Cramer: Caterpillar pain is just beginning

Jim Cramer didn't expect Thursday to be such an ugly day in the market. When he woke up at 4 a.m. he saw positive signs floating around. A strong dollar, oil flat and futures positive. But thanks to Caterpillar, it all went downhill.

Caterpillar, a large stock in the Dow Jones industrial average, sent shock waves through the market Thursday when it announced a shortfall of $1 billion in sales on a $49 billion basis. Additionally, it announced layoffs of as many as 10,000 workers as a result of the shortfall and weakness in various end markets.

The "Mad Money" host thought that Caterpillar was bizarrely honest about things. It pointed out twice in its release that this is the third consecutive year of sales going down, and at this pace it could be the first time in its 90-year history that it had declining sales four years in a row.

"That is an astonishing fact given that Caterpillar has been through a heck of a lot of downturns, not to mention the Great Recession and the Great Depression," Cramer said.

"CAT remains a sell, despite the fact that the company still produces the best big machines on Earth" -Jim Cramer

Yet these results make plenty of sense, considering that Caterpillar is the epicenter of old mining and manufacturing. The weakness stems from end markets such as construction, resource, energy and transportation industries which are the big three that drive global growth.

So how surprising was the Caterpillar announcement?

Caterpillar is one of the few U.S. companies that had done well in China, because of its inclination to natural resources, particularly coal. However, the world has turned against coal and it's not coming back.

Unfortunately, Caterpillar has so much invested in material handling machines that line up with coal. Its business has therefore been shrinking faster than anyone thought it would.

The biggest issue stems from construction equipment, which many thought was an area where the company was actually getting stronger. However, it turns out it was only gaining strength in the U.S. and the rest of the world has been turning worse.

Caterpillar's weakness confirmed the declines in value that Cramer has seen recently with stocks such as Deere, United Rentals, Cummins, Terex and Manitowoc. They all utilize Caterpillar's equipment. It also makes sense given the tremendous selloffs that have happened in mining, ranging from coal to iron ore to copper.

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Historically Cramer would have recommended investors to buy into the weakness. However, he still thinks that the company's revenue forecast is still way too optimistic given the horrendous backdrop.

"Even though the stock is down 28 percent year to date with a plus 4 percent yield, CAT remains a sell, despite the fact that the company still produces the best big machines on Earth," Cramer said.

Sometimes it doesn't matter how great a product is. If clients don't need them, business will still take a hit.

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