Markets live chat transcript for the chat ending at 12:00 on 6 Sep 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to Markets Live, FT Alphaville’s daily markets commentary
PM: Neil Hume is with me.
NH: morning
PM: Lots and lots to get through this morning.
PM: Some of it v funny — i can tell you
PM: Where do you want to start, Neil?
NH: At the fun end
PM: 
PM: So that will take us directly to the sticky end of the oil and gas exploration sector, I presume
NH: Directly
NH: Do not pass go
PM: Do not pass go
NH: We have a new Regal Petroleum ladies and gentlemen
PM: really, that’s great! — think VP is on the ball below
NH: yep. its max pets and has VP says just two weeks after a huge share price fall promopted the company to say everything was fine, it has been suspended by the Aim team at the London stock exchange
PM: MXP — Max Petroleum
PM: ah yes. You have mentioned this a few times
NH: I have
NH: Oil exploration company focused on Kazakhstan and a BIG and I mean BIG punters favourite
NH: There have been huge CFD positions built up in this stock since it floated in October 2005
NH: and like Regal Petroleum this stock has had one hell of a run
PM: So what’s happened this morning? Why is being called the new Regal Petroleum
NH: well just two weeks after the all clear statement the company has suspended its chief executive Chief Executive Officer, Steve Kappelle, and Chief Operating Officer, Ole Udsen
PM: 
PM: what for?
NH: some sort of share options scandal
NH: here’s this morning’s statement
NH: The Company announces that it has suspended its Chief Executive Officer, Steve Kappelle, and Chief Operating Officer, Ole Udsen, pending an investigation into potential breaches of their employment contracts involving the undisclosed receipt of share options. The scope of the investigation, however, will not be limited to these matters.
PM: Oh, the last line is a bit of killer — what ARE THEY SAYING?
PM: the scope of the investigation, however, will not be limited to these matters
PM: 
PM: 
NH: yep and who really knows what that means or what the situation is on the ground in Kazakhstan
NH: hang on here’s some background on the two suspended guys
NH: Ole Udsen – Chief Operating Officer
NH: Ole has more than 16 years of experience in domestic and international oil and gas, upstream and downstream. Before joining Max Ole had been Deputy Managing Director of Maersk Oil Kazakhstan GmbH since 2001, taking the leading role in general management, government relations and legal and administration matters. Prior to taking up this position Ole had worked for Maersk Olie og Gas AS in Denmark and Maersk Oil Qatar AS in Qatar. He is a member of the Association of International Petroleum Negotiators and the Kazakhstan Petroleum Lawyers’ Association. Ole graduated as a Master of Law from Copenhagen University in 1990.
NH: Steve Kappelle – Chief Executive Officer
NH: Steve Kappelle, aged 42, was appointed Honorary Australian Consul for Kazakhstan in 2004 and has been based in the Middle East and Central Asia for 20 years. From 1990 to 1995 he worked for Shell in Dubai where he held several managerial positions including Business Development Manger for the region. In Kazakhstan he has worked closely with government oil companies and in 2001 was instrumental in establishing the governmental crude swap agreement between Kazakhstan and Iran. Subsequently with the government and in private organizations based in Kazakhstan, he was responsible for co-ordinating the multi modal export over 4,000,000 tons of crude oil from Kazakhstan. He has an honours degree in Economics from the University of Western Australia.
PM: Hmm — honary consul Kazakhstan
PM: So, presumably the stock has cratered on the news
PM: Serious serious serious
NH: unfortunately the sweet smell of burnt fingers has not been watfing across the Thames from the City this morning
PM: ????
NH: the stock exchange has deprived us all of some fund and games
NH: they suspended the stock
PM: Aaaaaah
NH: But there were a few early trades that went through, which I think have since been cancelled
NH: they seemed to indicate a price of 70p
PM: where did Max finish last night??
NH: 110.5p
NH: I suspect when they relist the shares they won’t trade at 70p for long
PM: Er, no
NH: I reckon there will be loads of forced selling
PM: Marginitis — pandemic
NH: will probably hit its sister company Roxi Petroleum, which is also suspended at the moment pending news of a reverse takeover
PM: hang on !!!!
PM: Are you kidding me here ! — Roxi Petrolum!!!!
NH: they are named after the children of a company founder
PM: right
NH: apparently this guy was a top prop trader at a big German bank
PM: Hmmmm
PM: So what do we think Mssrs Kappelle and Odsen are accused of?
NH: as you can imagine there are plenty of rumours flying round the market
NH: one story is about forward selling of stock and options being excercised
NH: however, that does not seem to tally with this morning’s statement which talks of undisclosed receipt of share options
PM: Some sort of problem with admission documents
PM: Which is where you would disclose this sort of stuff
NH: the other rumour is that this is all about a power struggle between Kappelle and the executive chairman Jim Jeffs
NH: and that the investigation will bring up nothing
PM: What a fantastic mess
PM: Who floated Max?
NH: Looks like it was Nabarro Wells & Co. Limited.
PM: Hmmm
PM: Individual??
NH: i think you know him
PM: Ah….
PM: anything else to say?
NH: well, I think it is worth pointing out to the readers just what a ‘success’ story Max had been before today’s news
PM: Good idea
NH: shares enjoyed an incredible run since based largely on the fact that management seemed to have great contacts in the Kazakh government and had managed to get themselves some very interesting prospects
NH: couple of its deep well prospects were said to have the potential to be world class
NH: while the company boasted its shallow wells would provide cash to fund its exploration activities
NH: shares listed at 30p in October 05
NH: they hit 207p in July 07, which valued the company at a staggering £670m
NH: not bad for a company that has only produced a tiny amount of oil for the local market
NH: along the way the company attracted interest from some big brokers. Cazenove for example cover the stock
NH: in fact they are joint broker
NH: one broker recently said a risked exploration estimate suggested a share price of 430p
NH: although it did qualify that by saying a discount of 50% was warranted
PM: Oh — that’s helpful
PM: this really is Regal mark II
NH: its uncanny
NH: anyway the dream now looks over
PM: Any feed back from the company/ Advisers?
NH: no but the message coming from the company’s advisers is that the chairman has taken over, there is no problem with the Max’s licenses in the country and results will come out tomorrow
PM: Those wil be interesting
NH: and hopefully the shares will be relisted and then the fun and games can really begin
PM: 
PM: 
PM: Quick appeal — any readers got a Libor fix ??
PM: Only ask since the banking sector is being hammered at the moment
NH: yep Northern Crock in particular taking another battering
PM: What’s it down currently?
NH: off 14p at 679p
NH: can’t be too far off the lows seen at the height of the August melt down
PM: RBS, Barclays both showing falls of 2.6%
PM: Worth throwing in that Standard chartered announced they had lost their head of risk this morning
PM: That cant have helped sentiment
PM: Also, as VP notes below, China has raised reserve requirements for its banks
PM: latest attempt to cool things over there
NH: on the Standard stuff, think the guy has left for another for another job
PM: if that’s the case you’d think StanChart would mention it in their statement — given current market conditions
NH: anyway to the wider market
NH: FTSE 100 off 4.3 points at 6,266.4
NH: nig turnaround from earlier
PM: Was up sharply at 6327 at its height this morning
NH: plenty of scare stories doing the rounds
PM: There are
NH: further problems at Tribeca Global Investment
NH: that’s a Citigroup hedge fund
NH: talk of senior departures at CQS
PM: And there are many many others
NH: there are and the mood has turned very jittery again
PM: NONE of these rumours have been substantiated we should add
NH: no, they are all RAW market info
PM:
PM: At this point why dont we go to……
PM: let’s go Big Picture
NH: Big punt u mean
PM: Well…. THINK BIG says Teun Draaisma of Morgan Stanley
PM: THINK BIG
NH: We received a healthy amount of pushback on our call
from mid-August to start buying equities again. Pushback
is good. We know that we may well be on the right track with a
call, when we get a lot of investor pushback. It means we are
not consensual. Six to twelve months later, with the benefit of
hindsight, we know we will look very silly or very right.
PM: Yes, this is Morgan Stanley saying BUY BUY BUY
NH: Push back is good, eh?
NH: We see
12% upside to our 12-month target of 1750 on MSCI Europe,
and we recommend investors start building positions now, as it
is possible that there will not be a better entry point. Our bull
case, overshoot-type scenario, implies 21% upside from here.
Since the market troughed on August 16, MSCI Europe is now
up 7.7%. Our preferred sectors are Tech & Telcos, Healthcare,
Financials. Our least preferred are Consumer-related areas
PM: MS has put out a note defending / justifying its BIG CALL on equities
PM: This is great stuff from MS
PM: It’s so….
PM: So….
NH: bullish
PM: Recklessly so?
NH: Look, it’s a confident call!
NH: Here’s some more…
NH: Building the base for a mania? There are many risks at the
moment. But imagine that we get through this financial turmoil,
and an uptrend in equities resumes, as we expect. In this piece
we describe why we think that will be the case. If we are right,
then equities could be set for a big, big rally.
NH: Bulls will say that
this uptrend is unbreakable, after all the trouble that has been
thrown at it. “The cycle is dead”, and “this time it’s different” will
be heard all over the place.
PM: WOT!?! This time is different will be heard all over the place. ?????
NH: Go on, say it – old timer!
PM: I will !
PM: This Time It’s Different
PM: THE FOUR MOST EXPENSIVE WORDS IN HISTORY
NH: Well here’s some more from MS
NH: Emerging markets will be seen as
the new growth engine that cannot be derailed.
NH: This final leg of
the bull market will be characterized by all the things we have
not seen yet this decade, including big retail buying of equities,
big strategic M&A, an increase in corporate confidence leading
to a capex boom and multiple expansion in equity markets.
PM: Look stop it. This guy’s on happy pills.
NH: Great read, innit?
NH: There would also be a real mania in certain concept stocks,
probably mostly in those related to commodities, infrastructure
and emerging markets. Remember that it was only after the
1998 correction that the likes of Nokia and Ericsson went to 70 times PE multiples
NH: But he adds – specially for you…
NH: Of course, it won’t be different this time,
and as always it will all end in tears, eventually, probably when
higher inflation and rates lead to the next recession. But if we
get through the current financial crisis, it is highly likely that the
next phase in equities is a mania of epic proportions.
PM: A mania of epic proportions.
PM: This stuff is just fabulous
NH: But look – he also sees a downside….
NH: The bearish extreme: equities will be down more than 50%
in the next recession! Timing of that next recession is
everything, but it will be horrible. We estimate that if the
recession starts today, equities could go down as much as
70%.
PM: 70%!!!!!!
NH: We do think, however, that of three
scenarios: mania, recession, or muddle-through, the
muddle-through scenario is the least likely.
NH: We recommend investors start buying equities. The
scenario we think is most likely is that this is a bull market
correction, and that markets will go to new highs before this bull
market finishes
PM: There is just so much of this stuff.
PM: To do Mr Draaisma justice …
PM: And to afford him enough rope…
PM: I’m going to do a series of longer posts a bit later on Alphaville setting out his thinking in detail.
PM: Then people can make up their own minds.
NH: so do come back and have a look. should generate plenty of debate
PM: it’s called Pushback, Neil
NH: sorry not debate PUSHBACK
NH: so come on readers lets have some PUSHBACK
PM: 
PM:
PM: Right — bear with us a mo — we are still looking for a Libor fix
PM: Looking at the comments below — we can come back to carpet right — but first lets go to Umbro
PM: UMB
NH: shares down 22.25p at 166.5p
PM: Ouch
NH: company has said this morning that 2008 profit will be hit by poor sales of England football shirts
NH: given the dismal performance of the national team I am surprised that the market had not factored that in
PM: Hmm. Who’d wear one
NH: anyway we are more interested in the impact on Sports Direct
PM: Ah yes — been a while since we visited our friend Michael
PM: Nice one VP — below — correcting our price
PM: market is currently quoting 116.5 in the middle for Umbro
PM: You can start correcting our spelling if you want
PM: But Neil what do you want to say about Sports Direct??
NH: well one Sports Direct’s biggest sellers are football shirts
PM: Of course
NH: company also has an exclusive deal with umbro
NH: now umbro are saying 2008 replica shirt sales are going to be below forecasts
NH: and remember 08 sees the European football championships
NH: so imagine what sales will be if england don’t qualify
PM: Hmm
NH: which has to be a very real possibility
PM: Got any analysts comment on this??
NH: got some stuff from Oriel Securities
NH: they have been amongst the biggest bears of Sports Direct
NH: The read across from the Umbro Interim results (those shares are down 18% first thing) is not a positive one for Sports Direct. Firstly there is the confirmation that the Umbro “store within a store” project will be rolled out to 180 Sports Worlds this year (don’t forget that Mike Ashley famously went on the record, saying that in-store “worlds” don’t work). Umbro also state that they think that sales of replica shirts will be below forecast in 2008. Sports Direct’s AGM on Monday should give us more colour on forecasts but we’d expect to be disappointed rather than dazzled. The valuation doesn’t reflect the risks to earnings and the shares remain resolutely a sell.
NH: In-store turnaround: on the first (of the two) occasions that Mike Ashley met (non-connected) analysts, he stated that he did not think that dividing his stores into “worlds” was a good idea…if customers want trainers, for example, they want to see all the trainers that are on sale retailed from the same place. Since then however, JJB and JD have pressed on with introducing nike and adidas specific areas in their stores (at the suppliers’ expense).
NH: And now Sports Worlds will have Umbro “Football Areas” in the stores. Volte face? You bet. This is clearly a Sports World response to the apparent success of the JJB and JD areas (the latter’s LFL has been stellar of late), but we really don’t think that Umbro is a brand that should be mentioned in the same breath as nike or adidas. We continue to fear that relationships with those two manufacturers are strained at best. Umbro simply will not pick up enough slack as a footfall driver.
NH: Umbro warning on replica kits: 2008 is a football championship year (the European Championships in Austria/Switzerland). Already Umbro is warning that it does not think that replica kit sales will match its initial targets for 2008. And this is before England have even qualified. If the unthinkable happens and England fail to get through then both Umbro and Sports Direct’s share prices will go in to freefall. Today’s news is bad enough anyway.
NH: SELL: the shares have performed disastrously since the float but have further to fall. We have no confidence in our forecasts and do not expect Monday’s AGM will soothe any nerves. 12p of EPS is at risk. A multiple of 10x could be too high. Either way the shares are going to 120p and below. SELL.
PM: Well that’s straightforward advice!
NH: Sports direct shares holding up. not sure the market has fully appreciated the read across here
NH: down 2p at 137p
PM: Interesting
NH: got an interesting bit of gossip about Ashley
PM: oh go on — do share
NH: Apparently the great man was in the Bllu Bambu club in Newcastle last week and proceeded to buy 150 pints for revellers to enjoy. He then left staff a £500 tip.
NH: he was also wearing a Newcastle United shirt
PM: v funnny — if true
NH: sure it is
PM:
PM: Moving straight to Libor again
PM: Thank you buketshopboy — fyi we use Reruters here and cant find the bleeding page
NH: we do have a Bloomberg but its two floors below in the old newsroom
PM: Stacy is just checking down there — she’s jsut got back in the office
PM: As for HipPriest…
PM: A Fall fan by chance?
PM: We are told that Libor is fixed at 10.50 — but there seems confusion as to when this is actually distributed
PM: And thanks Toonie!
PM:
PM: Right — we’ve been asked about miners — what have you got to say on this Neil?
PM: looks like you have started something Rio this morning
NH: it does
PM: Shares up 87 at 36.15 currently
PM: Traded as high as 37.50
PM: and that’s all seemingly on the back of your story that BHP Billiton and CVRD are working on a break up bid for Rio
PM: In this mornings paper
NH: whoa hang on there
NH: it was not a story, just a rumour
NH: and all I was doing was reporting it.
NH: don’t shoot the messenger
PM: yeah, yeah
PM: perhaps you could run us through
PM: Messenger
NH: right for the past couple of days there has been talk among market pros that BHP is working on a big a deal
NH: then we heard talk that CVRD were interested in getting involved in a break up bid
NH: now, there has been plenty of debate over whether this is possible
NH: because of competition problems
NH: bsaically, RIo, CVRD and BHP are the top three in iron ore
NH: so any combination of those three would lead to a big competition issues
NH: not everyone agrees with that line of thinking.
NH: some think CVRD and BHP could get round it by selling equity stakes in their iron projects
NH: in fact Citi published an excellent note on the possibility of a bid for RIo in June. In went in depth on the iorn ore stuff
NH: and the other thing to note is that BHP’s incoming CEO has been telling people that the company COULD spend up to $80bn on expansion
NH: but there are also some technical factors for today’s move in the Rio share price
NH: this went up on Dow Jones earlier
NH: Rio Tinto (RIO.AU) +3.5% at A$99.00 as spread traders
anticipate short squeeze. Rio Tinto PLC (RTP) stock recall likely to intensify
before next Friday’s Rio Tinto vote on Alcan bid. “Recalls aren’t happening yet
but are likely to happen ahead of the vote,” says senior institutional trader
at major U.S. brokerage. Tight stock borrow market should tend to support RIO
before Sept. 28 Alcan vote by holders of Australian listed shares. Rumor of
looming joint takeover bid from BHP (BHP.AU), CVRD (RIO) also helping RIO
outperform in face of weaker LME prices, though no details to this rumor,
traders don’t feel it’s likely any time soon. (DWR)
NH: and I also have a bit of reaction from MF Global on the rumour
NH: wanna see it???
PM: Er, sure
NH: Reason for Comment: Crystallising Value
• Rio Tinto shares up on take-over talk. Speculation of a potential joint bid between BHP Billiton and CVRD have
driven the Rio Tinto shares up by 3.5% in Australia;
NH: Do we believe in it? We believe in one thing and one thing only: Value. In this case, we see a SOTP even when
being unambitious of around 4,500p (see attached excel spreadsheet). We also see that the P/E remains attractive
NH: at 12.7x 08E, even when applying our 40% haircut of metal price assumptions from recent peaks. Through the cycle
the stock traded at around 15-16x on average. So yes, we could see a 20-40% probability of this deal
happening on the back of the value on offer;
NH: That said, BHP Billiton and CVRD would need to get their skates on and sort our a few ‘technical issues’.
The Alcan deal is set to close in 4Q07 and more likely in the first half of the 4th quarter. Also, the syndicate would
have to sort out the market share issues in iron ore;
NH: Trading/commodity prices also support Rio Tinto. With some 30% profit exposure to iron ore, 40% exposure to
copper and 9% exposure to coal (all pre Alcan), the Group is in all the right areas. The iron ore spot price in August
rose sharply, while the coal price is touching new highs around the world. Even copper is not doing too badly; and
• Rio Tinto shares remain attractive at least until the Alcan deal closes. To conclude Rio Tinto remains a solid
investment proposition in terms of value and trading/commodity prices, while speculation will continue to underpin
the share price or actually drive it up until the Alcan deal closes.
PM: Phew!
PM: Thanks for all that
PM: I was beginning to feel out of a job
PM:
PM: To Mark E Smith below — posing as HipPriest
PM: Thanks for that — you just beat Stacy
PM: Who has also informed us that we can simply type LIBOR into a reuters quote box and get the numbers
PM: But its one hell of a move from 6.8 to 6.8775 for 3m
PM: no relaxation in the money markets then
NH: hippriest don’t be so rude. we have not had an opportunity to talk about Ashley till today. so we thought we would include a mention of the 150 points story. This isn’t a sports/celeb blog in case you had not realised
PM: Oooooohhh
PM:
PM:
NH: Northern Crock still under pressure, down 25.5p at 668p
NH: that’s on the LIBOR news
PM: C&C — sorry we haent anything on AIM / BOI
PM: Bt will ask around
PM: We’ve got to go. Thanks for joining us today.
PM: We wil be back tomorrow at 11am
NH: bye