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!