I always wished that my grade school had buried a time capsule. As a nostalgic sort of Fool, that kind of preserved snapshot could have been fascinating to unearth years later.
The overarching theme running throughout the U.S. industrial sectors this earnings season has been one of truly surprising strength. Within such an encouraging array of improving industrial activity, however, the results from one critical sector appear to be stuck in a time warp.
Mirroring the same set of regional dichotomies viewed consistently throughout key sectors of the global economy, Cemex observed sales expanding in Asia and Latin America while continuing to contract sharply in North America and Europe. A painful 24% reduction in Spain (where sovereign debt has just incurred a foreboding credit downgrade) punctuated sales while the rest of Europe (excluding the U.K.) fell 13%. On this side of the pond, the United States played the role of Spain, with a 24% drop in these telltale sales of construction materials (namely cement and related aggregates).
Preserving the bad with the good
Why on earth would anyone want to preserve this sort of a monstrous earnings result in a time capsule? Well investors the world over are continuing to exhibit confidence in global equities, as recovery talk reaches new heights of relieved enthusiasm. If widespread presumptions of a sustainable economic recovery underfoot in the U.S. prove correct, then this laggard from the construction sector will provide a fascinating snapshot of a miraculous recovery forged in the notable absence of either meaningful job growth or a reversal in the multiyear decline of the construction sector.
If, on the other hand, my concerns about the potentially fleeting nature of a synthetic, stimulus-fueled rebound prove well-founded, what we will have preserved will be a record of the missing link in the formula for sustainable recovery. You see, even within Cemex's dastardly results, the primary driver of remaining demand came from infrastructure projects rather than commercial or residential construction. Fools will recall that, just last month, Commercial Metals
Deconstructing a constructionless recovery
Wallboard manufacturer USG
A significant portion of the observable improvement in domestic industrial activity overall is attributable to the seemingly inexhaustible engine of growth among Pan-Asian economies. When bellwether U.S. manufacturers like mining equipment specialists Joy Global
We may finally be seeing some hard-won results from massive stimulus spending in the world's major economies, as well as some concerted efforts to restock depleted inventories, but in my view this indicates precisely nothing about sustainable recovery. It's a welcome reprieve, but more than that we cannot presently discern with any degree of confidence. I continue to recommend that investors stand well clear of construction-related equities like USG and Cemex, and approach even unrelated industrial plays with a Foolish ounce of caution.
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