Morning Mumble: Sainsburys Food Deflation and the Piggy in the Middle, Vedanta and Dire(light) (DIA) the belated strategic review (cash needed) + Stands Energy Addition

Good Morning,

Sainsbury’s (SBRY),  Q1 was pretty much as expected and now should be referred to as the 'also ran' in the supermarket sector. Suffering 6 straight quarters of LFL sales declines. Is there actually a price war, or a disruptive element in the discounters that's forcing more competition in the market place? What should perhaps be called a deflationary war on market-share?

Tougher competition isn't aiding Sainsbury's at all, with Waitrose improving (gaining customers from SBRY). The biggest risk is SBRY has been caught in the middle between the perceived decent and the discounters (or wannabe discounters), the piggy in the middle!

On today's results it’s very hard to substantiate a holding in SBRY, where there are simply better performing stocks, and an 'unknown' potential liability in property valuations. If one was to consider the supermarkets to a horse race, SBRY are very slow off the mark (read as react), and although there's woes for the sector they're unlikely to benefit without a strategic change. Morrison's may just be placed correctly for a pricing perception benefit. 

In conducting some research, Asda's (Walmart's) "guaranteed to be 10% cheaper" gimmick is losing interest with the customers. The shoppers prefer everyday low prices (EDLP) more than gimmicks, and shoppers whom were enticed to Asda, Lidl and Aldi are returning "home" to Morrisons (MRW). 

Expect Morrisons, with home delivery roll out starting to reduce their drop in sales and slow the growth of the discounters. More so, looking at Tesco's whose emphasis is back on the customer and EDLP, Asda is likely to suffer as a result of MRW/TSCO's actions. SBRY's is in no man's land and likely to be a casualty without a distinct shift in focus, one that price is not everything but perception of value is. 

Food cycles, mean the deflation at the checkout is likely to slow, and in parts reverse. As an indicator, one often follows Pork for various reasons (and also having to price it most days). Unusually, pork normally appreciates around Chinese New Year (it did not) and more importantly, in June prices start to appreciate, the historic seasonal trend. 

The pork prices, including the pork riblets, semy meaty that all good supermarkets should stock, have remained relatively "flat" since February/March. There has been little appreciation (3-5%) in prices that often occurs around June and July. 

Demand simply is not peaking as expected, and if one considers a longer-term price from 2013/4, with an increase in supply both in the UK and Europe, the prices have been capped out. The supermarket prayers of food inflation won't be for another 6 months at least. It will come, but simply not yet.

Yesterday, VED responded to press speculation about their corporate structure. How VED do this and what the tax implications are is another story. India's retrospective tax obligations are very public (Vodafone and Cairn Energy (CNE). 

The minority protection afforded to holders of 26% or more is circumventable by buying out the businesses, but may create an unwelcome tax liability. Whether the tax liability is better than the potential dividend distribution tax that would be imposed by cashing out Cairn India, is a question for the accountants. 

There's been some debate in the mailbox about the woes of Vedanta (VED). Continuing on from EMC: VED Robbing Peter to pay Paul, VED are stuck between a rock and a hard place, with debt being their biggest hurdle. 

Merging the entities to simplify the structure is challenging but not impossible, however there will be liabilities. The Indian's have realised the risks in holding their stock and being left  out in the cold, the stock slid near as much in Mumbai as it rose on the LSE, yesterday.  However, today, Cairn India took off today, near 12% up, one assumes the Indian market knows more than LSE. Trading up as high as 12%, currently just off 9%. 

VED's recent appreciation in price is unjustified, with a gross debt of $16.7 billion and net debt increasing to $8.5 billion. Mainly as a result of VED increasing their stakes in Vedanta Limited and Cairn India Limited to the tune of $0.8B. A tightly held stock, so expect the irrational price appreciation to continue, at least for the time being. With the change in name of Sesa Sterlite to Vedanta Limited in April, it's only a matter of time before VED as a group become a single entity with operating divisions/companies, rather than "majority interests" in a complex structure. 

No doubt the economic times will update the market before the Indian Market or LSE have an RNS, Vedanta Update & Search Cairn India, which appears faster than the Borg! 

As Leggie rightly points out, one of my favourites, Dialight (DIA). They have come out with a trading update. This "company" was of focus some time back, EMC: DIA January 2014 but the opinion has not changed. Recently Michael Sutsko from Laird Plc was appointed Group Chief Executive. It begs the question why the dividend was paid on the 2nd June! Michael has his work cut out, over to DIA...

In its AGM Trading Update of 15 April 2015, Dialight said that Group revenue growth for the first quarter had exceeded expectations but that we had a number of operational inefficiencies.

However, since April the Group has also experienced a slowdown in the rate of orders in the Lighting segment in both the US and Europe which is likely to result in a shortfall in full year revenue. In consequence, the Board expects that underlying operating profit for 2015 will be significantly below expectations and that the results for the first half will be less than the prior year.

The Board believes that this reduction in orders is linked in part to a slowdown in the oil and gas sector.

In the light of this adverse financial performance, and in conjunction with the previously-announced exercise to develop the Group's production infrastructure and processes, Michael Sutsko, the new Group Chief Executive, is leading a strategic review of the business. This review will focus will on the markets in which the Group currently operates, together with an attendant review of its operations, supply chain, and product development. 

The Board remains convinced of the longer term prospects for the Group and it expects to update the market with the findings of this review in the autumn.

As a consequence the target price of 315 pence is under review. 

Atb Fraser

Thanks Leggie for this: Stans Energy Files Additional Arbitration Claim Against Kyrgyz Republic. Diary date 29th June 2015 to see whether the Stans case is likely to go the distance if the Kyrgyz Republic do not see common-sense. 

Morning Mumble: REM's Desperation & Writedowns lost in the GLEN. Copper Gossip & Spain 2.0.

Good Morning, 

Markets tend to be more confident in the UK as it shrugs of its seasonal affective disorder to start the spring afresh, but not for long! It was yesterday the supreme chartists (exc. Hugo) are now calling for a FTSE 100 retrace to near 4000. To quote Hugo, as it's unusual for him to be consider the FTSE, if there was a retrace it would be circa 5100, nowhere near the 4000 being bandied around. 

REM (Rare Earth Minerals) appear desperate to get above 20% before any such EGM at Bacanora Minerals (BCN). LGO don't have the necessary cash to remove the issue of a vote for the appointment of a Director to the board. The question should be, how much cash do REM have left? No much is the answer…

Having spoken to a few savvy investors in BCN it's unlikely that David Lenigas will achieve the intentions via REM without 20%+ direct holding. All holders should be thanking REM for creating a large illiquid squeeze (do not blame shorters as they were near nil or should have been!) in the stock with the price near doubling. This does not mean they should vote REM or any associates on to the board, far from it in fact.

Glencore's (GLEN) preliminary results 2014 in EMC's view should have taken a huge hit on thermal coal.  The carrying values have warp the overall figures to give a false sense of security for an improvement in the dividend, up 9% today. Viterra saved GLEN from dismal results, debt reductions of circa $5.2b will aided those with myopia and the savings from the incorporation of crap from XTA (Xstrata) are just mystifying. Although when one unwinds the debt, it’s worth noting the sole reduction was down to Las Bambas sale. Had the 'synergies' and CAPEX reductions be substantial enough, the level of debt paid down would have been circa $6.4B and potentially nearer $7b. (Time for a picture, it's dire!) 

The preliminary snapshot sums GLEN up, but doesn't give the whole picture. The market should have been selling into these results. They are dire if you add in coal and the return on shareholder funds, laughable. Roger Bade goes with 4.2% return on shareholder funds. 

Its ironic BLT (BHP Billiton) achieved better than GLEN despite having Short32 to get people's mouths watering. Although, with GLEN's trading division and the level of capital intensity required you'd be a fool to expect the same metrics as Rio/BLT and dare I say it Vale, whom have their own issues.

Roger asks some very good questions about the reasoning or underlying issues within GLEN regarding fees, commissions and pay. Perhaps GLEN was more suited as an unlisted anomaly. Well not for the sellers! It’s very hard to justify a valuation above 265 pence for GLEN, and that's pushing it. So over to the analysts to maintain the status quo with targets of 330-360 pence, obviously not for their own money though!

Analysts are left guessing where GLEN will cut its CAPEX. We'll leave the summary to GLEN, "Responding to the volatile market backdrop, we comprehensively reviewed the appropriate level of capex for 2015. Originally guided to $7.9 billion, we now expect 2015 total industrial capex to be in the $6.5-$6.8 billion range, with reduced spend across the broad portfolio." Coal? Oil? Alternatively OPEX? Marketing? Perhaps more transparency on the marketing fees and 'associated' costs? 

Of course we should end the GLEN commentary on a high note with the largest LMI (Lonmin) short...the in-specie distribution. How has the stock performed since GLEN's in-specie announcement 11 Feb 2015? Those two analysts in RSA (Republic of South Africa) that thought it would be good for liquidity, with a TP or near 240! 

With Mugabe's 91st Celebrations being in the headlines, Mwana Africa (MWA) managed to raise $20M via a bond issue for the smelter restart from ZIM institutionals. One hopes MWA have checked the lead times for the equipment they need in for the smelter reopening in 9 months’ time. 

There's a guaranteed uncertainty coming to the politics of Zimbabwe. It would be sensible to consider this with any investment, irrespective of the benefits of the commodity (namely Nickel). ZANU PF (The Zimbabwe African National Union – Patriotic Front) are in turmoil about who takes over...Even the MDC-T (Movement for Democratic Change) are becoming soft in their old age and wanting to maintain the status quo of ZANU PF, lip-service objections?

Copper gossip via Li in China, Zambia are alleged to be reviewing the overall tax-rate for open-pit mining that has impacted copper production and sentiment on any investments there. After initial discussions with the operators, Zambia are alleged to be reviewing the 20% royalty rate to 12-14%, although ahead of the previous 6% welcomed by the miners. 

Zambia have risked their entire industry in the short-term with the revisions to the Zambian corporate tax and mining royalty regime. With First Quantum's Sentinel mine coming on stream, they have had to revert to their lenders to tweak their covenants. The 12% for Vedanta is still far from positive, and creates risks, despite a recovery in the copper price (currently 2.66/lb)

With Zambia appearing to want to play a hard line on taxation (at least at the moment) Vedanta (VED) is at real risk of being the casualty. Its capital and corporate structure drastically need simplifying/clarifying in order to survive, VED appear have got ahead of itself in the price recovery. 

A few super-yachts cancelled today?

Atb Fraser

Morning Mumble: Food Prices (partial), CU lower soon + Market Items

Good Morning,

Apologises for the delay, Game Digital (GMD) stating the obvious sentiment in margin and bundles in the Christmas trading update. Many thanks to the GMD IPO (although a repeat listing) aiding 2015. Along with KAZ Minerals the short benefiting today's market joys with Credit Suisse yesterday commencing the kicking. 

VED (Vedanta) ( as EMC'd yesterday) was known to be closed early, it had hit the target price for a long term short circa 7 months. It does need a revisit for intra-trading but one has to take money off the markets with strict discipline. Its a muppets disease not to bank significant profits and that includes the institutional readers whom think the trend is forever, yes you too can be a Muppet. Glencore, my short on the basis GLEN's (Glencore) copper beliefs were out of touch with the market nevermind their "tear" of assets (poor I know). 

The herd shall follow in due course, but its wise to consider their coverage if they cannot get the obvious right. With coal getting a kicking again...GLEN's earnings are looking that great with greater capital intensity. Kudos to Liberum Capital whom I suspect didn't expect 240 pence, Investec might need to review their switch from Rio to GLEN

Below are some brief out-takes for something I did in June 2013/Jan 2014 and July 2014, for which I've adapted this morning. For those that know about Pork Riblets, Semi-Meaty (I'm trying to make it sound luxurious)...December has been the hit by a quadruple whammy that has continued unabated, positive for the pocket and for retail sales and more so if the trend continues. Retail will see cheaper goods (consumer durables/white goods) and higher demand as well (see  EMC thoughts on shipping costs) with greater disposable income. Global deflation/zero inflation is a risk to western economies more so than developing countries. Save for the developing nations weakness in currency (about time I must say) eroding a good 50% of any price price reductions.

So with oil now mirroring a lot of commodities with speculation being stripped out to leave a realistic market (over supply) even in the short-term, copper as the indicator of growth has fallen back. Readers cannot say they were not given the warning  in November/December. So the indicator (Dr Copper as most refer to it) of global health is pricing in more realistic growth patterns (see Chinese trade growth) nearly bang on my estimates at CampAlpha). Even with the EU's intentions of Economic stimulus etc...America's demand may however support China (perversely). 

So with the decline in commodities positively impacting on food prices for the consumer both in agriculture (inc fertilisers and other associated harvest costs), supply chain logistics (in its entirety) and point of sale costs (including energy and staff costs re: recent hourly rate declines in the US), there's only one likely beneficiary. This theme will continue for some time, with the FAO (Food & Agriculture Organisation of the United Nations) indices mirroring (to a degree) iron ore and belatedly copper. Other sources but limited time so apologies.

See FAO Food Commodity Price Indices (left), showing significant drops in prices there's a real risk of further drops as bio-fuels are awash in the market and with limited / static demand creating a surplus in animal feed as well the alternative demand does not look positive either (grain feed/food ingredients). Plus a significant pressure on the fertilisers likely to drive costs/prices lower as producers hold out for better deals and the market being in oversupply (although recently tightening). 

With record harvests across feed grains, soya and meats (if one is allowed to call them a harvest), save for coffee(long), Cocoa (only short-term) and citrus fruits (Florida Harvest issues inferring one of the worst crop every. Prices are set in trend for the next 12 months save for any major issues. We have Soybeans dropping 3.6% After USDA Supply Report (WSJ) So for the dinner party live enthusiasts you will finally not have to pretend to substitute meat for your vegetarian guests. 

The global super-cycle is moving through commodities to food and is taking hold . With commodities the first to give, then food prices, forcing the factory gate prices in decline. (Simplified version). When considering the below, also consider the global impact both to Grocers but also to the consumer. 

Just a summarised bit on what I'm able to share in terms of food prices, please feel free to ignore or digest (I know).

Today we saw the risks presenting in copper with the tank, EMC copper's real risk could not have summed it up better, taking larger positions on the way down...in the absence of any support $2/lb. is the next station. 

Limited time for the other items. Its worth commenting on the iron ore price for those thinking the summer would last longer. All the majors were down, save for Atlas Iron the second coming, with massive volume, it would be wise to pause and plan (you vultures!). With the energy crisis of over supply (Energy rout I think CitiGroup called it) guess what's happening with Coal. With a few changes to increase the liquidity in LME coming into force on the 19th of this month, traders would be wise to read the manual:-).

Risk off? Gold on? hitting the support line of $1239/oz and retreating quickly. Cost deflation is going to impact gold, its only a matter of time!

Atb Fraser

It would have been respectful for certain individuals to acknowledge the source of their information in emails, reports and articles rather than just copying and pasting.

Morning Mumble: CU tomorrow...Maike, Au+Ag and Greggs (GRG) + Oil Woah! Defaults coming...Goodbye Vedanta

China’s Maike says copper set to rebound By Henry Sanderson now the knife catching begins. Although futures and orders contradict the statements by He Jinbi. With copper futures edging lower for March at circa $2.7200/lb (flat) for May 2015 and being limited in orders, it questions the 3 month outlook by Maike. One would be wise to acknowledge that the outlook for copper in the mid-term is good, in the short-term, as alluded to yesterday (EMC) the economic indicators are not as positive as some would have you believe. What the pricing is suggesting is China could have been the material cost in copper by not their (ghost) speculation not their physical consumption.

With most traders looking at the technicals of gold bar the obvious common-sense approach, both Gold and Silver made solid gains. Gold (Au) $1236.40/oz. currently and Silver (Ag) $16.84/oz. Au is likely to see headroom resistance at circa $1239.90 and Ag circa $17.10. With the larger bets going in on NY and Asia for a material tick up some $100+/oz., the surprise will be if Au breaches $1350 by March 20th (Key date for those speculators reviewing more than H Samuel restocking (Sarcasm).

Having to review my thoughts on Greggs (GRG) EMC 15 December 2015. Showing its wise to follow the market (at times), with oil tumbling at faster levels, the weather being more than favourable and food on the go in season it was rude not to long through the Christmas period. What today's trading update does show is I was categorically wrong to call the fluke in September (EMC). Dixons Carphone (DC.) has performed as well, but banking as it hit my target price. Who'd have thought the long/short balance was near 50/50 for the Christmas period, albeit changing as the obvious candidates drop further. 

Greggs (GRG), momentum appears to be gaining strength and with no likely interest rate rises in the pipeline for some time, low oil, retail and grocery + convenience is likely to benefit save for a deterioration in their equation of positive trading (aka weather, retail and higher discretionary spending). Could the Supermarkets slower declines in LFL (like-for-like) have been saved by lower oil! Improving the costs in the entire supply chain and on the shelf.

W Resources (WRES) is yet to change tracks positively, and down to the Tungsten price...edging lower circa Tungsten APT European $295/mtu (Metric Tonne Unit). It might be wise for Thor Mining (THR) to revisit their expectations of prices at least sensibly and reduce their expected $354/mtu within their upgraded Feasibility Study. Even with some sensible revisions, THR's returns are looking half decent allowing for a higher cash cost. In addition to the lack of gold benefits as Crocodile Gold Australia Operations Pty Ltd ended the memorandum of understanding in August 2014.

It was common-sense the oil trade (read as don't be long) EMC Oil the Support, we're currently only two bucks off my critical $43.20/bbls before OPEC has to act at Crude Oil (Brent) $45.42/bbl. Whether they do or not is another matter as the material downside has to be balanced appropriately with the benefits. Strangely Quindell (QPP) had an exposé on the short ownership as soon as nature would allow, it’s strange that Brent & WTI traders have not ! Over to those complex trading houses with opaque ownership structures to keep silent and the press not to break the status quo! No conspiracy theories here, just facts.

What the market is doing with itself is hilarious, CityLink entered administration but it takes a huge great flag from UK Mail (UKM) today to point out the obvious with their Q3 trading update. The comedy this morning being "the gossip" in my in box with an alleged seasoned professional repeating an echo of years back when Better Capital (BCAP) bought CityLink. Are parties aware that BCAP owned CityLink? Its highly unlikely they'd be bidding for certain assets. BCAP years ago was my favoured play, selling out and moving on to Blue Solar in circa July 2013 for my low risk pension play. 

Whether early on not today it’s a sad day to be closing the shorts with Vedanta (VED). Having been shorting this stock since mid-2014 its time to bank and wait for further indicators and an update from the company. VED has a number of risks besides the commodities prices...that being the majority shareholder and what he decides for VED. With net debt at the last count being $9,054.6 million its likely the tumble in commodity prices has not improved debt, with a deterioration in cash but gross debt maintaining the same levels of $17,234.0 million. Perhaps a little premature but one is always wise to bank profits. This will need a revisit soon.

Little time for everything else on such a big day...

Atb Fraser