Morning Mumble: ASOS - with market muppetry - Genel (GENL) its looking like a turn around but two swallows don't make a summer & VW - the realities + putting Presidential hopefuls media campaigns to shame.

Good Morning, in the morning as well!

Very brief so kept it to bullets...hopefully. 

• ASOS - (ASC) Final Results were out today and they were ahead of EMC expectations - bought into the sell-off. Consideration is, that although they don't justify PE's of a stellar proportions, its common-sense to consider the positives. 

• ASC have finally realised the need for brand loyalty in the online market space with their roll out of ASOS Rewards loyalty scheme. Its negative on margins (50 bps) but does encourage repeat business. With sales likely to be around 17-20% ahead for the year. Over to ASOS:

Following a successful trial, we will launch our new ASOS Rewards loyalty scheme during the next six months, initially for our UK customers. This rewards programme allows customers to build up points on purchases, which become convertible into vouchers for use on our platforms. In addition to this, customers will unlock a wide variety of other rewards such as birthday discounts, free next day deliveries and exclusive content.  

• Genel Energy - (GENL) gave a trading & operational update that was about the market. Swiftly followed by the Receipt of payment for KRI oil exports from Taq Taq field from the Kurdistan Regional Government (KRG). The "if" factor is the need for regular payments to be maintained and the market has had many a false dawn. The costs are being managed and with the current level of KRG payments at least interest payments and debt service is more than likely. 

• GENL - Consideration should be given to the guidance that is implying that supply was shut in until such time as the KRG put up. Time will tell on the latter, but certainly more positive than at the half yearly. 

• Volkswagen AG (ETR: VOW) recent share price support will be tested as news becomes apparent. Reuters - Edmunds.com and associated piece is telling, now consider the implications of the downside in Europe and potential further pressure in China. 

• VW have been very clever in the main - dealing with the crisis in text book crisis management. Credit where credit is due, they've kept the media and associated press articles focused on the marque VW, without the domino effect crashing through Audi, Seat and Skoda. Although, there may be some perception/overlap it will be limited. 

• Research (EMC's - we fund our own so reference it) - The opportunity based research on peoples’ perceptions of car manufacturers suggests that there is a devaluation in the VW marque - Passat/Jetta/Not Polo/Golf and Gold Estate and Sharan with a lesser degree to the Beetle. The irony being the Touareg, where owners 'didn't tend to worry' (we've avoided using the words, do not care).

• The impact and terminology used was more positive on the 3 other marques in the VW stable namely Audi, Seat and Skoda. Although this may change as lawyers grasp the media to force a settlement rather than have a showdown in the court room. This is a significant event risk/crisis management for VW. 

• For those that know a Bentley owner, whom we shall call Indiana. When asked about his perception of emissions on cars. Don't expect many donations to Save the Planet or Greenpeace in his name over the next few years! With a suggestion that he never gets to drive his car! As if!!

• Costs regarding the ‘fix’ for the VW Emissions fixing/rigging are likely to be higher than the initial consensus - Triple Pundit runs with - As Recalls of Volkswagen Cars Begin, Costs Could Climb to $40B. Those early share price targets of buy sub €130 will no doubt be under review. We maintain our target for VW - €87.63 (Euros) a share. The damage is yet to be done to perception. Over to VW's media campaign that will no doubt put some presidential hopefuls’ budgets to shame! 

• Rurelec – (RUR) The amount of communications regarding Sterling Trust today is truly staggering. We've had the company down as a jam tomorrow stock since the handling of the International Arbitration and then the spin-out of Independent Power Corporation from Rurelec. 

• Sadly for Sterling Trust lessons of diversification are a little too late. The spin-out/off of IPC contradicted the transaction in the first place. In the absence of further developments that may return a little to shareholders, don't hold out much hope. RUR has been a sell since the international arbitration and does not warrant much other rating bar avoid/high risk punts only. Have IPSA announced similar – one simply cannot be bothered to check.  

• Hochschild - (HOC) new shares hit the market today. With so much leverage, why they only raised the limited amount and didn't elect to shore up the balance sheet is anyone's guess. Perhaps there simply wasn't the appetite for a large fundraiser in the silver space currently?

• Some half decent results for gold miners today, more later once we've found a few additional toes to aide things. Petropavlovsk Plc (POG)’s interim management statement and Polymetal International (POLY)’s Q3 results.

• We’re hearing various bits of gossip regarding Glencore’s Zambia mines - namely Mopani – are GLEN conducting a deal to finance the expansion whilst maintain operations? One suspects not, but any rumours to assist their price won't go unappreciated by the IR department! Perhaps one for the broad-sheets? Anyone up for some Mopani?

• Vale SA – (NYSE: VALE) production report – were described as strong. With records being set in production it’s not good news for the FE (Iron Ore) price. More time needed there.

• Glencore - (GLEN) will be pleased that they "sold" their the Falcondo nickel operations and the Sipilou nickel projects. What with Vale’s nickel production up, Vedanta’s Hindustan Zinc Q2 production announcement hasn't assisted Glencore one bit! What’s the read across to Glencore’s affirmative action? VED need a stronger headwind than just Zinc

• Vale’s Q3 - results here.

Atb Fraser

Morning Mumble - belatedly: Chinese Steel - stranglehold continues unabated + Cue increases in Customs Rates & Anti-Dumping measures + Anglo's woes, with Tribal and Shaky Ground in China.

Good Morning, Good Afternoon,

Its been a very busy past week with the travel and meetings.

Continuing on from last Tuesday's theme - disappointingly for British steel producers the impact of China's need to export deflation is now being felt (ITV). Unusually, the ITV have been on the ball for once. With a closure/insolvency at Redcar and now a further 1,200 UK job disappearing at plants in Scunthorpe and Scotland, the end if nigh for higher cost producers.

The majority of steel producers are incapable of competing on a skewed playing field. With "energy pricing readjustments" being the favoured play in China, since the removal of the boron rebate (subsidy). Commercially this made sense, as most western construction companies started to avoid the higher content boron steel as welding joints was an issue (integrity).

China has not just benefit from advancements and investments in technology at the steel plants, but been aided by subsidies and "energy pricing adjustments" enabling them to produce significantly cheaper. the benefits of incentives benefit the . We'll come back to the Chinese energy consumption figures later, as there's a suggestion the economy is still contracting with circa negative 0.3-0.5% in energy consumption in the first 8 months. (The GDP figures will also evidence this.)

India responded in June (Economic Times/India Times) by increasing the import/customs tax increases to attempt to maintain a balance where their native producers. This has had limited impact and India may have to impose outright anti-dumping measures. Initially te India Government are likely to introduce 22-27% customs / import tax and this will be implemented shortly.

In January 2015, the EMC highlighted the issues of dumping of steel in Europe by China. The shorts were ArcelorMittal SA (AMS: MT) and Evraz (EVR) plus 'a few others, albeit thanks to some brilliant technical analysis by Hugo, it was played appropriately. 

Steel stocks, despite buy backs, have had the writing on the wall, where the competition was an tsunami like wave of supply into world markets. The affects have been witnessed in the share prices of almost every producer.

EMC- Boron (January 2015), its noted that the boron tax rebated ended early January 2015, yet just the other day a reader was amused by the Telegraph on boron in steel (from August)  referencingcontent from 2008. Readers will be aware of the bias here towards other news sources including our own as they are are much more reliable.

In contrast to the economic woes, just down the road from where Tata has mothballed the Llanwern site, Liberty Steel has been reopened the Newport rolling mill site (Times of India). A brave stance with the current outlook. 

In due course we shall look specifically at the Chinese (indirect) subsidies that are causing eyebrows around the globe that making Governments question the ability to produce at such costs. Its something to consider..

With a similar theme, and a quick recap with a decent read across from AccelorMittal and Kumba Iron (EMC: Kumba) - Anglo American are leveraged, operating in 'various entities and sectors' that have experienced pricing pressures. Made worse by a complex structure are operations that are hard to manage, including the allocation of funding and costs controls that provide for limited upside in the current environment. An example being Anglo/De Beer's Diamond operations need considering with the wider company structure below. 

A wider look from Bloomberg©. - Click on Image to Expand.

Anglo Corporate Structure

The market has appropriately read across from BHP Billiton's (BLT)'s recent debt Hybrid Part 1 & Part 2 and now acknowledges the mammoth task of Anglo's debt/leverage.  More to come for certain on this with Q3 due out 22 October. 

Thanks to an on the ball chap/analysts noticing the Rapaport item - there are reports of yet more carnage for De Beers (Anglo Diamond division). Rapaport has suggested that De Beers (owned by Anglo but more importantly the previous saviour of the group) has suffered at the last sales event. Additional reading: Current rough prices unsustainable and unacceptable.

The car crash being that prices were off yet again, suggestions of "larger diamonds being on the tables and the prices still taking a hit. So what did the buyers/sightholders do? Leave with near 70-75% of allocated diamonds on the tables. Revenue won't be near consensus of $450M but likely to be 200-250M on the last sale. Now De Beers/ANGLO can't even tempt buyers with larger/better stones at a discount. (EMC view).

We highlighted Dominion Diamond Corp (TSX/NYSE: DDC) last Tuesday as well. For those followers of fashion, it’s worth noting Rio Tinto has a 60% interest in Diavik Diamond Mine and numbers came in below expectations. With diamond production down 15% but more so, recoveries down 25%. Mind you, at least they'll have less to hold in inventory. 

Today, continuing on from our view on the profits warning in Tribal Group back in June May, EMC: TRB 15 May 2015. The company's theme has not changed at all. There is a trading update that's best to leave to Tribal to explain -

Tribal Group plc ("Tribal"), a leading provider of student management systems and services for education management, issues a trading statement to update its outlook for the second half of the year ending 31 December 2015.

In recent years Tribal has been successful in winning large software projects in our chosen markets. The expectations of our larger customers continue to evolve and attract the interest of new competitors, and our success in winning large contracts remains difficult to predict. At the same time, despite being well positioned in the market, the focus on our larger customers has resulted in Tribal being less successful in building a pipeline of medium-sized and smaller opportunities to complement these large deals.

We have also seen the extension of certain large customer programme timelines, which has resulted in the deferral of revenue and higher project delivery costs.

In light of these trading conditions, we now expect our revenues for the current year to be lower than the prior year, and we expect our operating profits to be significantly below our previous expectations.

The Board initiated a review of the Group's operations in the summer. Despite implementing initiatives to drive sales and increase our operating efficiency, we have been impacted by the more difficult trading environment. We are strengthening our sales leadership, fundamentally reviewing of our sales priorities and processes, and better aligning our cost base with our ongoing activities.

The process to appoint a new Chief Executive is advancing well, and an update will be provided in due course. [Ends]

One has a suspicion that the Chief Executive search hasn't gone as seamlessly as thought. What is the debt position of the company and more so....see bold (additions from EMC) that should be thought provoking. There are some positives, we didn't need to highlight the entire announcement. That's Tribal's third strike on the bases of profits/performance updates and as such the caveat of caution applies, expect a kitchen sink approach upon appointment. 

To save time, we'll merely edit the view from EMC May...

Tribal Group (TRB) gave an update into the AGM. a trading update. With timelines going out further, one would be wise not to ascribe too much value in light of a second third warning about the timing of and Keith Evan's departing departure, the warning signs were there! Having missed the previous year’s targets, the terminology is far from positive, but with a new 'man soon to be at the wheel' there's some hope, after a kitchen sink episode and some hope of an improvement in outlook. Yet another company struggling with its guidance and outlook. 

We'll leave the GDP announcement for China to the wider press, having already formed a view last week, there's some items that will need more time, than allowed currently. 

Thank you to a reader, this CNBC item Chinese property is worth noting. China’s economy built on shaky ground. There's some useful insights that were missed at the end of clip but worth finding...

Atb Fraser

PM Bolt-On: SABMiller, Commodities: Iron Ore & Base Metals - China & Glencore's coal neighbour + a little bling! + DOM, CWD & Majestic Wine's realities!

Good Evening,

There's significant demands on time at the moment, so apologies. 

Agreement has finally been reached between AB InBev and SABMiller. A rewarding trade for those going for the overnight 'thrill'. The discount to the £44 deal should not go unnoticed and evidencing how savage the arb market is ncurrently (BG included).

The benefits to Molson Coors (NYSE: TAP) should not be ignored but prudence dictates that profit taking would now be wise. 

Those longer term readers will remember Duncan Fox - who is no doubt relieved that the MegaBrew deal has been inked (*subject to regulatory approval). Duncan was  seen discussing SabMiller the other day (BBerg). Duncan can now look forward to the daily implications and sale of a stake in China Resources Snow Breweries.

In commodities there’s a growing trend that Europe are partially buying the story, the US consolidating it, but Asia are selling it (perhaps Asia is not in denial about the outlook). Iron ore has levelled around $54.5/t, but will not be assisted by the World Steel Short Range Outlook for 2015-2016. Worth a read, rather than taking the media reports.

The World Steel short range outlook factors in a number of assumptions that have yet to occur. Especially as a significant number of major projects are more than 50% complete and delays happening with new projects. All creating a hesitancy in opinion, it’s understandably difficult to measure the longer-term outlook without further flag waving stimulus from the Chinese Government.

Previously with any stimulation, there was a bias towards infrastructure, now with an emphasis on consumption, save for the Housing sector (the maintain stay), there could be a number of wild cards. Expect some focus on recycling, waste management and development of services.

What shouldn't be ignored are the indicators of increased inventories - sales not keeping a pace with production, exports down, imports down and pricing pressures evidencing the low factory gate prices. The only issue is...that's both in the US and China. It’s no wonder that FED rates are looking like they will be lower for longer. 

In Coal, there’s an inkling that a deal isn’t far off between Rio & X2 Resources. Rio's yearning to divest the Allied & Coal assets may, with X2 Resources willingness, have implications for Glencore’s margins. MickDavis (The Sydney Morning Herald), if the time is now, it may just put pressure on Glencore to merge the Australian asset with X2 being the operator.

The synergies are notable and Glencore must be kicking themselves that, save for a white knight, now lack the financial muscle to complete on the Rio deal. It’s ironic X2’s timing of a $2-3B deal, not only could imply the bottom of the market in coal/thermal coal, but more so strong arm Glencore into accepting a joint venture. Rio’s Bengalla sale to New Hope Coal (ASX: NHC) implies X2 would need to pay near $3B, but $2-3B is a sensible range.

Irrespective of such a coal deal, and Glencore's hopes a bull market in commodity prices, the reactions have been muted so far. Glencore’s newsflow continues unabated, and not always welcome, with Jim Chanos coming out and admitting he's "a potential purchaser."

It’s not the headlines that Glencore needed, as it shows Chanos’s is short the stock and highlights their woes. A brave call after such moves, but not without some sensibility in the statements.

The whole idea was if there was a downturn in the commodities markets the trading acumen would help offset the hard assets. It didn’t work that way. If that was the reason to put this thing together one has to question that strategy,” Chanos said.

Not forgetting that Glencore’s actions meant they’ve yet again gone into a corner where others are loathed to go. Remember Glencore attempted to shut in thermal coal production for a longer period and failed miserably. What happened to thermal prices when Glencore turned production back on? Down!

We are increasingly hearing of a drought in diamond financing at the moment, with Qatar being slow to finance new deals the prices are suffering (Idex Online). There is a possibility Qatar's financing options are limited at the moment. In part with the purchase of an agricultural business off Glencore (rumours) and taking a bath in a few stocks.

Retail demand appears subdued, but with contradictory news suggesting its more Global Emerging Markets than Western economies. Validated in part by the Alrosa and De Beers issues ref: Prices including allowing sight-holders to walk away from the tables. 

More to come on this in due course - worth considering why the need for the Dubai Diamond Exchange (DDE) to host a financing event. Is there going to be a recovery or more of a softer lander for prices? Alrosa's and De Beers' prices cuts will not have helped matters and the Russian currency gain is making any form of support difficult, with the Ruble/USD FX benefits.

With updates due soon from De Beers (Anglo American (AAL)), Alrosa MCX: ALRS, Rio Tinto (RIO), Dominion Diamond Corp (TSX/NYSE: DDC), Lucara Diamond Corp (TSX: LUC), Petra Diamonds (PDL) and Gem Diamonds (GEMD) – the market will obviously gain a better understanding of the situation.

Will Dominoes pizza (DOM) follow in the footsteps of Gregg's reporting and appreciate tomorrow? There's a lot of hope and expectation built in - with an early exit in the Rugby by England and the X factor / Strictly benefits losing appeal, will the pricing perception finally sink it? 

What justifies Countrywide's (CWD) premium rating? Not a lot...and looking more like a sell. With the capital markets day going down by certain preferred analysts like a damp squid, its getting hard to justify any premium to the valuation. 

And Finally, the market has awoken to the realities of Majestic Wines (MJW) yet again, with such headlines as Naked Wines Launches "Text for Wine" service, would you be long? No doubt some more consolidation due in the sector in due course. 

Atb Fraser

Apologies re: Grammar.

Pm Bolt-On: A belated Wolseley (WOS) with a soapbox item & Glencore's open secret - lines of credit or nooses of liquidity + Have Roy Hill & Tonkolili gone short iron ore!? Come on KAZ get with it...

Good Morning,

It was hoped that this week would allow a bit more time. 

With all the indicators suggesting some form of doom, why is Gold not up? Liquidity is contracting, outlooks are being adjusted, China's liquidity issues for SOE's are coming out, including their need to export deflation and recession to other countries. 

Wolseley's (WOS) final results weren't all that, with a feeling here that WOS were calling the top of the market. The plumb centre owner reiterated exactly what the market knew. The savages took their profits and retreated to the caves. WOS, a viable company, but the outlook isn't that great. 

Over to WOS with additions from the EMC in bold to highlight the short:

Ian Meakins, Chief Executive, commented:

"The highlight of these results was another great performance by Ferguson in the US where we achieved strong like-for-like revenue growth ahead of the market and a 50 basis point improvement in the trading margin to 8.2%, which is a record.  We continue to face some challenging markets in the rest of the Group and remain focused on improving growth rates and protecting gross margins whilst keeping the cost base tight. 

"Wolseley continues to be highly cash generative and we have adequate resources to fund our capital investment programme, bolt-on acquisitions and growth in ordinary dividends. We are also announcing a £300 million share buyback which reflects the Group's strong financial position and management's confidence in the business."

Commenting on the outlook, Ian Meakins said:

"We expect to generate like-for-like revenue growth of about 4 per cent in the first half.  In the US we expect continued good growth in Blended Branches, Waterworks, HVAC, B2C and Fire and Fabrication underpinned by decent Commercial and Residential markets. However, Industrial markets in North America, which account for about 15 per cent of revenue in the region, were challenging in the fourth quarter and we expect this to continue.  We expect a continued steady recovery in Nordic markets, although the heating market in the UK is expected to remain very competitive with little growth.  Overall, we expect to make continued progress in 2016."

The buyback may offer some support, but is this the best Wolseley can do with £300M? With net debt at circa £805M, prudence would dictate either an acquisition or reducing debt. Then again...with a fall in full-year profits one has to prop up ones share price. 

The concern here is that companies should be focused on the strength of the business not the ability to leverage to show strength. China have met with similar issues in recent times and company buybacks are simply a waste (view here). We're fully aware of the pros and cons, but in the absence of a viable strategy of investment, take it as a signal that irrespective of outlooks, the management are waving a flag of..."this is the best we can do." 

The writedowns are showing the fragility of the market place across all sectors. WOS's guidance on the Nordic business with writedowns and the outlook for the US business should not be ignored. The outlook contradicts the logical buyback principles. The expansion and acquisition of decent companies would surely be a sensible alternative to enhancing longer-term value. 

It’s acknowledged Wolseley acquired, but buybacks do not improve a business performance, only the earnings relating to each share. This is not always the best measurement, as the EMC has evidenced many times before…

With the FED considering interest rate rises and the alleged strength in the US, the guidance given contradicts some bulls. Reiterated by WOS statement of price deflation in the USA, UK and Central Europe and modest price inflation in Canada and the Nordic.

Glencore have come out with a statement in response to speculation (PDF/in full below). 

Baar, Switzerland 29 September, 2015 

Response to speculation 

Glencore has taken proactive steps to position our company to withstand current commodity market conditions. 

Our business remains operationally and financially robust – we have positive cash flow, good liquidity and absolutely no solvency issues. 

We are getting on and delivering a suite of measures to reduce our debt levels by up to US$10.2 billion. 

Glencore has no debt covenants and continues to retain strong lines of credit and secure access to funding thanks to long term relationships we have with the banks. 

We remain focused on running efficient, low cost and safe operations and are confident the medium and long-term fundamentals of the commodities we produce and market remain strong into the future. (Ends)

So in essence, Glencore have so far had a placing they allegedly did not need to conduct but did to assure investors. Now they're robust and operationally/financially sound. Whatever have Capt. Kirk and Scotty got planned next. 

Well, we're sure that's all fine and dandy. The gossip/rumours suggest all is not as rosy at the mill. Cargill's winding down of their $7bn hedge fund arm (FT) won't have assisted Glencore in the sale of the grains business.

With the current outlook and Russian taxation woes that are likely to have hurt GLEN, the suggested price tag of $12B for the grains business may be a struggle. Then again they got significantly more for the Las Bambas mine in Peru - over to the sales folk. 

There's gossip suggesting that Glencore are having issues with suppliers. This is unsubstantiated at the moment, but with credit lines and liquidity tightening globally, it’s with no surprise that rumours are surfacing of a big utility company cutting its credit line to GLEN. If this is true, what are the implications for operations? It will undoubtedly have operational and financial implications. 

One is wise to measure Glencore on its assets, the price of its commodities and marketing, in conjunction with its debt. Simply, the assets, save for coal are tier 2 (EMC view) without significant investment (see African Copper Update) to improve operational performance, and until the development of these assets the outlook will remain challenging. 

With some large IB's and analysts believing that Glencore is a viable business, this won't on its own make for a lower risk investment case and suggests an element of knife catching. Certain Brokerages have advocated that there are participants willing to lend to Glencore in comparison to than Anglo American (AAL). This in its own right isn't necessarily the best comparison, albeit, it does indicate what some brokers/analysts are using as a comparator. The absence of comparatives to tier one commodities companies rather says a lot.

Would it pay to buy Glencore? Quite frankly the unknown operational model poses some risks, but it’s always nice to have some higher risk exposure. It’s noted that personally the risks of being long are greater than having been negative on Glencore since IPO. This doesn't mean there cannot be a share price recovery, with the machine doing the rounds, expect some support. Investors would be wise to keep an eye on commodity prices.

To end on a cheery note, another leveraged play on commodities Freeport-McMoRan (NYSE: FCX). FCX had some good news with the drill head. Their 100% owned Horn Mountain Deep well in the Gulf of Mexico came in on the money The release in any other market would have been positive, more so, if it didn't mean the commitment of $$ to enable production the share price would have perhaps risen. Over to Icahn to break this one up…

Thought for the week - Rio/BHP plus Fortescue Metals Group (FMG), when's the impact of Roy Hill going to bring down the axe on iron ore? Inventories normalising again in China, and so a reducing demand globally. Its noted, Shandong Iron and Steel Group's are now back in production at Tonkolili. Those whom love romance in the market place will remember Tonkolili used to be owned by African Minerals (AMI).

One hopes that the acquisition of the Tonkolili Mine by Shandong was above board. It never rains but it poors (poor I know) for the former-AMI.  AWOKO article - one hopes the 'new' AMI has resolved such minor issues as moisture content, shipping and diesel disappearing. What are the chances of a three-pronged stimulus by China just as ore hits the market? 

Have KAZ Minerals got their cap out yet?!?! Put us out of our misery on the 50 pence rights issue please?!?!

Atb Fraser

Over to the grammar police/time limited and long-days. 

Morning Mumble (belated): Is VW Americas new BP? Just in the US? Perhaps with coffee? + JCB, KAZ & BLT.

Good Morning Evening,

Apologies it’s been manic!

The events unfolding for VW (Volkswagen AG) and the automotive industry as a whole were a complete surprise. The share price decline in comparison to the GM debacle was starting to look overdone until the outing of a further 10.5 million cars with emission issues. Prudence suggests it’s wise to consider the unquantifiable liabilities (irrespective of current provisions).

As per most corporate scandals of late, VW’s algorithmic adjustments were initially implied as being limited to circa 480K cars. Now the very size of the admission raises questions about the dividend and valuations become wide-ranging. Luckily for VW, the Suzuki monies will come in handy and are possibly not factored in by the market.

VW has not been absent of corporate issues before, with the Porsche hedge fund bonfire, union payments/benefits and now false emissions data. It would be a very hard/foolish to catalogue all the actions and conclude, after the fact, that VW was a veritable investment basket case. To do so, would question the very foundations of any investment. Save of course for the macro implications upon a company as large as VW i.e. China / Global auto markets.

With the range of fines and compensation ranges being so vast, some sensibility is needed. If one was to assume the issues of GM and subsequent cost implications, plus those of Toyota with their airbag denial had a similar gravity. Then one can at least ascertain those as being the minimum liabilities that VW can expect to pay. Admittedly, VW have come out with a $6.5B figure to side aside for potential liabilities or circa $590 a unit. Really?

VW and the market have some direction due to GM’s misfortune and currently (subject to further news) suggests it’s likely to cost them less than the worst case scenario bandied around.  The media have not so far implicated VW in any deaths or accidents as a result of their actions.  Having been short across the sector for car manufacturers on the back of the Chinese data, yesterday’s news was totally unexpected (perhaps a lesson...).

The corporates appear to have played right into the hands of the ever tightening grip of the enforcements agencies. Such Agencies/Government Depts. have gained as a result of the poor conduct of corporate entities (banks and autos), with severe financial penalties being imposed since the financial crisis (08/09). So one cannot discount too much of the U$D 37,500 per vehicle penalty, that the US Environmental Protection Agency (EPA) could impose for breaches to Clean Air Act.

Conveniently, America has an option to impose a higher penalty on VW due to the differences in laws governing the actions of VW, GM, Hyundai and Toyota. VW is at risk of being a pawn for the protectionism of America auto manufacturers.

The commentary about the reputation damage often ignores brand loyalty. It shows the limited understanding by some commentators of a sector and brands. A quick look at GM’s market share demonstrates they have maintained near to the level when the ignition faults were uncovered. Albeit, GM lost their key position of circa 25% market share back 2005 and have never recovered since. This was in part due to the diversity of the product offerings in America and quality.

The read across to other markets should not be ignored either, especially from the perspective of a) reputational damage b) potential liabilities and c) enforcement notices. Why would VW “conduct such activities” just in the North American Market? Are they alone in such practices?

VW’s actions have already given rise to questions about an exit from American market. With China in the crapper and Europe at best showing a dull glimmer of hope, what other options do they have? Stay and pay the price or exit?

Perhaps a new plant and improved corporate governance is a sensible approach. The read across of how quick VW’s hands went up, “we’re coming out, please don’t shoot” (Classic text book crisis management), would certainly suggest at this point in time they intend to stay in the US market.

Separately, US authorities have to consciously consider how much investment VW has made and is likely to make within the US. With recent speculation of another plant / operations being built. VW is invested in the US with the Chattanooga Plant, Tennessee (from 2011 onwards)

Chattanooga employs a significant number of people both directly and indirectly and, depending on how business recovers, could build more (but unlikely in the near future). The view in the auto industry is that VW is a big company to weather the storm, and that it's going to make the US work even if it takes slightly longer than planned. The planning stage may just be a slight underestimate, but one cannot knock optimisation.

With the litigious nature of such high profile cases, any costs are unquantifiable at this stage. Having been digging this afternoon, the likely outcome will not only involve X billions of dollars in fines ($4B estimate here), but associated warranty costs and, unless there’s a speedy GM type deal, possible criminal charges for those executives in the know. 

As the situation has been dragging on since August 2014, it would appear VW have been less than open with the EPA investigations. Of significance is the class-action lawsuits by US Drivers whom bought into the "clean diesel." Is there mis-selling? What are the refund liabilities? Do VW have to not only compensate drivers on false promise? Will vehicles over the longer-term be fit for purpose? Can modifications be made to rectify the issues?

The market’s reaction so far suggests there is a suspicion that all manufacturers have been up to similar. Just when the DoJ and American regulatory system are nearing the end of imposing fines on the banks. America have a headwind to attempt some protectionism on the back of VW’s woes. What with the pharmaceutical price gouging and auto defeat devices, US regulatory depts. and enforcements agencies may just have another busy year ahead.

VW have so far have been very clever to avoid putting the matter in context, more so, hands up and we’re cooperating. However, if one is to read across to the settlement of GM.

1. GM had 100+ deaths and injuries.
2. Arguably the product defects/flaw are potentially larger for VW.
3. GM’s lawyers and product specialists appeared to be aware of the situation and limited their actions to protect the consumer and general public.
4. The defeat device appears to be installed to circumvent existing emissions controls. Whereas, GM appeared to be after the fact. On the face of it, VW appear to have conspired to ‘beat’ the system and arguable had an unfair advantage over their competitors.
5. Both GM and VW have denied the existence of such a flaw/fault and as such, it has wider implications for the automotive culture of avoiding/taking blame.
6. For consideration in the liability is the multiplier effect - where potentially 2 or 3 owners of the same car could have rights to a claim due to the false statements and/or the practice of utilising the defeat device. So far, estimates here (EMC) suggest it’s likely to be around 14-16.5M owners that are affected by VW’s emissions practices. The issue is, what is the likely class action uptake of this case in comparison to those of GM? 10%? 15?%
7. What of the risks associated with VW’s assets back securities? VW Bank? Lease and financing packages etc…? Woah, over to DBRS / Fitch / S&P on that one, that may need a little tweaking.

Whether VW drivers are stalwarts to a brand is another story, with the reputational damage being another potential unknown. Evidence so far suggests GM are / have recovered in terms of market share since the scandal first emerged.  Their current market share of 17.2% certainly suggests the US consumer hasn’t been too phased by the ignition switch issues.

Once upon a time, German car-makers were known for the reliability, quality and efficiency. As such the sector read across is not great, but all is not lost.  This reputation is unlikely to be irreparable - theme parks and other such operators manage it over the 16-18 month cycle (psychology of risk selection). If one reads across to the psychology behind other brands, irrespective of sector, the norm is circa 12-18 months, more recently towards longer-periods. The poignant part is to avoid complacency, something VW should avoid at all costs.

There’s no two ways in putting it, that the industry as a whole has a crisis to manage. There’s a suspicion that the lack of commentary by other manufacturers suggests that there’s an element of due diligence being conducted currently. This comes with a caveat of conjecture at the moment.

Save for an ever expanding number of vehicles involved, one can look forward to a heavily fed media investigation. The Government agencies will of course cite the seriousness of such actions, outline a hefty fine $4+B and with an unknown quantum for recall and reparation costs.

The class actions may be the sticking point, with a wide range of circa $2-$16B (the latter assuming partial-refunds). In time, VW can invariably look forward to funding some form of "best practice centre on emissions" to remove the Government burden.

One could even draw on the past as an indicator of the future, with a speedy deferred prosecution agreement for three years (a la GM) to avoid further investigation. If one is the market for a new car, the plus being that VW cars may just be a buy (not the stock), as they have to build quality to repair this nightmare shareholder scenario.

The obvious question is which marques in VW's stable are at risk? Audi, SEAT, Škoda and Volkswagen marques. Greater scrutiny will be placed on commercial vehicles under the MAN, Scania, Neoplan and Volkswagen Commercial Vehicles marques?

In assessing the issues, there’s been a number of valuations. On the sums of the parts, discounting VW brand per se, cash etc.…With sensibility, assuming no further news, the worst case scenario based on current news of circa €87.63 (Euros) a share, with potential upside if the matter is put to bed fully, of near €115 a share.

At near €111 it’s very difficult at this stage to believe the issues are fully priced in, albeit expect those with greater risk appetites to be enticed. Perhaps those funds with telescopic calculations based on earnings in 2022 are being enticed? Can VW recover from here? Undoubtedly, but if further problems come to light, it’ll be a proverbial fire sale.

VWs exposure to China / Rest of the World is a story for another day that has not been fully discounted yet.

In other news, the JCB head count reductions and oil rig (including deep sea) count have not gone unnoticed. Kaz Minerals saga is reaching a conclusion with the market belatedly realising the all in unit costs are 20-30% below (edit) above market prices. ($2.80-$3/lb). Anyone for a rights issue? Previously a £5+B company.

Woes being felt in the UK steel industry by Bangkok's SSI and their Redcar plant with sympathies for Teesside workers. Redcar being a casualty of the Chinese steel exports.

BHP Billiton (BLT) Global Debt Investor Marketing Announcement is very well timed – considering Roy Hill is on track etc. raise it whilst you can’t! Did BLT ever update the market on the missing $1.5B capex guidance or is the situation still offline!? Expect more of the same…Copper not assisting Glencore either at circa $2.31/lb currently. 

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).