Global Growth At Risk; Eye on Joy Global, Terex, Pan American Silver, Dryships, Fluor

At the time of writing, global stock markets are rallying, presumably as a positive response to the Fannie/Freddie action. I can understand the trigger-finger excitement. Institutions and governments worldwide hold substantial financial interests in the toxic paper of Fannie Mae and Freddie Mac, and they have been given fresh reasons to believe in the magic of America's currency printing presses. But as Congress slugs it out over the plan and as the enormity of the financial commitment sinks in again, we should not be surprised to see the excitement quickly fade. Interestingly, Paulson included the following caution in his take-over announcement: "Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions." Buyer beware.

Jim Cramer is asking for the Federal Reserve to cut rates again. I guess because rate cuts have worked so well so far. Maybe the Freddie/Fannie action forestalls such a move, but it sure seems to me that the U.S. will not stand idly by as the rest of the world moves quickly to debase their currencies in efforts to stoke their own growth.

As governments around the world begin to worry about the health and growth of their economies, American CEOs are still telling us the global growth story remains largely intact...with few exception. Here is my latest sampling of commentaries:

Joy Global (JOYG) - mining equipment and related machinery
The CEO of JOYG defends his company on Mad Money in the aftermath of an ugly 19% crash in the stock price following earnings on September 2. I believe the market did not like the outlook on margins, but JOYG RAISED earnings guidance and reaffirmed revenue guidance. I chose to get long JOYG and competitor Bucyrus (BUCY) after this collapse in anticipation of a strong relief rally from this (short-term?) over-reaction.

Terex (TEX) - industrial equipment maker TEX issued a major earnings warning on September 4th and was crushed for a 20% one-day loss: "While our Cranes and Materials Processing & Mining segments continue to perform better than our expectations, continued market softening and input costs in the Aerial Work Platforms and Construction segments in Western Europe and the United States are expected to more than offset those positive factors..." In other words, TEX is claiming that the commodity-related business remains quite robust.

Pan American Silver (PAAS) - silver mining
During the August 13th conference call, PAAS insisted that "...we are witnessing some short term trading volatility and I remain very optimistic that we will see silver and gold trend much higher over the balance of this year and in the 2009." President and CEO Geoff Burns even offered: "I personally do not believe that the fundamentals it took silver to over $20 per ounce in March of this year and helped the silver price average close to $17.50 for the first six months of 2008 have significantly changed."

Dryships (DRYS) - dry bulk shipping
The transcripts on Seeking Alpha from the August 22 earnings report provide us the following revealing quotes:

"Taking a look at the Baltic Dry Index or BDI we can see from the dark blue lines representing 2008 that the market has reached historic highs earlier this year. The seasonal slowdown we are witnessing these days is expected to reverse as China comes back from the Olympics and demand picks up again. We expect the tight supply and demand balance and the continued strong input of iron ore and coal into Southeast Asia and particularly China to continue for the balance of the year."

95% of analyst's questions covered financial and shipping topics unrelated to speculations about global growth. However, toward the very end, Jay Goodgal of Castalia Advisers asked: "Can you talk about the market in the fourth quarter with current levels of inventory stock levels at 64 million metric tons for iron ore in China or above depending upon estimates and that’s either normal levels or higher and anywhere between three and half and four and a quarter percent estimate of the fleet being delivered to the balance of the year, why do you think rates are going up?" Here is the response from George Economou: "I think you are going to see increase in coal movement. You have a tradition dull moment in the summer. You have a lot of the Europeans that take the coal during the summer and they start increasing again in September, you will see the same in coal in Southeast Asia. Iron ore, 64 million tones is high but not exorbitant and we still think that there was a slow down because of the Olympics and we believe that you would see a gain and increased activity in terms of tone mile. "

In other words, DRYS confirms suspicions that China brought its economy to a "halt" for the Olympics. In addition to seasonal lulls, this stoppage should prove to be a temporary halt in the global growth story.

Fluor Corp (FLR) - infrastructure

The transcripts on Seeking Alpha from the August 11 conference call provided a lot of good material on the outlook for global growth:

"Overall, we continue to see very strong demand across many of our markets including oil and gas, infrastructure and mining. W;e're seeing the market for power pick up as well."

"For Industrial and Infrastructure, the two most active markets here are certainly mining and infrastructure which includes transportation. Touching on mining first...there are some very sizable projects slated for the second half of the year. These continue to be driven by investment to expand both copper and iron ore supply and by very strong commodity prices. We also see viable prospects associated with alumina, gold, tar sands, nickel and uranium. We anticipate strong demand for large capital projects in this market segment, well past the end of the year."

"...the whole sector [has] moved down with oil over the last month to six weeks, which [is] amazing because oil is still at a price that is significantly more than what I would need [to warrant] investments in the projects we are all looking at. So I think if there is if anything that the market works out today represents a great opportunity for the overall... for the whole segment as oil prices are still at a very strong level to justify the capital programs that our clients have."

"...we've been really focused on the... what I call the downstream side of solar. To me, that's where the real opportunity lies because the plants that are necessary to make the product to create a solar cell are a lot more complex, lot more capital intensive than actual solar farm would be. And so that's what we're focused to our chemicals businesses producing the polysilicon that goes into those cells"

I particularly like the nod to solar...!

Global growth summary
So, what does it mean when all these corporate executives declare that the global growth story is intact even as the market sells off in contradiction? Your guess is as good as mine. The market's imperfect discounting mechanism is trying to predict a global recession ahead of the game. For reference, the U.S. stock market has experienced repeated sell-offs since 2005 in anticipation of a significant slowdown in America, and we still have yet to record two consecutive quarters of economic contraction. The company executives are not going to give you any advance warning. What you choose to do depends on how you balance chart technicals vs market fundamentals, short-term vs long-term, and your own analyses independent of what is broadcast in mainstream media. I still prefer to buy into deep sell-offs in the commodity space and sell on the subsequent sharp rallies. I now believe that commodity-related names are well oversold and are worth playing for another sharp bounce. But further out, I do think that global growth is at risk and will be even more convinced the more that global governments act to intervene in their respective economies.

Disclosure: long JOYG, BUCY.

Comments

[wobatus:]

Why is the dollar rallying if what you say is true?

A private speculators? Please, Fannie and Freddie common was owned by mom and pops for divvies. Individually or through funds. And the bonds were owned by Pimco, banks and foreign governments. They are getting bailed. The taxpayers, some of them, got cheap mortgagaes due to the implied, now explicit, government backing. Supposedly.

Sure, it all sucks, but the speculators who caused this mess are more likely the commodity funds now selling like mad, looking for the next "bull" market, which is, today, shorting commodities. Hedge funds cause this rapid fire rise and decline. And wall street's structured mortgage products screwed all of us as well. 100 billion or 2 or 3 for fannie bailout is actually chickenfeed compared to the hedge fund dislocations and ruin of our markets. Long term'ism is being destroyed by these jerks.

2008 Sep 09 10:47 AM

[sandspider:]

200 years for America to go from a Republic to a socialist democracy and in the same time period to go from being an exporter with real $$ in the bank to being 5 trillion in debt. In one week the internationals - bankers - speculators and what have you, doubled our debt to be balanced on the backs of Americans to 10 trillion! When and where will it end? "The king (fed) has no clothes!"

2008 Sep 10 05:02 AM