
    • Colfax (CFX) 6am, $0.53
    • Colgate-Palmolive (CL) 7am, $0.73 - Preview
    • Diamond Offshore Drilling (DO) 6am, $1.16 - Preview
    • Domtar (UFS) 7:30am, $1.24
    • Dow Chemical (DOW) 7am, $0.54
    • Dunkin’ Brands (DNKN) 6am, $0.43 - Preview
    • EQT (EQT) 7am, $0.49
    • FLIR Systems (FLIR) 7:30am, $0.32
    • Ford Motor (F) 7am, $0.38 - Preview
    • Franklin Resources (BEN) 8:30am, $0.87
    • GNC (GNC) 8am, $0.76
    • Goldcorp (G CN) 8am, $0.20 - Preview
    • Hercules Offshore (HERO) 7am, $0.07 - Preview
    • Hershey (HSY) 6:58am, $1.01
    • Husky Energy (HSE CN) 7am, $0.54 - Preview
    • International Paper (IP) 7am, $0.93
    • Janus Capital (JNS) 7am, $0.17
    • KKR (KKR) 8am, $0.58
    • Lazard (LAZ) 7am, $0.36
    • McKesson (MCK) 7:31am, $2.04 - Preview
    • Mead Johnson Nutrition (MJN) 7:30am, $0.80 - Preview
    • Noble Energy (NBL) 7:23am, $0.96
    • Patterson-UTI Energy (PTEN) 6am, $0.28
    • Potash of Saskatchewan (POT CN) 6am, $0.41
    • Precision Castparts (PCP) 6am, $2.83
    • Precision Drilling (PD CN) 6am, $0.16 - Preview
    • PulteGroup (PHM) 6:30am, $0.37 - Preview
    • Rayonier (RYN) 8am, $0.46
    • Raytheon (RTN) 7am, $1.33 - Preview
    • Reliance Steel & Aluminum (RS) 8:50am, $1.20
    • Rogers Communications (RCI/B CN) 6:45am, $0.97 - Preview
    • Royal Caribbean Cruises (RCL) 8:31am, $1.64 - Preview
    • Shaw Communications (SJR/B CN) 8:15am, $0.33 - Preview
    • Sirius XM Radio (SIRI) 7am, $0.02
    • Southwest Airlines (LUV) 6:25am, $0.34 - Preview
    • Starwood Hotels & Resorts (HOT) 6am, $0.64 - Preview
    • Timken (TKR) 7:30am, $0.88
    • TRowe Price (TROW) 7:29am, $0.97
    • Under Armour (UA) 7am, $0.66 - Preview
    • United Continental (UAL) 7:30am, $1.55
    • USG (USG) 8:30am, $0.24
    • Valley National Bancorp (VLY) 8am, $0.15
    • Vantiv (VNTV) 7am, $0.41
    • Wabtec (WAB) 8:06am, $0.76
    • Xcel Energy (XEL) 7am, $0.77
    • Xerox (XRX) 6:49am, $0.25
    • Yandex (YNDX) 6am, $8.89
    • Zimmer Holdings (ZMH) 7am, $1.24 - Preview


    • (AMZN) 4pm, $(0.10) - Preview
    • Applied Micro Circuits (AMCC) 4:05pm, $0.03
    • BioMarin Pharmaceutical (BMRN) 4:01pm, $(0.31) - Preview
    • CA (CA) 4:05pm, $0.72
    • Cabot Oil & Gas (COG) 5:59pm, $0.17
    • Cerner (CERN) 4:01pm, $0.36 - Preview
    • Chubb (CB) 4pm, $1.90
    • Cincinnati Financial (CINF) 4pm, $0.63
    • Cliffs Natural Resources (CLF) 4:22pm, $0.75 - Preview
    • Compuware (CPWR) 4:13pm, $0.09
    • Deckers Outdoor (DECK) 4pm, $0.72
    • Eastman Chemical (EMN) 4:30pm, $1.64
    • Express Scripts  (ESRX) 4:01pm, $1.08
    • Flowserve (FLS) 4:04pm, $0.84
    • Informatica (INFA) 4:05pm, $0.32
    • Ingram Micro (IM) 4:05pm, $0.53
    • KBR (KBR) 4:09pm, $0.70
    • KLA-Tencor (KLAC) 4:15pm, $0.65
    • Manitowoc (MTW) 4:27pm, $0.32
    • Maxim Integrated (MXIM) 4pm, $0.40
    • Microsoft (MSFT) 4:01pm, $0.54
    • NCR (NCR) 4:02pm, $0.68
    • NetSuite (N) 4:05pm, $0.08
    • Outerwall (OUTR) 4:01pm, $0.88
    • Principal Financial (PFG) 4pm, $0.87
    • Qlik Technologies (QLIK) 4:05pm, $0.03
    • ResMed (RMD) 4:05pm, $0.58
    • Superior Energy Services (SPN) 4:15pm, $0.42
    • Synaptics (SYNA) 4:15pm, $1.23
    • Theravance (THRX) 4:05pm, $(0.79)
    • VeriSign (VRSN) 4:05pm, $0.57
    • Western Digital (WDC) 4:15pm, $2.05 - Preview
    • Wynn Resorts (WYNN) 4:02pm, $1.67
    • Zynga (ZNGA) 4:03pm, $(0.04)


  • WTI Oil Rises for First Time in Four Days on China Manufacturing
  • Platinum Shortages Extending as Car Sales Quicken: Commodities
  • Gold Climbs on Bets Federal Reserve Stimulus Will Boost Demand
  • Copper Swings Between Gains and Drops on Chinese Interest Rates
  • Wheat Climbs in Chicago as Demand Gains for Supplies Out of U.S.
  • Rubber Advances From Two-Week Low on China Manufacturing Data
  • Potash Corp. Reports 28% Price Slump as Uralkali Raises Output
  • Raw Sugar Near Erasing Brazil Santos Fire Gains; Coffee Advances
  • Asia Boosts West African Crude Oil Imports to 21-Month High
  • Rebar Falls Amid Concern China to Introduce New Property Curbs
  • Fukushima Radiation Prompts Uranium Price Cuts: Energy Markets
  • Singh Spends $2.2 Billion to Triple Oil Reserve: Corporate India
  • China Thermal Coal Imports May Wane in 4Q as Spreads Narrow
  • World Rubber Consumption Seen Climbing as Tire Demand Gains


























The Hedgeye Macro Team














Soft Tyranny?

“The will of man is not shattered, but softened, bent, and guided…”

-Alexis de Tocqueville


If we need a French guy to tell us what, precisely, is wrong with an un-elected US Federal Reserve whose Chairman has unlimited power over both the value of your currency and rate of return on your savings, so be it.


“… men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which government is the shepherd.”


Isn’t it sad? But which part is the saddest? Is it the cowardice in free-market leadership, or the groupthink grounded in how much people will pander to a man that gets them paid? I don’t know anymore. I read this Tocqueville passage at a picnic table at a rest stop in Maine last night. I lit up a cigar, and I felt like I was going to puke.


Back to the Global Macro Grind


The thought of Gold ripping and #GrowthSlowing because an un-accountable central planner doesn’t allow economic gravity to get marked-to-market makes me sick to my stomach. I run a small business in America. I have a payroll to meet and people to inspire – it gets a lot tougher when the economy slows than when it’s accelerating.


Not that anyone in Washington cares, but I’ll be fine. I started this firm during the thralls of 2008 when Bernanke thought the “shock and awe” rate cuts to 0% were going to save government from itself. So I can take a P&L punch. But if the buck keeps burning and rates keep falling, Bernanke, Obama, and “progressive” Republicans are going to knock some people right out.


I don’t agree with everything he says or thinks, but I think Mark Levin has this part of it right: “The nation has entered an age of post constitutional soft tyranny” (The Liberty Amendments, pg 4). And I’m not talking about politicized social issues or anything outside of my domain of required reading – I’m talking about the economy and markets.


How else would you describe a market that hangs on every breath of what an un-elected body @FederalReserve says and/or hints next? Forget the soft stuff – this is hard core tyranny.


So, after being the US #GrowthAccelerating bulls for the better part of the last year, how do we reposition for?


1.       Down Dollar

2.       Rates Falling

3.       #GrowthSlowing


Whether you like the probability of these things occurring or not, it’s officially rising. But you already know that. You can see the “growth style factors” in your portfolio slowing.


Yesterday’s US stock market correction (from the all-time highs) was led by the Financials (XLF). The only S&P Sectors in our 9 Sector Model that were up on the day were the 2 slowest growth sectors – Utilities (XLU) and Consumer Staples (XLP).


What else has been working this week?

  1. Gold
  2. Bonds
  3. Volatility

Isn’t that just great? Think about that for another few seconds – AT THE ALL-TIME HIGH IN THE US STOCK MARKET, GOLD, BONDS, and VOLATILITY WENT UP! And CNBC’s big government access ratings hit new lows.


This has never happened before…  that’s why it “enervates, extinguishes, and stupefies people.”


Why has it never happened before? That’s easy. We have never been at these all-time highs before – and the Bush/Obama Bernanke legacy now has plenty of “this time is different” economic policy that history will have plenty of time to review.


Is this time really different? Is it still 2008? Or do the people in Washington who are plundering your currency for political gain look like they are living through Bernanke’s said 1936 depression?


Or is it 2013 – the year when de Tocqueville finally nails it on US monetary policy being that soft tyranny that we are all so numb to that we just allow it to exist?


2013 FACT: as US economic growth accelerated (Dollar Up, Rates Up), the bond, currency, and stock markets all had this right. That’s why Gold got tapered. On September 18th, 2013, Ben S. Bernanke restrained market forces from acting as they were.


I don’t think torching the currency, starving savers or a risk free-rate of return, and trying to arrest economic gravity ends well for Americans. That’s why I went to 58% cash yesterday and I still feel like I am going to puke.


Our immediate-term Global Macro Risk Ranges are now as follows:


UST 10yr Yield 2.47-2.60%


VIX 12.01-14.62

USD 78.99-79.98

Euro 1.36-1.38

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Soft Tyranny? - Chart of the Day


Soft Tyranny? - Virtual Portfolio

CAT: Management Playbook Missing?

We Were Mostly Right, But Too Optimistic On Restructuring



We’ve been “short” CAT for about the past year and a half, but this is the first quarter where we were not bearish enough.  We had expected management to present the strong corrective measures hinted at on the 2Q 2013 call.  Instead of a restructuring program, CAT management sounded a bit helpless – revenue was just dropping too fast.  As the totality of the miss and lack of credible response sink in, we expect continued pressure on CAT shares.  CAT’s 2014 outlook implies an earnings decline from an already weaker than expected 2013.  CAT sell-siders are going to need to cut 2014 to ~$5.50 from ~$7, give or take, which will be hard for even the 13 analysts with Buys to spin as positive.  CAT is not in a good way with the Street.


Troubled Industrial companies usually have a “go to” playbook.  They trash a quarter or two with one-time impairment charges and accruals, boosting future earnings with a current profit hit that gets written off as one-time.  Analysts may complain that those future higher earnings are just the result of previous charges, but the market usually gives a partial pass.  Then that troubled company does some sort of “portfolio reshaping”, with a few small divestitures and a few large acquisitions with generous acquisition accounting.  As the charges/accruals run out, they just rinse and repeat.  We’ve all seen variations on this before, with some companies achieving greater success than others.  It gets the management teams through the down-cycles with a bit less pain and bad press.


We had assumed CAT would adopt a version of this playbook in 3Q, finally recognizing that the market for resources-related capital equipment is going to grind lower, not turn higher.  Even if CAT management truly believes that mining capital spending will come back, a series of charges would make it look like they were doing something – even if it was only protecting headline EPS.  They could then do a few acquisitions (looking at you MTW – mining shovels and cranes scream synergies, right?).  Acquisitions could stem the nasty revenue decline, allow CAT to stop repurchasing overvalued shares and, most importantly, give management something less gloomy to talk about. 


On the earnings call, CAT oddly disavowed much of this strategy.  We are “short” and even we had expected more positive news on this front. 


“And in terms of physical capacity, it doesn't make any sense to close down an assembly line or get rid of machining equipment that you've put in place. So I think just from taking out physical capacity standpoint, there's just not a lot of scope to do that... But we're going to need the physical capacity.” – CAT 3Q 2013 Earnings Call


As we read that, our response is “actually, no, you are not going to need that capacity.”  While we could be wrong, that expectation lies at the core of our CAT thesis and rests on pretty solid data and reasoning.  Nonetheless, CAT should be telling us that it is rationalizing capacity and will take a bunch of charges – that is the playbook.  It will be harder to do that convincingly with the comments above.



Why Can’t CAT Follow The Playbook?


Perhaps management is unwilling to accept an implied mea culpa on billions in bad investments in mining equipment.  Action to reduce capacity or focus acquisitions elsewhere might be perceived as an admission of bad choices. 


The lack of M&A is less of a surprise; the current management team’s track record on acquisitions is poor.  The Board would probably be very skeptical of any proposed transaction.  Given the publicity around the Siwei fraud and the BUCY purchase price allocation, transaction execution would probably not be much fun, either.


Why not ‘kitchen sink’ 3Q and then do a deal?  Maybe CAT is waiting for 4Q 2013 to combine it with goodwill impairment testing.  Maybe they are just responding really, really slowly – even though they responded very quickly in 2009.  Maybe Kynikos’ “accounting issues”, the Siwei fraud and the huge dealer inventory problem have attracted the attention of regulators and management is distracted or wants to stop digging.  Maybe senior management is about to turn over and the Board wants to leave the restructuring to the next team.  The last one seems a good guess. 


If the market hates uncertainty, CAT’s lack of a reasonable playbook is likely to foster continued share price weakness. We may be reading this all completely wrong, but the lack of a clear response to CAT’s challenges struck us as a key aspect of CAT’s release.  What, exactly, are the longs looking forward to?  Are they just going to wait for resource-related capital spending to turn up (think 2025)?  As the charts below show, mining capital spending is already cyclically inflated and likely on its way lower.  Please do not email that now earnings expectations are low enough – we get that every quarter.  2013 is low enough now, excluding a possible 4Q goodwill impairment charge, but 2013 is almost over. Expectations for the out years are still too high in our view.


We have held three “black book” calls and written numerous notes outlining our bear case for CAT.  Our thesis has played out well so far, but all the while we had assumed that CAT would go to the playbook.  While it may be interesting to see what CAT does instead, we do not see alternatives that are likely to benefit the share price anytime soon.


CAT: Management Playbook Missing? - fdr1



CAT: Management Playbook Missing? - fdr2

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