Markets live chat transcript for the chat ending at 11:51 on 29 Jun 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to Markets Live – FT Alphaville’s market commentary
PM: Neil’s with me. Raring to go.
PM: he’s even got his browser open
PM: I think
NH: that’s a bit of an exaggeration
NH: difficult to get too excited when the market is as a drab as this
PM: Nah — there are plenty of features to get stuck into
NH: such as????
PM: Sports Direct
NH: ah Sports Direct
NH: Mike Ashley has surprised shareholders again
PM: Deal junkie Ashley has been busy
PM: This morning he has announced plans to buy Everlast Worldwide
NH: a US version of Lonsdale
NH: boxing related sportswear
PM: He has bid $30 a share for everlast, which is listed on Nasdaq
PM: This trumps an earlier offer for the company of $26
PM: Headline price is a touch over $145m
NH: now, if there is one thing SPD shareholders probably did not want Mr Ashley to do at this particular moment is to start venturing into the US
PM: Certainly!
PM: V scary
NH: remember that SPD shares hit a post flotation low yesterday after a couple of brokers cut earnings forecasts because of the recent dismal weather
PM: What’s been the share price reaction this morning?
NH: unchanged at 183.25p
NH: just got a very amusing note in from Oriel Securities
PM: Oh yeah
NH: It’s hardly been wall to wall joy so far owning SpD but the one thing that investors
REALLY feared has happened: the company is starting to venture to the States.
NH: SpD is acquiring the Everlast brand (boxing and fitness equipment) in the US for $168m.
This represents 4.2x last year’s sales and 18.1x EBITDA, which feels pretty punchy to
us.
NH: The plan is to retail Everlast in the UK and use the brand as a stepping stone for SpD’s
other brands into the US.
NH: Whilst not a direct acquisition of a US retailer, it is a clear statement of intent.
• The shares may now appear cheap but it remains impossible to be confident in the
numbers and this will be yet another jolt to investor confidence.
• I keep thinking there’ll come a time to shut your eyes and buy this, and they keep giving
the market a reason to keep selling.
PM: Love that lovely payoff line
NH: we also have some stuff from VC Ratty at Seymour Pierce
PM: Yes please — Richard Ratner
NH: although it lacks his normal verve
PM: Print it anyway
NH: Whilst it may appear expensive at first sight, Everlast has a distribution
network in the US, where it would take Sports Direct years and
considerable costs to build up its own.
NH: Whilst the ‘offer’ strategically makes a lot of sense, given that it is a listed
company and there is a competing bidder, Sports Direct could still be
outbid.
NH: At the same time, given current trading conditions and the effects the
World Cup comparatives on JJB, we are revising our estimates for the
current financial year (we are happy with our forecast of £43.5m for the
last financial year, although we must admit to having miscalculated the
EPS!). We reduce our estimate from £207.2m to £166m, giving an EPS of
15.7p. We trim our dividend estimate from 9p to 8p.
NH: Fundamentally, apart from the current trading experiment, there is very
little wrong with Sports Direct. One doesn’t build up a company from
scratch to £1.2bn of sales, with virtually no net debt and profits in excess
of £100m unless it is ‘kosher’.
NH: However, corporate governance is another issue. Whilst we always knew
that Mike Ashley was a ‘maverick’, the loss of the independent chairman
was a major blow. Until this is sorted out (actually it would not be such a
bad thing if the company can’t find a willing occupier of the seat, if Ashley
were to take the job – thus at least we would know where we were!), we
remain at HOLD.
PM: So he has cut his forecast — but then that’s just guesswork on his part
PM: Given the lack of co guidance
NH: anyway we are big fans of Mr Ashley here at the FT
NH: we reckon he should be given an MBE in the next honours list
PM: For services to news editors on slow news days (Copyright: C Pretzlik, FT co editor)
NH: on regular basis Mr Ashley provides us with loads of column inches
NH: surely deserving of a honour
PM: 
NH: morning Greenback
PM: And morning Skeptic and aecurb
NH: Royal Dutch continues to benefit from yesterday’s very bullish note from Morgan Stanley
NH: to recap that said the company was undervalued by $120bn
NH: extensively picked up in the press this morning and a few slow coaches who did not read Alpha yesterday have been buying in
PM: Oil price also helping
PM: Crude price has been holding above $70 — for the third session this week
NH: and I think we still have big sector rotation going on
NH: people coming out of anything interest rate sensitive - insurers, property, utilities - into more defensive stocks
NH: and remember the likes of BP and Shell have pretty decent dividend yields
NH: also some of the technical stuff, particularly on BP looks v bullish
NH: real break out
NH: actually some people reckon it is reminscient of the end of the dot.coom bubble
NH: then the great switch was out of Voda in BATS
NH: happened a few months before it popped
NH: so we could be seeing people coming out of global property this time into oil and also telecos
PM: Blinking eck Neil!
PM: Moving to cable — dollar / sterling
PM: I dont sense the rates has been holding above $2 in any sort of convincing way so far — but I’m no FX expert!
PM: Is FX trader with us today?
PM: On Isoft….
PM: trust aecurb’s maths on the bid arb spread
PM: We just assume people are pricing in some sizeable risks here
PM: At the low end of these is the fact that the deal needs a governmental nod
PM: At the other end, Isoft has such an appalling record…
PM: And someone trading the Isoft/IBA spread might just find themselves in a UK/Aussie settlement pickle
PM: But look aecurb — we’ve just got in touch with a merger arb for some comment — they are going to email something over.
PM: So bear with us for a few moments
PM:
PM: Going to move to the wider markets now
PM: Neil has had to reboot his machine
PM: So while hell freezes over — and give you some of the index moves
PM: London equities opened rather brightly, but conditions quickly clouded over
PM: Footsie was trading as high as 6592 at one stage
PM: But its come back rather sharplyl — FTSE 100 is currently down 29.7 at 6541.6
PM: Neil is almost back with us
PM: Got his email up
PM: There’s an email he gets from Lehman Brothers each day — which crashes his system
PM: He might have learned not to open the mail by now
NH: it clicks on to it automatically
NH: anyway can’t complain about the hardware round here
NH: because the other day we got a new printer
PM: 
NH: our old was a decade old and had been flogged to within an inch of its life
NH: mind you the new one is dell so there is no telling how long it might last
PM: Now before you tell us why the market has gone in to such a steep decline, let me just answer Skeptic below
PM: Piece on Bloomberg this morning put potential losses at between $125bn and $250bn
PM: Yes, billion — based on the argument that the credit rating agencies have yet to catch up with downgrades
PM: Once they do, ma ny holders of CDOs will become forced sellers — cos of investment grade implications
PM: CDO market will supposedly collapse
PM: And we are all going to have to head for the hills
PM: Done a post on the main FT Alphaville home page if you want the links
NH: that said, equity markets seem to have taken all this relatively calmly
NH: in fact we were talking about this in our morning meeting today
NH: OK, the market has come off about 3-4% in the past week but there has not been any deals of real panic
PM:
PM: Right — why is the Footsie DOWN??
NH: another bloodbath in the property sector
NH: Segro, a stock lots of the punters have got, are down 23.5p at 614p
NH: Hammerson, another stock the punters have got a lot of, are off 59p at £14.01
NH: that’s a 4% drop
NH: British Land down 30p at £13.32
NH: I could go on
PM: Dont — too depressing
PM: But you could explain exactly what is going on
NH: well, the back drop of course is rising interest rates and rising bonds yields
NH: which makes the sector look less attractive on a fundamental basis
NH: but this morning’s carnage has been triggered by Morgan Stanley I believe
NH: they have come out this morning and said don’t attempt to catch the falling knife
PM: In other words, don’t be tempted to buy back into the sector just because its had a big fall
NH: precisely
NH: The US broker is expecting further pain
PM: Jeepers, that could wipe some of the punters out
NH: and some of our best contacts
PM: 
PM: Alright, let’s have a look at this note
NH: Don’t be tempted to jump into the property sector. We think that the factors that have driven the sector down so far this year have some way to run. In any case, experience shows that the property sector rarely, if ever, stops at ‘fair value’, either on the way up or on the way down.
NH: Expect higher ‘beta’ stocks to continue to perform worst. In the more testing conditions that we anticipate in the quoted property sector, we expect that it will be stocks with greater operational or financial gearing that will continue to suffer more than those that are less geared.
NH: Time to consider reversing preference for central London offices. It appears to us that central London office plays are ‘priced for perfection’ and that the consensus has forgotten about downside risks to tenant demand – history shows that investment banks can switch rapidly from hiring to firing when there is a downturn in capital markets.
NH: Germany remains our preferred market in ‘core’ Europe…We favour the German property market within ‘core’ Europe because its economic and property cycles are least advanced amongst the major economies. However, our key concern here is that much of the upside is already discounted in property share prices.
NH: and Russia remains our favourite play in ‘emerging Europe’. We think that yield convergence is largely played out in central Europe but that there is still some way to go in Russia. However, development plays on this volatile emerging market are the ultimate ‘beta’ plays within the property sector and so we anticipate a two-way pull on share prices.
PM: Thanks for that
PM: The stuff on central London is fascinating
NH: the point about investment banks is well made
NH: they will fire loads of people in a downturn
NH: Hammerson now below £14
PM: Getting hammered
NH: do you think the company will be able to fill the old stock exchange tower it is renovating in a market downturn
PM: Who knows
NH: what about the new JP Morgan HQ they are building
NH: could that be pulled in a downturn???
PM: Hang on! We’re not forecasting overall market meltdown, are we?
NH: we are not, but those are some of the risks
NH: on my way to work I come past loads of speculative projects
NH: all of them see to be Minerva projects
PM: Hmmm
PM: Shares in Minerva down 8.5 at 352
NH: still not everyone had given up on the sector
NH: HSBC reckons there is some value in the wreckage
PM: And HSBC have just sold their tower!! — on a ridiculously low yield!
NH: their analyst John Fraser Andrews has put British Land and Land Securities into his treasure trove, whatever that is
NH: unlike Morgan Stanley, he reckons central London offices offer exposure to robust global economic growth and protection against our revised forecast widespread outward yield movement.
PM: Maybe the West End — lots of Russian and Middle east demand
PM: But not so sure about the City and Canary Wharf
PM: Helen reckons there are 25 odd projects coming on-stream on the financial side of London — while the West End is chock a bloc.
PM: No square footage at all
PM: One other point — who is the US bank that has been taking on new space most aggressively of late
NH: bear stearns!!!!!!!
PM:
NH: Well Pau,l you will be pleased to hear that there has been a bounce in the Northern Crock share price
PM: Not so crock this morning then
NH: shares up 10.5p at 839.25p
PM: That’s not much of a bouce!
NH: 
NH: not really
PM: Anyway what’s caused it?
NH: I am hearing that Cazenove has upgraded and one of the reasons is that Northern Rock could be a takeover target for Dutch bank ING
PM: ING, eh?
PM: Make any sense?
NH: not sure
NH: the only point I would make before anyone gets carried away with a bid story in Northern Rock is that it has a poison pill
PM: Of course it does
PM: Northern Rock Charitable Foundation
PM: The charitable trust holds a special class of share, which entitles it to 5 per cent of group profits per year.
PM: but the important bit is that in the event of a takeover, this converts to an 18 per cent stake of the ordinary shares
NH: and that’s enough to put a lot of people off
PM: Any deal would have to be ultra friendly — like the Thomson Reuters link up
PM: Reuters has similar foundation
PM: do we have the Caz note??
NH: working on it
NH: all in all I reckon a takeover of NRK is unlikely
NH: still it can’t be dismissed totally out of hand
PM: Why not?
NH: ING Direct does have a lot of retail deposits (something NRK may need if funding becomes a problem).
PM: Fair point
PM: And it looks from this week’s profit warning that funding could well become a problem
NH: yes, it does
PM:
PM: Anything else moving?
NH: BT
NH: they have been marked 4.25p higher at 333.25p in the wake of some bullish comments from chief executive Ben Verwaayen
NH: he told Bloomberg that BT would do beat analysts’ sales forecasts
NH: hang on I’ll get the exact quote
NH: “We are absolutely confident that we will do better than most people think.”
PM:
PM: Have we got a response yet on Isoft — for aecurb?
NH: our merg/arb contact says - yes, the spread is very wide
NH: but there could be a couple of reasons for this
NH: 1.very little borrow in IBA stock
NH: 2.Difficult to hedge as stocks are not open at the same time
NH: Deal looks to still need OFT approval btut I doubt that is the reason – there could be some jitters as it was previously a hugely risky deal
PM: Good point — no2
NH: hope that clears things up
PM:
PM: Just going to thru up an extract from Albert Edwards weekly strategy note
PM: He’s the top top guy at Dresdner Kleinwort
PM: great writer and perennial bear
PM: Warren Buffet said “Only when the tide goes out do you discover who’s been
swimming naked.” As the US housing tide recedes, the skinny-dippers are racing
up the beach to find their beach-towels. But this is not a crisis driven by the US
sub-prime mortgage debacle. The housing slump guarantees this is a generalised
mortgage crisis. Sub-prime has just been exposed first. Buy beach towels.
PM:
PM: helen’s going to do a full post on his note after lunch — so come back to read it!
PM: Right — we are going to wrap up now. Neil’s got a lunch and i have MY LAST EVER LUNCH AS A SMOKER
PM: Mr Tony has told me to give up smoking — so that begins tomorrow morning
NH: where are you having lunch???
PM: Somewhere reassuringly expensive
PM: Just noticed fxtrader’s arrived
NH: such as??
PM: Sheekeys
NH: very nice
PM: Thanks for stuff on currencies
PM: And also FXtrader — Helen says thanks for your supportive comment on her past about PE/MPs and the Banks
PM: I mean “post” not past
PM: 
NH: also we are running a very funny email on the site this morning from a disgruntled JPMorgan employee
NH: worth checking out
PM: yes — lots to read on the home page this morning!
PM: We’re off — thanks for joining — Do come back at 11am Monday
NH: have a good weekend.
