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 mgarza4@bloomberg.net