Morning Mumble: Debt overhang (Negative Equity) and...GMD, Copper and ESG, the decline continues.

Good Morning,

China's banks have been reviewing the impact of declining house prices and risk of a debt overhang (negative equity), occurring in 'most cities ' (66/70) in China. Obviously, this will include syndicated loads to property developers and the probability of repayment or perhaps rolling over of loans/obligations. 

With new builds down circa 22% and new land purchases by registered developers, approaching a 40% decline year on year. The impact to the 'average' earning Chinese worker is significant, and is being felt across all of China. Whether Migrant workers, steel-makers, factory workers including those in equipment and machine manufacturers, none are exempt from the downside is slower growth. This contagion has already started to happen with a decline in factory output, and laying off of personnel. Today's flash PMI HSBC data confirms this (compiled my Markit).

Without further intervention, albeit, what else can the Chinese Government do, as they have reduced interest rates, relaxed borrowing requirements and eased property ownership rules. Save for further bailouts like those of Evergrande Real Estate Group (HKG: 3333), the developers are up the creek without a paddle. Same for Local Governments, whom were previously reliant on land sales and sales taxation revenue, all now significantly lower with the possibility of council tax/property taxation being considered to make up the short-falls in budgets. 

The Chinese Government have put a band-aid on a shark bite with the Chinese loan facilities extended to Evergrande (Circa$16B). With debts approaching $31.8B (EMC figures inc. perpetual bonds $7B approx.*) and revenues in decline, Evergrande's woes have only been delayed the inevitable, save for 'further stimulus'. 

Evergrande can make space for a Ghost Cities segment in their reporting? Or delayed developments? At what stage is the button pressed on a rights issue (to the Chinese Government or asset sales similar steel mills?) to scrub the debt off Chinese Property developers books. This will of course continue the perverse bull run on their stock prices, despite the sector running above 90+% net debt (average) across the industry and by a recent reports over the 120-130% debt to equity (EMC) estimates. 

Citron Research, had a view, "that Evergrande was insolvent and had consistently presented fraudulent information to the investing public." The Securities and Fraud Commission in Hong Kong has an on-going misconduct case against Citron. This started last Wednesday (18 March 2015), due to be finalised sometime beginning of March 2016 (yes 4 years later) on or around 6 March 2015. It would be wise to update ones diary on the tribunal. Although Citron's commentary hasn't always been blinding, but it is certainly worth considering the views of the short seller. Sometimes catching the mighty Deloitte on the back foot!

Today's mumble was delayed due to the requirements of Game Digital (GMD), with Benedict Smith (CFO) stepping down after lengthy 26 months in the position after dire  interim results.. With a decline in first half profits, (the company already sign posted in January), it’s no surprise the stocks on the tank (again), and any recovery in the SP from January was totally unjustified. The market is competitive, with delivery available next day for those wanting to trim their purchase price further. 

The entire gaming industry is suffering the woes of a lack of 'new' blockbuster games enticing the loyal followers to part with their cash. Margins squeezed on near the same revenue, although digital/online sales should provide some support. At anything above 200 pence, one finds the price very hard to justify. EMC remains negative on HOME and GMD as per the January commentary.. Although it’s wise to bank profits in the latter on the news today. From a technical perspective, can GMD hold 240 pence...

Copper had a brief recover, going to $6000/t ($2.72+/lb.) and now at $2.795/lb ($6160/t) despite the weak Chinese data, one assumes the market has spotted the Chinese trades as well and the rush to cover short positions on the dollar strength. The bets are on copper for Chinese stimulus and national grid developments...for now.

Reviewing the AGM announcements for ESG (Eserveglobal) it was a timely reminder for EMC's commentary on CFO Stephen Blundell flipping his options. The EMC was subject to criticism from certain parties. With threats of reports to the FCA for market manipulation 'based' on the EMC view of Stephen Blundell's director share sale and that of Investec's, being an indicator of what is to come. 

ESG shareholders and the board consider it prudent to appoint Stephen Blundell as the Chief Operating Officer. If the gossip is correct, Stephen Blundell has put himself forward for the permanent CEO position, where he is currently "interim" CEO as a result of Mr Paolo Montessori's resignation. The AGM statement, for those who have missed it. One would find it hard to criticise a share sale where the stock performance has been positive. 

GATE ventures watch, circa 12% down, 'ramp-fabulous!' With some significant rumour flying round about Oxus (OXS), its wise to avoid further commentary until the result of the arbitration and the Jerooy Mine update. A reminder for those getting carried away, the Prime minister Joomart Otorbayev of Kyrgyzstan warned back in January that "Each prospective investor [for Jerooy] should be warned of additional legal costs."

Atb Fraser

Morning Mumble: January dieting...Associated British Foods, Atlas Iron (wonders would...) and Oil. ALO forgot to tell the market about

Good Morning, with the market taking priority there will be no future apologies for the tardiness of updates nor urgency placed on any messages enquiring what time its going to posted. 

Morning Mumble: The diets begin in earnest... and the FT runs with Oil projects worth billions put on hold. The high impact drilling has always been questioned even at circa $100, quite why Premier Oil (PMO's) entered into Rockhopper’s Sea Lion on the economics is a question not of hindsight but of value for shareholders that shouldn't have been completed at this time. PMO's share price has gone only one way since Sea Lion Farm In, pre-the oil drop. 

PMO's all-in-costs from there trading and operations update will offer safety to a lot of oil investors. With some alleged low risk drilling (Falklands & Indonesia) and debt without the immediate concerns or RBL criteria, PMO is likely to have some potential upside. Personally, save for intra-day it’s difficult to justify any oil holding in the current market until the market has digested the changes. (See TLW). 

Tullow (TLW) today have come out with similar, giving clearer guidance on costs, albeit one would be wise to revisit their year-end accounts and work through the costs (limited time today). Tullow Oil plc - Trading Statement & Operational Update with write-off's of circa $1.2B and potentially more, one will wait to see what Tullow do next with murmurings in the market this morning. Over to Exxon Mobil (XOM) to acquire on the cheap with limited options for shareholders, the time to strike is "near." having cast their eye over this company before with the upside potential even in today's market. Do not expect the update to do much in the market, without some validated gossip of TLW losing its independence. 

With Game Digital (GMD) showing how margins and sales were impacted by Black Friday (Compete or Retreat), Home Retail Groups (HOME) update was with no hope of an improvement in comparison to GMD.

With Associated British Food (ABF) trading update today endorse repeated debates for divesting the food divisions, declining margins (as expected). The Sugar alone EMC Food Prices would impact and the EMC Duncan Fox ABF summing things up nicely. The company's trading outlook promoting (read as selling) the company nicely:

Trading outlook

This year we expect Primark's expansion to continue and Grocery, Ingredients and Agriculture to make further progress in operating profit on the back of their very positive performance last year. With the fall in EU sugar prices and weakness in the world sugar price, we expect a further large reduction in profit from AB Sugar, but this will put much of the effect of the structural changes in EU prices, seen over the last three years, behind us. We expect a decline in adjusted operating profit for the group but the impact on earnings will be mitigated by much lower tax and interest charges. Sterling's strength against most of our major trading currencies will also have a negative effect and we now expect a marginal decline in adjusted earnings per share for the group for the full year.

It will be interesting to see how my view on the not to short from November pans out! With my belief previous news being totally validated. (Disc: Long) Bold is mine. The market is now ignoring the Sugar and Ingredients divisions, so will look solely at the positives of Primark's performance the star in the group and making valuations difficult for traders. Closing on the news for the myopic trading and banking profits (myself). With little upside on the current SP, it’s wise not to carry profits much past the news. Under review for the short, now January 2015 has arrived.

It would of course be rude not to mention Atlas Iron (ASX: AGO), some of the dedicated have correctly spotted the shorting opportunity post-Christmas. As always, comments on AGO will be published if there are no obscenities and relevant. It is with pleasure that two significantly underwater holders decided to short post the Christmas nonsense appreciation, and have actually banked a break-even on their investment. Having held for their near 3 years from AU$3 they have actually broken even on shorts...have they been converted. Kudos! One hopes lessons have been learnt.

With Crude Oil finding support (and copper), it’s no wonder there's some hope for the obvious leveraged candidates. Brent and WTI both trading near par at $47.40/bbl (approx.). So today, the warning was on the door, the flags were waving, LGO Energy (LGO) conducts a placing to raise £1 million raised for Goudron, and Cedros update. Surely not, EMC LGO & Copper Coverage (Fumes) (Diet begins in earnest) seeing the writing on the wall, today I close my short and await the "constant" news flow again. LGO's Nomad and Brokers will obvious assure us no one knew about the placing and it wasn't broadcast far and wide and there was no selling down to fund the placement. Strangely no matter what they say, LGO has yet again performed predictably. Whatever happened to LGO's credit facility? 

Staying with the LGO theme, Alecto Minerals (ALO) placing, congratulations to whomever got this away...judging by past performance. Who'd have thought it with the importance of ALO's Completion of Analysis of Historic Drilling Results at Kerboulé Gold Project, Burkina Faso. Can anyone identify what regulatory news is contained within the 6 January 2015 announcement. The company today announces a placing to maintain working capital (read as sustenance) whilst discussions progress on potential joint ventures. ALO could have saved some RNS costs and updated the market on the Burkina Faso issues both with Government (CNT (no joke) and disturbances stopping operations for the Karma Mine operated by True Gold. Obviously other companies would be wise to update the market accordingly, after all gold is highly portable, such as Avocet (AVM) and Amara Mining (AMA), whom I'm led to believe operate not far away or have licenses near. Centamin Egypt (CEY) really need to bring the cosh out and put ALO out its misery...no premium share based takeover. The shareholders would immediately benefit. 

The final thoughts without reading too much into it the third quarter results of Mothercare (MTC) is why do they have shops? Investors should be considering graphite within the lithium squeeze, no cryptic messages just common-sense. Its always pleasing when investors re-read announcements and come back to reality, ZIOC (ZIOC EMC 30th September 2015 with ZOIC typo). (Disc: no positions short now.) Sirius Minerals (SXX) disappoints today with an update harbour facilities application. Perhaps the company can consider the difference between approvals and applications. This decisions is surprising seeing as there is the potential within the process to modify the application. Impatience will punish...

Atb Fraser.