Cemex is a Yes / No bet at this point + A detailed look at the company's derivatives losses
Last night I was picking through the numbers, looking at Cemex's recent quarterly results. There was some good and a lot of bad, but after looking at them for a while I decided that it wasn't worth it. Looking at the third quarter results for this company is sort of driving a car while looking in the rear view mirror. Mr. Market is clearly focused on Cemex's massive debt load and the fact that it has the potential to choke on it if the world falls into a skull-crushing recession.
Its acquisition of the huge Australian cement company Rinker has to be about the worst timing for an acquisition that I have seen. I'm trying to think of ones that were worse, Wachovia's buyout of Golden West, Daimler's purchase or Chrysler, and the Time Warner - AOL merger all come to mind, but there are only a handful. Of course, hindsight is 20-20 and not too many people, at least at the corporate level, saw this economic implosion coming.
I thought about Cemex a lot on my drive into work today and for me it all boils down to this...a simple Yes / No bet. Ignore all of last quarter's numbers and look at this company from a macro perspective.
Is the global economy doomed? Yes or No.
- If you think that we are headed into another Great Depression then Cemex is probably screwed.
- If not and things get worse, but do not fall off of a cliff then Cemex is probably OK and it will provide people who buy at today's price with outstanding returns.
Few companies are as directly tied to the state of the world economy than this huge cement company. One thing that I like about Cemex is that the President of its home market is trying his best to keep it afloat. Felipe Calderón plans to spend $4.35 billion on infrastructure in Mexico this year. Obviously all of that money will not flow into Cemex's pocket, but a lot will. That will help, but not if the global economy falls off of a cliff.
I personally believe that we are headed for a long, yet fairly shallow recession and that the U.S. governmet will "Print, Baby Print" (a modification of the stupid "Drill, Baby Drill" chant) enough money for us to avoid a depression and the credit markets will eventually unfreeze. If that is the case then CX will probably ultimately survive.
Especially infuriating for shareholders is the fact that the value of the evil derivatives that Cemex has on its books dropped from a positive $100 million to negative $500 million as of the end of September. It certainly is not alone in this regard. While I haven't seen any specific information on them, it seems pretty clear to me that its losses were a result of bets, or at least hedges, that the U.S. dollar would continue to fall. Tons of Latin American companies lost big bucks betting that the U.S. dollar will continue to decline. Bets like that have been absolutely hammered lately as the Mexican Peso entered a free fall and the dollar has soared.
Mexico's Peso Falls Amid Concern U.S. Bank Plan to Take Time
The strength of the U.S. dollar lately has been particularly perplexing to me and I have given it a lot of thought. The U.S. economy is weakening, the Fed is lowering interest rates, the government has been throwing money around like a bunch of drunken sailors, and the national debt is soaring...these ingredients are usually not a recipe for a strong currency.
However, in times of uncertainty people always seem to flock to what they know and to what has worked in the past. For all of its problems, the U.S. dollar is still the reserve currency of choice for most countries. Fear is driving people to try to protect their assets, hence the purchases of U.S. Treasuries at absurdly low interest rates. The rush into the dollar has been as much about fear and a search for safety than anything.
Furthermore, the extremely crowded long commodities / short U.S. dollar trade that the thousands of hedge funds out there had been pounding on for the past year is obviously rapidly unwinding both by choice and by forced liquidation. Add to this the unwinding of the famous carry trade where investors borrow money cheaply in countries that have low interest rates, like Japan where rates are close to 0%, and invest them in countries with high ones, like Mexico, where the benchmark rate is 8.25% AND the rapidly falling price of oil, which despite Pemex's incompetence is still very important for Mexico
...and viola the dollar has exploded.
The Mexican Peso has fallen significantly against the dollar lately. It is currently sitting at its lowest level since 1995. Mexico has been selling its dollar reserves in an effort to prop up its sagging currency. Just last week it liquidated $8.9 billion in U.S. dollar foreign currency reserves...more than a tenth of its total. The liquidation of Mexico's dollar holdings continued. It has said that it will auction $400 million U.S. dollars every day, at the previous day's closing price plus two percent.
I personally think that ultimately we will find that the U.S. dollar has overshot and it will drop some at first and ultimately quite a bit. For now, while the derivatives losses are annoying, they will at least make the cement that Cemex produces in Mexico cheaper and hopefully help to prop up demand some.
No position in CX