Monday, November 6, 2023

Morning Note: Cat's Signal, Investor Denial, and Your Weekly Sector, Region and Asset Class Update

Here are the highlights from Bloomberg's Tatiana Darie's warning about the signal in Caterpillar's latest numbers (which [Cat's global sales growth], btw, happens to be one of the 47 inputs to our PWA Index).

Emphasis mine:

Caterpillar Is Sending a Warning About the Economy: Macro View (Bloomberg) -- Caterpillar earnings spooked investors, who saw a drop in its order backlog as an ominous sign for the global economy. At least for the US, its largest market, that holds some truth, which means it’s also a warning for the stock market.

"Caterpillar reported that its order backlog decreased by $2.6
billion in the third quarter compared with the previous three
months and was down, too, from a year earlier. It marked the
first annual decline since the third quarter of 2020, when the
company was grappling with the supply-chain effects of the
pandemic.

The company is viewed as an economic bellwether because its machines dot construction, mining and energy sites around the world. Investors look closely at the order backlogs, which typically indicate customer demand in the months ahead.

Macro portfolio managers should worry as well because when the industrial company saw a drop in its order backlogs in the past, the US economy has tended to slow soon after.

Over the past decade, there have been 10 other instances when Caterpillar has reported a decrease in its overall order
backlog, either on a quarterly or annual basis, according to
data compiled from transcripts and presentations. In seven of the 10 times, quarterly GDP slowed in the following quarter."

"…a growth deceleration would be consistent with
warnings from the Fed that the economy is starting to see the effects of its aggressive rate hikes. Caterpillar’s warning may be one of the signs. If the past is any guide, it dims the stock market’s prospects for a strong year-end recovery."

With regard to the stock market's year-end prospects, while we 100% agree that this bear market's last leg down (provided there is one) will occur amid, and due to, a growth deterioration, ironically, initial evidence of such may very well produce an initial bounce (like last week), as investors (in denial) will initially view it as nothing more than the impetus for the Fed to loosen policy a bit... As opposed to the beginning of an earnings crushing, and, thus, stock market damaging, recession... The odds of the latter heading into next year are far too high to ignore right here!

And here's your weekly sector, region and asset class results update:

 











Asian stocks rallied overnight, with 15 of the 16 markets we track closing higher.

Europe's leaning green so far this morning, with 11 of the 19 bourses we follow trading up as I type.

US equity averages are mixed to start the session: Dow up 63 points (0.18%), SP500 up 0.19%, SP500 Equal Weight down 0.18%, Nasdaq 100 up 0.40%, Nasdaq Comp up 0.37%, Russell 2000 down 0.54%.

As for Friday’s session, US equities traded higher: Dow up 0.7%, SP500 up 0.9%, SP500 Equal Weight up 1.2%, Nasdaq 100 up 1.2%, Nasdaq Comp up 1.4%, Russell 2000 up 2.7%.

This morning the VIX sits at 15.28.

Oil futures are up 1.61%, nat gas futures are down 5.12%, gold's down 0.37%, silver's down 0.37%, copper futures are up 0.94% and the ag complex (DBA) is up 0.07%.

The 10-year treasury is down (yield up) and the dollar is down 0.04%.

Among our 33 core positions (excluding options hedges, cash and money market funds), 16 -- led by DBB (base metals futures), VNM (Vietnam equities), EWW (Mexico equities), VWO (emerging mkt equities) and XLK (tech stocks) -- are in the green so far this morning... The losers are being led lower by URNM (uranium miners), Range Resources, XLRE (REITs), SPTL (long-term treasuries) and EMB (emerging mkt bonds).

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
― Charles MacKay, Extraordinary Popular Delusions & the Madness of Crowds

Have a great day!
Marty





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