Caterpillar Leads a Flat Dow as Ukraine-Russia Tensions Rise

The situation in Ukraine is weighing on the Dow Jones Industrial Average (DJINDICES: ^DJI  ) today as tensions grow. Caterpillar (NYSE: CAT  ) is leading the Dow higher after reporting better-than-expected earnings. As of 1:15 p.m. EDT the Dow was basically unchanged, while the S&P 500 (SNPINDEX: ^GSPC  ) was up six points, or 0.34%, to 1,882.

Ukrainian troops today moved in on pro-Russia separatists in Slovyansk. Russian President Vladimir Putin condemned the actions and ordered the Russian troops stationed near the border to begin new drills, saying: "If it's true that the current regime in Kiev sent the army against citizens inside its country, then it is a very serious crime against its own nation. It will have consequences for the people who make such decisions, including relations between our countries."

Both countries are talking past each other, claiming the other side is the one provoking tensions. The Ukrainians blame separatists backed by Russia, while the Russians are saying Ukrainian nationalist group Pravyi Sektor is threatening the Russians in Ukraine. Many believe Putin is blaming the nationalists to provide cover for an invasion of Ukraine.

The Dow is only up slightly as the possibility of war in Ukraine weighs on investors' minds. In other news, there were two U.S. economic releases today and numerous positive earnings reports.

Report

Period

Result

Previous

New unemployment claims

April 12 to April 19

329,000

305,000

Durable goods orders

March

2.6%

2.1%

Durable goods orders ex-transportation

March

2%

0.1%

The 2.6% gain in durable goods orders beat analyst expectations of 1.8%. The rise was led by a 4% jump in orders for transportation equipment, which includes and 8.6% jump in orders for nondefense aircraft. Orders in the transportation sector can be volatile month to month. Looking at durable goods orders excluding transportation, the report still looks strong with a 2% rise, led by a 5.7% jump in orders for computers and electronic products. As these are orders and not shipments, both reports signal that the economy is set to grow faster than many had predicted going forward, and they offer more evidence that the Q1 slowdown was likely the result of harsh winter weather and not a new downward trend.

Also propping up the Dow today is Caterpillar, up 2% to $105.49. Investors have had low expectations for Caterpillar because the stock is fighting a headwind of slowing infrastructure spending, and thus lower commodity demand, in China. Chinese infrastructure spending and the country's massive demand for all types of resources have been a boon to the mining sector around the world. As China faces an economic slowdown and supply surpluses in many industries, commodity prices and activity have been hurt. Most notable has been the drop in iron ore prices, which have fallen nearly 50% from the highs of 2008 and 2011.

Iron Ore Spot Price (Any Origin) Chart

Iron Ore Spot Price (Any Origin) data by YCharts.

As Caterpillar's equipment is mainly used by the mining, construction, and power supply industries many believe the company will be disproportionately hurt by the Chinese slowdown. While I still believe that will be the case at some point, it hasn't happened to a great extent yet. Caterpillar's mining sales are expected to drop 20% this year. Its construction and power supply segments are making up for the shortfall with expected revenue growth of 10% and 5%, respectively.

Caterpillar reported that its earnings per share rose 5% to $1.44, beating analyst expectations of $1.21. Revenue was basically unchanged at $13.2 billion, slightly above analyst expectations of $13.1 billion. The results were strong enough that Caterpillar upped its 2014 EPS forecast to $6.10 for 2014, higher than its previous forecast of $5.85 and analysts' forecast of $5.72. I believe forecasts for Caterpillar are too optimistic, given the chance of a global commodity slowdown.

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