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!

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). 

PM Bolt On: Kingfisher (KGF) read across from HOME (Homebase specifically), + Hippo's sweets.

Good Evening,

A long day, and limited time for any thoughts tomorrow as its Cheltenham Gold Cup and tardiness is not allowed. We have Indiana (Ian) heading back to honour us with his company for the weekend +2 days, as he never replies to text at least he can read here that Hippo's sweetie is stuck the vent of his car.

Some thoughts on the train home, with Kingfisher’s (KGF) preliminary results due on the 31st of this month, with Homebase's performance not instilling much in the way of confidence for KGF. 

France, as a country, has struggled to achieve anywhere near the 2% EuroZone target and is now in deflation.  The outlook for retail including DIY and building projects isn't positive as a result of the deflationary pressures. 

Psychologically, we as the consumers (surprisingly the same in France) delay purchases (especially significant purchases) for longer when in a deflationary environment, in the hope goods or services will become cheaper. Last November, Kingfisher's French Castorama and Brico Dépôt sales declined adding to an overall 11.8% fall in profits to £225m. The cause was clearly weak consumer confidence in France (and Europe) and adverse currency moves, which have continued through to January 2015. 

More recently, France had a 0.4% decline in annualised prices in January (released March 2015). This previously occurred after the financial crisis in 2009/2010 where the French economy slipped into deflation (notably margin pressure from consumers), so the read across for the economy does not bode well in the short-term. 

Kingfisher's bottom line will be under-pressure not only by the currency strength of the pound (in reporting terms) but France's weakness in addition to the retail outlook in Germany, Poland, Portugal, Romania and Russia (Ruble watch out) along with their margins. Fools bet against buybacks of considerable size, however Kingfisher are likely to cap their price in the coming weeks. Save for some short-term momentum in the SP by the closing of the B&Q China deal for £140M.

The market should rightly be cautious about KGF performance, excluding the UK & Ireland revenue being marginally better (circa 2%). Kingfisher is logically up on the share buyback and special dividend. One will be very surprised if anything within KGF operations has been outstanding above and beyond the known. Screwfix will most likely be the shining star and still cannibalising the margins over at B&Q. 

With the buyback continuing for some time and being in the market for circa  5-8% of the stock most days, its not rocket science to know which way the stock was going. The news on the 31st March should change sentiment, save for speculation of the PE boys liking KGF cashflow and business model its hard to justify a target price of 270 excluding B&Q China special dividend of 6 pence. One wouldn't rule out The Home Depot lining up Kingfisher, but speculation is short lived in the absence of news. 

Whilst reviewing KGF, there was a fatal flaw in KGF operations, that not only did the man from Halfords (Matt Davies) identify in his strategy at Halfords, but changed the entire direction of the company. Having mused the possibilities of KGF, it was wise to close the last of the KGF longs today. (The prize for identifying the flaw is a pair of socks).

Atb Fraser

Dairy date of interest: PLUS500 (PLUS) Ex-dividend and special dividend date.