Citi Analyst Frowns on Obamamania; ABB (ABB) Gives Reality Check

As you know, the market is as much about sentiment as reality; most of the names we own are based on reality. But many - such as China, infrastructure, and housing at this moment - we own on nothing more than hedge fund thesis. Frankly, the minute these stocks start to break down as thesis turns to reality we are going to be exiting stage right.

Today we had some splashes of reality in infrastructure by a Citigroup analyst, and a European infrastructure company called ABB (ABB). Now please, don't get your hearts broken - a bridge in every backyard is still on track (per hedge fund thesis) but the reality is as the global economy slows the number of large projects will suffer/stall - and the government projects (that in many cases will take multiple years to play out fully) are only going to partially (and in small part) offset that. We wrote that a few times the past few weeks, but the stocks shot up anyhow because, as we like to say - perception is reality. Hence, when people realize Obama will not be depositing $3 Billion of projects into every engineering and construction company, these stocks will suffer.

I'd also like to add that oil has broken its long term support of $40 which is alarming; I thought that would hold at least for a while. At least until people realized how bad the global economy will be in 2009. While the equity market is living in an alternative universe of hope, oil and copper seem to be agreeing with my thesis. So all these petro dollar rich countries, living the high life at $70-$140 oil, are going to be a lot poorer this year. Some projects in the energy space will continue on as some "should" continue whether oil is $30, $60, or $120... but others will be cancelled.

That said, these are facts and stocks go up on thesis (Obama!) So I'd like to stress again - I am a "renter" of our one infrastructure stock on nothing more than Obama hype. Once the hype fades and hedge funds move on to the next thing to run up for 4 weeks we'll be running away too. Welcome to the casino of thesis.

Here is what Citigroup had to say - it's specific to Fluor (FLR) [one of the best E&C companies on the planet] but it applies to the whole group

• Shares of Fluor Corp. fell Friday as an analyst downgraded the engineering and construction company, downplaying benefits from public works spending planned by President-elect Obama and the Democratic leadership in Congress. Analyst Brian Chin of Citi Investment Research downgraded the Irving, Texas, company to "Sell" from "Hold."
• In a note to investors Thursday, he said Fluor's shares are up about 60 percent since mid-November, which he said cannot be accounted for by the impact of Obama's plans and the recent rally in energy-related shares.
• Chin said he also believes Fluor's share of a $15 billion refinery could be canceled by the Kuwaiti Oil Ministry.
• For the sector, Chin said earnings per share will rise by less than 5 percent in the next two years, which "has been more than factored" into engineering and construction company shares in the last four weeks.
• Firm's math concludes two of the E&Cs, Foster and McDermott, should not benefit at all from a stimulus package.

Here is where ABB sees things going

• Swiss engineering firm ABB warned of a sharp slowdown in orders over the past two months on Friday, and pledged to cut costs by $1.0 billion to deal with a more challenging economic environment. Its difficulties illustrate the toll that is being taken on providers of infrastructure by the clampdown of banks on financing.

I'd like to stress once more so people don't misinterpret - I think global infrastructure is an excellent play over the next decade; as are commodities. China and India are real stories, and modernization and industrialization will happen. But government spending (worldwide) is not going to replace a global economy gone bust. But this is the stock market, which is more about hedge funds finding a thesis and running and gunning stocks - so we're playing the game for a while at least. Sometime in a year or 18 months, these should be excellent stocks to believe in for real as the global economy begins to recover (2011?) from the disease the United States has spread to the world.

Remember, 40 acres, a mule, a solar panel, a 4.5% mortgage, and a bridge in every backyard - the current Wall Street thesis. Reality? Not quite so rosy.