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Cemex is a Yes / No bet at this point + A detailed look at the company's derivatives losses

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October 16, 2008 – Comments (8) | RELATED TICKERS: CX

 

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.

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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.

Deej
No position in CX

8 Comments – Post Your Own

#1) On October 16, 2008 at 10:46 AM, Imperial1964 (97.92) wrote:

I looked closely at CS a couple of months ago.  I like the company for the long-term.

But what I found in my research is that the Mexican government is in such bad shape right now I wouldn't invest in anything Mexican.  Drug trafficking cartels are assasinating high-ranking government officials on a regular basis.  Government revenue is falling off a cliff with declining oil prices and declining oil production.

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#2) On October 16, 2008 at 11:34 AM, Schmacko (79.85) wrote:

Cemex is still tied too heavily to US construction.  Rinker gets 80% of it's business from the US so the housing/construction downturn and poorly timed acquisition are killing them.  They've recently started to expand into Eastern Europe with the aquisition of RMC... but Eastern Europe is getting killed by the current world financial crisis so I have to imagine that isn't going to be bringing in a lot of cash.  Also my good friend Hugo Chavez jacked their Venezulean operations for the fair price of $0 cash money.  All in all it's been a bad year for CX.  Can't see them really rebounding until the US housing market does and that could be a while.  I don't think they pay a regular dividend so I don't think a lot of investors are going to have a ot of incentive to ride out short(?) term pain for potential long term gains with this company when there are relatively safer options elsewhere.  I think the compnay will survive and eventually this wil be a great investment, but why not wait for it to hit $5 (or lower) and jump in then.

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#3) On October 16, 2008 at 6:28 PM, nuf2bdangrus (< 20) wrote:

I have been eyeballing the stock too, but haven't felt we are far enough through this mess to dip in yet, especially with the bath I am taking in energy and infrastructure.

 

I believe that if things get worse, there will be a degree of government sponsored infrastructure plays, and companies like JEC and MDR could benefit.

 

I'm trying to dealy my purchases over a period of months between now and mid 2009.  I beneficted 0 from todays rally, but I will not buy after a large rally,.  I keep telling myself to buy panic.  

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#4) On October 16, 2008 at 7:47 PM, DemonDoug (94.07) wrote:

Deej, you gotta be kidding me.  Even with a shallow recession, homebuilding and residential construction is hosed.  Hosed!  Roads and highways use asphalt, not cement.  Maybe if there was some concrete used in buidling power plants or something, or to support the bases of wind turbines I'd be interested, but I just don't see the future growth.  CX will follow the path of the ITB, and that would be close to if not all the way to zero - demand for their product is going to be drying up fast.

I just don't see investing in a company that makes one product that has basically one use, as opposed to investing in other beaten companies that extract, transport, or refine a product that has literally thousands of uses (ie oil), and will recover faster and be more profitable than cemex.

At some point the slide in oil will stop - now down well over 50% from the top.  I cannot say the same for cement demand, or for residential homebuilding.

I will reiterate here what I said on a recent blog, if you want infrastructure without baggage, go with Siemens (SI), they are your best bet.

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#5) On October 16, 2008 at 10:09 PM, TMFDeej (99.45) wrote:

I definitely hear what you are saying, Doug.  I don't feel strongly enough about my guess that Cemex will survive to even buy it in
 CAPS, let alone in real life.

Deej

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#6) On October 16, 2008 at 11:07 PM, awallejr (82.68) wrote:

Good reply there Demon.

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#7) On October 17, 2008 at 2:21 AM, DemonDoug (94.07) wrote:

I guess what I was saying that the answer to that proposition is a "no."

REJECTED lolz.

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#8) On November 06, 2008 at 12:59 PM, Nuclearhab (< 20) wrote:

Deej,

What is the tangible net worth per share of Cemex?

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