Wednesday, January 14, 2009

Caterpillar Short Sellers Bet Against Stimulus Boost

Bloomberg: Jan 14 2009

Bets against shares of Caterpillar Inc. reached their highest level since April on doubts that the world’s largest maker of construction equipment will get a boost from President-elect Barack Obama’s public-works spending plan.

Short interest in Peoria, Illinois-based Caterpillar rose 25 percent to 27.5 million shares from April 30 through Dec. 31 2008, according to New York Stock Exchange data released this week and compiled by Bloomberg. The jump follows Caterpillar’s 36 percent stock rally from a four-year closing low in October through year-end. The shares dropped the most since Dec. 1 today.

Obama is pushing Congress to adopt a $775 billion stimulus plan that may include funds to rebuild crumbling roads and bridges and to invest in energy and technology programs. The plan to stem a second year of recession for the world’s largest economy remains an outline, and some analysts predict equipment makers won’t get a boost until at least 2010.

“The Obama stimulus glow drove up the share price, creating an opportunity for short sellers who are betting against the recovery,” Matthew Collins, an analyst with Edward Jones in Des Peres, Missouri, said in a telephone interview.

Mining and road-building equipment accounted for 63 percent of Caterpillar’s sales and about 45 percent of operating income in the first nine months of 2008.

Rising short interest indicates an increase in speculation that the shares will drop. In a short sale, a trader tries to profit from a price decline by selling borrowed shares in the hope of repaying the loan later with cheaper stock.

‘Underwhelming Plan’

The U.S. will need to spend as much as $700 billion to compete against Chinese companies, which benefit from new roads, bridges, ports and airports, Caterpillar Group President Doug Oberhelman said in an October interview. Jim Dugan, a spokesman for Caterpillar, declined to comment on the stimulus plan or short sales, saying it’s too close to the annual earnings report.

“President-elect Obama’s stimulus plan is looking to be underwhelming for infrastructure spending over the next 12 months,” said Larry de Maria, an analyst with Sterne Agee & Leach in New York. “The benefit to machinery companies that have rallied off the lows has likely been overstated at least for 2009, as the amount of money to trickle down to new equipment purchases may not be enough to move the needle for sales.”

Caterpillar fell $2.16, or 5.2 percent, to $39.24 at 11:35 a.m. in New York Stock Exchange composite trading. Earlier it dropped 7.6 percent, the biggest intraday percentage decline since Dec. 1. The stock lost 42 percent in the past 12 months.

$85 Billion

The amount of stimulus spending on infrastructure that officials are discussing is $85 billion, with about half of that being spent within a year, Robert Wertheimer, an analyst with Morgan Stanley, wrote in a report today.

“The resulting math does not mean much in a trillion-dollar construction market,” Wertheimer wrote.

Short interest has also surged in recent weeks for equipment makers Bucyrus International Inc.,Joy Global Inc. and Terex Corp. The shares of all four rose 11 percent or more on Dec. 8, the first trading day after the incoming Democratic president outlined his stimulus plan in a radio address.

South Milwaukee, Wisconsin-based Bucyrus, which makes and designs large excavation equipment for surface mining, saw its short interest rise sixfold since the end of September, to 10.9 million shares.

Westport, Connecticut-based Terex, the world’s third-biggest maker of construction equipment, and mining-equipment maker Joy Global reached new highs in short interest in mid-December. The number of shorted Terex shares almost doubled since mid-October, to 6.17 million shares at year-end, after peaking at 7.02 million the week after Obama’s speech.

Commodities Prices

Milwaukee-based Joy Global’s short interest ended the year at 9.77 million shares, more than triple the amount in mid- October. It peaked at 10.4 million shares on Dec. 15. Officials from Joy Global, Terex and Bucyrus declined to comment.

Short-sellers also may be betting that lower prices for commodities including metals, energy resources and crops will hurt makers of equipment for construction mining and farms. The Reuters/Jeffries CRB Index has declined by more than half since July 2 and plunged 36 percent for the year, the most since its debut in 1956.

Short interest in Moline, Illinois-based Deere & Co., the world’s largest maker of farm equipment, rose 82 percent from Sept. 30 to 8.9 million shares on Dec. 31, the data shows. A Deere spokesman declined to comment.

“Agricultural commodities prices have been cut in half, and that’s what drives farm incomes and demand for Deere equipment,” said Collins, the Edward Jones analyst.

To contact the reporter on this story: Melita Marie Garza in Chicago at

Tuesday, December 2, 2008

Q & A: Walt Bogdanich. Investigative journalist.

Interview: Walt Bogdanich, assistant editor, Investigative Desk, New York Times, a three-time Pulitzer Prize winning journalist.

I had a great opportunity to meet Mr Bogdanich to discuss his prize-winning series on how counterfeit glycerin – in this case ethylene glycol produced in China found way into the pharmaceutical supply chain in many countries causing death for hundreds of unsuspecting patients. He spoke about putting the pieces together across four continents with a Jake Hooker, a colleague in China.

Q1: How did the germ of the story develop?

In 2006, as patients in Panama were dying in droves from counterfeit cold medicine, I looked on with one overriding thought: this epidemic looked disturbingly familiar. A decade earlier, I had reported on a similar poisoning in Haiti where at least 88 children died from counterfeit fever medicine. In that case, the poisonous ingredient was traced to China, but the government there blocked any further investigation. No one was ever charged, much less punished. The incident was filed away in my memory.

I told my editor Matt Purdy, that I wanted to investigate the Panama deaths even though none of the victims were American. I had a hunch that China might be involved, just as it was a decade earlier in Haiti. Tracing the poison back to its manufacturer would reveal how counterfeiters operated in a globalized economy and China’s role as a major supplier of fake drugs. I wanted to know who would do such a thing. Did they know the consequences of their actions? And why did regulators not do anything about it?

Q2: How did you plan and execute the story?

Reporting in Panama was not without its challenges. When I went there the situation was still playing out. I had never visited the country, had no sources there. In addition, government officials were embarrassed about their role in distributing the lethal cold medicine and were reluctant to discuss the case. I did not lie but we manage to sneak into hospitals. We tracked a person who had consumed the poisonous ethylene glycol – but managed to survive.

I wanted shipping and sales records to document precisely how the poison moved from manufacturer to patient. I eventually got the records - from non-governmental sources - and they confirmed my suspicions: the Panama poison had indeed come from China, passing through a toxic pipeline that stretched across three continents. The poison had been falsely labeled and exported by a trading company owned by the Chinese government. I found that traders outside of China sold and resold the lethal ingredients without verifying that the products were safe, similar to the Haiti incident.

Q3: Describe the how you made connections with the developments in China for your story?

I got in touch with the Times’ foreign desk that put me to Jake Hooker in China. I asked Hooker to find out about the manufacturer in Hengxiang in the Yangtze delta. How did the poison slip into the drug supply? Was the Chinese government aware of the situation? Was the manufacturer certified to sell pharmaceutical ingredients? I sent him a couple of questions, he sent back 40 pages of reporting full of color and detail! I trusted him.

Hooker spoke to many people outside the factory - truckers, farmers living beside factory, salesmen among others. He could speak Chinese. He therefore had access to public records.

Companies must file reports with the local branch of the State Administration of Industry and Commerce, and these reports have names and addresses of employees, a list of licensed products, and annual inspections from regulatory agencies. Chemical plants must also declare the main ingredients they use to make their products, as part of environmental assessments.

The clinching moment was when Hooker managed to get in touch with another counterfeiter. We had an opportunity to look into his mind to know how he operated.

We found that these counterfeiters and manufacturers used a route across various countries where inspections at ports and custom checkpoints were the least. The Free Trade Areas (FTAs) were used for this purpose.

Q4: How difficult is it to gain access to public records – medical reports, judicial proceedings and customs information – that was used in the story?

Public records are the heart and soul of what I do. That is the beauty of public records. There are always underlying documents to support your story. I checked the internet and culled out information. We made our own databases. I could access websites of those Chinese companies that were in English. I found the names of companies, the products they sold, those that were licensed or regulated. Although I am not a numbers person, I knew there was a way of quantifying the problem. We had to be specific.

Q5: What kind of impact that the stories have?

It brought the attention on to goods from China. The U.S. administration had new regulations for Chinese made goods and issued import alerts at borders. Something as ubiquitous as toothpaste was known to have contamination. This elicited a lot of concern. There were high level negotiations between both the countries on this issue.

In China, although most of the culprits got away, the factory that produced faulty glycerin was shut. The company was owned by Chinese government officials and no one was prosecuted.

Q6: For a three-time Pulitzer Prize winner, how does it feel when you crack into these stories?

It is very gratifying. There is a joy in being able to put together all pieces of a story. There is a sense of accomplishment. Here was a 5000 words non-American story in an American newspaper done by Americans. There is a difference between whipping up fast food and laying out French cuisine. It is worth the effort and is memorable.


It was my first day at NYU, when Mr Bogdanich came to speak to us about his experiences. His speech was very inspiring, reminding us about the true responsibility of a journalist - to keep important issues alive by asking simple questions even when they disappear from public memory, to dig deep into questions left unanswered in everyday reporting. Meeting him one on one for a class assignment was a humbling experience. I strongly feel that every journalist must possess these two qualities - empathy and humility - Mr Bogdanich has both in abundance.

Saturday, November 29, 2008

Econoblogosphere and the state

Real Time Economics , WSJ's blog took note of Peter R Orszag's appointment by Obama. The blog said that Orszag's appointment means that the econoblogosphere has lost an important voice since he spent time correcting media's wrong interpretations to the lightening changes in regulations over the last few months. Orszag put up a post at the Congressional Budget Office's blog that he would miss the CBO. He has been appointed for the Office of Management and Budget job. Mr Orszag has an interesting view on why the $ 700 billion bail-out package may not have a lasting fiscal impact on the government's balance sheet - depending on whether the transactions are a net gain or a loss to the government.
I think this is an interesting development when key future budget officials are in touch with the junta (for all non-Indians, 'junta' is a word used in Hindi to describe the common man.) I think it says as much about blogging as a medium as it does about the new generation public official.
I cannot conceive of Indian budget makers being so open to the media and the world at large! They are usually sequestered in the finance ministry both before and after the annual budget exercise. To be fair, there have been many officials who take it as their mission to educate government/economic reporters on the actual consequences of a budgetary allocation or accounting changes, but they are few and far in between.
This culture of speaking to the media - by the rank and file of the administration stems very much from the top. Many senior journalists in Delhi tell me, if the minister in question is 'open' to the media, it comes across with the way bureacrats in revenue, expenditure and economic affairs deal with the media. Have strong reasons to believe that the current administration is far from being courteous to economic journalists.
Coming back to the Obama administration, am sure American journalists are looking to having access to a more open government over the next few years, given that it was preceded by the most all-inclusive Presidential campaign.

The politics induced liquidity crunch

That we live in bizzare times has long been accepted, but I guess never fails to surprise us ever so often. Here is a report on how banks on the Gaza strip are facing a liquidity crunch as a result of sanctions by Israel. The Associated Press reported, "The Israeli shekel is a widely used currency in the Gaza Strip, and the territory needs at least 400 million shekels, or about $100 million, each month in new currency to replace aging notes and to pay salaries......The main source of currency is the moderate Palestinian President Mahmoud Abbas' government in the West Bank, which sends in currency shipments each month to pay its civil servants. The government dominated by the Fatah faction still claims authority over Gaza, despite losing control of the territory last year to the rival Hamas militant group." Gazans are pushed to using tattered notes. One newspaper noted that the term 'financial meltdown' has taken a whole new meaning here.

This is even when Israel's banks will be infused with $2.75 billion to shore up the banking sector to ensure credit availability. Merrill Lynch cut earnings estimates for Israeli banks by 40% in 2009. A MarketWatch article critiques the measures taken by the Treasury Department in Israel.

Saturday, November 22, 2008

Capital Losing Color

Taking stock of currencies:
1. The Chinese currency has remained virtually unchanged because it is contained within a narrow trading band. China's currency has a 'crawling peg' to the U.S. dollar but is still not fully convertible.
2. The Singapore Dollar - among Asia's worst performing currencies this quarter after the central bank - the Monetary Authority of Singapore (MAS) shifted a 'zero-percent appreciation' stance last month. It has fell 6.2% against the dollar since October.
3. The Indian Rupee: This currency has shed 21% this year trading over Rs 50 to a dollar. The RBI has been selling dollars in the currency market either directly or through government-onwned banks to prop up the falling rupee
4. Of all the currencies in the world, the worst performing is the Icelandic Krona because the country essentially went bankrupt. The currency is down 55.70% year to date.
5. The Russian Ruble has already fallen significantly this year but the Argentinian Peso has only dropped 5%. But weakness is expected in both. Russia used up a quarter of its forex reserves (fell by $144.6 billion) since August as the central bank struggled to contain its worst financial crisis since 1998. The ruble slumped 15% against the dollar since July 31 and 5.5% versus a basket (which comprises of 55% dollars and the rest Euros)
6. South Korean Won has lost 40% and touched a 11 year low last week. One investment bank sent out the following note to investors : "We painfully realised that our 1.1 percent growth forecast for Korea in 2009, while being consistently the lowest on the street, is just too optimistic if our deleveraging theme plays out. Thus we are lowering the 2009 GDP forecast to minus-3 percent."
7. The Citigroup news is putting the dollar in a spot today, it is helping both the Yen and the Euro. But overall there is still confidence in the greenback despite fundamentals.
8. Relative to the dollar, the euro is weakening. Investors have lesser confidence in the Euro than in the dollar. (Notwitsdtanding the current scenario)
9. The yen rose against the dollar. It also gained against the Australian and New Zealand dollars on the speculation the carry trades will be reversed as the credit squeeze hurts profits of companies.

Tuesday, November 18, 2008

Degrees of crises

Indicators of financial market stress: Bank credit default swap rates
(An average of 5 year CDS rates on bank's senior debt)

COUNTRY---------ROUTINE -------TURMOIL-------CRISIS---------NOW
PERIOD-----------AUG 07-----------SEP 08----------OCT 08---------NOV 08
1. USA-------------21-----------------158--------------271-------------142
2. EURO AREA----13------------------79---------------170-------------127
3. U.K.-------------10-----------------97----------------177-------------115
4. 3 MNTH--------39-----------------125---------------321-------------189

Source: OECD

Sunday, November 16, 2008

Crystal Ball

A brief gist of a seminar at the Stern School of Business last week - 'On advising the next president on global finance' :

*China’s stimulus package has set the tone for other emerging economies where there is a realization that they cannot export their way out of the problem. External deficits for some of these countries have stopped growing. The issue is that some economies are net borrowers that worsens the situation. So there is a dire need to ensure liquidity to these economies particularly Eastern European ones.

*It was pointed out that we are not living in an era of free floats of currencies after all, lets stop deluding ourselves – the yuan is pegged to the dollar, Russia’s currency is pegged to the euro and the dollar, the Japanese Yen is not a free float currency, nor is the Indian Rupee.

*An interesting observation was that 75% of the total banking assets in the country are across six bank-holding companies. Economists did not agree with each that it was a good thing. Some suggested that such is the situation that GMAC may become a bank soon!

*The International Accounting Standards Board (IASB) is being persuaded to give greater discretion to banks on how they must account for the value of the assets on their books.

* Pace of new regulations - Technically the Fed is not supposed to do unsecured lending, it is precisely doing that by stepping in for institutions it does not regulate. Will these widespread changes in regulatory policies prove to be costly mistakes in future?

*Can IMF help? With $200 billion to spare to ‘help’ out economies, that’s a pittance, panelists felt.

*A member of the Roubini camp – painted a worst case scenario –
1. Oil at $30 a barrel
2. Commodity exports contract further
3. Eastern European economies do worse
4. China’s stimulus does not work
5. Current account surpluses go up
6. Deflation feeds into the U.S.