Parallel Universe: The So-Called Golden Age of Infrastructure Boom as Gov’t Construction Data, Holcim and Cemex Sales and Earnings Plunge in Unison!

In this issue

Parallel Universe: The So-Called Golden Age of Infrastructure Boom as Gov’t Construction Data, Holcim and Cemex Sales and Earnings Plunge in Unison!

-Parallel Universe: Building Boom as Government Data Proves the Opposite

-Lackluster 3Q Bank Loans, Construction Material Prices, Steel and Cement Prices

-Build, Build and Build Boom: Holcim and Cemex Sales Collapsed in the 3Q and in 9-months Period!

-Cement Industry: Another Consensus or One-Way Trade

Parallel Universe: The So-Called Golden Age of Infrastructure Boom as Gov’t Construction Data, Holcim and Cemex Sales and Earnings Plunge in Unison!

Parallel Universe: Building Boom as Government Data Proves the Opposite

Sometimes it feels like this world exists in a parallel universe – a hypothetical self-contained reality co-existing with one's own (Wikipedia). 

That is when deeply entrenched popular wisdom goes astray with empirical evidence perceptional deviations seem to split the world into parallel realities

The popular notion is that there is an ongoing construction boom.  Such popular impression is reinforced through my thoughts especially when I witness bristling construction activities first hand. Because I personally see it, therefore, it must be true!

Importantly, because everybody thinks it is, a theme incessantly amplified by media, it MUST be true!

Never mind the idea that this could be a local phenomenon instead of a holistic one. And never mind the economic concept of “compared to what”?

There have been lots of construction activities on the street alright. But as recently shown, even the government’s construction permits took a dive in the 1H. (upper window) [Another Wow. 2Q and 1H Construction Permits Plunged! Worst Decline in 6 years! September 6, 2017]

Since permits precede actual construction activities, then this data should presage a slowdown in private construction activities.

Nevertheless, compared to the last 3-5 years, sure, construction has been brisk. But when compared to the latest numbers, even in nominal figures, the impression of a persistent boom just fizzles. (lower window) Though current construction activities may still be teeming, it has been less animated from last year. So from an observational standpoint, marginally fewer activities have barely been noticeable.

The patent irony in the construction downturn in the 1H of 2017 has been that this has surfaced in the midst of the acceleration in fiscal spending and from the escalation in money supply growth as cumulative consequences of the BSP’s debt monetization and the banking system’s unleashing a torrent of credit money.

When M3 rocketed in 2013-2014 and also in 2015-2016, construction permits boomed. That relationship just stalled in 2017.

Thus, when statistics reveal of negative price changes, which denote of contractions, this can’t be interpreted as in a boom, unless the world exists in parallel realities.

Lackluster 3Q Bank Loans, Construction Material Prices, Steel and Cement Prices

The setback in 1H construction permits may have filtered into bank loans and construction retail and wholesale prices.

The BSP will release its September data, most likely tomorrow (October 30). So unless there will be a humongous spike in construction and real estate loans in September, present credit activities have been less vigorous at present compared to the same period last year. In 2017, construction loan growth registered 19.56% and 18.64% in July and August (21.57% and 17.95% in 2016) while real estate loans posted 18.94% and 18.05% over the same period (18.82% and 19.54% in 2016).

A caveat on reading real estate loans. The BSP has a bank loan cap on the real estate industry. Thus, credit activities could be suppressed or most likely diverted into other sectors.

When the BSP “tapered” monetizing the National Government’s spending in early 2017, M3 slowed. Construction material prices, along with real economy prices, followed suit. The opposite happened when this nuclear option has once again been redeployed in the 2Q. Construction material retail and wholesale prices have turned upwards.

Please take note that wholesale prices have mostly been about government construction spending, hence such data essentially embodies the ballyhooed "the golden age of infrastructure".

As a side note, the government’s MRT-3 reportedly suffered its 11th technical glitch this week. Eleven malfunctions in one week. One of these has supposedly been due to a wayward diaper. If existing infrastructures can barely be managed well, then how does one suppose the attainment of economic elixir from the installations of new ones?  Because promises are better or more reliable than actual performances?

Cement prices printed a relative narrower decline in August at -3.55% from July’s -3.95%.  The paradox has been that cement prices continue to sag and deviate from the effects of a recharged M3

In addition, the government’s steel prices have had diverse price actions in the two months of the third quarter. Following a near collapse, reinforcing steel bounced to reflect on the resurgent M3 (August 2.09%, July 1.51%). Structuring steel prices have also revved up which seemed resonant with M3 (August 3.94%, July 2.79%).

The point is steel prices appear to have been more receptive to a revitalized M3 compared to cement prices, which have so far become deviant.

Part of that explanation is oversupply.  As cement prices fumbled, manufacturers continue to churn substantial output (August 14.55%, July 8.7%).

With government’s data showing unimpressive numbers, just how will construction be presented in the 3Q GDP?

Build, Build and Build Boom: Holcim and Cemex Sales Collapsed in the 3Q and in 9-months Period!

The beauty about economics is about the logical consistency of the causal relations of the fundamental theory that gets manifested on empirical data. Though government numbers may not have accurately reflected on the actual economic conditions, they have, so far, provided useful clues. Put bluntly, micro EQUALS macro!

(As an aside, government cement sales dropped only in the 2Q and 3Qs while prices fell mildly relative to what the majors have declared below)

The substantial fall in the government’s barometer of cement prices has reverberated with the sales performances of the two of the biggest cement manufacturers - Holcim Lafarge’s Holcim Philippines [PSE: HLCM] and the Cemex Philippines [PSE: CHP].

Holcim’s 3Q sales plunged 18.03%, contributing to the 17.15% crash in its 9-month sales. In the company’s 3Q 17Q, the lackluster performance was blamed on “soft market demand particularly the first half of the year that impacted our nine-months of operations coupled with challenging price environment and aggressive competition.” As a result, HLCM’s 9-month net income and eps dived by 57.7% (3Q eps crashed 81%!).

In the company’s presentation, cost pressures became a considerable factor: “Tighter competition and higher production expenses challenged the performance of building solutions provider Holcim Philippines, Inc. in the third quarter but the company continues to sustain its investment and expansion plans in the country, believing in the growth ahead…. Holcim Philippines also experienced cost pressures from rising energy expenses and the declining peso.”

The BSP has been attempting to raise NGDP, for tax and inflation based redistribution purposes, through inflation targeting channeled through emergency ICU measures of debt monetization and zero bound rates.

Bolstering NGDP means to raise price pressures in the real economy. Thus, price pressures have translated into higher business costs for manufacturers like HLCM and the general manufacturing sector in the 3Q. However, the limits of the markets to absorb price increases, compounded by oversupply, extrapolated to a profit squeeze. Or, manufacturers bore the yoke of the inability to pass through price increases to consumers, thus the restrained output and likely losses by the sector in the 3Q [Sorry Folks, Manufacturing Growth Tumbled in the 3Q… (The Revenge of Economics II) October 16, 2017]

The BSP fails to understand that not only that there is no such thing as a free lunch forever, the costs - from stripping away the purchasing power of the citizenry - are NOT benefits.

But these setbacks do little to curb utopian expectations from the “golden age of infrastructure”.

Since just about everyone in the industry believes that “build, build, build” should lead to massive shortages of cement in 2020, major participants have been stampeding to raise capacity.

And soft demand today may radically shift to supply shortfalls thus for HLCM: “Despite this, Holcim Philippines continues to ramp up its support for Mindanao with its Php 2.7 billion project expansion in Davao with groundbreaking of its facilities upgrading this October in rites to be attended by key government and top company officials. This will bring its cement production capacity in the city to 2.2 million metric tons, as part of raising Holcim Philippines’ total cement capacity by 2019 to 12 million metric tons from the current 10 million metric tons.”

Curiously, Cemex has a different take on its staggering 11.4% dive in the 3Q and 12.88% plunge in 9-months sales.

From CHP (bold mine): “Domestic cement volumes increased 2% year-on-year during the third quarter. Sequential activity improved with volumes increasing 4% versus prior quarter. • We estimate that positive demand, supported by a pick-up in infrastructure spending and stability in private sector construction, resulted in mid-single digit growth for the industry year-on-year. • Sequential volume growth despite adverse weather, which affected logistics capabilities. Domestic cement prices during 3Q17 declined by 13% year-over-year and by 5% sequentially. The decline in prices reflect heightened competitive conditions”

For cement prices to plummet by 13% where volume only increased by 2%, the disproportion in price-quantity balance has represented an outcome of competitive conditions??? Really???

If true, then prices wouldn’t have dropped by such extent or some manufacturers or importers would have absorbed the astounding scale of CHP’s marketing lapses. The competitor would have seen a tremendous jump in sales! Surely, HLCM was not the competitive force which grabbed CHP’s share in 2017.

AEV and Eagle will come out with their 3Q results soon, so we would see if any of these firms had been responsible for snatching CHP’s markets away.

Besides, if such claim is true, CHP should fire or overhaul their entire sales and marketing hierarchy for gross incompetence.  Or has CHP’s management been looking for a scapegoat?

Yet in their presentation, CHP noted that cement prices cratered by 10% in 9-months (year on year) and 5% (quarter on quarter). Did competition deliver such significant price drag? What role did demand play to have allowed such sequential dramatic price reductions?

Isn’t the Philippines supposedly in a building boom?

Even from a quarterly basis, the 5% drop in domestic cement prices had been significant enough to shed light that competition has hardly been a factor here.

Instead, such downside price pressures have highlighted what HLCM noted as “soft demand” and of oversupply conditions as the combo principal reasons.

And like HLCM, CHP noted of rising costs of sales and distribution expenses attributed to higher fuel prices, shutdown expenses and lower utilization of logistic assets that severely affected its 9-month bottom line (eps saw an -86%! tailspin; 3Q eps -81%!).

And like HLCM, CHP has embarked on a US $255 million capacity expansion program of its Solid Plant which it expects to start operations in the fourth quarter of 2019.

Despite the partial distortions from implicit price controls and from regulated imports, aside from the BSP’s monetary policies, the market pricing system in the cement industry remains functional!

Cement Industry: Another Consensus or One-Way Trade

As a final note, if you haven’t noticed because EVERYONE seems FIXATED on the DEMAND SIDE from the supposed “golden age of infrastructure”, NO ONE seems to have been noticing the SUPPLY SIDE RESPONSES from such unanimity.

It is as if only demand matters while supply has only a neutral impact.

In other words, everyone sees almost ONE PERCENT 100% SUCCESS from such political undertaking to plough insane amount of money and resources into building capacity, which alternatively, means NO ONE is taking the other side of the trade.

By sheer virtue of faith, risks have been vanquished as an obsolete force.

Do you see now what would happen in any event that such political undertaking falters? And even if “build, build, build” goes as planned (good luck on this), what would happen to such massive scale of capacity once they simultaneously go on stream?

By the way, don’t forget “build, build, build- the golden age of infrastructure” has NATURAL constraints. Just ask the USD-peso, real economy prices and the interest rates (bond yields).

Oh and another thing. Has anyone from the mainstream seen what has been happening to the cement industry today????

A so-called booming building economy. Yet faltering cement prices and construction activities. Doesn’t it feel like a parallel reality?

The Secret of Star Analysts; the Ayala Family Joins the Razons, the Gokongweis and the Tys in “Profit-Taking”

The Secret of Star Analysts

The financial markets of the European Union will be implementing a new legislation called the Markets in Financial Instruments Directive (MiFID II) in January 2018

Because part of the mandate includes the unbundling of market research with other financial services, some media analysts had a gander, not only at how valuable star analysts are worth but the role they play in the industry.

From Bloomberg Gadfly analysts Shelly Banjo and Nisha Gopalan

Many senior analysts spend only 10 percent of their time conducting research and writing reports. Teams of junior associates (or sometimes robots) maintain financial models and blast out notes. Some use pre-recorded voice mails to alert clients to new research.

Gadfly estimates that between 50 and 70 percent of a senior analyst's time is spent on corporate access. Things like arranging lunch with a CFO or connecting a client with a lawyer, supplier or other industry expert to delve into what the data doesn't. For this reason, analysts are often required to log the number of phone calls, meetings and events arranged each month.

The final 20 percent of an analyst's time is spent on pre-IPO research, conferences and bespoke projects, such as flying a drone over a retailer's parking lot to track how full it is; scoping the laundry outside apartment blocks; or conducting so-called channel checks to see how much oil's being pumped through a particular pipeline.

Sales and business development appear to be the main functions of star establishment analysts; that’s if we go by such observations. Objective in-depth assessments or evaluations of the companies covered by them have been virtually inexistent. What happens instead is that publicity materials are repackaged and presented as research papers. So such analysts essentially moonlight as copywriters or as public relations specialists. The conflict of interests between researchers and their clients/readers have been showcased by such arrangements.

I understand this because I have experienced it. I was once asked by a mid-scale listed firm to write about them in exchange for a paid vacation trip. Because I didn’t believe in the firm’s business model, I politely declined. I would be very much in the mainstream limelight and would likely be showered by perks and privileges had I pursued such path. But as tradeoffs, I would have comprised the interests of my clients and blog readers then.

Unlike the establishment, my work here is 100% objective (theory and empirical) research.

As a sales agent, I should benefit from encouraging people to transact. However, learning from experience, material benefits should be subsidiary to responsibility, as well as, to people relationships. In short, long-term goals must not be sacrificed for instantaneous or short-term gratifications. This position holds true for me even when my clients or readers don’t share my view.

From my perspective, the purpose of trade is to profit. A portfolio exists to handle a variety of trades in the objective of attaining generalized gains. Yet, perfection in trades is not the goal. To attain profits for the portfolio, whether through momentum or trend-following trades or value investing, such should translate to the suppression of risks and the maximizing of space for advances.

And this should apply even if I don’t directly handle my reader’s accounts.

For instance, not only do I send (post) this outlook for free, I do not benefit from non-stock recommendations. When I recommend a buy on the USD-peso, this is beyond my scope. To have a handle on this, readers can go to the banks and foreign exchange dealers have a handle on this.

In so many words, mandates like MiFID II or the US Fiduciary Rule would not be in place had transparency between principal and agent had been a priority and embedded as part of the industry’s culture.

 

Finally, here is an example of an important function that has persistently been ignored by the establishment. Well, it can be interpreted that way or has been designed to imprint on the public’s mindset as normative activities.

However, we are dealing here with the pricing system. Because it is ignored or deemed as a standard, does it mean that the manner of pricing securities have been irrelevant?

Will securities that have been priced unnaturally have only benefits? Will there be no long-term ramifications to the health of equity price trends? More importantly, what would be the transmission repercussions of such price signaling distortions to the capital allocation process in the real economy?  In short, the consequence from such deliberate distortions will span more than the stock markets and the real economy but have indirect social and political aspects too.

If the markets and the real economy will get affected, would such artifices have no consequences to the social and political front over time as well?

Finally, as an agent, I do not question any orders forwarded to me by my clients for execution. I am just a lowly order taker

The Ayalas Join the Razons, the Gokongweis and the Tys in “Profit-Taking”

Last Monday, a huge special block sale of Ayala Corp shares (7,063,490 shares at Php 1,060 per share) was posted at the PSE.

Unlike their peers, the Ayala’s reportedly unloaded Php 7.84 billion of their flagship company to foreign investors.

I saw only one stock market article which covered this. From the Inquirer:

Mermac Inc., the holding company of the Zobel family, sold a portion of its stake in Ayala equivalent to 7.06 million shares or 0.86 percent to a foreign institutional investor.

After the transaction—which was executed by BPI Securities and UBS Securities—Mermac will hold 47.75 percent of Ayala’s common shares and 55.56 percent of the voting shares, and will remain Ayala’s largest shareholder.

There are now four elite families who have sold part of their holdings to the public during the last two years through wholesale sales.

 

In 2016, as their share prices of their respective flagship firms were aggressively bid higher, the families of the Gokongwei and of the Tyliquidated a portion of them.

This year, ICTSI’s Enrique Razon joined this club to sell 3.18% of his Bloomberry holdings. [Wow. BPO Investments Collapse as the Phisix Storms to New Heights! ICTSI’s Razon Sells 3.18% of BLOOM; Signs of Wave of Insider Selling  September 24, 2017]

This week, it was the turn of the Ayala family.

As I have previously explained, the actions by these elites could be appreciated as likely expressions of demonstrated or revealed preferences. 

The easiest way to justify these actions is that they “took some profits”. Of course, they did.  

But the question is why did the Ayala’s opt to sell at 1,060 and not at 1,100 or 1,150 or higher if they so believe that their shares are worth MORE than their present prices? Or one can also ask why not lower at 1,000 or 980 or 950? Why Php 1,060 per share?

It would be useful to see the actions of Ayala’s predecessors.

Empirical evidence appears to support my hypothesis that perceived overvaluations were the foundations of such profit taking activities

The present price quotes of JG Summit, GT Capital and Bloomberry have significantly been lower than their published selling prices from the special block sales.

Moreover, sales by these titans occurred while the PSEi drifted at the range of milestone levels: 7,400 and 8,000.

And because the Phisix fell to a trough of 6,563.37 on December 23, 2016, JGS share prices even crashed to Php 65.55. The recent sprint to a record high for the Phisix buoyed JGS prices to current level but still below the threshold point where it sold in block. It is unclear if the Gokongwei’s bought back during the latest nadir.

Meanwhile, present prices of GTCAP shares have drifted near the December 2016 low of Php 1,120. So, the shareholders of GT Capital have missed entirely the “record” rally.

The point of this exercise is to show that while the elites took profits, they did so because they must have seen excessiveness in the way the markets have valued them. Thus, they capitalized on it.

And if they are right, this means they could be positioned to buyback their shares at significantly lower levels. Or perhaps they’ll just consume the profits.

And another thing. It would seem that the four tycoons sold their shares to foreigners. Yes, all four.

What if the purpose of the sale was not only to take profits but to load up on the US dollar too???

So far, actions do speak louder than words.