Why You Should Sell Caterpillar Inc. (CAT)

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) did recently acquire Plains Exploration, giving it a portfolio of US-based natural gas assets in addition to its mining operations, but even natural gas prices should not be expected to hold up in the event of a Chinese construction collapse.

Then there’s Australia. Stanley Druckenmiller, hedge fund manager George Soros’ old partner, recommend investors short the Australian dollar back in May. He reasoned that Australia’s economy was heavily dependent on the commodity market, and sagging demand would wreck havoc on Australia’s currency.

As a percentage of GDP, the mining industry accounts for nearly one-fifth of Australia’s economy.

iShares MSCI Australia Index Fund (ETF) (NYSEMKT:EWA) is a way for US-based investors to play the Australian economy. It holds 70 large- and mid-cap Australian stocks, including commodity giant BHP Billiton Limited (ADR) (NYSE:BHP), which makes up over 10% of the ETF’s holdings.

If China’s construction sector collapses, Australia’s economy — and by extension, EWA — should not be expected to perform well.

Investing in Caterpillar

Investing in Caterpillar is an indirect way to invest in China’s property boom. Should that boom go bust, Caterpillar shareholders could suffer as the maker of mining equipment finds the market for its products to be far weaker than it otherwise anticipated.

In addition, Freeport-McMoRan and the broader Australian economy could likewise suffer. At any rate, if investors are leery of China, it doesn’t make sense to be bullish on Caterpillar.

The article Why You Should Sell Caterpillar originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.

Joe Kurtz has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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