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Markets live chat transcript for the chat ending at 11:59 on 5 Sep 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)

PM: Good morning and welcome to Markets Live – FT Alphaville’s daily markets commentary.

PM: Neil Hume is with me

PM: I know he’s keen to jump straight in to a particular market feature this morning

PM: But first a quick request — if anyone gets detail on the libor fixing 3m this morning, do post a comment

PM: We find the interbank lending market SOOOOOO interesting at the moment

NH: morning

PM: Right — i know you want to visit the property sector again Neil — and this time it is not to do with Jack Petchy

NH: yeah. had a statement from Land Secs 20 mins ago

PM: This is in reaction to a story in the telegraph this morning?

NH: yep. they said the company had launched a strategic review

PM: Wot does that amount to?

NH: i’ll paste the statement

NH: Land Securities announces that it is conducting a review of its business
structure. The review is well progressed and the Company will provide a further
update once the review has been completed and any decisions, as appropriate,
have been made.

Francis Salway, Chief Executive, commented: “It became evident to us in the run
up to and following REIT conversion that we should test our current business
structure against alternative options to ensure that we have the optimal
structure for creating long term shareholder value.”

PM: Hmmm. Telegraph was earlier saying that this review might lead Land Secs to be broken up

PM: In particular mentioned its Trillium sale and leaseback division, which might be hivved off

NH: the question some traders have been asking me is Land Secs doing this because it feels vulnerable to a bid??

NH: its discount to NAV must look tempting to a long term investor

PM: Possibly — discount sitting circa 25%

PM: Well it was — before a hike in the price this morning

NH: one of these sovereign wealth funds could decide that land secs is a better bet than holding US treasuries especially as the dollar is weakening

PM: Good point — but the price has not run away — Land Secs currently up 28p at 18.55

NH: that’s because the story is not entirely new

NH: this rumour has been doing the rounds for a while

PM: Sure

NH: this is what Jim Pickard our property correspondent wrote back in August

NH: Land Securities move prompts rumours of split - JIM PICKARD PROPERTY.
By JIM PICKARD
715 words

NH: By this time next year Land Securities will no longer exist. Britain’s biggest listed property company will have been torn in two.
That, at least, is one rumour. Apparently no decision has been reached beyond January, when the group becomes a real estate investment trust (Reit). But there is no doubt that Land Secs’ management is looking carefully at its structure beyond that point.

NH: Splitting the company into a) retail property and b) London offices is, at the very least, an option for chief executive Francis Salway and new chairman Paul Myners and their team. The third leg of the business, outsourcing group Trillium, could be hived off or thrown into either pot.
The argument for such a set-up has been well-rehearsed by some analysts; not only for Land Secs but also for British Land - where the jungle drums suggest chief executive Stephen Hester is keen on a split - and Hammerson.

NH: Many existing property companies are, as Forrest Gump might say, like a box of chocolates. You might like their retail parks and London offices (hazelnut whirls) but dislike the secondary shops (coffee creams). Next year that may reverse.
By focusing on a single sector, a Reit allows shareholders to mix the type of property they want to invest in. With retail falling out of fashion, you could just have access to Land Securities’ impressive development schemes in London without exposure to everything else.

PM: Hmm. The ceo of Land Sec was talking about the market returning to “equillibrium” back in May

PM: Equilibrium can clearly be rather uncomfortable

NH: hang on Jim has just put a story up on the web

PM: Ta for that — on ft.com

NH: Paul Myners, chairman of Land Securities, has hired Citigroup to look at various options for the group including a potential break-up.
Shares in Britain’s largest property company are down by about 21 per cent since the start of the year in line with most of its bigger peers, reflecting anxiety about the future direction of the underlying market.

NH: Splitting up Land Securities into three parts - retail, London offices and Trillium, its outsourcing business - has long been an option for the group. The FT reported rumours last summer that Francis Salway, chief executive, had come within inches of ordering a break-up of the business.

NH: Mr Myners, who became chairman in January, said in March that he was “open-minded” about the possibility of separating the group’s divisions.
At the same time, however, he said that “I am not persuaded that the argument for specialisation is as strong as some of its protaganists might suggest.”
However, it is thought that the group’s falling share price has prompted a rethink by Mr Myners, who has asked Citigroup to provide an informal review of the company’s strategy.

NH: Land Securities is currently trading at a discount of 17 per cent to its last stated net asset value from May.
Some analysts believe that investors tend to undervalue Trillium.
There is also an argument that its London office business, which has a large development pipeline, should be trading more closely to NAV given how strongly rents are growing in the capital.
But that is not necessarily true of the retail business, as Harm Meijer, analyst a JP Morgan, pointed out this morning.
“We do not believe that Land Secs’ retail portfolio would trade at a smaller discount to NAV than the company does currently,” he wrote.
Mr Meijer said that a break-up of the group “would not make sense at this point” because its diversification would be a strength in a downturn.

PM:

PM: Right — we should switch sectors — swiftly

PM: To the banks — where Northern Rock has been getting crocked this morning

NH: yep. Northern Crock under pressure

PM: Was off 4 per cent a couple of moments ago

NH: now down 25p at 707p - that’s s fall of 3.4%

PM: What’s going on –

NH: someone must have seen the new Libor fix

NH: yesterday’s fix was 100 basis points over base rates

PM: Assumption that Northern Rock is having real problems financing itself in the money markets currently

NH: yep and every time Libor goes up it hit margins and makes another profits warning even more likely

PM: We’re just having a run thru the flashes taht are coming up on our reuters machines …. bear with us a mo

NH: these are the new reserve limits from the BoE

NH: and it does not look like they are going to do much to bail out the market

PM: Stands ready to offer extra reserves of 25% of reserve target on Sept 13 if overnight rates high

PM: But reserve target is only 17.6bn

NH: yeah but here’s the important quote

NH: Measures are not intended to narrow interbank lending spreads

PM: Ah, yes

PM: Bank indicating it is not unduly concerned by 3m Libor

NH: but to be fair the BoE is saying that its objective over the coming months is to have overnight rates close to the level set by the MPC on Sept 6

PM:

PM: Right — so how has all this effected the wider market

NH: well, the FTSE 100 is down 17.3 points at 6,359.5

PM: What is under particular pressure?

NH: well obviously the banks

NH: and also Tate & Lyle

PM: Really — what’s wrong with sugar in this market?

PM: I notice the price is down 15p at 547 — a fall of 2.7%

NH: from what I am hearing a few hedge funds are shorting the stock this morning

PM: what because of the rising corn price?

NH: yep that seems to be the angle

NH: Tate is exposed to rising corn prices through it’s a number of its divisions

NH: Food ingredients and starches I think

NH: Tate makes high fructose corn syrup which is a key ingredient in soft drinks

PM: Right, so the corn price rise must be quite a worry

NH: yep and Tate have already unleashed one monster profit warning this year

NH: anyway here’s what we wrote on our markets page about wheat this morning

NH: Wheat prices broke new records on both sides of the Atlantic yesterday, forcing producers to increase bread prices.

NH: Premier Foods of the UK raised the price of its Hovis loaf and warned further increases were likely.
Fears over possible export restrictions in Russia and growing concerns about the prospects for crops in the southern hemisphere were responsible for the price gains. Analysts in Australia predicted significantly lower production than the last official estimate of 22.5m tonnes.

NH: “Drought-like conditions (currently) are eerily similar to those of last year as we enter the critical crop heading stage when Australian wheat production was cut in half,” said Gavin Maguire, of Iowa Grain. “Further (price) rallies are in store if solid rains do not fall in the coming weeks.”

NH: In Chicago, the September contract increased 44 cents to Dollars 8.11 a bushel, a record. The most active CBOT December wheat contract rose by its 30 cent daily trading limit to Dollars 8.05 1/2 a bushel.
“We have to say that we simply don’t know where the high will be,” said Toby Gorey, commodity strategist at Commonwealth Bank of Australia. “Current trading in the wheat market is not about price or any notion of intrinsic value. Virtually no-one wants to sell and each time the price steps higher, the fear of selling grows. Wheat at Dollars 8 a bushel might be ‘ridiculous’ but there’s no reason why prices can’t go on to rise to ‘absurd’ or even ‘crazy’ levels.”

NH: European wheat prices continued to trade at record levels yesterday. French November milling wheat futures jumped 6.8 per cent to Euros 285 a tonne, its highest price since the contract was launched in 1998.
Wheat’s strength dragged other soft commodity prices higher as farmers are expected to switch into cheaper alternatives for animal feed.

PM: hmmm. Seems like the price is headed only one way

NH: u

NH: up

PM: While tate head down — off 2.6% currently

PM:

PM: What else is moving?

NH: well today seems to be all about stuff you can dig out of the ground

NH: Mining and oil stocks in demand after big pushes from Merrill Lynch and Morgan Stanley

NH: and strong gains in those two sector has helped prop up the FTSE 100

PM: I see where you mean…

PM: Vedanta …. Lonmin …. Anglo … Fags…

PM: All up between 1.5 and 5% this morning

NH: so do we want to have a look at the notes responsible for the gains??

PM: We do — which house is it?

NH: here’s the ML stuff on miners

PM: Cheers

NH: We are upgrading our long-term price forecasts for aluminium (+19%), copper
(+20%), nickel (+45%), zinc (+4%), lead (+16%), thermal (+21%) & hard coking
coal (+28%) based on incentive pricing analysis. These upgrades are driven by
our view that the capex required to build, and opex required to produce from new
operations continue to increase substantially across the industry vs 2 years ago.

NH: Producers continue to alter long-term price protocols in order to justify projects.
Most believe >25% of cost increases experienced over the last 4 years are
structural in nature and unlikely to be removable in the longer term.

NH: Higher long-term prices don’t always mean higher margins
We have analysed the impact of higher long-term prices on EBITDA & EBIT
margins of major metals and coal companies, comparing 2013 margins vs 2004.
The lowest cost producers of each metal generally see margin expansion by
2013. Conversely, higher cost producers can experience margin contraction. This
increases our “comfort factor” – that we have not been excessive in the changes.
In fact, the results suggest that there is still upside risk in our prices.

NH: Which companies experience the greatest NPV upside?
Stocks we have upgraded to BUYS on this report are: Alcoa, Alumina Ltd,
Century Aluminum, Grupo Mexico, Norilsk Nickel & Eramet, while upgrades from
Sell to Neutral include PCU, KGHM, Kazakmys & Antofagasta. We retain a
Neutral on BHP, but would look to review our recommendation on this stock when
it reaches +5% over NPV at

PM: Goodness — thsoe long term upgrades for copper and aluminium look punchy

NH: they do and the Morgan Stanley note on oil is equally as aggressive

NH: here it is

NH: Mid-cycle oil prices increased to $65/bbl …
We are raising our long-term oil price forecast to $65/bbl
WTI (previously $55/bbl). Our 2007 and 2008
assumptions have also been raised to $65/bbl
(previously $60/bbl). For a full explanation, please refer
to Doug Terreson’s note published today entitled
Raising Oil Price Forecasts.

NH: … but we also factor in a weaker dollar and higher
costs. We are also incorporating into our new
estimates a weaker dollar and higher costs to reflect
further tightening in the service industry.

NH: E&Ps: This group is the biggest beneficiary of the
mid-cycle oil and UK gas price upgrades. NAVs are
raised by between 4% and 23%. Our top picks are
Tullow and Soco.

NH: Attractive view on Energy: Before the recent volatility
in equity and oil markets, we argued that Energy was
fundamentally undervalued. We see no reason to
change this view. Our order of preference is for the
Oilfield services, E&Ps and some of the more leveraged
mid-caps. The Supermajors should also outperform the
market, buoyed by the return of operational momentum
and as the market discounts higher normalised prices.

PM: Right — thanks v much for that

PM:

PM: Right –let’s get back to libor for a mo

PM: You know i am a little obsessed by this at the mo

NH: have we had a fix yet??

NH: Libor addict

PM: No — but I’ve got a 9am quote here which says 6.61% for 3m

NH: but that’s not official?

PM: No — but it indicates the pressure has come off just slightly since yesterday

NH: hmmm. doesn’t seem to be helping the share price of Northern Rock though

PM: It doesnt

NH: just had a some good comments in from Capital Economics on the BoE reserve stuff we were talking about earlier

PM: What they saying?

NH: well, their view is that the BoE has addressed liquidity worries this morning but not credit risk

PM: Interesting — more to add?

NH: here’s the comment

NH: The Bank of England has taken action this morning to address the liquidity problems in the inter-bank market. As expected, the target for the reserves banks choose to hold at the Bank over the next month has risen (by around 6% from last month). This gives the banks greater scope to effectively borrow at the repo rate of 5.75% rather than market rates or the Bank’s standing lending facility rate of 6.75%

NH: But the Bank has also said that banks can boost their reserve targets at its open market operations on September 13th, without being penalised for doing so as they normally would. These measures fall short of the Fed’s decision to cut its discount rate but should help to bring very short-term (e.g. overnight) interbank rates back in line with the repo rate of 5.75%

NH: Crucially, though, the Bank has stressed that these measures are NOT intended to, nor can be expected to, address the level of interest rates at longer maturities (e.g. 3 months), which are a reflection of credit risk, not liquidity problems.

NH: It seems likely that these rates will remain elevated until wider concerns over the US sub-prime crisis and associated credit issues start to ease. We expect that to happen gradually over the coming weeks, but the longer they remain at current levels, the greater the potential effect on the economy and monetary policy.
Jonathan Loynes.

PM: Hmm. Thanks for that

NH: so Capital Economics are saying that these moves will not help bring down 3-month Libor prices

PM: letting the banks — and by extension the swaps market — sweat

NH: actually this could be quite smart

PM: Go on

NH: well, some people take the view that lettting three month libor rise is the same as a rate rise

NH: so the BoE is taking froth out of the market but it is not doing it by killing the consumer with rates rises

PM: Yes — interest point

PM: There’s also the stuff that our colleague Gillian Tett was saying this morning…

PM: But the Bank of England has refused to implement emergency measures, arguing that this would create longer term moral hazard in the system.
Some senior officials remain vehemently opposed to anything that might be perceived as a “bail out”.

PM: However, the Bank has at least two potential weapons under its monetary policy framework.
One is to modify the bank reserve targets, in effect forcing them to stand ready to handle more cash; another is to narrow the gap between its overnight standing facilities and the overnight rate - in effect, making it cheaper for banks to raise emergency funds. The Bank may try to use some form of this first step as early as today, in the course of its regular consultation process

PM:

PM: This volatililty has not been bad for everyone

NH: no. Icap seem to have done very well out of it

PM: Michael Spender is never adverse to a bit of publicity is he?

NH: h’s no backward in coming forward

PM: What news from him this morning?

NH: the company experienced record volumes in August

PM: Should point out here that ICAp is the worlds’ largest money broker

PM: the accent being on broking — it does not have big principal positions — agency

NH: here are the facts and figures

NH: ICAP, the world’s premier interdealer broker, experienced record volumes in August in its electronic broking products against a backdrop of volatile global markets.

NH: ICAP’s electronic broking platforms EBS and BrokerTec traded a record of approximately $1.3 trillion ($1,275 billion) on Thursday 16 August, an increase of almost $200 billion above the previous record ($1,077 billion). This was followed by $1.2 trillion ($1,218 billion) on Friday 17 August. Average daily volumes on EBS and BrokerTec in the month of August reached $945 billion, an increase of 51 percent on August 2006.

NH: Spot FX on ICAP’s electronic broking platform EBS reached a record level of USD $456 billion on 16 August, surpassing the previous record achieved on 27 July of $311 billion by almost 50 percent. This record volume was almost three times as high as the average daily volume in the first half of 2007. This was followed on 17 August by a new second highest trading day of US$ 411 billion. Average daily volumes on EBS were strong throughout August at approximately $240 billion per day.

NH: Electronically traded fixed income products – U.S. Treasuries, European Repo and US Repo - also reached a new record of $819 billion on 16 August, breaking the previous record of $809 billion. Average daily volume in these products in August was $703 billion, an increase of 42 percent on August 2006.

PM: Thanks for that

PM:

PM: Just looking at the comments below — interesting from OJ on Lehman

NH: yeah, we were just about to come to that

NH: particularly bearish on Northern Rock and bradford & bingley

PM: Hmm

NH: here’s the stuff on Northern Rock

NH: Higher wholesale cause significant uncertainties over the group’s direction and earnings power. We see little
fundamental support for the shares without the prospect of a reopening of asset backed wholesale funding
markets. We are therefore downgrading our recommendation to 3-Underweight.
􀂃 Wholesale funding costs have risen by some 40bp over the past month. In addition, there are uncertainties
over the likely liquidity of asset backed markets even at higher spreads.
􀂃 Wholesale funding represents 65% of the balance sheet and we estimate that funding representing 18% of the
balance sheet needs refinancing within 12 months.
􀂃 The Base-libor gap has widened to over 90bp. Some £15bn of the balance sheet is exposed to this gap

NH: and here’s he bit on B&B

NH: Uncertainities in asset backed markets and rising wholesale funding costs are likely to affect earnings within the
sector and specifically at Bradford and Bingley. We have incorporated the effect of higher funding and
securitisation costs and lower wholesale revenues across our coverage universe. The resulting changes to our
estimates for Bradford and Bingley reduce EPS in 07 by 1.3%, in 08 by 5.6% (compared to an average
downgrade of 5% to 08 EPS across the sector) and in 09 by 9.7%. We are downgrading our recomendation to 3
Underweight and revising our price target to 467p.
􀂃 Please see our sector report released today for detailed comments on earnings impact of recent credit market
uncertainities and our preferences within the sector as a result.

PM: Ok — thansk for that

PM: On ABN for C&C ……

NH: good piece on breaking views this morning

PM: What did that say?

NH: well it was in response to these scare stories about the RBS consortium lowering their offer

PM: This was the idea that RBS might be able to claim a material change clause to cut the price they might pay

PM: Widely scotched

NH: yeah but these MAC clauses are a) standard and b) nortiously difficult to trigger

PM: Sure

PM: Notice that someone from the RBS camp was being quoted by Spanish media this morning say it is way to premature to talk about re-setting the ABN takeover price

NH: i suspect barclays are trying to stir it all up

NH: i mean Bob Diamond was telling the papers at the weekend that barclays had been prudent in using a lot of stock in their offer

PM: Oh, yes — that was a hedging strategy!

NH:

PM:

NH: makes us laugh every time we read that one

PM:

PM: Right, lets move lower down the equity market

NH: good idea

NH: got a research report on a company you hate

PM: what is it??

NH: moneysupermarket

NH: note has been published by Credit Suisse, which brought the price comparison website to the market

PM: so it should be objective

NH: now, now Paul. These big banks have Chinese walls you know

PM: of course they do, how silly of me to forget

NH: do you want me to paste some??

PM: Go on

NH: Scarce Internet story-Moneysupermarket.com Group plc (MSC) is a leading UK online price comparison company that has
recently listed. In our report we initiate coverage with an Outperform rating, target price 190p.

NH: • Exceptional growth prospects, in our view, and high profitability-Revenue grew 54% in 2006 and 67% yoy in Q1 2007. We forecast 45% revenue growth in 2007 and 30% in 2008, driven by structural growth in broadband penetration, Internet usage,
price research online, e-commerce and online advertising. We think there are also opportunities to capitalise on the scalability of its business model into other ‘verticals’ and internationally. The company is profitable, generating an adjusted EBITDA
margin of 31.6% in 2006; we forecast 31.0% in 2007, reaching 33.4% in 2011.

NH: • Catalysts: successive earnings releases-We believe the company’s future earnings releases, beginning with the 2007 H1 interims on 19 September, will convince the market that (i) the company is not overly vulnerable to tightening credit markets;
(ii) there is significant growth potential in the price comparison market in general; (iii) MSC’s leading market share is sustainable; and (iv) the business model has high operational leverage.

NH: • Valuation undemanding-We value MSC at 190p per share, suggesting 23% upside potential from the current share price. We base this on a 2008E EV/EBITDA range of 14-16x, derived from comparable multiples. This translates into an equity valuation
range of £905m-1,031m, with a mid-point of £968m, or 190p per share-our target price for MSC. This valuation is supported by our DCF valuation range of £1,131m-1,713m, with a central case of £1,352m, based on a WACC of 9.2% and a perpetuity
growth rate of 5% from 2011E.

PM: hang on. What price did this thing float at??

NH: 170p late in July, just before the meltdown started

NH: that was right at the bottom of the 170p -210p

PM: Really. But Credit Suisse only reckon it is worth 190p a share

PM: Where are the shares trading at the moment??

NH: up 4.5p at 158.5p

PM:

PM: Very briefly ….

PM: back to libor — thanks to HeartAttack below

NH: been fixed at 6.8%

NH: up slightly from yesterday

PM: jsut slightly at 6.8

NH: Northern Rock and B&B not taken the news well

NH: NRK down 30.5p at 701.5p

NH: B&B off 12.75p at 370p

PM: HeartAttack — does your name derive from the splash headline in today’s FT?

PM: “Acird test for ‘heart attack’ markets”

NH: Alliance & Leicester also being dragged down

NH: off 32p at £10.26

PM: We could only think of Gaviscon

NH: or Rennies

PM: And we note fxtrader’s ref to zopa.com

PM: This one of those peer to peer lending outfits

PM:

NH: don’t think we are going to go there

PM: Not yet — my credit lines are still open

PM: unlikes north….

PM:

PM: Right, before we finish up…..

PM: Notice trading has kicked off in Sport Media Group today.

NH: This is the company that has just taken over ownership of the Daily Sport and Sunday Sport newspaper from the Gold Brothers

NH: And glamour publisher David Sullivan sold placed his stock.

PM: Hmm. Daily and Sunday Spurt.

NH: Don’t go there Murph!

PM: Aliens turned my son into an olive

PM: Aliens drowned by my son in a martini

NH: All true stories, you know

NH: You should try the same approach to headlines on Alphaville

PM: Wot, Banker Turned Prime Variable Housing Loan into Toxic Lump?

NH: And that really is true.

PM: Swaps Broker gets Spanked after Subprime Sweatout

PM: Call that a Hair Cut!

PM: “You’re restructured!” Ms SIVstress scolds weeping City bod

PM: Banker caught wearing BarCap!

PM: Repo man reaps the Grim Repo Man

NH: Oooh, subtle one.

NH: i’ve got one

NH: Bob Diamond says theres plenty of liquidty in the market

PM: Oh don’t be stupid – who’d believe that story

PM:

PM: Anyway, whats this Sport Media Group actually done, stock price wise.

NH: Spurted 1.5p to 71.5p

NH: Sprinted, sorry

PM: Right — on that note we are off.

PM: Thanks for joining us today. And thanks for the comments

PM: Neil and I will be back tomorrow at 11am for the next edition of Markets Live

NH: see u tomorrow