A healthy caterpillar will always turn into a butterfly, a beautiful, stunning representation of a natural system in good balance with sustainable proportions. Likewise, a healthy Caterpillar is a sign of a stable and healthy economic system, whether defined by region or the entire globe. If we look at Caterpillar’s dealer sales figures, it gives us a hard and pure measure of business investment in physical productive capacity – unlike other economic data series that are either a sentiment survey or some statistical model of a business survey.

ABOOK May 2013 CAT Metamorph

I have noted before that Caterpillar has seen far better days, and that current results do not bode well for our expectations of economic butterflies. Given the close alignment of Caterpillar dealer sales and economic outcomes, we can make some relatively robust assumptions about the state of global economic output in the business investment segment.

ABOOK May 2013 CAT Longer

The US housing bubble is clear in the CAT dealer sales figures as North American sales soured in the latter part of 2006. However, despite the drag of the US housing segment, the global economy moved forward even into the middle of 2008, as did many parts of the domestic economy. It wasn’t until the economic collapse in the fourth quarter of that year that other global regions were dragged into the dramatic dislocation.

Out of that depression, the business climate across the world has moved in near unison. That includes the high growth rates of 2010 and early 2011, and then the accelerating downturn beginning in 2012 and becoming a full and sharp contraction (at least according to CAT) in early 2013.

ABOOK May 2013 CAT Recovery

The momentum (or lack of it) is absolutely clear if we simplify to CAT’s total global sales.

ABOOK May 2013 CAT Total World

The results from CAT shown above look so very similar to nearly every economic data series we have analyzed in the recovery period. There is a uniformity and synchronization beyond just CAT sales in various geographic regions, including end user demand.

Just from this data alone, we can surmise that total economic demand for goods has not kept pace with expectations, otherwise businesses would still be ordering more equipment for investment in physical production. Related to that, Walmart and Target, the #1 and #3 retailers in the US, respectively, just released corporate earnings that pretty much conform to the trajectory of data pulled from CAT.

In the 13-week period from January 26 – April 26, Walmart comparable store sales fell 1.4%. Total consolidated sales were only up 1% for the period. Total free cash flow totaled $1.9 billion, but Walmart decided to increase its share repurchase and dividend activity to $3.8 billion. So, from whatever meager income the company was able to extract from a declining sales environment was more than “invested” in the effort to maintain EPS and the stock price.

Over at Target, total consolidated sales grew by only 0.5% in the first quarter. Like Walmart, comparable store sales also fell (-0.6%). EBIT was down 7.5% compared to Q1 ’12, to $1.2 billion; Q1 ’13 GAAP earnings were $498 million. And just like Walmart, Target made sure to return more than that to shareholders, some $779 million in the first quarter.

The lack of forward revenue momentum and declining comp sales is both an indication of economic demand and a constraint on business activities. But in almost every case, companies react in unison to this constraint: maintain emphasis on EPS through financial “investment”.

The emphasis on stock price is both a reaction to the bubble climate, as monetary conditions provide the incentive structure that feeds this behavior, and partly its creator. The clear preference for returning “capital” to shareholders is partially to blame for the economic malfunction in the first place, while subsequently acting as a positive feedback loop that amplifies this economically damaging imbalance. The more revenue pressure on companies, the more they respond with favoring returning cash to shareholders, the worse the real economy gets as capital investment is diminished and thus less jobs are created directly from corporate net income.

What we get is not sustainable economic activity, but a stock price emphasis that eats the caterpillar before it ever has a chance to transform into that beautiful next stage of life.

 

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