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: Glencore, FED with fears of Déjà vu, owning American stocks? Lithium (who's taking it?) FMC/SQM/Tanqi, + Gold (not quite a bug) on Randgold.

Good Evening,

Initially it was going to be Glencore’s results on the share placing, but every-man and his dog has covered it and there appears to be a consensus that the debt matters resolved. With the employment and cost issues cropping up on GLEN's care and maintenance proposals, the costs savings might just need a little Tipp-Ex. 

Tomorrow’s news on the Fed could or could not be the impetus and momentum needed commodities. Any deferral in rate rise, will only lead to speculation of when it will raise rates, including the associated risks (Déjà vu). Here the view is, the FED should bite the bullet, but those whom know about all such things suggest its unlikely. 

The question is likely to be, why own American stocks? Justification that cheap money has been used for buy-backs and/or capital returns isn't a sound investment case in its own right. Return on capital employed/invested and return on shareholder funds, isn't hindsight but prudence. 

News is rife with Lithium. The market appears very slow to give some credit to a changing market. Perhaps with the likes of FMC Lithium (NYSE: FMC) on a PE of near 35 it’s enough for now. 

FMC have wisely sold their Consagro operations (Brazilian generic crop protection distribution and sales subsidiary), to ‘Atanor do Brasil,’ the Brazilian subsidiary of Albaugh. A sensible choice as FMC have/had neither scale nor a leading position to leverage off.

FMC poignantly update the market that as a direct result of “continued market growth is outpacing current industry supply capabilities for most of our product lines.” This has improved market conditions to justify a hefty 15% price increase in lithium (Inc. lithium carbonate, lithium chloride, lithium hydroxide and all other products) except speciality products that are rising $3.50 per kilogram.

Tesla are shrewdly conducting deals, signing up off-take/supply agreements at a discount to market and capping the price. Examples being Pure Energy Minerals (TSX: PE) (Sept 16 release), whom today did a deal with Tesla.

Same for Bacanora Minerals (BCN) whom near two weeks ago struck a similar deal supply agreement with Tesla. Although small fry, it’s giving an indication Tesla is working very hard to stabilise the price, admittedly not very well if one compares Chinese prices.  

The price rises are unlikely to help Chinese buyers whom have an import duty of 6.5% on top of the price. It’s difficult to find the appeal of Tesla with their failure to convert sales in China, but Marmite has customers, so why not Tesla.

The price increases are marginal for car producers including the likes of Tesla. Without checking, more recent estimates suggested that Tesla required between 11-16 Kilos of lithium per car. Will Tesla become a gimmick in China, especially as average auto sales prices are dropping, margins down, incentives up but demand contracting? Don't Tesla at some point need volume rather than R&D costs eating into the majority of the unit sales price?

Like energy pricing by the ‘non-cartels in the UK,’ with FMC leading the way, you can be assured that Albemarle (NYSE: ALB) whom bought out Rockwood Holdings (U$D5.7 billion), Global X Lithium ETF (admittedly not exclusively a direct exposure to Lithium producers; noted RD), Sociedad Quimica y Minera (SQM (NYSE: SQM) and Talison Lithium. (Formerly TSX: TLH), will be "compelled" to act...

Talison Lithium, a once upon a time target for Rockwood Holdings, is near impossible to gain exposure to having been bought Chengdu Tianqi Industry Group (Tanqi). Note the indicator was there post any fundraiser of a take out for CDN$850M (from memory.) The Chinese press had reported well before the offer that the Chinese Investment Corps (CIC’s) had approved loans to funds the purchase of Talison by Tianqi well before the event. After all, they'd completed the financing for the mine.

Being prudently reminded of the SABMiller (EMC) commentary. To quote yours truly, “The best hope for SAB is a take-out, over to Anheuser-Busch InBev whom today had a good justification to limit any premium if it were "going to make a move at the end of the month." Today’s news on Anheuser-Busch InBev (ABInBev) SABMiller PLC - Responding to press speculation crystallising ‘most’ of the value.

Whilst not being the biggest fan of gold, Randgold (RRS) today presented with an opportunity to place money (with requirements of safety), with gold steady around $1100/oz, RRS is the preferred Fed Arb, with costs and cash built in even for a longer-term trade. RRS's ability to weather the market and price movements is not to be under-estimated. Even with some citing $775/oz. as a possibility, Randgold may find it tough, but others would quicker fall, causing a shortage of supply. Shockingly, this is likely to be a longer-term investment here.

Admittedly, some see gold as a hedge rather than a supply issue and a store of value. Albeit, the dynamics of the market have always mirrored those of supply and demand. It’s the basics of global risks and perception of risk. With deflation in mining equipment, CAPEX expenditure and energy prices all reducing, it will all assist the unit costs on an all in basis. Obviously save for those producing the equipment reliant on a booming markets. 

Sensibly closing positions in advance of the fed movement today, due to the close nature of any such call, we'll revisit Caterpillar (NYSE: CAT) in due course. The strength in the North America market is facing a wave of deflation in mining and shale costs, caterpillar are not immune, although hedged to some degree by their financing arm.

CAT's Parts may benefit as machines that are run for greater hours per day/week and annum, but insufficient without some form of recovery within commodities generally (read as and/or stimulus). Not forgetting inventory of parts carried by the major miners is also being reduced or managed more efficiently (BHP Billiton a prime example). The destocking on top of pricing pressures won't be positive. We shall reserve comment on Caterpillar's finished goods until 22nd October (Date for Diary). Caterpillar's sponsorship of the Energy and Mines summit is noted.

The recommended reading list is growing and appreciated so please be patience. 

Atb Fraser

Morning Mumble: A valium edition - a recap, from China to the oil price requirements on government expenditure - flying pigs poignantly timed for Macau's disappearing Billions...but it's ok it's only 3-4% of the Macau Junket liquidity ++ KGF being Screwfixed!

Good Morning, 

One would be wise to make sure they have coffee or Valium!? Some missives from the past couple of days. 

Not only is there a rise in Chinese inventories, retail price increases, wholesale/factory gate prices are falling - to stay competitive China have resorted to energy price manipulation. All of which are eating into the earnings of global producers – aluminium a prime example. Following in unfortunate timing with, FT: Asia trades cautiously following Chinese data.

The overhauling of the SEO’s (State Owned Enterprises) is insufficient on its own. China, with any form of sensibility will have to adjust the wastage and excesses. The implications throughout the economy are not positive, if SEO’s suddenly garner economic prudence. The agendas of the Government will be harder to be played out, including, but not limited to, employment numbers, wages but also benefits.

The indicators suggest all is not as well in China, in addition to flying pig prices - notably the pork industry isn't as leveraged. China's food inflation won’t assist the economy out of this glut either, but they can hope. Similar to Russia but not as dramatic, China is suffering from a reducing wage cost, the impact on how people service there mortgage will perhaps be another story.

Finished goods prices (wholesale) have come under pressure from lowering demand but aided mostly by reducing commodity prices that are limiting the chances of growth. If UBS and Goldman Sachs forecasts’ of a worst case $28.50 and $20 a barrel respectively, come to fruition it’s not looking great either. If one was so inclined, this belated about turn by UBS and GS, may be an indicator the market is about to improve, with drilling count and well reductions.

See: AFR's: BHP Billiton price target cut on oil forecast revision and Bloomberg: How Low Can Oil Go? Goldman Says $20 a Barrel Is a Possibility. Essentially the outlook for certain countries isn't great, nor for debt of the oilers or the credit ratings.

Bloomberg’s Brazil's Junk Status is just the start of the risk realisation in international bond markets. Where, in the race for returns, monies have been lent on the basis of being a lower risk than the realities of the situation present. What are the implications for the following debt? More so who will own Petrobras? 

Country	Oil Price to balance fiscal budgets 2015
Algeria	Needed $130/bbl, revised to $98/bbl
Angola	$100/bbl++
Brazil’s just another story entirely, Petrobras’s debt woes won’t disappear overnight!	$115/bbl estimated just to service debt. Junk!
Ecuador	$80/bbl
Iran Allegedly	$130 by consensus but more than probable at $84/bbl based on increased exports.
Iraq	$95/bbl
Kuwait	$55/bbl
Libya	$140/bbl
Nigeria	$120/bbl
Qatar	$55/bbl
Saudi Arabia	$62/bbl (*based on revisions and financing)
Rest of UAE	$70/bbl
Venezuela	$120/bbl

Bloomberg's: Best & Worse Analysis.

For those readers that are keen on Pork Ribblets, Semi-Meaty. The UK suffered a lowering in pork prices and demand during August. Spain and Portugal, despite significant increases (double digit EMC estimates 10-12%) in exports, has seen only modest 2-4% increase in prices, despite a surge in demand. 

The global pork prices, even allowing for US woes of Porcine Epidemic Diarrhoea Virus, or PEDv, have not seen the supply issues being cited in the Chinese press nor so in China. One can only wonder who or what is leading the media to believe there is a supply shortage of pork in China? A flying pig perhaps? 

With the current news flow including companies attempting to rationalise their balance sheets and spending, similarities are yet again being drawn towards Japan. Japan suffered a prolonged period of disinflation occurred after periods of strong growth. Ticking another box in the theory that Chinese companies' having no alternative but to invest globally (EMC: Japan August 2015) and / or pay down debt. Some appear exempt on sensible ratios of debt. With Japan printing, is it a case of sell GEM (Global Emerging Markets) and buy Japan?

Corporate entities have a rather large issue in China. The need to focus on their borrowings, part acknowledged by China's reduction in interest rates. If Chinese corporations continue without some form of prudence and debt reduction, the deflation and slowing of demand will create a real risk the number of defaults rising. It could be just the foundations and consolidation that China needs. China's premier will not be resting on his laurels with regard to a stimulus, but perhaps more prudent to take ones time.

The wholesale deflation has made it very difficult for the corporations to service debt, maintain earnings and justify the higher levels of employment. Banks, are sensibly risk assessing new applications despite the actions of the PBOC (People’s Bank of China), shrinking liquidity further. 

China is being forced to become efficient (or attempt to), this will have implications for employment levels and taxation receipts. The PBOC has realised this, with planned infrastructure and PPP/PFI spending, there are little alternatives.

It’s prudent to have a quick recap of the Chinese growth story and their economy this year. To prop the economy up, the PBOC has reduced interest rates five times (soon to be six). Injected capital directly into the banking system to attempt increase lending and part replace the capital outflows. 

China have reduced the Reserve Rate Ratios (RRR) 5 times to a now 18% and attempted to prop up the stockmarket financially, followed by policy. Better yet, China devalued their currency and tightened up on e-payments and capital outflows including commodity financing deals. Glencore would be wise to consider the latter.

Most of the actions by the Chinese government have had limited impact, China has no alternative but to acceleration spending on infrastructure projects. China has already been discreetly bringing forward infrastructure projects, examples being the development of waste management systems for Beijing.

Tax incentives are being given for investments and capital expenditure, both for individuals and corporations, on top of development grants for those wishing to become entrepreneurs. We have not forgotten the dire state of local government and their dwindling revenues and central government seizing $150B, where the confetti of debt has been issued and underwritten by central government. 

It appears Macau have caught another cold, thanks to a group with a light-fingered approach to gambling. Not only is Macau in the glut of a property depression, in part aided by Li's anti-corruption policies and clampdown on excesses, but more so, the wider economy both with property and business revenue declines. 

Not to worry, gross revenues in Macau may have dropped by 38% in June (worst for five years), but their property has so far only dropped 15%. Junket’s losing near $250M appear not to be of significance to some analysts, it’s only 3 percent to 4 percent of junket volumes.  Ironically, due to the declines it’s actually nearer 8% but what’s a few % of an entire market in decline?

One has to wonder how well the listed Macau Property (MPO) is and what of their Net Asset Valuations in light of the property situation in Macau. With some dramatic discounts being touted on high end property of 25%, but the average is 15% decline as a minimum. We'll know more in due course with a visit planned very soon by the travelling duo!

Of course, with a share buyback in full swing at MPO you'd have thought the SP would be appreciating/holding. With a NAV near 50% above the current SP, one cannot think what the buyers are waiting for!

Staying with a theme, Cloudbuy's (CBUY) NOMAD Westhouse has quit with immediate effect. Disappointedly (for the management) it won't have helped them with their half yearly report also out at the same time. 

Why did Westhouse quit, more so, if anyone was long on this stock post the EFH (Here EFH 1 and Here EFH 2 about turn) debacle covered very well elsewhere, then they need to have words with themselves. Time would not be wasted in looking at how EFH traded this stock, perhaps those whom earn monies exposing such things will be inclined? 

Kingfisher’s interim results are out, beating expectations (EMC) and also a beat on the implications of the BDO. However, the drop in profit is not to be ignored. One has to consider the sensibility of the ScrewFix expansion - 200 stores. The press/city would be wise to wake up to the discounting and margin erosions, more so ScrewFix is not just a “tradesman’s entrance.” Margins yet again under pressure.

KGF are not confident of a French performance (remaining cautious on trading in Castorama and Brico Dépôt France). In essence what the UK gave, France took away. It would be wise to monitor the industrial output of France, renamed “the indicator for Catorama and Brico Dépôt.” KGF, in hindsight for them, may be thankful in being unable to complete on Mr Bricolage.  How prudent of KGF to sell their controlling stake in China.  

To save time, we’ll say goodbye to Haik Chemical now, this company has been the eternal dog of performance. We could blame the likes of Hi-Tech Spring, whom consistent with higher inventories and lower demand have been forced to be more competitive.   

Apologies for the search function not working properly in the top left hand corner, there is nothing that can be done about this. Utilising Google's site search, may be wise. 

Atb Fraser

(Travelling today so limited).