Record US Stocks as US 1Q 2015 GDP Grows By Only .2%!

The Federal Reserve of Atlanta’s GDPNow or the real time forecasting of the statistical economy now look prescient or prophetic with the affirmation of the US 1Q GDP which turned out with a disappointing (to the mainstream) .2%. 

As I pointed here, record stocks in the face of only .2% growth have extrapolated to deepening signs of economy-financial markets disconnect!!! 

The above chart from the Bespoke Invest shows how broad based the downturn has been for the US statistical GDP in 1Q 2015. It’s only government spending and inventory that has lifted the statistical GDP to positive.

Nonetheless here is how the mainstream reads the .2% 1Q GDP

From Wall Street Journal’s Real Time Economics Blog: (bold mine)

Strong Dollar, Port Slowdown Weigh on Economic Output: A number of factors pulled overall first-quarter growth lower, including bad weather, a slowdown at West Coast ports, a stronger U.S. dollar, weak global demand and lower oil prices. The single biggest drag was falling exports of goods, which knocked 1.26 percentage points off GDP, the most since the first quarter of 2009. The second-biggest factor weighing on growth was a slowdown in business investment in new structures.

Bad weather and labor strike at West Coast Ports? They seem as rather aggravating circumstance rather than of the real cause. That’s because World Trade has been on a slump since December 2014.

More…

Consumer Spending Slows Amid Severe Winter Weather: U.S. consumer spending slowed in the first quarter, despite lower gas prices and strong job creation. Spending on goods inched up at a 0.2% rate, compared with 4.8% in the fourth quarter. Spending on services grew at a 2.8% pace, compared with the previous quarter’s 4.3%. Spending on housing and utilities contributed 0.59 percentage point to the quarter’s 0.2% growth rate, versus 0.24 percentage point in the prior GDP report. That was offset in part by lower spending on motor vehicles and groceries.

So whatever happened to the popular rationalization of lower gas prices EQUAL spending growth??? Popular wisdom again debunked by reality?

As for job creation—March job gains had been a big miss.

With the energy sector providing the a big chunk of employment gains in the past (EIA), the current downturn in the energy sector due to sustained low oil prices have yet to be factored in. Additionally, energy sector has been highly leveraged (previously accounted for 17% of high yield bond markets), thus sustained pressures on the industry will not only lead to credit problems but likely to the contraction of investments and output. Such will have spillover effects to areas where these industries operate on and to ancillary sectors.

Besides, the quality of jobs is important, a lot of the jobs recently created have been about “waiters and bartenders” or jobs that pay less because they represent the less productive segments of the economy.

Business Investment Drops: Businesses slowed spending in the early months of the year, suggesting U.S. companies remain cautious amid weak global demand and the strengthening dollar. Business investment–which reflects spending on software, research and development, equipment and structures—shrank at a 3.4% rate, after growing at 4.7% in the fourth quarter and 8.9% in the third quarter. The dropoff reflected a slowdown in spending on new structures, driven primarily by the oil sector.

Little investments equal little job growth and spending growth. Record stocks have done little to boost investments.  

Paucity of investments has weighed on corporate earnings (chart from Yardeni.com)

More from WSJ...

Trade Weighs on First-Quarter Growth: Foreign trade subtracted 1.25 percentage points from the first quarter’s 0.2% GDP growth rate. Exports fell at a 7.2% annual pace during the quarter, down from the previous quarter’s 4.5%, while imports slowed to 1.8%. Imports are a subtraction from the GDP calculation, so that dragged down broader growth, though not as much as the previous quarter. A stronger dollar makes U.S. exports more expensive and imports cheaper.

As pointed out above, the strong dollar signifies symptom of central bank policies. The ongoing slowdown in global trade instead reflects more on what I call as the “periphery to the core” phenomenon of bursting bubbles. 

Multiple bubbles around the world has been under pressure. And those hissing bubbles have fueled an economic-financial market feedback loop between Emerging Markets and Developed Markets whose eventual outcome will be a global recession or a crisis.

As I projected in February 2014:

Even when the exposure would seem negligible, if the adverse impact of emerging markets to the US and developed economies won’t be offset by growth (exports, bank assets and corporate profits) in developed nations or in frontier nations, then there will be a drag on the growth of developed economies, which would hardly be inconsequential. Why? Because the feedback loop from the sizeable developed economies will magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth. Such feedback mechanism is the essence of periphery-to-core dynamics which shows how economic and financial pathologies, like biological contemporaries, operate at the margins or by stages.

And part of such feedback loop dynamics has been manifested on the US dollar which current strength signifies its temporary safehaven attribute.

Additionally, the boost in inventories (chart from Zero Hedge) which rescued the 1Q GDP from contraction will have future implications. Unless demand picks up, the above will mean added downside price pressures on the economy from which the mainstream will read as “deflation”. This may also mean lesser production in the future.

Finally as noted in the first chart, final demand has been down by 2.8%, analyst Jeff Snider provides the possible ramifications: (bold mine)

There is more to say about GDP itself, especially since GDP ex inventory was about -3% again, but there are worse and more important indications than even that. The Final Sales accounts strip out some of the artificial and beneficial (for GDP’s view on growth) aspects and focus solely on the private economy at the point of sale. That means inventory is extraneous in terms of the private economy in the moment; the purchaser view also does not infuse imports with a negative sign, as we want to know how much private “demand” actually exists before entangling geography and currency systems in analysis.

Of Final Sales to Domestic Purchasers, the statistical problems are evident straight away in Q1 2015. Real Final Sales, taking account of the official version of “inflation”, were $31 billion more than Q4 2014. However, Nominal Final Sales were $33.5 billion less quarter to quarter. Not only are the signs reversed, these are enormous discrepancies in that direction. Under ideal circumstances, such would be great fortune for the economy and a welcome respite from its monetary repression (buying more and paying less for it), but the unusual nature of this arrangement again suggests more statistical problem than actual economic benefit.

Seeing a negative nominal growth rate in final sales is highly unusual, which might as well be expected given that we have been under some form of an “inflation” appeal of monetary theory since 1965. In the twin final sales accounting, Final Sales of Domestic Product, there have only been four instances of a negative quarter since 1958. Three of those were during the Great Recession, and Q1 just produced the fourth!

We can argue about the official inflation calculation as to how bad everything might be, but a negative nominal rate removes the doubt.  As if to confirm that dire interpretation, in Final Sales to Domestic Purchasers there have only been five negative quarters since 1958 (with Q2 1980 being the fifth/first).

The rarity of these occurrences and their comprehensive association with nothing but recession is concerning about the degree of recession vs. recovery that may have, to this point, existed concurrently. In other words, the balance may be (may have been) shifting(ed) in the past year or so…

The economy is like a boxer being dazed from constant blows, getting knocked down (“unexpectedly”) several times. The fact that the boxer has so far re-risen from each does not suggest that the boxer is now better prepared to handle the continued onslaught, that the next blow will not be the knockout. In fact, repeated knockdowns advise the danger of a knockout has only increased; at some point the economy won’t get back up.

Record stocks in the face of record imbalances at the precipice.

As Oil Prices Collapse Anew, Tremors Hit Global Stock Markets

Financial market crashes have become real time.

Well, last night oil prices plummeted again. The European Brent crashed 5.87% to 53.11 per bbl while the US counterpart the WTIC dived 5.42% to close BELOW $50 or $49.95 a bbl.

The chart above from chartrus.com reveals that the present levels of US WTIC have reached 2009 post Lehman crisis levels.

Then, oil prices responded to deteriorating economic and financial conditions. Today, oil prices seem to lead the way.

Collapsing oil prices hit key stock markets of major oil producers, such as the Gulf Cooperation Council, quite hard.

The recent sharp bounce that partly negated losses from the harrowing crash that began last September seem to have been truncated as Dubai Financial, Saudi’s Tadawul, and Qatar’s DSM suffered 3.35%, 2.99% and 1.91% respectively (charts from Asmainfo.com) last night.

In short, bear market forces seem as reinforcing its presence in these stock markets.

Yesterday’s oil price meltdown affected least Oman’s Muscat and Bahrain Bourse. Nonetheless, again bear markets have become a dominant feature for GCC bourses.

A prolonged below cost of production oil prices will translate to heavy economic losses for Arab oil producing states. Such will also entail political repercussions as welfare programs of these nations depend on elevated oil prices as discussed here.  This will also have geopolitical ramifications.

Incidentally, as I previously pointed these nations play host to a majority of Philippine OFWs. 

More than half or about 56% of OFWs according to the Philippine Overseas Employment Administration (POEA) have been deployed to this region. Will OFWs (and their employers) be immune from an economic or financial crisis? This isn’t 2008 where the epicenter of the crisis was in the US, hence remittances had been spared from retrenchment. For this crisis, there will be multiple hotbeds.

So a financial-economic collapse (possibly compounded by political mayhem) in GCC nations may impede any remittance growth that could compound on the travails of the Philippine bubble economy.

It’s not just in emerging markets, though, last night Europe’s stock markets likewise convulsed.

Part of the concerns had not only been about oil but about a GREXIT or Greek default from tumultuous Greek politics based on the failure to muster majority support for a presidential candidate.

Incredibly German’s DAX was slammed 3% (table above from Bloomberg).

Crashing Greek stocks lost another 5.63% yesterday.

Apparently broad based selling also buffetted near record US stock markets.

The XLE Energy Sector endured another tailspin down by 4.19%. Yesterday’s clobbering only fortified the bear market forces affecting the US energy sector which has diverged from her peers.

I propounded that the slumping energy sector will eventually impact the rest of the markets. Divergence will become convergence; periphery to the core.

Remember, the reemergence of heightened financial volatility comes in the face of October’s stock market bailout via stimulus implemented by ECB, BoJ-GPIF, and the PBOC.

This implies that the soothing or opiate effects, which had a 3 month window, has been losing traction. 

Will Ms. Yellen come to the rescue???

As Oil Prices Collapse Anew, Stocks of US Energy and Oil Exploration Firms Crash!

So the US stock markets isn’t invulnerable to market crashes after all.

As I have been saying, since October, market crashes have become real time. Most importantly, incidences of global market crashes has been spreading.

Prices of both US and Europe’s oil benchmarks continues to plummet, falling by over 3% last night. OPEC projects that demand for oil will be the weakest in 12 years. But this hasn't just been about oil. Commodity prices in general has been sluggish as seen by the CRB index or even in Industrial metal stocks (GYX)

Meanwhile, crashing oil prices has also prompted the S&P Oil and Gas exploration (XOP) benchmark to a 4.79% meltdown last night!

The carnage in the energy sector (XLE) led last night’s selling pressure.

Even the bullish Bespoke Invest admits: "The S&P 500 Energy sector has now fallen 25% from its peak nearly six months ago, while the S&P 500 Oil Exploration and Production group has fallen even more at -45%.  If you want to label it a crash, be our guest." 

The energy sector's meltdown spread to the general market.

Will the energy sector, particularly the shale industry, serve as the causa proxima to a financial crisis?

Remember these crashes comes in the face of ECB-BoJ-PBoC easing which seems to indicate that the ecstatic phase of the stimulus seems to have already faded.

And those who buy into the “immunity”, “decoupling” and G-R-O-W-T-H thesis will soon be surprised when crashes becomes THE general market condition.

History tells us that the obverse side of EVERY mania is a CRASH, central Bank Put notwithstanding!

Quote of the Day: Economic output as weapons of national policy

All nations seem to assume that a public energy policy will bring their citizens and industries cheaper and more stable energy.  The opposite, of course, always happens.  This is just the latest example of government meddling in a key sector of the economy.  Germany’s government has chosen to close its nuclear plants.  It subsidizes windmills.  Germany’s green movement is very powerful and exerts a negative influence on Germany’s ability to exploit domestic energy sources through new techniques, such as fracking.  As a result, energy prices in Germany are approximately double those of the US and it is dependent upon supplies from political dictatorships like Russia.

In a free market for energy firms would rush to fill energy orders when a rival supplier appeared to be unreliable.  In a free market for energy a Russian cut off of natural gas would result in a permanent loss of customers to rival suppliers.  The current situation is made worse by US law that prohibits exports of natural gas.  In an unhampered market, US firms would be free to sell gas to the highest bidder and there is little doubt that Europe would negotiate alternative sources with a threatened Russian supply cutoff.  A Russian embargo would permanently damage its natural gas industry by proving it to be an unreliable supplier, costing it the loss of business for many, many years.

Unfortunately, all nations use the economic output of their citizens and firms as weapons of national policy, even in the absence of war.  The result is the opposite of their intentions, which should surprise no one.

This is from Patrick Barron at the Ludwig von Mises Canada.

It's sad to see how most people have been deceived to see governments as the answer to social problems, when in reality, governments have been the major sources of the vast majority of society's ills. Worst is that the public have been unwittingly held hostage by many governments, where in the latter's desire to force their will upon other governments, increases the risks of military conflicts or wars. In short, the more the politicization of resources, the greater the risks of violent (inhumane) outcomes.

Energy Information Administration: Shale Gas Is A Global Phenomenon!

When people talk about Peak oil or peak anything, they only look at current prices and the available quantity of declared reserves, which they see as fixed and which they equate with neo-Malthusian insights of shortages.

They do this without comprehending the economic value of resources and without understanding the concept of human action—or that people don’t just standstill in the face problems, we react by working to resolve such unease via the price mechanism.

People, via the markets, respond to prices. This means when scarcities are projected via price signals, the market resorts to either conservation (rationing) or substitution.

This brings us to the announcement by the US EIA that shale gas production is a global phenomenon, with US having been the pioneer in its development.

The EIA writes, (bold highlights mine)

The use of horizontal drilling in conjunction with hydraulic fracturing has greatly expanded the ability of producers to profitably produce natural gas from low permeability geologic formations, particularly shale formations. Application of fracturing techniques to stimulate oil and gas production began to grow rapidly in the 1950s, although experimentation dates back to the 19th century...

The development of shale gas plays has become a “game changer” for the U.S. natural gas market. The proliferation of activity into new shale plays has increased shale gas production in the United States from 0.39 trillion cubic feet in 2000 to 4.87 trillion cubic feet in 2010, or 23 percent of U.S. dry gas production. Shale gas reserves have increased to about 60.6 trillion cubic feet by year-end 2009, when they comprised about 21 percent of overall U.S. natural gas reserves, now at the highest level since 1971

Shale gas production from the US has been exploding. (From the EIA) This accelerated progress has been buttressed by (free market induced) technological enhancements.

Shale reserves have likewise been expanding along with production. This proves the case of the growing economic value of Shale gas.

Shale Gas reveals of the substitution process in action.

Now for the global perspective, more from the EIA.... (bold highlights mine)

It appears evident from the significant investments in preliminary leasing activity in many parts of the world that there is significant international potential for shale gas that could play an increasingly important role in global natural gas markets... In total, the report assessed 48 shale gas basins in 32 countries, containing almost 70 shale gas formations...

The estimates of technically recoverable shale gas resources for the 32 countries outside of the United States represents a moderately conservative ‘risked’ resource for the basins reviewed. These estimates are uncertain given the relatively sparse data that currently exist and the approach the consultant has employed would likely result in a higher estimate once better information is available.

What does all this tell us?

The energy market is working quite well, despite numerous interventions applied by governments.

The diffusion of technological advancements combined with the attendant economies of scale enhances the commercial viability of these projects, which if the EIA is correct, would mean more nations utilizing their natural shale gas resources. This also means reserves will grow as usage grows, enabled by technology.

In short, shale gas is gradually being recognized as an economically valuable energy resource.

Shale gas is probably one of the possible candidates to compete, replace, if not compliment fossil fuel as a major energy source.

Only the markets will say.

Oh, I almost forgot: Please remember changes happen at the margins.

Natural Gas: Alternative Energy Of The Future

The Economist has this nice article about natural gas.

The article goes to show that the world isn't running out of energy. It's just a matter of markets aided by technology, adapting to the current conditions.

Here's an excerpt, (all bold highlights mine)

``The source of America’s transformation lies in the Barnett Shale, an underground geological structure near Fort Worth, Texas. It was there that a small firm of wildcat drillers, Mitchell Energy, pioneered the application of two oilfield techniques, hydraulic fracturing (“fracing”, pronounced “fracking”) and horizontal drilling, to release natural gas trapped in hardy shale-rock formations. Fracing involves blasting a cocktail of chemicals and other materials into the rock to shatter it into thousands of pieces, creating cracks that allow the gas to seep to the well for extraction. A “proppant”, such as sand, stops the gas from escaping. Horizontal drilling allows the drill bit to penetrate the earth vertically before moving sideways for hundreds or thousands of metres.

``These techniques have unlocked vast tracts of gas-bearing shale in America. Geologists had always known of it, and Mitchell had been working on exploiting it since the early 1990s. But only as prices surged in recent years did such drilling become commercially viable. Since then, economies of scale and improvements in techniques have halved the production costs of shale gas, making it cheaper even than some conventional sources.
More from the Economist,

``The Barnett Shale alone accounts for 7% of American gas supplies. Shale and other reservoirs once considered unexploitable (coal-bed methane and “tight gas”) now meet half the country’s demand. New shale prospects are sprinkled across North America, from Texas to British Columbia. One authority says supplies will last 100 years; many think that is conservative. In 2008 Russia was the world’s biggest gas producer; last year, with output of more than 600 billion cubic metres, America probably overhauled it. North American gas prices have slumped from more than $13 per million British thermal units in mid-2008 to less than $5. The “unconventional”—tricky and expensive, in the language of the oil industry—has become conventional.

``The availability of abundant reserves in North America contrasts with the narrowing of Western firms’ oil opportunities elsewhere in recent years. Politics was largely to blame, as surging commodity prices emboldened resource-rich countries such as Russia and Venezuela to restrict foreign access to their hydrocarbons. “Everyone would like to find more oil,” says Richard Herbert, an executive at Talisman Energy, a Canadian firm using a conventional North Sea oil business to finance heavy investment in North American shale. “The problem is, where do you go? It’s either in deep water or in countries that aren’t accessible.” This is forcing big oil companies to get gassier."

Read the rest here

My comments:

As we have repeatedly said, politics has been the fundamental reason for the elevated prices in oil, caused mainly by geological restrictions or limited access (mentioned by the article) combined with artificial demand from inflationism and or policies, such as subsidies (not mentioned in the article).

Nevertheless, because people adjust to the circumstances they are faced with, such as the pain of higher prices and political constrains, the perpetual desire to satisfy human needs makes possible for ingenuity to pave way for innovative technology which would allow for more access to supplies or substitution.

In the case of natural gas, since there is a recognition, out of the existing technologies, of the abundance of reserves, higher oil prices will likely compel producers to compete to convert erstwhile uneconomical resources into utilizable reserves, ergo "forcing big oil companies to get gassier" as the article mentioned.

And if successful, which I am optimistic of, this will have a spillover effect to the midstream (processing, storage, marketing and transportation) and the downstream (retail outlets, derivative products, etc...). In other words, part of the transformation would likely see global transportation evolve to natural gas as default fuel.

So in the future, we should expect natural gas to also play a big role in the transition to diversify energy sources.

The following chart caught my eye. If the technology to access shale oil becomes universally commercial, guess where the bulk of reserves are?

In Asia Pacific!

A Future Race Between Energy and Technology For Market Leadership?

Bespoke Invest has another set of great charts shown below. They reveal of the fluid dynamics of the composite weightings of the S & P 500.

Since the latest rally, the mangled financial sector has made a significant move to regain some of its lost grounds.

Although what really caught our eyes is the seeming emergence of a new leadership seen in the technology sector.

From Bespoke, ``After representing nearly a quarter of the S&P 500 at its peak, the Financial sector's weighting in the index fell all the way to 8.88% on March 9th. Since then, however, the sector has regained some market share and now represents 11.78% of the index. This share gain of 32.66% is by far the biggest jump for any sector off the 3/9 lows. Consumer Discretionary increased its weighting by 11.34%, followed by Industrials (6.52%), Technology (3.24%), and Materials (0.32%) on the upside. The Energy sector has seen its representation in the S&P 500 fall the most during the rally with a decline of 12.27%. Telecom, Utilities, Consumer Staples, and Health Care are the other sectors with declines in market share. Technology still holds the title for the biggest sector at 18.15%, with Health Care in 2nd place and Consumer Staples and Energy in a race for 3rd." (bold highlight mine)

As presented in a table...

Bespoke also illustrates the historical trending of each sector of the S&P 500.

Adds Bespoke, ``Below is a historical look at S&P 500 weightings for each sector. The red line represents the average weighting for the sector since 1990. As shown, Financials moved sharply below average at the end of 2008, but have bounced slightly recently. Technology is just above its historical average, while Health Care and Energy are well above average but headed lower. Consumer Discretionary, Industrials, and Materials are below average but appear to be headed higher." (bold emphasis mine)


We have been looking at the energy and material sector as possible market leaders over the longer term since they've been depressed for quite sometime. (yes decades)

Nonetheless, technology has also been a downtrodden sector since the dot.com bust during the advent of the millienium. But given the rapid explosion of technological advances, it wouldn't be a surprise for this sector to have a shorter cycle relative to the others.

So a question popped into my mind, could the next bubble be a race between the energy and technology industry?

Stay tuned.

San Miguel’s Shifting Business Model: Risks and Opportunity Costs

``An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”-Benjamin Graham

We recently read with interest how San Miguel has been scaling down on its Beer business model and has been phasing into the energy sector gradually.

Note: Our comments here are not intended for any recommendation but serves as to analyze on the possible opportunity costs of the shifting corporate strategy of the second largest publicly listed company (technistock.net) of the Philippines.

Although we are not clear about the details of the proposed changes in the structure of ownership of San Miguel, Japan’s Kirin Holdings which has reportedly acquired a cumulative 19.7% stake in the company in 2001 and 2005, is reportedly in talks to acquire a majority share.

According to Finance Asia, ``Japan’s Kirin Holdings and San Miguel Corporation yesterday announced that they have signed a memorandum of understanding which includes an exclusivity clause for Kirin to acquire a further 43.25% stake in San Miguel Brewery. No financial details were disclosed, but based on San Miguel Brewery’s last traded share price, the stake is estimated to be valued upwards of $1.25 billion.”

Yet, recently San Miguel [SMC: SMCB] acquired the 27% stake of the Philippine Government Service Insurance System (GSIS) in Meralco (abs-cbnnews.com) and a 50.1% stake in Petron from a London-incorporated investment fund Ashmore Investment Management Ltd while dabbling on the idea to enter the telecoms industry with Qatar Telecom (gmanews.tv).

Thus, San Miguel’s business model is being overhauled over a very short period of time.

The Risk Variables

From our point of view, the shift in San Miguel’s corporate strategy comes with the following risk variables:

1. Competency risk. As the company veers away from its métier, it will incur a learning curve. While the company may “acquire” experience to reduce the costly interfacing of such learning curve, the drastic changes in the business path could entail some challenges in the operational, management and or corporate culture by way of frictions.

2. Country concentration risk. San Miguel which used to diversify its business internationally seems to be putting all of its eggs into one basket-banking on the Filipino consumers.

3. Restrained Profits. The consumer based energy industry is a heavily regulated industry with attendant regulatory profit caps. Meanwhile growth prospects are likely to follow the growth conditions of the local economy’s growth.

4. Political Risks. Extreme price changes in consumer energy could lead to highly volatile social mood swings. In times of political extremities, where governments can turn “outside-in”, the risk of nationalization could play a significant ‘sword of Damocles’ over the company’s new business model.

5. Late Mover Disadvantage. The telecom industry is a highly competitive capital intensive environment. Trying to gain market share from the existing players at time where the mobile user’s penetration level is at 60% seems quite challenging. It would be better for the company to acquire one of the existing players or adopt a ‘pail and shovel’ approach by introducing technology related which could cater to the industry.

The Opportunity Cost

San Miguel’s decisions will also mean lost opportunities. And this will include the loss of capitalizing on:

1. Asian consumption growth.

While today’s financial crisis is expected to hurt consumer spending everywhere, it is simply part of the business cycle which ultimately will segue into a recovery.

From our point of view, today’s crisis should be used as an opportunity to position for such cyclical transitions and eventually reap on the rewards of the prospective dynamism of the fast growing region.

According to the Economist in 2007, ``CHINA has the world's biggest thirst for beer, comfortably outstripping the country in second place, America. But the Chinese market is highly fragmented. Around half of all the suds sold in America is produced by Anheuser-Busch, brewer of Budweiser. Snow, China's most popular cold one, commands only around 5% of that country's market.”

Figure 4: Economist: Top TEN Beer Markets

In short, a fragmented market in a rapidly growing economy like China can translate to enormous potentials to secure added market share and expand profits.

2. Currency regional currency gains. Exposure overseas extrapolates to revenues in localized terms. With our expectations of Asian currencies to appreciate over a longer horizon, the potentials of such currencies gains could compliment profits will be missed.

3. Exploit Other Global Opportunities. San Miguel could have used the present opportunities to expand into consumer related industries parallel to their field.

The Boston Global Group in their 2008 New Global Challengers identifies the possible success dynamics for companies in Rapidly Developing Economies (RDE) over the coming years, see figure 5.

Figure 5: Boston Consulting Group: 2008 New Global Challegers

According to BCG, ``Our analysis of the 2008 BCG global challengers reveals globalization dynamics that are already affecting every market and industry, reshaping the world’s economic landscape.”

The BCG candidates for the world’s fastest growing companies come from mostly the BRIC (Brazil, India, Russia and China) zone. While our neighbors have some representative Indonesia (1), Malaysia (2) and Thailand (2), the Philippines have none.

The 6 BCG models quoted from Atlantic community

``1. Taking RDE Brands Global: Having established their brand identity in their home markets, companies attempt to take their brand global. Usually their expansionary growth is entirely organic, as witnessed at India’s Bajaj Auto or Brazil’s Nature cosmetics.

2. Turning RDE Engineering into Global Innovation: Low labor costs and strong R&D performances offer RDE companies global competitive advantages, as with Brazil’s Embraer, the world’s third biggest aviation company.

3. Assuming Global Category Leadership: Faith in their own product’s strength drives some of the challengers to an attempt to assume a leading role in their line of business. China’s battery producing BYD has successfully realized such a strategy.

4. Monetizing Natural Resources: Spurred by soaring commodity prices, the challengers can increasingly use mergers and acquisitions (M&A) to expand globally and to secure viable growth. An example would be India-based Hidalco’s recent purchase of Canada’s Novelis.

5. Rolling Out New Business Models to Multiple Markets Companies such as the Mexican mobile-network operator America Movil adapt their branding and marketing strategies to different regions, while retaining their basic business model. This has allowed them to expand their business into new markets while localizing operations in each.

6. Acquiring Natural Resources Assisted by their government, some challengers — especially Chinese ones — focus on securing their access to resources to ensure long term growth.”

Basically, San Miguel’s main opportunity cost is the cost of globalizing its business model.

There could be two possible angles from which we suspect could have shaped these strategy shifts:

One, the San Miguel management believes that recent globalization trends might be reversed over the long term and thus has positioned defensively by going domestic or

Second, the company’s chairman Eduardo Cojuangco Jr., who is founder of the National People’s Coalition and has ran against Fidel V Ramos for the 1992 presidency but lost, could possibly have politically associated strings to these acquisitions with the 2010 elections only a year away.