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