Caterpillar outlook – market update

CAT chart shows immediate drop below 40 and a retest of 36/37 is due. Fundamentally, the stock looks very cheap ($6 for 2008 matches 6.7 PE) but it had a huge run in emerging markets construction, which came to a standstill and CAT might face huge losses from currencies as well. So the earnings are by no means sustainable for 2009 and a drop by 50% is already priced in. Still, in a deep recession that might turn out to be a trend, therefore the valuation approach might be not reliable (especially with further expected Dollar strength). For the ones who want want to participate in stocks in the mid 30’s, this might be a defensive value until mid 2009.

Market trades again with very low volume as yesterday and does not make a real statement yet. The basic statement though is the earnings will be weaker in Q4 as warnings increase and positive surprises narrow on top of the fact that basic effects of a weaker economy need to be priced into the 2009 earnings, which are still to high. On a net basis, they expect a earnings growth for 2009 compared to 2008 – mainly based on the expectation that financial earnings will somehow improve. I doubt that can happen unless taxpayers money pumps up the balance sheets with softer rules on marking bad assets or due to the fact they can sell their assets at high prices to TARP, which might give them a one time profit if they marked them down.

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~ by behindthematrix on October 21, 2008.

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