Morning Mumble: China (of course) + Liquidity with some likely sad news for a few Chinese traders, PLUS500 (what are its user costs). The pain of Graphene and GKP!

Good Morning,

Overnight the Chinese authorities have banned listed entities selling stock (if over 5%) in other listed entities for 6 months. So those collateralized loans should be safe for now, with a Band-Aid on the value of them. 

China curbs stock sales in effort to halt market rout and they've dealt with those insurers owed money from brokerages, by banning them from calling their positions (Reuters). The articles doesn't mention the liquidity issues the insurers are suffering as a result nor the Peoples' Bank of China assisting them with emergency funding "for as long as is needed."

The woes of China are causing a "drag effect" across all markets as a race to cash occurs. As seen on the DOW yesterday and other markets with Asian exposure. The FTSE/LSE's will have a similar occurrence. 

In essence, the Chinese are liquidating the positions that are left to cover the woes of being locked in in on native markets. After just a few days, where the Chinese market would have perhaps found a natural level and the issues resolving itself, it’s likely the woes will be engrained for the longer-term. 

Insurers have liabilities, brokers have liabilities and the population as a whole have commitments (rents, mortgages, car payments etc...) This rout or liquidity contraction is being felt across all market classes. The Chinese appear to have been oblivious to the ensuing train wreck and will recoil in terms of risk appetite and exposure to said risks. Same for their purchases, such as cars, food stuffs and luxury items. 

There's a lot of commitment tied up in the market (near $2 trillion). Chinese directors with stock pledged as collateral for loans against the now suspended stock. The Chinese Government, are reported to have pledged "unlimited liquidity." Around the same time as the state media reported this, all commodities rallied, as though a new source of financing had been found or the keys to the safe. The most notable bounce being Copper treading water around $2.50/lb and Nickel jumping above the key $5/lb to $5.15, but felt by all except precious metals. 

One cannot help but wonder if the Chinese Government are trying to patch leaks in the canoe as they appear, rather than taking stock of the situation. The insurers are now expected to shoulder some of the margin issues, along with the China Securities Regulatory Commission (CSR) and  Brokers, Margin houses and banks (PBOC holding the shoe/house). Local Governments have also seen a keen opportunity to tap the Central Government for some cash. 

The woes may be felt further with the "payday" events that have typically occurred in China, but will put further pressure on the system. Historically late payment of wages has been a normal practice, but in the absence of liquidity, this may be outside the normal practices. Especially if some companies were say "margin trading" when they were not expected to be and are now locked in. 

The SHCOMP (Shanghai Stock Exchange Composite Index) traded in a very large range of 3,373.54 - 3,748.48, with the predictable tank on opening with consistent buying throughout the day. Same for SZCOMP (Shenzhen Composite Index), trading in the range, 3,373.54 - 3,748.48.

The saddening part is the news will soon be awash in China of police arrests for "illegal short-selling practices." The scapegoats are going to have little ability to defend themselves with funds frozen already or to be frozen. The need by Chinese officials to find a scapegoat or 8 to lock up for perpetuity. 

Despite the crime being the stupid levels of long margin that was allowed to go unchecked or regulated properly. All that was needed was an 11% contraction to have a confirmed bear market rather than the normal 20%. Whereas to short in China is very difficult, not only restricted but limited to 5% of total stock, with tight controls previously in place. Even on the grey market, shorting was restricted which rather contradicts the Chinese officials’ assertions that it has been the product of a targeted and sustained shorting attack. Sounds good though doesn't it! 

PLUS500 have given a trading update. What the market would be wise to consider is who has deposited the funds a) the customer b) the company or c) an introducer? The number of active customers may have a significant distortion depending on the answer. PLUS500 traders (as per Facebook) are suggesting if you put pressure on PLUS they'll "give you between €100-200" pending on the value of that customer. More so, PLUS500 are believed to be including these "Freemans" as active customers (really?). 

Customers are in essence drawing their monies out, but first obtaining a freebie to fritter away on highly speculative bets, as between 100 and 200 trades/points are required to be able to draw out the €100-200. What is important in today's announce is the lack of Average user acquisition costs (AUAC) that will have to be revised in light of the "retention" attempts by PLUS. Or are PLUS going to introduce another cost item, say "customer retention costs." This has a material impact on bottom line of anywhere between, €9.3M and €18.6M pending on how generous PLUS have to be or have been. With some "whales" allegedly getting near €2.1K. 

The massive increase in the AUAC costs has not gone unnoticed. More importantly, with gossip from certain quarters suggesting there's some settlement by those "armed up with a lawyer" to recover all their losses during the suspension. Will this become a more common-theme? What is the impact or liability for PLUS. This is excluding the unknown quantum of any potential fine that appears to be a material breach of AML procedures. Over to Playtech to ask those questions during their due diligence. Do PLUS 5000 have to update the market on these liabilities both legal and potential fines? 

Centamin Egypt (CEY) gave a better than expected Q2 Production, ahead of guidance but overall guidance wisely remaining the same. With little in the way of costs per ounce guidance, one has to range between $729 and $655 per ounce. AISC (all-in-sustaining costs) should be around $945/oz but with some positive revision potential towards $915/oz. Grades into Q3 are key, as a lack of improvement will shave %'s off the overall FY of 430,000 and 440,000 ounces."

As one savvy analyst has noticed and is likely to give some greater PR to the graphene industry is the Collaboration between Haydale Graphene Industries (LSE: HAYD) and Talga Resources (PDF version) (ASX: TLG). 

With some unfortunate victims of the 'new tech' era, such as Graphene Nanochem (GRPH). whom operate in materials and chemicals such as  Fuel additives , oilfield chemicals and homecare products. Unfortunately for GRPH their margins will be squeeze across the board, whether there's potential out there for further contracts, there's been a sustained level of selling. 

With debt levels increasing, margins being squeezed and a number of plates spinning it would be wise to price in an equity raise. Whether the company are considering this or not, it's going to be no mean feat. Limited cash, debt of circa £30M, expect news of rescheduling of debt and some element of equity raise. The Company has been punished rightly/wrongly for perhaps being listed too soon. Or arguably from a company perspective of being able to access the capital markets. 

There is/was a lot of hype around the Graphene launches, including Applied Graphene (AGM). With no debt, AGM has not been punished to the same degree, however GRPH are at a different evolutionary stage. GRPH's IR needs a significant work-over irrespective of the sustained selling. When comparing, it would be wise to consider GRPH the leveraged play, whilst AGM/HAYD and ASX: TLG appear to be more reliant on the markets for capital than creditors. 

Limited time for Gulf Keystone (GKP) who's output guidance / forecast has been cut. As a positive GKP have received some cash and will hopefully be shipping oil out via the Turkish pipeline soon. The market didn't need reminding that as a result of the 5 weeks suspension production would be down, near as damn it the 10% GKP are guiding on today. With directors departing and the like, this low ball offer is looking more and more likely! Over to GKP TV for those incapable of reading! (Mentioning no names). With certain folks taking the jolly to Paris for the AGM, sobriety will be top of their lists. 

Atb Fraser