Pm Bolt-On: A belated Wolseley (WOS) with a soapbox item & Glencore's open secret - lines of credit or nooses of liquidity + Have Roy Hill & Tonkolili gone short iron ore!? Come on KAZ get with it...

Good Morning,

It was hoped that this week would allow a bit more time. 

With all the indicators suggesting some form of doom, why is Gold not up? Liquidity is contracting, outlooks are being adjusted, China's liquidity issues for SOE's are coming out, including their need to export deflation and recession to other countries. 

Wolseley's (WOS) final results weren't all that, with a feeling here that WOS were calling the top of the market. The plumb centre owner reiterated exactly what the market knew. The savages took their profits and retreated to the caves. WOS, a viable company, but the outlook isn't that great. 

Over to WOS with additions from the EMC in bold to highlight the short:

Ian Meakins, Chief Executive, commented:

"The highlight of these results was another great performance by Ferguson in the US where we achieved strong like-for-like revenue growth ahead of the market and a 50 basis point improvement in the trading margin to 8.2%, which is a record.  We continue to face some challenging markets in the rest of the Group and remain focused on improving growth rates and protecting gross margins whilst keeping the cost base tight. 

"Wolseley continues to be highly cash generative and we have adequate resources to fund our capital investment programme, bolt-on acquisitions and growth in ordinary dividends. We are also announcing a £300 million share buyback which reflects the Group's strong financial position and management's confidence in the business."

Commenting on the outlook, Ian Meakins said:

"We expect to generate like-for-like revenue growth of about 4 per cent in the first half.  In the US we expect continued good growth in Blended Branches, Waterworks, HVAC, B2C and Fire and Fabrication underpinned by decent Commercial and Residential markets. However, Industrial markets in North America, which account for about 15 per cent of revenue in the region, were challenging in the fourth quarter and we expect this to continue.  We expect a continued steady recovery in Nordic markets, although the heating market in the UK is expected to remain very competitive with little growth.  Overall, we expect to make continued progress in 2016."

The buyback may offer some support, but is this the best Wolseley can do with £300M? With net debt at circa £805M, prudence would dictate either an acquisition or reducing debt. Then again...with a fall in full-year profits one has to prop up ones share price. 

The concern here is that companies should be focused on the strength of the business not the ability to leverage to show strength. China have met with similar issues in recent times and company buybacks are simply a waste (view here). We're fully aware of the pros and cons, but in the absence of a viable strategy of investment, take it as a signal that irrespective of outlooks, the management are waving a flag of..."this is the best we can do." 

The writedowns are showing the fragility of the market place across all sectors. WOS's guidance on the Nordic business with writedowns and the outlook for the US business should not be ignored. The outlook contradicts the logical buyback principles. The expansion and acquisition of decent companies would surely be a sensible alternative to enhancing longer-term value. 

It’s acknowledged Wolseley acquired, but buybacks do not improve a business performance, only the earnings relating to each share. This is not always the best measurement, as the EMC has evidenced many times before…

With the FED considering interest rate rises and the alleged strength in the US, the guidance given contradicts some bulls. Reiterated by WOS statement of price deflation in the USA, UK and Central Europe and modest price inflation in Canada and the Nordic.

Glencore have come out with a statement in response to speculation (PDF/in full below). 

Baar, Switzerland 29 September, 2015 

Response to speculation 

Glencore has taken proactive steps to position our company to withstand current commodity market conditions. 

Our business remains operationally and financially robust – we have positive cash flow, good liquidity and absolutely no solvency issues. 

We are getting on and delivering a suite of measures to reduce our debt levels by up to US$10.2 billion. 

Glencore has no debt covenants and continues to retain strong lines of credit and secure access to funding thanks to long term relationships we have with the banks. 

We remain focused on running efficient, low cost and safe operations and are confident the medium and long-term fundamentals of the commodities we produce and market remain strong into the future. (Ends)

So in essence, Glencore have so far had a placing they allegedly did not need to conduct but did to assure investors. Now they're robust and operationally/financially sound. Whatever have Capt. Kirk and Scotty got planned next. 

Well, we're sure that's all fine and dandy. The gossip/rumours suggest all is not as rosy at the mill. Cargill's winding down of their $7bn hedge fund arm (FT) won't have assisted Glencore in the sale of the grains business.

With the current outlook and Russian taxation woes that are likely to have hurt GLEN, the suggested price tag of $12B for the grains business may be a struggle. Then again they got significantly more for the Las Bambas mine in Peru - over to the sales folk. 

There's gossip suggesting that Glencore are having issues with suppliers. This is unsubstantiated at the moment, but with credit lines and liquidity tightening globally, it’s with no surprise that rumours are surfacing of a big utility company cutting its credit line to GLEN. If this is true, what are the implications for operations? It will undoubtedly have operational and financial implications. 

One is wise to measure Glencore on its assets, the price of its commodities and marketing, in conjunction with its debt. Simply, the assets, save for coal are tier 2 (EMC view) without significant investment (see African Copper Update) to improve operational performance, and until the development of these assets the outlook will remain challenging. 

With some large IB's and analysts believing that Glencore is a viable business, this won't on its own make for a lower risk investment case and suggests an element of knife catching. Certain Brokerages have advocated that there are participants willing to lend to Glencore in comparison to than Anglo American (AAL). This in its own right isn't necessarily the best comparison, albeit, it does indicate what some brokers/analysts are using as a comparator. The absence of comparatives to tier one commodities companies rather says a lot.

Would it pay to buy Glencore? Quite frankly the unknown operational model poses some risks, but it’s always nice to have some higher risk exposure. It’s noted that personally the risks of being long are greater than having been negative on Glencore since IPO. This doesn't mean there cannot be a share price recovery, with the machine doing the rounds, expect some support. Investors would be wise to keep an eye on commodity prices.

To end on a cheery note, another leveraged play on commodities Freeport-McMoRan (NYSE: FCX). FCX had some good news with the drill head. Their 100% owned Horn Mountain Deep well in the Gulf of Mexico came in on the money The release in any other market would have been positive, more so, if it didn't mean the commitment of $$ to enable production the share price would have perhaps risen. Over to Icahn to break this one up…

Thought for the week - Rio/BHP plus Fortescue Metals Group (FMG), when's the impact of Roy Hill going to bring down the axe on iron ore? Inventories normalising again in China, and so a reducing demand globally. Its noted, Shandong Iron and Steel Group's are now back in production at Tonkolili. Those whom love romance in the market place will remember Tonkolili used to be owned by African Minerals (AMI).

One hopes that the acquisition of the Tonkolili Mine by Shandong was above board. It never rains but it poors (poor I know) for the former-AMI.  AWOKO article - one hopes the 'new' AMI has resolved such minor issues as moisture content, shipping and diesel disappearing. What are the chances of a three-pronged stimulus by China just as ore hits the market? 

Have KAZ Minerals got their cap out yet?!?! Put us out of our misery on the 50 pence rights issue please?!?!

Atb Fraser

Over to the grammar police/time limited and long-days. 

PM Bolt-On: Was he pushed or did he jump +...FQM & Noble Group (Cap in hand)

Good Evening,

How dare you think it's VW!

It’s rather full on at the moment, for those thinking one twiddles thumbs all day. Thoughts in the morning are limited. It’s around this time I'd kick Li and Ian for their limited input, but hooray, they're working flat out. Hugo's man-flu is in recovery, so almost full-house. 

It was only a few weeks ago we were discussing the conviction of selling short Caterpillar (NYSE: CAT). This has been a focus here for some time, not just because of Mining but Shale and Construction per se. 

When should Caterpillar have updated the market on their outlook? Was the threshold for notifying the market today post a review, or perhaps a month prior to Chris Curfman vice president of Caterpillar's Mining Sales & Support Division's retirement? It’s somewhat immaterial to the outlook but it raises the question of "was he pushed or did he jump?"

Caterpillar et al where stunned when commodities all crashed, and operating costs became all the rage - admittedly the markets attempted to deny this for too longer period of time. This is not hindsight but more a realisation of basic economics. Caterpillar now have to reduce prices, irrespective of their commentary about market share gains. Feel free to catch up with the proverbial sandwich 8-K Report of unscheduled material events or corporate event. 

Points:

1. What are the risks to Caterpillar finance and future planned growth? What inventory levels are they committed to? Are there likely to be stock write-downs in addition to the adjustments for the restructuring.
2. With limited focus on new mine development, plus machines being utilised more efficiently - what are the implications on new sales? Part margins? Service agreements?  
3. With other companies attempting to maintain space in a more competitive market, Caterpillar's premium is at risk. Margins are key...over to the Japanese/China. The latter in terms of machinery has been totally overlooked! 
4. Can Caterpillar reduce costs quick enough? Caterpillar's savings in operating costs have a long lead time and not without significant cost. 
5. With new machinery on a cycle, Caterpillar may find the Aldi and Lidl scenario being played out. Over to heavy machinery manufacturers with better FX outlook (weakening). 

What's a few days? It was meant to be commented on the other day, but FQM holdings in company. Now one could be forgiven for the odd day, but 232 days after passing the threshold to report? 

Some VW: Some comments on EMC: VW that's worth noting (comments sections). More soon on Chinese liquidity, global inventories and borrowing as a percentage of company assets. 

Finally, we have Noble Group (SGX: N21) where rumours are rife that they sounding out investors for a Glencore type rights issue. Noble Group are allegedly cap in hand for $750-$1B. Would you? Not on your Nelly! In the absence of being able to roll-up their debt, expect some clever enticements for investors. (Glencore 2.0). 

Common-sense caveats apply about trading gossip...although with their balance sheet looking like a train wreck and other "issues", admittedly disputed, one suspects it’s got some plausibility to it. 

Atb Fraser (Tired so if the spelling/grammar police are out, feel free to correct.)

PM Bolt-On; VW the unknown (bleugh), Chinese PMI Data + SOE defaults + Copper.

Good Evening,

VW rose - judging by the number of analysts pinning the name to €126-€130 a share, it would appear the world and his dog bought into it. Save for here, where undoubtedly there's trading opportunities, but the end game has yet to play out. We'll close the VW item on some teasers for those willing to burn the midnight oil:

1. What is the cost of a fix per unit, based on 85% recall uptake? We have taken this apart today and come back with various figures from the low side of $450, to the average of $1,500 per unit (remedy).
2. With the press statement and Notice of Violation outline some of the issues. Worth consideration is the Air Resource Board compliance letter. In discussions today with a very helpful lawyer, it was suggested that a mass refund process is unlikely.
3. The law affords most vehicles manufacturers the opportunity to rectify the issues. The sticking point is, not only have VW had the opportunity, but they in essence they obtained an invalid certificate of compliance (COC) by installing the defeat device. What are the implications for breaching the TREAD Act?
4.  Assuming item 2 is correct, there will be a valuation gap that will have to be honoured between the cars previous value and that of today, plus compensation.  If item 2 is incorrect, then it’s a fire sale of a significant number of models.

It’ll be prudent to revisit the VW issues as it evolves.

The Caixin Flash China General Manufacturing PMI™  - below the revised consensus. Despite being conservative on the figures with revisions, the outlook does not look great. 

Its prudent to acknowledge the impact of the WW2 celebrations and athletics, but this was allowed for in most consensus. There was even an attempt to over-shadow the woes with China’s order for 300 beoing planes and a factory.  The PMI is worth a read, and in part, validates the hard work put in to keep ahead.

We have a sense of déjà vu, with China National Erzhong Group defaulting, albeit briefly. The levels of wastage in China have been commented on here for a number of years here, making up for near 40-45% of GDP (this is declining rapidly) - contrary to those Chinese bulls. The situation is now unravelling, not only due to inflation but a liquidity event in the making.

China are going to be compelled to make a significant adjustment to their Reserve-Requirement Ratios (RRR) by a whopping 200 bps. Although this may be conducted with some form of sensibility and over a period of 6 months. Its clear that the Chinese are now starting to tamper with their figures to avoid any suggestion things the economy is stalling (Who’d have thought it!?).

Li suggests those with an interest in China, should look at the number of failed SOE (State Owned Enterprises) and their subsidiaries that have either attempted to uncouple themselves from the state or list part of their operations in Shanghai or Hong Kong. Erzhong did just this.

Erzhong is a prime example why one should avoid the alleged investment case for the majority of SOE’s. We’ve had sub-prime, interest rate rigging, auto emissions, all we need now is some form of litigation on the back of alleged SOE sales pitches implying viability. 

There’s a raft of debt issued or that was rolled over circa 2012, with repayments becoming due. Whether enticing investors into SOE’s is wise for China is another story, unless of course there’s two sets of books.

With a quick glance at the miners suggesting some were breathing a sigh of relief, there’s a number of technical indicators that Rio et al are struggling to hold on to. It would be rude to forget copper and Glencore, or as one chap called it Glenron.

With copper teetering around $5000/t (+1%), $2.29/lb it’s struggling to find support. If we believe the producers the demand and supply mix isn’t as bad as the price would suggest. In that case, with 266K/pa production cuts (assumed), why hasn’t the price sustained a recovery? That would be…

Caterpillar (NYSE: CAT) have a realisation that the rig count and mining woes aren't necessarily a good thing for earnings. Especially as JCB fired the starter pistol on the outlook.

The paired trade for midday - short Umicore (EBR: UMI) and long Johnson Matthey (JMAT) (EMC: JMAT & Umicore). To finish, some wild card (high BS rating gossip) of Intu Properties - allegedly there's some fund or other sniffing. Really? Good luck with that one. The market does love a bit of gossip. 

Atb Fraser

Morning Mumble (belated): Is VW Americas new BP? Just in the US? Perhaps with coffee? + JCB, KAZ & BLT.

Good Morning Evening,

Apologies it’s been manic!

The events unfolding for VW (Volkswagen AG) and the automotive industry as a whole were a complete surprise. The share price decline in comparison to the GM debacle was starting to look overdone until the outing of a further 10.5 million cars with emission issues. Prudence suggests it’s wise to consider the unquantifiable liabilities (irrespective of current provisions).

As per most corporate scandals of late, VW’s algorithmic adjustments were initially implied as being limited to circa 480K cars. Now the very size of the admission raises questions about the dividend and valuations become wide-ranging. Luckily for VW, the Suzuki monies will come in handy and are possibly not factored in by the market.

VW has not been absent of corporate issues before, with the Porsche hedge fund bonfire, union payments/benefits and now false emissions data. It would be a very hard/foolish to catalogue all the actions and conclude, after the fact, that VW was a veritable investment basket case. To do so, would question the very foundations of any investment. Save of course for the macro implications upon a company as large as VW i.e. China / Global auto markets.

With the range of fines and compensation ranges being so vast, some sensibility is needed. If one was to assume the issues of GM and subsequent cost implications, plus those of Toyota with their airbag denial had a similar gravity. Then one can at least ascertain those as being the minimum liabilities that VW can expect to pay. Admittedly, VW have come out with a $6.5B figure to side aside for potential liabilities or circa $590 a unit. Really?

VW and the market have some direction due to GM’s misfortune and currently (subject to further news) suggests it’s likely to cost them less than the worst case scenario bandied around.  The media have not so far implicated VW in any deaths or accidents as a result of their actions.  Having been short across the sector for car manufacturers on the back of the Chinese data, yesterday’s news was totally unexpected (perhaps a lesson...).

The corporates appear to have played right into the hands of the ever tightening grip of the enforcements agencies. Such Agencies/Government Depts. have gained as a result of the poor conduct of corporate entities (banks and autos), with severe financial penalties being imposed since the financial crisis (08/09). So one cannot discount too much of the U$D 37,500 per vehicle penalty, that the US Environmental Protection Agency (EPA) could impose for breaches to Clean Air Act.

Conveniently, America has an option to impose a higher penalty on VW due to the differences in laws governing the actions of VW, GM, Hyundai and Toyota. VW is at risk of being a pawn for the protectionism of America auto manufacturers.

The commentary about the reputation damage often ignores brand loyalty. It shows the limited understanding by some commentators of a sector and brands. A quick look at GM’s market share demonstrates they have maintained near to the level when the ignition faults were uncovered. Albeit, GM lost their key position of circa 25% market share back 2005 and have never recovered since. This was in part due to the diversity of the product offerings in America and quality.

The read across to other markets should not be ignored either, especially from the perspective of a) reputational damage b) potential liabilities and c) enforcement notices. Why would VW “conduct such activities” just in the North American Market? Are they alone in such practices?

VW’s actions have already given rise to questions about an exit from American market. With China in the crapper and Europe at best showing a dull glimmer of hope, what other options do they have? Stay and pay the price or exit?

Perhaps a new plant and improved corporate governance is a sensible approach. The read across of how quick VW’s hands went up, “we’re coming out, please don’t shoot” (Classic text book crisis management), would certainly suggest at this point in time they intend to stay in the US market.

Separately, US authorities have to consciously consider how much investment VW has made and is likely to make within the US. With recent speculation of another plant / operations being built. VW is invested in the US with the Chattanooga Plant, Tennessee (from 2011 onwards)

Chattanooga employs a significant number of people both directly and indirectly and, depending on how business recovers, could build more (but unlikely in the near future). The view in the auto industry is that VW is a big company to weather the storm, and that it's going to make the US work even if it takes slightly longer than planned. The planning stage may just be a slight underestimate, but one cannot knock optimisation.

With the litigious nature of such high profile cases, any costs are unquantifiable at this stage. Having been digging this afternoon, the likely outcome will not only involve X billions of dollars in fines ($4B estimate here), but associated warranty costs and, unless there’s a speedy GM type deal, possible criminal charges for those executives in the know. 

As the situation has been dragging on since August 2014, it would appear VW have been less than open with the EPA investigations. Of significance is the class-action lawsuits by US Drivers whom bought into the "clean diesel." Is there mis-selling? What are the refund liabilities? Do VW have to not only compensate drivers on false promise? Will vehicles over the longer-term be fit for purpose? Can modifications be made to rectify the issues?

The market’s reaction so far suggests there is a suspicion that all manufacturers have been up to similar. Just when the DoJ and American regulatory system are nearing the end of imposing fines on the banks. America have a headwind to attempt some protectionism on the back of VW’s woes. What with the pharmaceutical price gouging and auto defeat devices, US regulatory depts. and enforcements agencies may just have another busy year ahead.

VW have so far have been very clever to avoid putting the matter in context, more so, hands up and we’re cooperating. However, if one is to read across to the settlement of GM.

1. GM had 100+ deaths and injuries.
2. Arguably the product defects/flaw are potentially larger for VW.
3. GM’s lawyers and product specialists appeared to be aware of the situation and limited their actions to protect the consumer and general public.
4. The defeat device appears to be installed to circumvent existing emissions controls. Whereas, GM appeared to be after the fact. On the face of it, VW appear to have conspired to ‘beat’ the system and arguable had an unfair advantage over their competitors.
5. Both GM and VW have denied the existence of such a flaw/fault and as such, it has wider implications for the automotive culture of avoiding/taking blame.
6. For consideration in the liability is the multiplier effect - where potentially 2 or 3 owners of the same car could have rights to a claim due to the false statements and/or the practice of utilising the defeat device. So far, estimates here (EMC) suggest it’s likely to be around 14-16.5M owners that are affected by VW’s emissions practices. The issue is, what is the likely class action uptake of this case in comparison to those of GM? 10%? 15?%
7. What of the risks associated with VW’s assets back securities? VW Bank? Lease and financing packages etc…? Woah, over to DBRS / Fitch / S&P on that one, that may need a little tweaking.

Whether VW drivers are stalwarts to a brand is another story, with the reputational damage being another potential unknown. Evidence so far suggests GM are / have recovered in terms of market share since the scandal first emerged.  Their current market share of 17.2% certainly suggests the US consumer hasn’t been too phased by the ignition switch issues.

Once upon a time, German car-makers were known for the reliability, quality and efficiency. As such the sector read across is not great, but all is not lost.  This reputation is unlikely to be irreparable - theme parks and other such operators manage it over the 16-18 month cycle (psychology of risk selection). If one reads across to the psychology behind other brands, irrespective of sector, the norm is circa 12-18 months, more recently towards longer-periods. The poignant part is to avoid complacency, something VW should avoid at all costs.

There’s no two ways in putting it, that the industry as a whole has a crisis to manage. There’s a suspicion that the lack of commentary by other manufacturers suggests that there’s an element of due diligence being conducted currently. This comes with a caveat of conjecture at the moment.

Save for an ever expanding number of vehicles involved, one can look forward to a heavily fed media investigation. The Government agencies will of course cite the seriousness of such actions, outline a hefty fine $4+B and with an unknown quantum for recall and reparation costs.

The class actions may be the sticking point, with a wide range of circa $2-$16B (the latter assuming partial-refunds). In time, VW can invariably look forward to funding some form of "best practice centre on emissions" to remove the Government burden.

One could even draw on the past as an indicator of the future, with a speedy deferred prosecution agreement for three years (a la GM) to avoid further investigation. If one is the market for a new car, the plus being that VW cars may just be a buy (not the stock), as they have to build quality to repair this nightmare shareholder scenario.

The obvious question is which marques in VW's stable are at risk? Audi, SEAT, Škoda and Volkswagen marques. Greater scrutiny will be placed on commercial vehicles under the MAN, Scania, Neoplan and Volkswagen Commercial Vehicles marques?

In assessing the issues, there’s been a number of valuations. On the sums of the parts, discounting VW brand per se, cash etc.…With sensibility, assuming no further news, the worst case scenario based on current news of circa €87.63 (Euros) a share, with potential upside if the matter is put to bed fully, of near €115 a share.

At near €111 it’s very difficult at this stage to believe the issues are fully priced in, albeit expect those with greater risk appetites to be enticed. Perhaps those funds with telescopic calculations based on earnings in 2022 are being enticed? Can VW recover from here? Undoubtedly, but if further problems come to light, it’ll be a proverbial fire sale.

VWs exposure to China / Rest of the World is a story for another day that has not been fully discounted yet.

In other news, the JCB head count reductions and oil rig (including deep sea) count have not gone unnoticed. Kaz Minerals saga is reaching a conclusion with the market belatedly realising the all in unit costs are 20-30% below (edit) above market prices. ($2.80-$3/lb). Anyone for a rights issue? Previously a £5+B company.

Woes being felt in the UK steel industry by Bangkok's SSI and their Redcar plant with sympathies for Teesside workers. Redcar being a casualty of the Chinese steel exports.

BHP Billiton (BLT) Global Debt Investor Marketing Announcement is very well timed – considering Roy Hill is on track etc. raise it whilst you can’t! Did BLT ever update the market on the missing $1.5B capex guidance or is the situation still offline!? Expect more of the same…Copper not assisting Glencore either at circa $2.31/lb currently. 

Atb Fraser

Morning Mumble: Shooting Fish in a Barrel (FED) & Ferrexpo

Good Morning,

Last nights decision making by Janet Yellen was enlightening, but an opportunity to shoot fish in a barrel (trading both indices, FX, caterpillar & Freeport McMoran). Not only was there an acknowledgement of the USD zone but more so, China is now an acknowledged risk. 

The fed considering the relevance of China says a lot. Seeing as basic economics is a level attained here on a regular basis (June 2012), its rude not to consider the implications. 

Whilst America considers the implications globally, China will be attempting to re-base its growth forecasts for a much longer period. Any adjustments made by America will be countered by China until they have evidenced growth and control on the economic slowdown occurring.

The scale of the Chinese situation should not be underestimated in anyway. We know first-hand that the economy is under a number of fiscal pressures. Regional Government/Local Authorities laden with debt, struggling with a decline in revenues, are now fearful of being indicted for fraud if they approve major projects. So Beijing, tasked with resolving the issue, not only took back uncommitted budgets, but have returned most of them (not really inspiring confidence.)

Some Analysts are convinced China is under control now - this is merely a knife catching exercise with hopes of some panacea of a stimulus. However, in the absence of a coordinated approach, not only with infrastructure projects but a commitment to sensible investment and deleveraging, one would be wise to not ascribe too much value to it. This of course won't exempt the market being in denial and momentum. It’s more prudent to consider that “China are attempting to gain some control on the situation.”

Having spoken with Li and his travelling compadre whom have become the roving reporters (read as holidaying).  Working shifts in SOE’s (State Owned Enterprises) and larger factories have been adjusted, resulting in reduced working hours (and pay). The SOE’s are more obligated to maintain employment levels, but the knock on effects are not to be ignored.

Capacity at steel mills has not returned to near the magical 85%, but commitments to produce maintain employment levels. No wonder China wants to open SOE invested permitted, another sector requiring gift-aid status.

The PBOC/China have not only been erratic in their economical actions but limited to the depth. China have prudently loosened in-bound/inward investment rules but its i) not that enticing and ii) simply not enough. The time for China is running out, not only due to corporate leverage being unsustainable whilst deflation occurs, but those with “commitments” being forced to unwind exacerbating the situation across sectors.

Automobile sales are under pressure, with enticements at greater discounts and margins being eroded, how much is priced into our Germanic listed manufacturers’ forecasts? With contradictions of house sales growth in 50 ish% percent of the statistics, when will they deduct off enticements including the costs of mortgages being paid for X months, if you purchase now?

So, like the rest of the world, the Fed is simply forced into waiting to see what China does. Infrastructure on its own is simply not enough. The dollar trading zone is significantly bigger than the economy, and the Fed have woken up to the Chinese and Global Emerging Markets implications.

The US, whatever the trade levels suggests, is much more exposed than the simplicity of trade balances. Thus, any changes in policy without assessing the damage of the US decline in exports, reduction in Chinese growth and depreciation would be flawed. 

Despite the view that companies are simply investing badly evidenced by debt for dividends and share buybacks. Perhaps the QE crack cannot be weaned off the economies and companies that are utilising the low borrowing costs to sustain models that are built on quick sand (leverage). 

Not only does China impact on the dollar in buying a significant percentage of global commodities, but more so, has in direct link with a significant number of economies that also trade with America. Ignoring the situation would be to the detriment of America.

For consideration is Voldemort Zone that's been pinged across a number of times, over recent days. Rather good summary of the situation. The consideration goes a little further, where, if China continues to under-perform as current trading would suggest, then can the US ever attain their 3.5% interest rate projections. Perhaps its a signal for a series off zones a la underground?

Everything Janet Yellen discussed yesterday (Fed linkto press conference) sounded more and more like Japan. Save for China committing to a stimulus, there's limited growth and non-existent inflation. More so, one has a suspicion inflation is but a mere thing of the past in western economies. 

Allowing for the FED projections over the longer term, its going to create a productivity and earnings drive/exodus across every sector. With limited inflation, save for innovation, companies will have a hard look at out-sourcing and GEM manufacturing. China's cost base has increased significantly both on fixed costs and leverage. They are going to remain non-competitive in a number of sectors and without adjustments in their currency and cost base - something China has no aversion of doing.

Ferrexpo (FXPO) come out an inform us today their main bank is insolvent. Is this a risk consideration for Globo (GBO)?  FXPO had $174M with F&C, whom are also their largest shareholder. 

Does anyone smell a distressed seller in the market soon? What about FXPO's ability to make payments? We are led to believe the figure could be reduced a fraction by the timing of payments, circa $15M. Further digging is required, but with suggestions this morning that its wise to right off all the $174M, that would be a sensible place to start. According the National Bank of Ukraine, “According to the National Bank, the lion's share of bank assets was associated with lending business of the shareholder.”

It would appear “a shareholder has failed to fulfill its written commitments to support bank liquidity and standards within the agreed terms, including not reached the recommended indicators of reserve requirements of the regulatory capital adequacy and liquidity.” One assumes this is Kostyantin Zhevago, CEO of ermmm FXPO?

Atb Fraser

No proof-reading unless Indiana is about!

Morning Mumble: Randgold disappointing Volte Face (with apologies)

Good Morning,

The news of Randgold (RRS) and AngloGold Ashanti's (JSE: ANG) joint venture agreement for the Obuasi gold isn't great. The asset has a long-standing saga where many have failed before RRS. With the Ghanaian taxation issues, so far this morning have only been considered by one analyst. The expansion and redevelopment of Obuasi is not fully decided yet, but in the interim there will no doubt be some bullishness around the potential. 

The Ghanaian tax authorities (GTA) operate a ring-fence policy, whereby profits cannot be offset by other operational areas. The GTA will have to reconsider the corporate income tax rates of 35% and an additional tax of 10% on mining companies, as a result of declining expenditure and the commodities rout. Having considered Randgold's positives, yesterday’s purchases were cut at a pathetic profit, with significant time wasted and being left with cash!  

There are much better assets out there at depressed prices that $1B invested in would produce better returns. Many times has Amara met the criteria for Bristow's commentary with the benefit of an operational blank sheet and sizeable savings to be had if the CAPEX was committed sooner rather than later! 

The hope of yesterday's news by the market, has eroded any benefit even for the longer-term. Although the joint venture is at an explorative stage, why will Obuasi at an operational level be any different for Randgold? In the current climate it's simply a care and maintenance parasite on any company’s balance sheet. 

Whether its Elephant country or not (FT), prudence dictates purchasing a decent asset with a better outlook than Obuasi. Good money after...As a reminder, PWC's Mining Taxes and Royalties and an article that AngloGold Ashanti's might want one to quickly forget.  

Disappointing waste of time on RRS and perhaps losing ones mind! When investors thousands of miles away from the mine can assess the benefits or lack of in investing in Ghana, concerns should prudently be raised. More later...

Atb Fraser

PM Bolt-On: Glencore, FED with fears of Déjà vu, owning American stocks? Lithium (who's taking it?) FMC/SQM/Tanqi, + Gold (not quite a bug) on Randgold.

Good Evening,

Initially it was going to be Glencore’s results on the share placing, but every-man and his dog has covered it and there appears to be a consensus that the debt matters resolved. With the employment and cost issues cropping up on GLEN's care and maintenance proposals, the costs savings might just need a little Tipp-Ex. 

Tomorrow’s news on the Fed could or could not be the impetus and momentum needed commodities. Any deferral in rate rise, will only lead to speculation of when it will raise rates, including the associated risks (Déjà vu). Here the view is, the FED should bite the bullet, but those whom know about all such things suggest its unlikely. 

The question is likely to be, why own American stocks? Justification that cheap money has been used for buy-backs and/or capital returns isn't a sound investment case in its own right. Return on capital employed/invested and return on shareholder funds, isn't hindsight but prudence. 

News is rife with Lithium. The market appears very slow to give some credit to a changing market. Perhaps with the likes of FMC Lithium (NYSE: FMC) on a PE of near 35 it’s enough for now. 

FMC have wisely sold their Consagro operations (Brazilian generic crop protection distribution and sales subsidiary), to ‘Atanor do Brasil,’ the Brazilian subsidiary of Albaugh. A sensible choice as FMC have/had neither scale nor a leading position to leverage off.

FMC poignantly update the market that as a direct result of “continued market growth is outpacing current industry supply capabilities for most of our product lines.” This has improved market conditions to justify a hefty 15% price increase in lithium (Inc. lithium carbonate, lithium chloride, lithium hydroxide and all other products) except speciality products that are rising $3.50 per kilogram.

Tesla are shrewdly conducting deals, signing up off-take/supply agreements at a discount to market and capping the price. Examples being Pure Energy Minerals (TSX: PE) (Sept 16 release), whom today did a deal with Tesla.

Same for Bacanora Minerals (BCN) whom near two weeks ago struck a similar deal supply agreement with Tesla. Although small fry, it’s giving an indication Tesla is working very hard to stabilise the price, admittedly not very well if one compares Chinese prices.  

The price rises are unlikely to help Chinese buyers whom have an import duty of 6.5% on top of the price. It’s difficult to find the appeal of Tesla with their failure to convert sales in China, but Marmite has customers, so why not Tesla.

The price increases are marginal for car producers including the likes of Tesla. Without checking, more recent estimates suggested that Tesla required between 11-16 Kilos of lithium per car. Will Tesla become a gimmick in China, especially as average auto sales prices are dropping, margins down, incentives up but demand contracting? Don't Tesla at some point need volume rather than R&D costs eating into the majority of the unit sales price?

Like energy pricing by the ‘non-cartels in the UK,’ with FMC leading the way, you can be assured that Albemarle (NYSE: ALB) whom bought out Rockwood Holdings (U$D5.7 billion), Global X Lithium ETF (admittedly not exclusively a direct exposure to Lithium producers; noted RD), Sociedad Quimica y Minera (SQM (NYSE: SQM) and Talison Lithium. (Formerly TSX: TLH), will be "compelled" to act...

Talison Lithium, a once upon a time target for Rockwood Holdings, is near impossible to gain exposure to having been bought Chengdu Tianqi Industry Group (Tanqi). Note the indicator was there post any fundraiser of a take out for CDN$850M (from memory.) The Chinese press had reported well before the offer that the Chinese Investment Corps (CIC’s) had approved loans to funds the purchase of Talison by Tianqi well before the event. After all, they'd completed the financing for the mine.

Being prudently reminded of the SABMiller (EMC) commentary. To quote yours truly, “The best hope for SAB is a take-out, over to Anheuser-Busch InBev whom today had a good justification to limit any premium if it were "going to make a move at the end of the month." Today’s news on Anheuser-Busch InBev (ABInBev) SABMiller PLC - Responding to press speculation crystallising ‘most’ of the value.

Whilst not being the biggest fan of gold, Randgold (RRS) today presented with an opportunity to place money (with requirements of safety), with gold steady around $1100/oz, RRS is the preferred Fed Arb, with costs and cash built in even for a longer-term trade. RRS's ability to weather the market and price movements is not to be under-estimated. Even with some citing $775/oz. as a possibility, Randgold may find it tough, but others would quicker fall, causing a shortage of supply. Shockingly, this is likely to be a longer-term investment here.

Admittedly, some see gold as a hedge rather than a supply issue and a store of value. Albeit, the dynamics of the market have always mirrored those of supply and demand. It’s the basics of global risks and perception of risk. With deflation in mining equipment, CAPEX expenditure and energy prices all reducing, it will all assist the unit costs on an all in basis. Obviously save for those producing the equipment reliant on a booming markets. 

Sensibly closing positions in advance of the fed movement today, due to the close nature of any such call, we'll revisit Caterpillar (NYSE: CAT) in due course. The strength in the North America market is facing a wave of deflation in mining and shale costs, caterpillar are not immune, although hedged to some degree by their financing arm.

CAT's Parts may benefit as machines that are run for greater hours per day/week and annum, but insufficient without some form of recovery within commodities generally (read as and/or stimulus). Not forgetting inventory of parts carried by the major miners is also being reduced or managed more efficiently (BHP Billiton a prime example). The destocking on top of pricing pressures won't be positive. We shall reserve comment on Caterpillar's finished goods until 22nd October (Date for Diary). Caterpillar's sponsorship of the Energy and Mines summit is noted.

The recommended reading list is growing and appreciated so please be patience. 

Atb Fraser

Morning Mumble: A valium edition - a recap, from China to the oil price requirements on government expenditure - flying pigs poignantly timed for Macau's disappearing Billions...but it's ok it's only 3-4% of the Macau Junket liquidity ++ KGF being Screwfixed!

Good Morning, 

One would be wise to make sure they have coffee or Valium!? Some missives from the past couple of days. 

Not only is there a rise in Chinese inventories, retail price increases, wholesale/factory gate prices are falling - to stay competitive China have resorted to energy price manipulation. All of which are eating into the earnings of global producers – aluminium a prime example. Following in unfortunate timing with, FT: Asia trades cautiously following Chinese data.

The overhauling of the SEO’s (State Owned Enterprises) is insufficient on its own. China, with any form of sensibility will have to adjust the wastage and excesses. The implications throughout the economy are not positive, if SEO’s suddenly garner economic prudence. The agendas of the Government will be harder to be played out, including, but not limited to, employment numbers, wages but also benefits.

The indicators suggest all is not as well in China, in addition to flying pig prices - notably the pork industry isn't as leveraged. China's food inflation won’t assist the economy out of this glut either, but they can hope. Similar to Russia but not as dramatic, China is suffering from a reducing wage cost, the impact on how people service there mortgage will perhaps be another story.

Finished goods prices (wholesale) have come under pressure from lowering demand but aided mostly by reducing commodity prices that are limiting the chances of growth. If UBS and Goldman Sachs forecasts’ of a worst case $28.50 and $20 a barrel respectively, come to fruition it’s not looking great either. If one was so inclined, this belated about turn by UBS and GS, may be an indicator the market is about to improve, with drilling count and well reductions.

See: AFR's: BHP Billiton price target cut on oil forecast revision and Bloomberg: How Low Can Oil Go? Goldman Says $20 a Barrel Is a Possibility. Essentially the outlook for certain countries isn't great, nor for debt of the oilers or the credit ratings.

Bloomberg’s Brazil's Junk Status is just the start of the risk realisation in international bond markets. Where, in the race for returns, monies have been lent on the basis of being a lower risk than the realities of the situation present. What are the implications for the following debt? More so who will own Petrobras? 

Country	Oil Price to balance fiscal budgets 2015
Algeria	Needed $130/bbl, revised to $98/bbl
Angola	$100/bbl++
Brazil’s just another story entirely, Petrobras’s debt woes won’t disappear overnight!	$115/bbl estimated just to service debt. Junk!
Ecuador	$80/bbl
Iran Allegedly	$130 by consensus but more than probable at $84/bbl based on increased exports.
Iraq	$95/bbl
Kuwait	$55/bbl
Libya	$140/bbl
Nigeria	$120/bbl
Qatar	$55/bbl
Saudi Arabia	$62/bbl (*based on revisions and financing)
Rest of UAE	$70/bbl
Venezuela	$120/bbl

Bloomberg's: Best & Worse Analysis.

For those readers that are keen on Pork Ribblets, Semi-Meaty. The UK suffered a lowering in pork prices and demand during August. Spain and Portugal, despite significant increases (double digit EMC estimates 10-12%) in exports, has seen only modest 2-4% increase in prices, despite a surge in demand. 

The global pork prices, even allowing for US woes of Porcine Epidemic Diarrhoea Virus, or PEDv, have not seen the supply issues being cited in the Chinese press nor so in China. One can only wonder who or what is leading the media to believe there is a supply shortage of pork in China? A flying pig perhaps? 

With the current news flow including companies attempting to rationalise their balance sheets and spending, similarities are yet again being drawn towards Japan. Japan suffered a prolonged period of disinflation occurred after periods of strong growth. Ticking another box in the theory that Chinese companies' having no alternative but to invest globally (EMC: Japan August 2015) and / or pay down debt. Some appear exempt on sensible ratios of debt. With Japan printing, is it a case of sell GEM (Global Emerging Markets) and buy Japan?

Corporate entities have a rather large issue in China. The need to focus on their borrowings, part acknowledged by China's reduction in interest rates. If Chinese corporations continue without some form of prudence and debt reduction, the deflation and slowing of demand will create a real risk the number of defaults rising. It could be just the foundations and consolidation that China needs. China's premier will not be resting on his laurels with regard to a stimulus, but perhaps more prudent to take ones time.

The wholesale deflation has made it very difficult for the corporations to service debt, maintain earnings and justify the higher levels of employment. Banks, are sensibly risk assessing new applications despite the actions of the PBOC (People’s Bank of China), shrinking liquidity further. 

China is being forced to become efficient (or attempt to), this will have implications for employment levels and taxation receipts. The PBOC has realised this, with planned infrastructure and PPP/PFI spending, there are little alternatives.

It’s prudent to have a quick recap of the Chinese growth story and their economy this year. To prop the economy up, the PBOC has reduced interest rates five times (soon to be six). Injected capital directly into the banking system to attempt increase lending and part replace the capital outflows. 

China have reduced the Reserve Rate Ratios (RRR) 5 times to a now 18% and attempted to prop up the stockmarket financially, followed by policy. Better yet, China devalued their currency and tightened up on e-payments and capital outflows including commodity financing deals. Glencore would be wise to consider the latter.

Most of the actions by the Chinese government have had limited impact, China has no alternative but to acceleration spending on infrastructure projects. China has already been discreetly bringing forward infrastructure projects, examples being the development of waste management systems for Beijing.

Tax incentives are being given for investments and capital expenditure, both for individuals and corporations, on top of development grants for those wishing to become entrepreneurs. We have not forgotten the dire state of local government and their dwindling revenues and central government seizing $150B, where the confetti of debt has been issued and underwritten by central government. 

It appears Macau have caught another cold, thanks to a group with a light-fingered approach to gambling. Not only is Macau in the glut of a property depression, in part aided by Li's anti-corruption policies and clampdown on excesses, but more so, the wider economy both with property and business revenue declines. 

Not to worry, gross revenues in Macau may have dropped by 38% in June (worst for five years), but their property has so far only dropped 15%. Junket’s losing near $250M appear not to be of significance to some analysts, it’s only 3 percent to 4 percent of junket volumes.  Ironically, due to the declines it’s actually nearer 8% but what’s a few % of an entire market in decline?

One has to wonder how well the listed Macau Property (MPO) is and what of their Net Asset Valuations in light of the property situation in Macau. With some dramatic discounts being touted on high end property of 25%, but the average is 15% decline as a minimum. We'll know more in due course with a visit planned very soon by the travelling duo!

Of course, with a share buyback in full swing at MPO you'd have thought the SP would be appreciating/holding. With a NAV near 50% above the current SP, one cannot think what the buyers are waiting for!

Staying with a theme, Cloudbuy's (CBUY) NOMAD Westhouse has quit with immediate effect. Disappointedly (for the management) it won't have helped them with their half yearly report also out at the same time. 

Why did Westhouse quit, more so, if anyone was long on this stock post the EFH (Here EFH 1 and Here EFH 2 about turn) debacle covered very well elsewhere, then they need to have words with themselves. Time would not be wasted in looking at how EFH traded this stock, perhaps those whom earn monies exposing such things will be inclined? 

Kingfisher’s interim results are out, beating expectations (EMC) and also a beat on the implications of the BDO. However, the drop in profit is not to be ignored. One has to consider the sensibility of the ScrewFix expansion - 200 stores. The press/city would be wise to wake up to the discounting and margin erosions, more so ScrewFix is not just a “tradesman’s entrance.” Margins yet again under pressure.

KGF are not confident of a French performance (remaining cautious on trading in Castorama and Brico Dépôt France). In essence what the UK gave, France took away. It would be wise to monitor the industrial output of France, renamed “the indicator for Catorama and Brico Dépôt.” KGF, in hindsight for them, may be thankful in being unable to complete on Mr Bricolage.  How prudent of KGF to sell their controlling stake in China.  

To save time, we’ll say goodbye to Haik Chemical now, this company has been the eternal dog of performance. We could blame the likes of Hi-Tech Spring, whom consistent with higher inventories and lower demand have been forced to be more competitive.   

Apologies for the search function not working properly in the top left hand corner, there is nothing that can be done about this. Utilising Google's site search, may be wise. 

Atb Fraser

(Travelling today so limited). 

Morning Mumble: Italics, Copper, along comes a Chinese Stimulus (iron ore?) and Anglo (In brief).

Good Morning,

It’s been about the busiest time on the markets for as long as one cares to remember, more so the demands of one’s time. 

Not only has Glencore's African copper review (ACR) made specific trades a kin to shooting fish in a barrel, but thanks in part by Freeport-McMoRan’s (NYSE: FCX) copper reduction in copper sales of 150 million pounds per year (for 2),  (Circa 68,038T's per annum). There's an avoidance to say much more on copper, at the moment.

One trader that was sweating when Glencore (GLEN) went significantly below 145, can now have a nap whilst the shorts are forced to close by Glencore's lack of confirmation (Shrewd). Are they? Do they need to? How will it be done? Glencore still eyeing options to raise $2.5bn in new equity (FT). We'll await Glencore's updates. Perhaps after they're done unwinding a few items aided conveniently by the ACR, it will give them some clarity on the balance sheet.

China have come out and acknowledged how bad it is (or how good it is about to get), with an intention to stimulate their way out of this rout, glut or downturn (Reuters). You can read this many ways, depending on how one is allowed to write the news. 

Of course, China's stimulus will be supported by the controls that are being introduced by the China Securities Regulatory Commission (CSR) including the soon-to-be married SHCOMP circuit breaker (CNBC). No mention of the reforms regarding to automatic trading? Or selling for that matter! There's more to this, but we're waiting on clarity on a couple of things before commentating further. With some of the tones suggesting there will be limited selling, ever...some long onlys will like this style!

The stimulus woke the iron ore price and likewise the producers appreciated the gesture, RIO/BLT/FMG and even some Jo'burg (JSE) marginal that have formed an EMC fan club. It’s a bounce and a half, perhaps with over-confidence on certain companies that are far from out of the woods. The low cost producers are viable, it's the "leveraged" higher cost crap that is rising that should raise an eyebrow or two. Perhaps, in answer to certain company directors’ prayers, they are now able to consider raising a few quid?  

As a positive, Fortescue Metals Group’s (ASX: FMG’s) white knights may now just be tempted to pay somewhere near Twiggy’s asking price. Shorts would be wise to note this potential event, with the Australian FIRB (Foreign Investment Review Board) unlikely to find any issues with an infrastructure deal. FMG have little choice but to do conduct a deal soon or risk the surplus over the longer-term weakening their hand.

Andrew ‘Twiggy’ Forrest may dislike the current offer on the table, but any deal circa $2.5B+ back on the balance sheet will give the stock more confidence. BaoSteel (EMC: June BaoSteel) are the likely front runners although, China's Hebei Iron & Steel Group and Tewoo Group (separately), will not discount any such deal.  

Keeping with the tone, Anglo American (AAL) has risen today, on the back of "selling" Rustenburg. Whether it'll be cash, shares or a mix, is immaterial to the market celebrating that AAL have removed a boil on the balance sheet. The carrying value from memory was well over £300M (please check), so there's circa £240M of Tipp-ex required on AAL’s part.

What the market should perhaps pay attention to is Sibanye. This company has in essence been "given" a liability, if one is to believe the value of the deal. Sibanye are obviously confident that they can return the operations to profitability, by the very structure of the deal. However, they won't have lost anywhere near as much as AAL! 

Have AAL sold/flogged or gifted an "asset" away when the PGM sector is starting to look like it may actually bear some modest fruit (FT: Platinum output to be hit by investment cut). 

If Sibanye can return the mine to profitability, it will be a testament to the managements understanding of mining and operations. Sibanye have a very good understanding of legacy assets, with keen eyes. It will obviously raise very sensible questions about whom should be running AAL, in the event of a turnaround. More so, what of the Scoliosis and White-Finger class action suits? Has this liability been passed on with the asset? Or are AAL fully on the hook for $1 billion.  

All for now, noted on Monitise. As a side thought, what's the unit cost for Vedanta (VED) on its iron ore operations?

Atb Fraser