Saturday, June 18, 2011

6/18 Weekly Commentary

I shifted to a neutral position over the past week, first by selling the short ETFs, then on Thursday the short mutual funds.  The stock market finished the week up on DJI, SPX, and Russell but down Nasdaq.
The 8-day lead on the short-term timing component of I1 timed the end of the decline in DJI, SPX, and Russell.  The Nasdaq has made and kept a slightly lower low.  This component indicates rally mode for a minimum of 5 more sessions (marked "early" on the chart), if the 8-day lead remains in effect.

Meanwhile the smoothed I1 is pointing to a bottom in late August.

The transition from a capital goods economy to a service economy has been a 50 year process and has rotted the U.S. from the inside.  America's bridges are a good indicator and, like the process itself, only show the rot when inspected.  The average American, like the frog in warm then hot water, has not noticed the destruction of his childrens' futures because it happened in slow motion.  The funds to fix infrastructure will come at the expense of new projects so the map of America will remain unchanged for 20 years.  Since the Highway Trust Fund for infrastructure has been running deficits for years, what infrastructure has been built and maintained have come increasingly from the general fund.  This is one more iminent problem that has been kicked down the road for decades.  
Caterpillar is the primary U.S.-based construction machinery manufacturer. 
Deere and McCormick are predominantly farm equipment
Joy Global is mining equipment. 
Bucyrus is coal mining equipment.
Caterpillar has declined sharply since April and will be a good short sale on a bounce.  China has taken over the wheel loading equipment within China and is rapidly gaining share in the excavator market (it has now mastered the more complex machining) within China.  The U.S. will be running a distant third after Japan there.  10 years from now Caterpillar will have sent it's manufacturing overseas or will not survive. 
Deere and McCormick are prospering due to the Fed's food inflation. 
Joy is doing well on base metal pricing.
Bucyrus has prospered on China shutting small coal mines and focusing on large ones.
Nucor and US Steel are all that remain of the American steel industry and export little (the rest are small potatoes).  (Nucor's exports are predominantly from it's Mexican mills.)
Meanwhile in all categories China is gaining share.  The ability to manufacture equipment "good enough" to do the job at half the American price has accelerated with China's infrastructure build-out.
The 5 companies above are all that remain of the 30 companies that comprised major capital goods manufacturers 50 years ago.  Caterpillar still remains dependent on U.S. government projects and this support will vanish.  In addition, there will be few Caterpillars sold in China 5 years from now.  This future prospect is in stark contrast with it's stock chart.

The elimination of food and base metal inflation, the elimination of new U.S. infrastructure projects, a slowdown in China, and the development of the Chinese machinery industry will be the bases for a reversal of the remaining U.S. capital goods industry.  The continued shrinkage of U.S. capital goods global market share will manifest in acute problems in the above manufacturers, with the possible exception of Bucyrus (depending on coal energy production trends).


  1. Great post, Steve.

    Sometimes I get very sad when I remember what the US was like when I was a little kid during the late 50's and what it has become today.

    For a few years now I have considered emigrating. Canada seems like the logical choice, but I know I would miss the southwest with all its sunshine and vast landscapes. It will probably take something serious and even threatening for me to actually do something about emigrating.

    Seems like you have settled into rural NM for the duration. You think things will hold together well enough that your own safety will not be jeopardized by staying in the US?

  2. pima, I think I'll be OK where I am. If it gets bad I have friends that have different survival skills to make up for whatever I may lack. Security will not be a problem. Local grown produce will have to be established.