Caterpillar (CAT) is the latest victim of the commodities crash…

Caterpillar is the world’s largest publicly-traded machinery manufacturer. It sells trucks, bulldozers, and other heavy machinery to miners, energy producers, and lumber companies.

Last quarter, Caterpillar’s sales fell 13% from the year before. Profits fell 29%.

Regular readers know that commodity prices have crashed. The Bloomberg Commodity Index, which tracks 22 different commodities, is at a sixteen-year low. The price of oil is down 51% over the last year. The price of lumber is down 34%. Platinum and copper prices are both down more than 24%.

Crashing prices have forced commodity producers to cut back on spending. The Wall Street Journal reports that global energy and commodity companies will cut capital spending by 14% this year.

These companies are Caterpillar’s main customers…and they’re not buying much equipment from Caterpillar right now.

•  On Thursday, Caterpillar announced $1.5 billion in spending cuts…

The company plans to lay off 10,000 workers over the next four years.

Management warned that sales in 2015 and 2016 will be lower than it originally projected. It blames “broadly weaker business conditions.”

Caterpillar’s stock fell 6.3% on the news. As we show in the chart below, its stock is now down 35% since last September.

•  Caterpillar isn’t the only big company having trouble with crashing commodity prices…

Regular readers know that big mining company Glencore (GLEN.L) recently reported ugly results.

Earlier today, Glencore’s stock plunged an incredible 29%…to a new all-time low.

Glencore was a huge company. A year ago, it was worth $45 billion, roughly the size of iconic U.S. carmaker General Motors (GM).

But its stock price has fallen so much that Glencore is only worth $10 billion today. It has lost $13 billion in value in just the past month.

Like Caterpillar, Glencore has announced drastic spending cuts. It recently suspended two dividend payments and announced plans to sell $2 billion in assets. On Friday, Glencore said it was also selling part of its agricultural business. On top of that, the company raised $2.5 billion earlier this month by issuing new shares.

Glencore is trying to cut $10 billion from its $30 billion of debt by the end of 2016. Some investors don’t think it will be enough. The Wall Street Journal explains:

Investec Securities said in a report Monday that if commodity prices don’t rebound, the value of Glencore’s stock is “virtually eliminated.” That’s because Glencore, with nearly $30 billion in debt, would need to dedicate excess cash to repaying debt obligations, the analyst said.

If prices don’t recover, “Glencore may have to undertake further restructuring beyond the dividend suspension, capital raising and asset sales programs it has already announced,” Investec said.

Meanwhile, falling commodity prices are also hurting entire countries…

•  On Thursday, Norway’s central bank cut its key interest rate by 0.25% to a record low…

The rate cut is meant to help Norway’s struggling economy. (Regular readers know low interest rates make it cheaper to borrow money.)

Norway’s unemployment rate just hit an 11-year high. And its currency, the krone, has fallen 21% over the last year.

Crashing oil prices have hit Norway hard. Norway is the largest oil producer in Europe. Oil and natural gas make up 67% of the country’s exports, according to the European Commission. They also make up 22% of its gross domestic product (GDP).

•  Norway made a lot of money when the price of oil was high…

It tucked a lot of those profits away into its sovereign wealth fund, which is basically a giant national investment fund.

Norway’s sovereign wealth fund grew into the largest sovereign wealth fund in the world. It owns more than $800 billion in assets, including 1% of all stocks worldwide. It also owns 2% of all European stocks, making it the single largest owner of European stocks.

If Norway’s economic problems continue, its sovereign wealth fund may have to sell stocks to cover the nation’s bills. Bloomberg Business explains:

If the government has to withdraw money from its $875 billion sovereign wealth fund, it will be a historic step. It’s either that, or heavily rein in fiscal spending at a time when the country needs it most. The state’s spending could start to outstrip income from oil, which it pours into its wealth fund for future generations.

If Norway does decide to sell part of its massive portfolio of stocks, it could put downward pressure on global markets.

Chart of the Day

The crisis in emerging markets is creating big problems for Caterpillar…

Emerging markets are markets in countries on their way to becoming developed like the U.S. and Germany. China, Brazil, and Russia are all emerging markets. As a group, emerging market stocks have fallen 23% over the past year.

Financial Times reports that Caterpillar receives 60% of its pre-tax profits from outside of the United States. Much of that revenue comes from emerging markets.

Today’s chart compares Caterpillar’s stock price with the MSCI Emerging Markets Index. This index tracks the stock performance of roughly 800 stocks in 23 different emerging markets.

Over the past decade, Caterpillar’s stock price has moved closely with emerging market stocks.

And as you can see, emerging market stocks and Caterpillar recently plunged together.

Regards,

Justin Spittler
Delray Beach, Florida
September 28, 2015

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