Credit deflation and the reflation cycle to come.

[sancho panza]

12 hours ago, Barnsey said:

This is why I think NewRiver are far better positioned for the immediate aftermath of the 2019 crash (and possibly another in 2020/21 if we get a QE stimulated bounce), still don't hold any but they're close to target. Value retailers are where it's at for a couple years at least when SHTF, then perhaps like you say with some cash sloshing around in the reflation people might start spending again.

But will value retialers be negotiating rent reductions?

40 minutes ago, onlyme said:

Like saying a clinically obese person has kept pace with the food they were eating.

Exactly............Imputed rents are now 12% of GDP as opposed to 2% 30 years ago....

[Castlevania]

3 hours ago, sancho panza said:

But will value retialers be negotiating rent reductions?

They should be. I posted in the High Street thread an extract from an interview with the CEO of the video game retailer GAME. They’ve cut their rent bill by 40% in the past year, mainly due to being in a position whereby due to the state of the high street they can (their leases are on average less than a year in length) and even have some stores where they don’t pay any rent (I assume the landlord would rather have someone in to pay the business rates than having an empty unit). 

If you’re privately owned you can go down the CVA route if your leases are too onerous. Not a good time to be a high street landlord in my opinion.

[Castlevania]

Emoov are to go into pre pack administration. 

https://www.google.co.uk/amp/s/news.sky.com/story/amp/online-estate-agent-emoov-faces-repossession-11566731

[Ash4781b]

7 hours ago, sancho panza said:

Down 40% .....interersting.I follow the ftse 100 at work when I have time.Saw Land Sec and the builders being the bg losers today.Sadly cut my shorts on the builders two weeks back and never went back in.Still short Land Sec.The whole property ponzi looks ripe to get smashed....

 

I think a lot of High St shops are vulnerable,particualrly the £1 variety..period.Rates,rents,wages.I suspect most are barely covering 2 out of 3

 

I tried to find some data on Poundland. Go in the the stores they are rammed but the margins are so thin(and by the end of the day it looks like a plague of locusts have swarmed). From what I can tell the U.K. operation is reported loss making but that’s just the investment vehicle but getting all the detail well that’s buried well in Steinhoff accounts and mapping all that malarkey I’ll leave that to others. In a few years the book will come out.

[Democorruptcy]

6 hours ago, Castlevania said:

Emoov are to go into pre pack administration. 

https://www.google.co.uk/amp/s/news.sky.com/story/amp/online-estate-agent-emoov-faces-repossession-11566731

Thanks for the that. I particularly enjoyed this bit about the Daily Express HPI ramper losing money
 

Quote

 

An insolvency process could leave prominent investors including Richard Desmond, the former Daily Express and Channel 5 owner, nursing seven-figure losses.

Channel 4's Commercial Growth Fund, which strikes media-for-equity deals with advertisers, is also a shareholder in Emoov.

 

 

[DurhamBorn]

10 hours ago, sancho panza said:

But will value retialers be negotiating rent reductions?

Exactly............Imputed rents are now 12% of GDP as opposed to 2% 30 years ago....

Tricky.From what iv seen it depends on the rents already paid.New River has a retail park in Kendal.Next tried for a rent cut when the lease expired,New River refused,kicked them out at the end of the lease and put B+M Bargains in with a 15% increase in the rent from what Next were paying.However in a town where all the shops around the centre are going empty can the centre maintain rents?.Thats more tricky.I think most of the remaining retailers will gravitate to community shopping centres and a rent of £12.50 sqf is sustainable IF they can hold footfall steady.I also expect to see many new uses in the right located ones.Doctors,NHS,shared work space etc.Its a hated sector facing into massive headwinds,but im a contrarian investor and so im happy to slowly buy into who i consider the best management team in the sector,and also one where i like the structure of the assets and the debt profile (un-encumbered balance sheet is crucial at this stage of the cycle).I think your right though that some of the discounters might/will go under as wages will be hitting them hard,though rates have fallen 20% for most in the provincial towns.Interesting to see how it plays out and who if any of the companies can give a +8%pa return over the next 8 years.

[Viceroy]

Latest from Martin Armstrong for those who want to follow: 

The Fed - Interest Rates - Real Winds Behind the Curtain

By: Marty Armstrong

Friday, November 30, 2018

Nothing has changed with the broader view of the share market. Federal Reserve Chairman Jerome Powell' statement that interest rates are close to neutral is a far more reaching statement that meets the eye. The winds behind the curtain are blowing hard against the banking system in the Eurozone. Powell is caught between a rock and a very hard place. On the one hand he desperately needs to keep moving rates higher to try to avert a massive pension crisis building in the state and municipal level. On the other hand, lobbying is growing intense for the Fed to please DO NOT RAISE RATES. 

 

 

The risk of a European banking crisis begins in December and builds with intensity into January. The EU is even putting pressure on Switzerland to sign what is known as the framework agreement and gave them a deadline by December 7th.  The so-called framework agreement being discussed covers five of the larger bilateral deals: free movement of persons, mutual recognition on conformity assessment, agricultural products, air transport and land transport. Measures related to the free movement of persons are the main stumbling block.

 

 

The share price of Deutsche Bank has been continually declining with little note from mainstream press. The deadly silence about the European Banking Crisis is very unsettling. There has been considerable lobbying against the Fed to stop raising interest rates. The ECB cannot raise rates in the face of a banking crisis without fear of pushing Europe off the edge.

We should expect volatility to begin to rise in December and our key turning points are January and March. So get ready. The fun times are just beginning.

Today, we have the month-end closing. The Dow Jones Industrials is once again nowhere near a Monthly Bearish Reversal so the consolidation still does not threaten a change in long-term trend. In the Euro, a closing below 11313 for the close of 2018 will be an important warning that this market is poised to decline during the first quarter 2019.

[Barnsey]

20 minutes ago, DurhamBorn said:

I think your right though that some of the discounters might/will go under as wages will be hitting them hard,though rates have fallen 20% for most in the provincial towns.Interesting to see how it plays out and who if any of the companies can give a +8%pa return over the next 8 years.

Certainly is an interesting dynamic, especially after the Intu fallout sounding an alarm on a retail recession, always worth taking a defensive step back and look at the cyclical picture. We've had a decade of easy credit, many living beyond their means, hence the springing up of M&S simply food stores all over. We've become fiscally lazy again.

When things turn bad, the retailers at the bottom always perform strongly. From 2009:

https://www.independent.co.uk/news/business/news/poundlands-sales-soar-during-recession-1679911.html

Poundland's sales soar during recession

Poundland delivered record sales for the year to the end of March, as the single-price retailer attracted hordes of new customers seeking value for money during the recession.

The 209-store retailer's total sales soared to about £395m, compared with £330m last year, for the 12 months to 31 March 2009, driven by strong underlying sales growth and 41 new stores. Jim McCarthy, chief executive of Poundland, said: "It is a combination of new stores, strong like-for-like sales, new products and growth in food and drink." Poundland has benefited from the flight to value and a 22 per cent increase in AB socio-demographic shoppers over the financial year, as middle-class families hunt down bargains.

[Lightscribe]

1 hour ago, Barnsey said:

Certainly is an interesting dynamic, especially after the Intu fallout sounding an alarm on a retail recession, always worth taking a defensive step back and look at the cyclical picture. We've had a decade of easy credit, many living beyond their means, hence the springing up of M&S simply food stores all over. We've become fiscally lazy again.

When things turn bad, the retailers at the bottom always perform strongly. From 2009:

https://www.independent.co.uk/news/business/news/poundlands-sales-soar-during-recession-1679911.html

Poundland's sales soar during recession

Poundland delivered record sales for the year to the end of March, as the single-price retailer attracted hordes of new customers seeking value for money during the recession.

The 209-store retailer's total sales soared to about £395m, compared with £330m last year, for the 12 months to 31 March 2009, driven by strong underlying sales growth and 41 new stores. Jim McCarthy, chief executive of Poundland, said: "It is a combination of new stores, strong like-for-like sales, new products and growth in food and drink." Poundland has benefited from the flight to value and a 22 per cent increase in AB socio-demographic shoppers over the financial year, as middle-class families hunt down bargains.

With the bargain £ stores the issue won’t be with sales, as you have pointed out in a recession, the wider demographic will look to cut costs wherever they can.

The issue will be on the supplier costs, transportation and increased business rates/rents and managing with a paper thin profit margin. As DB has said before, goods (and tat) from China have increased in cost, and that will be the key difference from 2008/9 and the future financial crisis we will face.

[dgul]

33 minutes ago, Sideysid said:

With the bargain £ stores the issue won’t be with sales, as you have pointed out in a recession, the wider demographic will look to cut costs wherever they can.

The issue will be on the supplier costs, transportation and increased business rates/rents and managing with a paper thin profit margin. As DB has said before, goods (and tat) from China have increased in cost, and that will be the key difference from 2008/9 and the future financial crisis we will face.

The answer is clear...

[DurhamBorn]

1 hour ago, Sideysid said:

With the bargain £ stores the issue won’t be with sales, as you have pointed out in a recession, the wider demographic will look to cut costs wherever they can.

The issue will be on the supplier costs, transportation and increased business rates/rents and managing with a paper thin profit margin. As DB has said before, goods (and tat) from China have increased in cost, and that will be the key difference from 2008/9 and the future financial crisis we will face.

Yes they will have to pass on costs,no doubt about that.My own town is a great example of retail.15k population and a catchment who shop here of around 50k.We have a town centre and a new edge of town retail park.The town centre is dead.More and more empty shops,no chance of letting them.A small shopping centre with Wilko's,three other shops and an empty old Argos.Im sure Wilkos will look to leave at the end of the lease as well.The retail park is heaving.Jam packed all day every day.Iv never yet not seen a tail back at Mcdonalds drive through.Retailers are scrambling to get there,fully let,free parking and a cinema and new food places coming next.

Its very interesting to see how things play out.As ever buying assets cheap in the right places with the right equity/debt mix is key.Then managing the asset to ensure mix and footfall keeps up.If Game as mentioned above have a shop in a side street they can easily ask for a 40% rent reduction.If they are four doors down from Primark in a shopping centre they have no chance of getting one and would be booted out at lease break.Owners of these assets need to make sure they manage them,unlike where pension funds etc own one or two and simply collect the rents.

[sancho panza]

11 hours ago, Castlevania said:

They should be. I posted in the High Street thread an extract from an interview with the CEO of the video game retailer GAME. They’ve cut their rent bill by 40% in the past year, mainly due to being in a position whereby due to the state of the high street they can (their leases are on average less than a year in length) and even have some stores where they don’t pay any rent (I assume the landlord would rather have someone in to pay the business rates than having an empty unit). 

If you’re privately owned you can go down the CVA route if your leases are too onerous. Not a good time to be a high street landlord in my opinion.

Like you CV I can't see a way out.Housebuilers getting walloped today alongside CRE ...again....

Have to say there's a few particualrly noxious one man band local High St CRE gangstas I know that will get a useful lesson in humility if you're right...and I think you're bang on bit in bold

11 hours ago, Castlevania said:

Emoov are to go into pre pack administration. 

https://www.google.co.uk/amp/s/news.sky.com/story/amp/online-estate-agent-emoov-faces-repossession-11566731

Goes to show how quickly a £100mn price tag can be undone 

'Sky News has learnt that the company, which orchestrated a three-way merger just five months ago that attributed a £100m price tag, is on the verge of appointing James Cowper Kreston, an accounting firm, to act as administrator.

Sources said that a pre-pack administration, through which a buyer acquires some of a company's assets while leaving its liabilities behind, could be announced as soon as Friday.'

7 hours ago, Ash4781b said:

 

I tried to find some data on Poundland. Go in the the stores they are rammed but the margins are so thin(and by the end of the day it looks like a plague of locusts have swarmed). From what I can tell the U.K. operation is reported loss making but that’s just the investment vehicle but getting all the detail well that’s buried well in Steinhoff accounts and mapping all that malarkey I’ll leave that to others. In a few years the book will come out.

Persoanlly ash, I can't see where the margins are strong enough to withstand any one of the following

1) suppliers going under and having to source higher priced stock

2) rise in IR's.

3) a 5% drop in turnover

 

They're also a bit of a sucker shop in that a lot of the deals are worse than Aldi.There's one in Leicester.After I've taken my 11 year till watching in M&S and Wh Smith,we go to the pound shop so he can look for good deals on things and we rarely come out with anything.The one thing I will say is that there's always a big queue and I'm always suspicious of shops where the owners allow big queues because it suggests that their margins aren't strong enough to staff tills adequately.

Rule 1 of retail to me is to get the cash off people efficiently,queues at tills put off customers with big wads to spend.

M&S clothing dept go the other route and have loads of staff but few customers...................

[sancho panza]

4 hours ago, DurhamBorn said:

Tricky.From what iv seen it depends on the rents already paid.New River has a retail park in Kendal.Next tried for a rent cut when the lease expired,New River refused,kicked them out at the end of the lease and put B+M Bargains in with a 15% increase in the rent from what Next were paying.However in a town where all the shops around the centre are going empty can the centre maintain rents?.Thats more tricky.I think most of the remaining retailers will gravitate to community shopping centres and a rent of £12.50 sqf is sustainable IF they can hold footfall steady.I also expect to see many new uses in the right located ones.Doctors,NHS,shared work space etc.Its a hated sector facing into massive headwinds,but im a contrarian investor and so im happy to slowly buy into who i consider the best management team in the sector,and also one where i like the structure of the assets and the debt profile (un-encumbered balance sheet is crucial at this stage of the cycle).I think your right though that some of the discounters might/will go under as wages will be hitting them hard,though rates have fallen 20% for most in the provincial towns.Interesting to see how it plays out and who if any of the companies can give a +8%pa return over the next 8 years.

I think smaller community ones have a future.Aldi/Lidl can bring huge footfall to previously rarely travelled by shoppers and they can fit on a postage stamp compared to your Sains/Asda types.

Even then DB,I'm not sure they'll be able to maintain rents if all around are crumbling.Ultimately though,some shops will survive but rather as add ons to online businesses or specialist retialers,which I suspect will again draw down rents.

The more solvent CRE co's eg Newriver(who I've been running the slide rule over since you first tipped them) will pick up some plum assets cheap.

4 hours ago, Barnsey said:

Certainly is an interesting dynamic, especially after the Intu fallout sounding an alarm on a retail recession, always worth taking a defensive step back and look at the cyclical picture. We've had a decade of easy credit, many living beyond their means, hence the springing up of M&S simply food stores all over. We've become fiscally lazy again.

When things turn bad, the retailers at the bottom always perform strongly. From 2009:

https://www.independent.co.uk/news/business/news/poundlands-sales-soar-during-recession-1679911.html

Poundland's sales soar during recession

Poundland delivered record sales for the year to the end of March, as the single-price retailer attracted hordes of new customers seeking value for money during the recession.

The 209-store retailer's total sales soared to about £395m, compared with £330m last year, for the 12 months to 31 March 2009, driven by strong underlying sales growth and 41 new stores. Jim McCarthy, chief executive of Poundland, said: "It is a combination of new stores, strong like-for-like sales, new products and growth in food and drink." Poundland has benefited from the flight to value and a 22 per cent increase in AB socio-demographic shoppers over the financial year, as middle-class families hunt down bargains.

Back in 09,I used to shop at Aldi and it was me n the workers on a saturday afternoon.They do midget gems for like 30p I think and they're decent.I can't see a revival in pound stores.The sweets they sell are often crap-no name/poor quality-and a lot of teh washing liquid style deals are barely better than the local co op.

I must sound like a geek but I watch shop shelves,like I watch shop tills.Interesting to see the co Op running some strong brands on deal eg fairy liquid/Quaker oats/Cadburys'.The bigger brands are clearly suffering some margin compression to maintain sales

[Majorpain]

11 minutes ago, sancho panza said:

I think smaller community ones have a future.Aldi/Lidl can bring huge footfall to previously rarely travelled by shoppers and they can fit on a postage stamp compared to your Sains/Asda types.

They have sprung up everywhere in the working class neighbourhoods around Tyneside, especially on brownfield sites. it doesn't make much sense to me with a car, but I can see it being very profitable having decent sized stores with a good selection within walking distance of as large a number of people as possible.  Especially if car ownership becomes out of reach for increasing numbers of people.  The quality of most of the non-fresh food is as good as anywhere else for a decent price I find.

[Majorpain]

http://www.constructionenquirer.com/2018/11/30/rising-debts-force-kier-to-launch-264m-rights-issue/

The shorters were right, whilst everyone was focusing on Interserve, its Kier that's in the deepest hole!

[dgul]

21 minutes ago, Majorpain said:

http://www.constructionenquirer.com/2018/11/30/rising-debts-force-kier-to-launch-264m-rights-issue/

The shorters were right, whilst everyone was focusing on Interserve, its Kier that's in the deepest hole!

Assets £460m, debts £624m, market cap £675m...

[DurhamBorn]

9 minutes ago, Majorpain said:

http://www.constructionenquirer.com/2018/11/30/rising-debts-force-kier-to-launch-264m-rights-issue/

The shorters were right, whilst everyone was focusing on Interserve, its Kier that's in the deepest hole!

Debt (credit) deflation in action.Its incredible really that CFOs should of had net cash on the balance sheet at this stage in the cycle,instead they have big debts.All exactly as expected and its this that leads to a reflation cycle.Companies cant build,no credit,money gets sloshed into the system from CBs and goes inflates whats left.

Kier might actually be doing the right thing here for its maybe survival,but massive destruction of equity for shareholders.

[Band]

6 minutes ago, dgul said:

Assets £460m, debts £624m, market cap £675m...

Lot of money to lend someone to build a website.

 

[leonardratso]

10 minutes ago, dgul said:

Assets £460m, debts £624m, market cap £675m...

if they could just sell some more shares pulled out of their arse then theyd be right as rain.

Perhaps they could flog some of those intangibles, or rent out their 'brand' name for use elsewhere.

[DurhamBorn]

 

https://woodfordfunds.com/funds/holdings/kier/

[Shatner's Bassoon]

17 minutes ago, DurhamBorn said:

 

https://woodfordfunds.com/funds/holdings/kier/

His recent record is hilarious - Capita, Provident Financial, AA, Prothena. One disaster after another. 

[Ash4781b]

1 hour ago, Majorpain said:

http://www.constructionenquirer.com/2018/11/30/rising-debts-force-kier-to-launch-264m-rights-issue/

The shorters were right, whilst everyone was focusing on Interserve, its Kier that's in the deepest hole!

How’s Interserve share price holding up on the Kier news?

[DurhamBorn]

18 minutes ago, Shatner's Bassoon said:

His recent record is hilarious - Capita, Provident Financial, AA, Prothena. One disaster after another. 

I actually think Woodford is a very good investor through a cycle.The problem he has had lately is that he doesnt understand we are at the end of a near 40 year dis-inflation cycle that is ending with a debt/credit deflation.He keeps saying the UK macro situation is very good,compared to China.I agree,it is,but thats if we project credit conditions forward and ignore the Fed tightening.The facts are liquidity is falling,and liquidity falling means the dominoes start to go down,the most indebted/lowest margins first.He has ignored debt on companies balance sheets (the AA a prime example) and simply priced forward dividend+ dividend growth as if the debt didnt exist.Companies like Kier should have net cash on the balance sheet,not huge debts.

He has pretty much gone all in on UK growth shooting higher and falling world wide liquidity having no affect on earnings.

Saying that i started a ladder again today into Imperial Brands his biggest holding.£23.80 ladder down to £18.

[Majorpain]

48 minutes ago, DurhamBorn said:

Debt (credit) deflation in action.Its incredible really that CFOs should of had net cash on the balance sheet at this stage in the cycle,instead they have big debts.All exactly as expected and its this that leads to a reflation cycle.Companies cant build,no credit,money gets sloshed into the system from CBs and goes inflates whats left.

Kier might actually be doing the right thing here for its maybe survival,but massive destruction of equity for shareholders.

The current main contractor model was built on extending payment to subcontractors and using that to pay day to day expenses.  It was essentially subbies lending money for free since you dont pay interest on current payment terms.  Nice work if you can get it, and major reason why Carillion with their 90-120 day payment terms caused such a massive amount of damage when 3 months of payments got wiped.  The government has got wise to this which is why Kier is suddenly desperate for cash, and needs it now!

https://www.constructionenquirer.com/2018/11/29/major-contractors-face-public-work-ban-over-late-payment/

7 minutes ago, Ash4781b said:

How’s Interserve share price holding up on the Kier news?

Not great, but not too badly.  Unlisted private Laing O'Rourke which struggled to get its accounts signed off earlier this year has lost credit cover, 2 years ago the insurance company gave as much cover as wanted within 30 mins of looking at their accounts!  They are bleeding senior staff to competitors and are another one to watch IMO.

[UnconventionalWisdom]

Some interesting graphs on us corporate debt 

https://www.marketwatch.com/story/these-5-charts-warn-that-the-us-corporate-debt-party-is-getting-out-of-hand-2018-11-29?siteid=yhoof2&yptr=yahoo

Nonfinancial corporate debt as share of gdp.

Proportion of BBB rated bonds 

Leveraged loans