Weekend: Juridica (JIL) and Burford (BUR)

Good Afternoon, 

Juridica (JIL) - in June we saw no benefit in holding. We believe in the third party litigation model but saw limited to no upside in Juridica, preferring Burford Capital (BUR). It's prudent to take some profits on Burford with 90% over two years not to be sniffed at. 

EMC: Juridica from June:

Having taken profits and dividends in both Juridica (JIL) and Burford (BUR) today's portfolio update was negative on the bottom line. Measured in NAV, JIL is valued after today around $150M (ish) without checking. Consequently, the stock correctly repriced the stock 88 pence.

With some volatility in JIL at the moment, it’s hard to justify any share appreciation based on the NAV. As a result, a disappointing 17% return over near 3 years on this investment, allowing for today's sale with no further holding. Better than most bank returns but disappointing. Time will tell whether its wisdom to hold Burford (BUR), performing better over the 3 years with a better blend of small dividend and share appreciation (50%) ish.

Juridica are contemplating winding things up - they appear not to have the size or traction to absorb losses after the portfolio update (16 November 2015). Juridica provided case funding of $3.5M and are likely to receive around $2M ($6.9M below case valuation). They state they’re considering an appeal but…

The corporate review of operations was a little surprising (18^th November 2015) – it appears JIL had discussions with some shareholders. They state they envisage no further investments will be made and elude to a potential a change in business purpose or operations in a different sector – finance? SME lending? Biotech? Who knows...? Also a wild card of there being some form of tie up between Burford and Juridica - although unlikely.

The Board announces that the Company will not make new investments (other than for funding existing investments in the Company's portfolio where such funding is reasonably required to realise maximum shareholder value).

Will seek to return capital to shareholders in the most appropriate manner, following the completion of investments.

Comprehensive review of all its cost and fees structure, with the objective of reducing the ongoing costs and fees of the Company given the investment approach set out above.

We feel Juridica’s fair value is around £62.5m lower end (57p ish) to £67.5m top end (61.5p) - although there could be some benefits from higher than expected return on certain cases and/or cost savings if no further investments being made.  

Atb Fraser

GBPUSD Exchange rate used £1:$1.52 / Number of shares 109.98m

Weekend: A quick run through...'onest guv' (Coffee) - Sirius Minerals (SXX), Vale, BHP Billiton (BLT) - Dividend Cuts, Anglo American (AAL) , Kaz Minerals, Drax (DRX), Clarkson (CKN), Royal Mail (RMG) SunEdison (SUNE) & Finally JMAT

Good Afternoon,

Another manic week with various bits of news coming out - a speedy run through of what can be remembered:

Sirius Minerals (SXX) - It would be laughable if it wasn't true - from memory Israel Chemical (NYSE: ICL) via Cleveland Potash Boulby Mine raised concerns/objections regarding the application or process for SXX's York Potash polyhalite mine. 

ICL inform the market of the refocusing at the Boulby Mine and will mine polyhalite. With some amusement, ICL have trademarked a brand called Polysulphate – amazingly derived from polyhalite. ICL is listed NYSE and with limited upside, what reasons are their to hold the stock.

Vale / BHP - The trade was the debt at Samarco owned by Vale and BHP Billiton (BLT) - They have been compelled to undertake further emergency tailings dam work. The damage and overall cost implications are unknown although perhaps affordable, the market now should price in a real cut to BLT's dividend. The price has risks...even for Vale, whose leverage is phenomenal but the price is now about right. How will one sleep at night not being short Vale?

South32 (Short32/S32) – updated the market. The same however cannot be said for Anglo American (AAL). AAL own 40% of the venture where they have yet to notify their shareholders of Samancor manganese joint venture issues.  Anglo deem it appropriate to update on the changes to their senior management and ignore the woes of their 40% stake in SamancorCR. 

From South32, the joint venture's South African mines will remain closed until the completion of the ongoing strategic review. Production was suspended following a fatality at the Mamatwan mine on 2 November 2015. 

SunEdison (NYSE: SUNE) - The idea of SUNE being a car-wreck was pooh-poohed when we raised the question "why was SUNE valued near the same as Solarcity?” Our view was that there was limited equity value left for shareholders in SunEdison. In contrast others believed in the solar expansion of the world. 

The markets may be right about solar longer-term, but not with SUNE - they expanded fast, attempted to hold on to projects rather than sell them and have significant leveraged. It's an all too familiar story of elastic expansion that may not snap, but is likely to be a shadow of its former self. 

Despite some inference we had lost the plot in June, July and August, we were vilified by the price action on Friday where SUNE's ability to access capital and outlook has finally been realised. The price still is unappealing but there's no reason to hold the stock unless a white knight can be found. We know it's not Blackstone, they came out and said they weren't considering it on Wednesday (Reuters). 

SUNE's second quarter results released in August only confirmed what the market should have acknowledged debt vs earnings and over-expansion is a recipe for...What are the implications for the yieldco's? Another over-expansion similar to the Chinese co's of yesteryear. 

Barrick Gold (NYSE: ABX) continues to flogs four mines to continue reducing debt. It makes one wonder why they bothered in the first place - See Mining.com Barrick Gold. Their need for cash is keeping the short-interest happy in Acacia Mining (ACA) - from memory ABX still have 64% in ACA and with the significant overhang, would you be a buyer?

Lucara Diamonds in Canada (TSX: LUC) - not only found 1111 Carat Diamond where the share price was muted but then LUC recovered two more diamonds including a 813CT stone. We missed the price action due to travels but what took the market so long to react positively?! Certain traders...tut tut. 

Anglo Pacific (APF) - companies apparently have efficient with their IR - last weekend we had reports in the press that Rio Tinto were threatening to close their Kestrel operationsdown if they did not get approval for Kestrel. APF, by the silence, obviously do not consider the ground water issues in Australia significant enough to update the market on the future prospects of Kestrel. Perhaps the market will be honoured of an update within the Q3's due 26th November 2015 this week coming. 

Kaz Minerals (KAZ) - luckily for them they have a Chinese contractor whom appears to be very flexible. KAZ have been granted a reprieve with some can kicking of liabilities by Non Ferrous China (NFC). Over to KAZ, (bold and italics are additions):

Under the revised terms, $300 million of construction costs which were scheduled to be paid in 2016 and 2017 will be settled in the first half of 2018. There is no change to the overall amount payable to NFC or the project budget of $2.3 billion. Aktogay remains on track to commence production from oxide ore in 2015 and production from sulphide ore in 2017.

Oleg Novachuk, Chief Executive, said: "The deferral of $300 million to 2018 provides KAZ Minerals with additional liquidity during the construction and ramp up of Bozshakol and Aktogay. This agreement also demonstrates the strength of our relationship with NFC and continues our strong track record of securing support from our partners in China for these strategically important copper projects."

We maybe have a different understanding of the term additional liquidity to others, however the directors think it's a positive - John Mackenzie bought 5000 shares, Andrew Southam purchased 99,238 shares and Simon Heale (and connected parties) purchased 77655 shares. Perhaps they feel the purchases will be beneficial and a sign of a recovery in their company - hmm What additional liquidity is there?!?!

Coal - The UK Government came out with all coal power stations Technica - coal power plants to close 2025. This doesn't bode well for the industry as a whole nor prices where similar policies are impacted on global prices. Mick Davis / X2 might just be better suited to other projects, but one suspects they smell a bargain on some Australian assets. 

Are Drax (DRX) viable? With risks associated with their subsidies and the general outlook to biomass. Having met with a few private companies recently involved with ports, the outlook certainly isn't encouraging with some owners looking to sell. Implications for HSP (Hargreaves Services), albeit it should be cash generative even allowing for RedCar Steel closures. What is the read across to Associated British Ports and Clarkson's (CKN) etc....etc...

Cliffs Natural Resources (NYSE: CLF) - continued with their views on dumping in the US by China as well as announcing they are temporarily idling iron ore pellet production at its Northshore Mining operation in Minnesota by Dec. 1, 2015. Another company where this is no reason to hold the stock until anti-dumping measures are enforced. One suspects there's others issues at stake so it's going to take longer than the companies under pressure hope for. 

Royal Mail (RMG) - came out with better than expected results. The sector outlook remains competitive and consider RMG, in the absence of significant change, to be a dinosaur. The industry, like most sectors,  is cannibalising their own margins in the search for dominance. Not specifically aimed mail and courier companies - but there appears to be a thirst for expanding into space at the cost of all. See DX Group (DX.) trading update and UK Mail (UKM) half yearly report whom both showed the competitive nature of the market.

Johnson Matthey (JMAT) – Interim results were undoubtedly better with the added bonus of further savings (£30M). The news from JMAT’s Emission Control Technologies division (ECT) was waited for. There have been few/little indicators of how well the diesel market was performing after the current VW issues (whom just increased the number of cars with emission woes).  Our belief that the diesel demand would fall has so far proven incorrect with Europe doing well – more so it appears to be expanding.

There has been continued commentary around NOx emissions from diesel vehicles and speculation as to whether diesel's share of production in Europe may decline.  The proportion of diesel vehicles produced in Western Europe was stable at 51% in our first half (H1 2014/15 50%).

We did not properly consider that lower PGM prices would be so beneficial to the working capital levels.  Nor the true read across from the NOx issues that are a hot topic as a result of VW’s actions. JMAT, like Umicore (EBR: UMI), informs us that 6B + NOx requires additional catalyst technology and increases sales per vehicle for Johnson Matthey by around 20%.

JMAT's Dividends will be hugged in a shrinking market. (bold italics addition) - An interim dividend of 19.5 pence per ordinary share has been proposed by the board which will be paid on 2nd February 2016 to shareholders on the register at the close of business on 8th January 2016.  

The estimated amount to be paid is £39.6 million and has not been recognised in these accounts. The board is also recommending a special dividend to shareholders of 150.0 pence per ordinary share which will be paid on 2nd February 2016. JMAT could have utilised the sale proceeds better, one would hope they’re in the process of one or two acquisitions before the 2nd February.

Have a good weekend, Atb Fraser

PM Bolt-On: Exclusively Majestic Wine (MJW) - you may need coffee.

Good Evening,

Majestic Wines trading update came in better than expected - fear not, it’s still not great but with the 'strategic review completed' the market has bought into the story. Despite Majestic Wines stating the obvious:

This transformation will take time and require significant investment, so we expect profits to fall before they grow again. However, we are certain that it is the right thing to do for shareholders, customers, staff and suppliers.

The structure of Majestic's pre-Naked Wines meant MJW should have been able to develop a Business to Business (B2B) and an e-offering without having to acquire Naked Wines. Majestic had an established network and logistics already in place – it did not have to spend £70M.  

Majestic's web-based expansion plans are putting shareholder returns at risk (dividends), with the majority of free cashflow likely to go towards customer acquisition - why is the market buying into this? With the company guiding to no dividend until July 2018 at the earliest, there's no urgency to put equity at risks unless you are a true believer in the story. 

The mainstream  ran with, ‘Investors may raise their glasses to toast Majestic Wine’s new boss Rowan Gormley today if he can deliver a much-needed three-year strategy that can deliver on upturn to the group’s finances’ (Telegraph – with apologies). 

EMC's believes in the short-to-mid-term that online wine, text for wine and all web-type-wine-entities offer limited upside. The method of acquisition and enticements do little to promote customer loyalty; resulting in higher costs and ironic reduced loyalty rates. The market appears to subscribe to the "hope value in this being a profitable web based offering", we do not.  

These types of marketing strategies are a bet on a customer relationship lasting long enough to recover the initial outlay and make a profit. Examples of enticements being ‘a free case of wine, ‘£40 off a case', or ‘sign up to paying a monthly fee for discounts’. Has the market not seen this before - including offering rewards for recommending friends? 

The best of the results are normally in the summary, we'll handover to MJW (bold, italics and underlining are additions) and cover some of the balance sheet later:

• Underlying H1 trading encouraging at Majestic Wine whilst strong growth continued at Naked Wines.

• Thorough strategic review now completed, challenging medium term target announced today along with key new initiatives and updated short term cost guidance.

• New management structure and team in place and working well. 

Are Majestic management losing sight of the value of Majestic retail by chasing revenue with Naked Wines? The challenging medium term target implies there's going to be a revolution in online wine sales and the Business to Business (B2B) arena. Established players are very adept at dealing with challenges. We believe there is a good argument for a Majestic (brand specific) web offerin - where customer acquisition costs could be cheaper than if the Naked Trader brand or format was used and with brand loyalty.  

There's undoubtedly value in expanding the B2B offering, but the question remains, why expand within an already competitive online market place? What is Naked Wine's edge in the market place? 

If Majestic asserts that Naked Wine's will be the go to ‘virtual’ shop for online wine, one has to consider the competition - Laithwaites and Virgin Wines (This is Money). In an already competitive market, we now question whether growth will be profitable enough to warrant the investment and the suggested valuations (we have avoided stating shareholder returns at this stage).

Analysts with rose tinted spectacles might like to consider the following: Googled for you -search wine (Search 1) and Googled for you - online wine (Search 2). Please note the positioning of "Majestic's" in Search 1 compared to Naked Wines in Search 2. More so Laithwaites, Virgin Wines  and Tesco all come in above Naked Wines in Search 2. The very position of Majestic in search two (online) questions why there was a need to pay £70M for Naked Wines. EMC ignored the advertisers as well, albeit these are as poignant. 

We note the change in director’s responsibilities and some amusing KPI's with a challenging set of three year targets up to 2019 (see further down). 

Over to Majestic with their Three year transformation plan highlights (ECM's additions are italics, bold and underlined):

• Underlying H1 trading encouraging at Majestic Wine whilst strong growth continued at Naked Wines.

• Thorough strategic review now completed, challenging medium term target announced today along with key new initiatives and updated short term cost guidance.

• New management structure and team in place and working well.

• Announcing today a new strategy to deliver sustainable, volume led earnings growth and improved return on capital

• Targeting over £500m sales by 2019. Key performance indicators to demonstrate progress are also published today

• Good progress made on structure, team and key initiatives
• Key elements of the plan include:

• Absolute focus on disciplined investment to generate returns on investment - measured as annual recurring EBIT generated as a % of investment outlay - above our target of 25%

• Change of emphasis from opening new stores to new customer recruitment to drive higher returns from the current level of investment spend

•  Total UK store target reduced from 330 to 230, currently 211

• Reviewing the existing store network for opportunities to unlock value

• Reinvigorating sales growth in mature Majestic Retail stores with a new and simplified pricing policy (including no minimum purchase) and improved customer experience in store and on-line

• Continuing to expand the fast growing and successful Majestic B2B business by winning additional accounts

• Continuing to expand the fast growing and successful Naked Wines businesses in the UK, USA and Australia

We concur with B2B focus and customer relationships managers (CRMs) that have perhaps been underutilised to date. In essence, Majestic will be making the current estate work harder and this is always a positive for shareholders. However, these positives may be offset by Naked Wines that has to acquire customers at a cost - one cannot help but wonder if all the key metrics and words utilised sound a little "Hello Fresh" like in the KPI format (below)

Likewise, reducing store footprint and/or limiting expansion when growing the B2B is somewhat of a contradiction. The ability to deliver and compete would surely be a benefit of further expansion. There is also a marketing opportunity within the B2B that would cost significantly less than the Naked Wine concept that entices customers with a free case of wine or similar etc.

Majestic's KPI's     

Segment	KPI	Current level	Significant improvement by:
Majestic	Customer retention	45%	H2 FY17
Retail	Product availability	67%	H2 FY18
	Store manager retention	77%	H1 FY18
	Wine quality	TBC	H2 FY18
	Proportion of 5-star service ratings	85%	H1 FY17
Naked	Number of Mature Angels	269k
Wines	Net Growth in Mature Angels	+29k
	Retention rate of Mature Angels	66%
	Growth investment in Mature Angels	£1.2m
	Return on Investment in New Mature Angels	112%

Note: Wine quality at Majestic Retail will be measured in future by customer ratings. No current data is available.

Questions;

1. How does Majestic's measure customer retention? 
2. What is the retention measured against - Active Customers? Does it mean incentives are offered to customers to stay? 
3. With a 45% Retention Rate - does one assume then that it is a 55% churn rate? 
4. Will all these retention numbers be stripped out per operating divisions? 
5. How does one check in a shop-based business if someone is a returning customer – store customers are notorious for forgetting to bring their loyalty cards.
6. Product availability? Does this mean Majestic's has to carry sufficient stocks to not be out of stock? Or simply have wine for sale? Being out of stock is only a bad thing if it means a lost profitable sale – what is customer behaviour – do they substitute; or return; or have deliveries to their home? 
7. Are the Majestic stores out of stock because the model relies on limited volumes of attractively priced wine to bring the punters in? Without explanation and analysis ensuring ‘sufficient’ stock could be a Majestic own goal.
8. Store Manager retention - is the limited opportunistic research we've conducted correct, that Majestic are haemorrhaging their talent at significant cost to training?
9. 5 star customer service based on what platform for reviews?
10. Are Mature Angel customers who leave kept on the books for a period of time "just in case they re-join?" Or is their no motivation for Angels to return.
11. Retention of Mature Angels – as per the KPI table - in the cycle of achieving the status of a Mature Angel, does this mean 55% churn/exit before becoming an Angel. Once qualifying, is there an expectation of 35% of Mature Angels exiting. What is the cost to the company for a customer to attain the status of Mature Angel? Or for that matter, the cost to customer?
12. Growth Investment in Mature Angel? Is the KPI the amount the customers have paid in or the amount the company has spent?
13. What's the difference between Naked Wine and any other offering? 
14. Do supermarket models offer less value? We disagree and consider Naked Wines model to funding and monthly payment a hindrance to customer on-boarding and choice. Supermarkets including the discounters challenge the model not just on price and margin but more importantly convenience. 
15. Is the Naked Wine's "customer monthly payment/crowd funding" model the way forward rather than a hindrance? The customers shall decide over time - perhaps it gives some sales outlook and reliability in forecasting
16. Comparatives are hard to find in LFL wine offerings but there are remarkably similar themes. The main benefit being, one doesn't have to pay monthly or become an Angel "to obtain a discounted price" at a supermarket or off-licence. We feel this type of offering / marketing gimmickry may work, in the short term. 
17. A KPI of "average revenue per customer" or "average basket price"- like Majestic used to report would be beneficial. 

We should at least loosely consider Majestic’s results:

• Net debt and liabilities are currently near £25M – with the aspirations of expansion there is a real likelihood this will increase as marketing/customer acquisitions continue apace.

• All is not lost though - debt is sufficiently serviceable if operational performance remains stable and/or improves in 2 of the four divisions.

• We rate Majestic Wine retail division and consider the commercial division B2B to be of significant future value as it has yet to be fully developed. We can draw possible similarities in the B2B space between Conviviality (CVR) and Majestic's in the future and the potential of such an offerings - perhaps even M&A to command better margins. 

• Ley and Wheeler (L&W)– we acknowledge that L&W could be developed further with the possibility of added to other divisions with the bolt on of specialist fine wine business.

• We have already mentioned the reduction in new store roll out (CAPEX) - one suspects will be directed towards marketing.

Today confirmed the belief that dividends are toast for the foreseeable future – Majestic suggests they intend to return the dividend in July 2018. This validates our belief that Naked Wines does not fit the Majestic model and will be a drain on profitability longer-term.

The hype of the 'internet of things' is not a model we invest upon within the wine space. Retail clothing yes (BooHoo etc…), but wine has so many other competing factors including supermarkets and their discounting cousins. Simply, why add another 'point of sale item' to your weekly/monthly shopping - hobbyists perhaps but the average consumer........? 

Businesses should be viable and as such, Naked Wines needs to prove itself significantly more to warrant us buying in Majestic. If investors feel there are rewards in buying the stock based on two divisions and hopes of an web-based wannabe Goliath (Naked Wines) + specialist fine wine business – then today will no doubt present as an opportunity over the longer-term. 

We do not deny the webcast was well received by the market – however we remain unconvinced. We feel the strategic review was unchallenging and has not gone far enough improve the outlook for Majestic Wine on many levels. Validated in part by the Majestic statement:

We are excited and confident about the future, but I must emphasise that these plans will take time and require investment, which means that we expect profits to fall before they return to growth from a low point in FY16.  We anticipate that our strong cash flow will enable us to invest as needed while continuing to deleverage and restoring the dividend in full by 2018.

In our view, they have not answered how they will manage the supermarket threat to margins (conventional or discounters); or how they will shift consumer perception of their offerings and how the value of Naked Wines is justified. The outlook for Majestic may be changing, but currently there are insufficient indicators to warrant us being a buyer; we have been negative since the acquisition of Naked Wines. 

The benefits of the economic moat Majestic previously had have been eroded - this we felt insulated Majestic's offering with the 6 bottles minimum purchase. This helped establish Majestic’s brand and offering over years and was devalued in an instant; other options were available and should have been explored.

We believed the two models do not fit together for investors. A good percentage of shareholders would have invested on the basis of a very different concept. Expect those in Majestic 1.0 (dividends and modest growth) to sell into any strength of Majestic 2.0 (web-based hopes and expansion). 

Atb Fraser

Weekend: Tous pour un, un pour tous + A Fad of Things, Property, Retail and Wines!

There's no good in the actions of those in France! So it’s limited to - Evening, rather than ‘good evening’.

Tous pour un, un pour tous! Sympathy and thoughts go out to the families and friends of all those affected by the senselessness that occurred in France.

We are losing count of the profits warnings and revisions in guidance on a global scale – especially industrials. The trade this week was Rolls Royce (RR.) where the interimmanagement statement echoed the woes of Fenner et al. A general theme about earnings and outlook that will continue for the foreseeable future (over to Caterpillar after the JCB layoffs).

Themes from the previous week continued all the way through and are now the reality (Weekend's EMC - NFP & Weaklings) - deflation is hurting earnings and causing a nervousness in guidance. Those companies that are leveraged whether in oil & gas, manufacturing, services and support are all starting to acknowledge "the world's largest customer(s) are changing / have changed their appetite." 

In the US the likes of FitBit (NYSE: FIT) is beating the trend (currently), with what we here consider a gimmick formulae. FitBit need to overcome a common theme of fad utilisation with their products, which are often used for not much longer than that of a gym membership - circa 3 months (EMC research) there after being destined for a drawer. 

We have to acknowledge one reader’s wife’s commitment to use her for an eternity! Although if you’re stuck for a present for your beloved, you too can do your thing for wearable revenues! Wearable tech undoubtedly has mileage across the sector, but with competition, what’s in it for shareholders? Those reliant on one arm (scuse the pun) of the sporting sector are limited in their traction, where they’ll have to compete with the likes of Nike+ etc.…

For some investors, they have been rewarded with the Fossilacquisition of MisFit, but for others it’ll be a cycle of confetti issuance for equityraisings a la FitBit.  There is perhaps a hope of being acquired rather than having to justify being a viable business that warrants a decent valuation.

FitBit’s placing (and discount) was expected and the price is understandable when one has a quick look at the accounts. Innovation costs money, especially where there’s a theme of a “fad of things” emerging. The EMC considers FitBit to have an over reliance on novelty and gimmickry that drives sales – Christmas is upon them where they should do well. We will not comment on Fitbit inventories levels, receivables and trade payables, they appear to be insignificant to investors – but not those that bought into the equity issue.

Rocket Internet (ETR: RKET) call these “proven winners” (Rocket Internet terminology from the lengthy CMD) - but we have HelloFreshbeing withdrawn (FT). Bringing into question the valuation of Rocket’s “proven winners.” The market is getting wise to the actions of companies, especially those that issue discount vouchers like confetti pre-IPO.

Within the commodities space we have the Icahn’tseries of Freeport McMorran (NYSE: FCX). When a major investor tries to bet against the global outlook; one should pay attention. The market is changing, oil will stabilise as will copper, but significant bets against a global trend are often unwise (in the short-to-mid-term). We note the two brokers that criticised our approach - being 40% down from our commentary, are we not validated?

We also have trends occurring in retail space in the US that have yet to present themselves fully in the UK - albeit consumption has been brought forward by Help to Buy (H2B) scheme. This is propelling the results of the house builders, but with a muted response from the market Inc. BarrattDevelopments Trading Update (BDEV), RedrowAGM Statement (RDW) and GreatPortland Estates (GPOR). This Tuesday (17 Nov 2015) sees British land (BLND) reporting half yearly, a stalwart that shouldn’t be ignored.

US retail space are admitting the need to entice consumers with discounts and showing the price-sensitivity in the market – evidenced in part by Macy’s and NordstromQ3 Results. Big ticket items impacting on retail - Walmart, Nordstrom and Macy's all showing a similar story. By big ticket, we mean houses, cars, home refurbishments and extensions, electronics and smartphones – yes this is a retail driver in China as well (missed by most!) and will have consequences to this.

In the UK these themes have already hit the likes of Kingfisher, Travis Perkins, Speedy Hire, HSS and as a wildcard Halfords. Two companies in that list haven't helped themselves either (Speedy & HSS), but we'll save that for those accounting gurus with more time on their hands. 

Retail will also be hurt by the rise in student debt, where there is a suspicion that student registrations rose because of the recession rather than a yearning trend to improve oneself. The student leverage and consequences mean that a few generations are going to skip a housing purchase until later in life.

If society loads a student with debt the consequences will impact an entire generation, especially where wage growth is slowing or deflationary. Student Fees on the increase, student loans on the increase…remind yourself of the purpose of education?

Pearsons (PSON) education is showing the realities of the market place. See PSON interimresults graph for a trade plan courtesy of Bloomberg ™® and one shrewd trader.

We have Majestic Wines (MJW) reporting tomorrow - with the trading update from Conviviality(CVR) – have they cannibalised MJW’s margins? Majestics have erased their economic moat of six bottle minimum purchase – we will start to see the implications of this tomorrow and average spend.

Some poignant questions for Majestic Wine’s – if the removal of the 6 bottle limit didn’t impact on revenue, will it maintain them longer-term? What is the customer acquisition costs of Naked Wines? Are Majestic’s in a declining space where novelty type drinks are on the increase? We have insufficient data for a conviction trade. We won’t comment on their limited response from IR either and will maybe comment further tomorrow. …

Atb Fraser

In trading or taking a view, the impact of being laid off, made redundant or hurt by the actions of some idiots may appear to be ignored. These are never forgotten, including the implications for the families. 

Morning Mumble: The Data Dump - China's retail sales Grew...with Golden Week included. + Steel and Defaults - But hey we're not worried!

Good Morning, Good Afternoon,

Unlike the echolalia in the press, we have decided to work backwards from the almighty data dump and finish with a compelling statement of the realities of the situation. 

The market is now pricing in a stimulus - whether this is delivered or massaged into figures is another matter. We shall avoid all references to a “wappy wending” heard recently on a conference call! Li’s mishap was more entertainment than anything else, but gives the realities of the steel situation in China.

We have the mystical deflation that is occurring in food prices, retail and manufacturing both in goods inwards and outwards - Not the model one likes when leveraged and expecting non-stop stellar returns!

On Saturday (the trade data) in conjunction with today’s economic data merely represents the facts. We’ve had disappointment in imports (18.8%), exports (down 6.9%) and retail flat (11% up compared to this time last year).

What with the trade data and dump, we’re back to media copy and paste measures eluded to here and in the odd morning note and call. The PBoC are listening to the cries of those that scream blue murder at “only 6.9%” (yeah right) GDP growth (EMC has always been 4-4.5%).

The PBoC is now left compelled to slash interest rate, massage the Reserve Ratio Requirements (RRR) and stem the capital outflows. Actually, the latter could perversely damage China with a requirement to “bring home the bacon” in terms of revenue. There is now a need to also diversify away from a reliance on an overcooked and slowing economy. Sell China/US? Hmmm compelling argument.

All the above is compounded by an inflation rate, that for saying there’s been X stimulus etc…etc… (We’ll avoid the bore), the inflation rate is falling. Aided to some degree by the price of pork falling…as covered here! Also in part due to producer prices slid 5.9%, declining for the 44th consecutive month. Never mind the inventory issues and wage costs that may have further implications on non-performing loans (remember those last time around?).

With the industrial figure being below consensus, September’s reported 5.7% and near 5.6% the market has looked for reassurance in retail performance - Retail can only be described as flat. The sales however mask an element we’ll be covering here called Chinese Margins, because one suspects they’ve taken a beating as well. Footfall’s and voids at malls, giving a different view on the figures as well. A quick survey of rents paid shows some eyebrow raising questions…why if retail is improving are the very retailers struggling?

The industrial production figure at 5.6 was below September's 5.70 per cent level and below the pencil brigades’ consensus - The data validates China’s need to move towards consumption. The speed of the transition is likely to be the stumbling block for expectations, with some pain and unknown implications for growth.

One needs to see further evidence in the PMI Services for China to start to turn modestly positive of a floor being found in the economy. This may be aided by a massive glut/trend of Private Finance Initiatives/Public Private Partnerships to assist the transfer of wealth from state to comrade. (We’ve covered this previously).

We are also reminded of the Chinese Iron and Steel Association report whereby their members have reported collective losses of near $4.5B. What with the “assistance” they’ve received both in the pricing of energy, rebates and what we shall loosely call Central/Local Government grants - quite staggering if there was a level playing field.

We note that ArcelorMittal pulled the trigger on a rights issue in South Africa, that’s not only bad for Kumba Iron Ore with their revised pricing agreement but gives an indication of sector realities. The Kumba Iron Ore and Atlas Iron fan club have beaten back into action with some meaningful suggestions on occupations for yours truly!

Expect more headlines similar to this on Thursday when China Shanshui Cement Group defaults on its debt. The prudence, as reported by Bloomberg is: China Fund That Gained 24% on Bonds Sees Substantial Correction. Additionally, following on from the EMC piece of steel, where apparently Chinese Steel Mills were reacting to market forces, then we need to consider Baoshan Steel's Loss Highlights Crisis Engulfing China Mills.

As promised, at the beginning (if you’re still reading) – from the Baoshan Article on Bloomberg:

HFT One-Year Open Bond Fund was ranked No. 2 among the 270 bond funds, according to Haitong Securities.

“We aren’t worried about large-scale defaults because the central bank’s monetary policy will stay loose within the coming two years,” Shao said, adding he plans to expand his fixed income team from 16 to as many as 25 within the coming three years.

We’ll just ask readers to consider that again in Italics…and leave it out there:

“We aren’t worried about large-scale defaults because the central bank’s monetary policy will stay loose within the coming two years,” Shao said, adding he plans to expand his fixed income team from 16 to as many as 25 within the coming three years.

Atb Fraser

N.B. We note the Prosecutor on the Tailings Dam is citing Negligence on the radio and in the media…whether BHP can walk away from this is another story. Vale simply cannot afford to as the cashflow or “hope of cashflow is needed.” Samarco debt trading at a near binary bet of existence.

PM Bolt-On: Non Farm Payrolls & Weaklings - Freeport & Valeant wth some hindsight on IMIC (International Mining & Infrastructure Corporation)

Good Afternoon,

The UK wasn’t the only place with fireworks this with week. What with the Non-Farm Payrolls (NFP 271,000) increasing the probability of a rate rise – now the odds are looking at 85/15 in favour.

The NFP fanfare has forced investors to consider the risks of heavily leveraged companies and those made vulnerable by the liquidity contraction across emerging markets and/or commodities space.

In the longer-term there may be some reward by investing in restructuring plays like Freeport-McMoRan, but not for the faint hearted. The recovery in leveraged companies isn’t clear cut either, so expect some reality/stresses in the short-term.

Commodities producers reacted this week (selling) –

1. China’s focus on innovation and a limited response to an infrastructure stimulus. (Hopes of higher PE - long the SHCOMP on hopes and/or China 300 only on momentum).
2. Standard Chartered’s (STAN) prudence sticking the knife into the commodity sector and a realisation of avoiding a light in a tunnel or two (Qingdao). We hope for STAN’s sake it’s not a train coming towards them - Currently no reason to hold the stock.
3. Fears being realised of a credit bubble/liquidity contracting in emerging markets.
4. German Manufacturing Data (negative for copper) – answers on a post card.

& Friday’s…

5.  Boom busting NFP figure that was a wildcard and above expectations.  

Companies will need to bolster their balances sheets if they operate in a deflationary market, especially those with significant debt and limited operational free cash flow. Remind you of anyone? Not just Anglo, but the market will now belatedly start focusing on rightful candidates. We had the analogy in the morning call that “certain traders are like a bunch of hyenas!!” As if!

The open secret of “debt to revenue service costs” is finally acknowledged as a risk. Not that the writing hasn’t been on the wall for some time. Admittedly, It’s difficult to find a reason to hold US equities with the dollar strengthening. Those goliaths are going to take a haircut to earnings.

With fears of larger scale corporate default and financial bubbles, the market is now factoring in restructurings whether it be fundraising, equity issues, convertible notes or debt for equity a k a dilution for the weak.

Shareholders should be prudent to the possibilities of losing control via the back door or worse, there being limited equity left for shareholders. Freeport-McMoRan (FCX) are not immune to these woes either, but with Icahn on board at least there’s some form of hope signal for the shareholders.

Valeant - without repeating the woes of Valeant (VRX) verbatim (See Citron Research) – it is the pharmaceutical equivalent of VW as it has so many unquantifiable liabilities. With three + warnings out now, it’s likely a case of the die-hards hugging the stock. "Value seekers" will no doubt be sifting the wreckage and be tempted to trade. 

From a psychological model, with such a nuclear fallout and one suspects more to come, is there any reason to hold Valeant? What is the value? What are the risks? With the market perversely needing to be told of the value or limit the slow motion car wreck, what is the likely outcome? With such a wide range of variables, what pricing methodology does one use for Valeant? The price range here up until Thursday was $56-$103 and now, we suspect there’s more potential liabilities, so have narrowed this to $38-$44 a share.

The damage within the pharmacy/dispensary industry cannot be ignored. Pharmacists may now follow the cost conscious route across all prescriptions, not just related to Valeant medications.

In coming to a price, we’ve considered Valeant’s responses and what we assume Pershing Square may be ignoring. Of course Pershing may be selling/have sold, but in the absence of a notification, we’ll assume they’re holding.

For consideration:

1.       Was Philidor using pharmacy codes for pharmacies it had not (yet) acquired e.g. R&O?  

a.     Did they have permission to use them?

b.   What are the implications for Valeant if they are considered to a shadow director/owner of Philidor? Do the rights that Valeant acquired in Philidor mean they have also liabilities?

2.      Its been suggested that dermatology products sold through Philidor were of average profitability -  if we assume that at least some revenues comprised of generics costing $5 or less, but when combined by Valeant and branded it enabled a charge of $400 plus++. If this is correct, then it becomes very difficult to buy into the average profitability claims suggested as the ‘worst case downside.’

3.   It’s been inferred that Philidor filled/dispensed prescriptions even when they were not required / requested. If Valeant’s revenues were reliant on the revenues of 3 units when only one was needed - what are the real implications on Philidor closing/departing company? Repeat prescription business will in essence be torched?  

4.       There’s been vague disclosures as to what other 'specialty pharmacy' networks Valeant has. Will this have further implications?

In making a few assumptions from the above, it’s easy to come to conclusion that the impact on Valeant profits is likely to be double digit. As a reminder, Valeant in October 2015 disclosed they had $1,420M cash and debt of $30,883.3M. What will earnings be and the outlook? If one conducted a simple calculation, deducting net debt from the market capitalisation, what equity would left for shareholders?

In the small caps it would appear there's a sense of déjà vu. Those that remember the views expressed here EMC: International Mining & Infrastructure Corporation (IMIC). To quote yours truly:

International Mining & Infrastructure Corporation plc (IMIC) loan conversion shows the faith in the company, a mere 30% discount to the SP. One hopes you've sense my irony with the mere...the 1 year chart must surely look like the cellar steps! Next stop 10 pence? 

It would be wise to think how the terms are fair and reasonable as Strand Hanson Limited, the Company's Nominated Adviser (NOMAD), consider that the terms of this transaction are fair and reasonable insofar as the shareholders of IMIC are concerned. Its not something I shall be complaining about having rated this as a sell since they acquired Afferro Mining Inc.

IMIC was suspended after the resignation of their NOMAD Strand Hanson in October.  As a positive those holding the Afferro Mining Inc. bonds of yesteryear get a few more shares (whether they’re tradable is another issue), with the conversion notice yesterday.  Is IMIC now extinct? Or can they pull off the unthinkable in the current mining space? Perhaps even find a NOMAD?

So whether it’s goodbye or see you in another form? Who knows…It’s wise to keep an eye on the assets of the micro craps, perhaps not the companies that trade them left and right, but follow the assets.

In other news, the South African and Australian “anti-EMC fan club appears to have gone silent!” Surely it’s not the Zumba Iron Ore share price? Atlas or perhaps Slater & Gordon?

The final thoughts go to Anglo American (AAL) having a rights issue?? The odds are getting higher! BHP Billiton (BLT) tailings damn could be a significant liability...what are the implications and costs? We have varying ranges and estimates as high as $2B excluding losts dividends and as low as $450M, 

Atb Fraser

Morning Mumble: The Federal Reserve - Shooting Fish + Steel - the bottom is near! Bitcoins to Randgold with Glencore's mass garden leave project.

Good Morning,

For those having been up most of the night playing the "shooting fish in a barrel game" thanks to the Fed (without complacency). It was an opportunity to take the market reaction to Yellen's inferences on a "potential" December rate rise and short base metals. 

Iron Ore was more resilient, finding some form of support circa $47.5-48/t - we note the hefty discounts now being offered for sub 62% FE grades. One has a suspicion there's an "at any price seller in the market", perhaps requiring cashflow.

The U.S. Department of Commerce "cottoning on" (the phrase will be more poignant later in the year) to the subsidies Chinese are companies are getting. Not only were Angang Group Hong Kong Co. and Baoshan Iron & Steel Co. identified but, perhaps somewhat tongue in cheek a Baosteel Group Corp. spokesman said "the company’s operations are based on market forces." We'll cover it with, "of course they are governor!"

The Chinese labour intensity in metals processing has significant implications for central and regional governments. Especially some regions that have an over reliance upon the mills, processors and smelters (or associated services) + coal fired power stations to maintain some the status quo of employment. As such, there's been a repricing or energy discounts (development grants) and where possible a reduction in local business taxes to maintain the levels of employment

Only yesterday there was a discussion and opportunity to be educated on the benefits of bit coin, after some significant price movements. Before we get a telling off, we haven't become "all things knowing about the BitCoin" but today, it was rude not to attempt to short it only to realise the market was well ahead! 

It appears someone has recognised a slight liquidity/ramp potential. The FT explains it so much better than here, Bitcoin surges as Chinese flock to Russian fraudster’s site. (Izzy, Dan and Robin on the title). It won't do the bull case much good when the manipulation appears to be almost pyramid like...only time will tell. 

We had Randgold (RRS) reporting today with differing views on this this morning. Previously EMC has had a target of 4250, albeit the volte face being because of Ghana, where RRS still believe in exploring a JV. Why oh Why!? Returns were on the low side, with net cash, some production issues and the like...the market sold off on the news not helped by the dollar strength and fall of gold. 

Glencore could be the largest single funded garden leave project in Zambia.See: Glencore Can't Fire Workers at Zambian Unit, President Says. The company should be acknowledged for their hard work, but the space they operate should wisely taper back expectations, one near £2.80. 

Atb Fraser