Caterpillar (NYSE:CAT) is up huge this morning after it blew away analysts’ earnings estimates for the 2nd quarter. Caterpillar is an important proxy for global growth because it sells so many machines overseas. So when it reports earnings of $0.72 a share when it’s only expected to make $0.22, it seems like a big deal.
The assumption is that global growth is helping Caterpillar. If only it were that simple. But Caterpillar missed expected revenues by nearly a billion dollars. Analysts wanted to see $8.7 billion in revenues, but they only got $7.9 billion.
Caterpillar benefited from cost-cutting and a lower tax rate. Since December, it has cut 17,000 full-time jobs and axed another 17,000 in part-time and contract jobs.
Caterpillar can be commended for cutting back its production to be in line with demand. But there clearly isn’t any growth here.
*****This is a common theme so far this earnings season. Companies are talking about stability, not growth. In other words, things aren’t getting worse. But they aren’t getting better, either.
Companies are beating earnings expectations through cost-cutting, which is essentially a one-time event. And in the big picture, those cost-cutting moves help profits, but ultimately remove demand for goods and services because they are adding to unemployment.
I don’t think unemployment has peaked. I also think that we will see high unemployment persist for a few years. And that will mean a long wait for robust growth from the U.S. economy.
And to complicate things, we can also expect more regulation and higher taxes to stifle growth. I’m calling this situation "Managed America." And investors need to be prepared for how to invest in Managed America.
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*****Here’s some great news from the commercial real estate sector. Convenience store company 7-Eleven is opening 200 new stores this year. Why? Because it’s getting leases at a 30% discount form just 6 months ago. And interestingly, it’s moving into some of the hardest hit real estate markets – New York and California.
Now, 200 stores won’t turn the commercial real estate market around. But 7-Eleven’s move illustrates how commercial real estate, and real estate in general, will recover.
The first step is the painful part – leases and mortgages go into default and are written off. This is a complicated process as there is usually a trail of financial obligations based on the assumption that whoever leased or purchased the real estate will be paying.
As we’ve seen, defaults and foreclosure have far-reaching effects. But once the losses are taken, the property can be leased or sold at a price that makes sense for a business. In other words, a company like 7-Eleven couldn’t make money at rents from six months ago. But now that the price is down 30%, suddenly it makes good business sense for 7-Eleven to open stores and hire people.
There’s a lot more pain to go through before this process actually leads to a growing economy. But it will happen, eventually.
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