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Markets live chat transcript for the chat ending at 12:12 on 12 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: But he’s busy discussing Arsenl with Tony Tassell, one of our news editors

PM: ZZzzzzzzzzzzzzzzzzzzzzzzzzz

PM: Do get your comments up early — so we have some time to think of smart arse answers

PM: While we waiting I can tell yo that the FTSE 100 is off 16.5 at 6264.2

NH: morning. sorry i’m late got problems with our terrible email system

PM: Actually — he’s late cos he was discussing Arsenal

PM: Anyway — the Bank of England is the headline news this morning

NH: that’s not true

NH: its the email system. drives me mad

NH: its so random. one it works, the next its doesn’t

PM: Just noticed the comment about you having your chin strap on too tight

NH: the picture does me know favours

PM: No favours that is

PM:

NH: quite why they decided to snap me with my head a 45 degrees I have no idea

PM: Anyway, the BoE!

PM: People are chewing over this letter that has just been sent by Mervyn King at the Bank of England to the Treasury select committee.

NH: my email works. amazing!

NH: Hmm. Merv will not swerve, it seems.

NH: Playing hardball.

PM: Lovely prose though

PM: I am conscioius that in sending you this statement I am taking a snapshot of a fast moving situation with a long exposure camera.

NH: Gorgeous writing

PM: conscious — my misspelling

PM: Dont want him on the phone

NH: This seems a key quote

NH: Injections of liquidity in normal money market operations against high
quality collateral are unlikely by themselves to bring down the LIBOR spreads that
reflect a need for banks collectively to finance the expansion of their balance sheets. To
do that, general injections of liquidity against a wider range of collateral would be
necessary. But unless they were made available at an appropriate penalty rate, they
would encourage in future the very risk-taking that has led us to where we are.

PM: Read – Moral Hazard.

NH: And then this:

NH: If risk continues to be under-priced, the next period of turmoil will be on an even bigger scale. The current turmoil, which has at its heart the earlier under-pricing of risk, has disturbed the unusual serenity of recent years, but, managed properly, it should not threaten our long-run economic stability.

PM: So the banks can burn – for now.

PM:

PM: let’s got to the question below

PM: Yonathan — is that an uptodate libor??

PM: Think that is yesterday’s fig

PM: Right — but what about C&C??? makers of Magner’s irish Cider

PM: Rumours of interest from SAB??

NH: been in touch with the company’s this morning

NH: and they say there is nothing in it

NH: had no approach

PM: That’s the fell collar

PM: felt collar even

PM: got to try and get it together

NH: nonetheless shares up e0.27 at 6.17

NH: probably a dead cat bounce

NH: C&C has been a horror story in recent months

NH: couple of big profit warnings have decimated the share price

NH: down 48% in three months

PM: Blinking eck

PM: We should say that we continue to believe that the object of SAB’s desire is still Scottish & Newcastle

NH: yep

PM: Which brings us to Michiel’s question below on Carlsberg

NH: the view we are taking is that given the speculation and the comments made by various senior directors at Carlsberg the Takeover Panel would defo have been in touch with its advisers

PM: And so the absence of a statement indicates nothing is happening

NH: FOR THE MOMENT

NH: remember Carlsberg’s new CEO does not take the helm until the start of Oct

PM: Good point

PM: And an interesting point from rahodeb below on C&C —

NH: Yonathon check the date on the Libor quote - its the 11th

PM: He’s just said that!

PM: Sorry — Yonathon — we have a delay on the system from our end — typing wise

PM: So we have a few secs to stop libels being printed

NH: just had some raw market info

PM: This is good

PM: RAW — but entertaining

NH: concerns BAE Systems which is the biggest riser in the ftSE 100 at the moment

NH: the story is this

NH: BAE’s IR have been hitting the phones this morning

PM:

NH: they have been checking email addresses and contact names

NH: fund managers have also been callled

PM: V funny — The BAe Telegraph

NH: now there were rumours last week that BAE was poised to announced a eurofighter deal worth £20bn with Saudi arabia

PM: Tomorrow is the start of Ramadam — and the suggestion is that the company will want to get the news out quick

NH: should also point out the other factor driving BAE shares this morning is that company is in talks with the US DoD over a deal to supply 10,000 trucks

PM: The bulls — citing the charts — on this one are talking about the price breaking out of 478 and running as high as 570p

PM: But we should repeat — this is RAW market chatter

NH: very RAW

PM: Funny tho — just the sort of thing BAe’s IR would do — ring round to check contact details

PM: When you look at the company’s PR generally over the past few years

PM: Well…..

NH: you know they won an award recently

PM: Actually, you are right — didnt they hire a woman called Charlotte Lamkins (spell?) recently?

PM: From Bell Pottinger

NH: think they did

PM: Oh, I meant to tell you – some people are reading us and actually taking our advice.

NH: Wot? That sounds a bit dangerous.

NH: Who’s taking our advice?

PM: Warren Buffett, it seems.

NH: Buffett? Yeah right.

PM: No seriously.

PM: Given all the danger signs we’ve posted on China.

PM: Saying it’s a mega bubble – the bursting of which will bring this great bull market to a close.

PM: Well the Great Man – the Sage of Omaha – has been cashing out.

PM: Cashing out of China that.

PM: I think it was your statement this week – that you agreed with me on China – saying the Shanghai market stank.

PM: I think that just tipped him.

NH: Have you got any evidence for this???

PM: Yeah – it’s in an SEC filing overnight.

NH: Oh yeah?

PM: It is.!

PM: Look he’s sold 93m shares in PetroChina – taken $136n off the table

PM: The stock has doubled so far this year — and Buffett is taking his profits

PM: That said, he’s still got 2bn shares in the thing – just under 10 per cent.

NH: So he’s got a way to go.

NH: Wasn’t there some stink about PetroChina earlier this year?

PM: Yes, it’s linked in some way to Sudan – and there was a shareholder motion at the Berkshire Hathaway AGM to get Buffett to sell out.

PM: Supporting a corrupt regime, etc. But the resolution was rejected.

PM:

PM: Anyway — let’s get back to the London market

PM: What’s going on? What has caught your eye?

NH: Its pay day at Ashmore, the emerging markets fund manager

PM: Certainly is. News this morning of a big share placing by a non-executive director and a number of employees

NH: they are looking to offload 26.5m shares – that’s 3.4 per cent of the company through Goldman Sachs and UBS

NH: announcement was made alongside figures, which look OK

NH: not a huge surprise that some employees are looking to sell

NH: Ashmore has performed well since it floated at 170p last October

PM: So is this a sign the employees are nervous about the outlook for emerging market?

NH: well, in this morning’s results statement the company sound pretty confident

NH: say the recent meltdown has been triggered by events in the US and emerging markets have not been hit as hard

NH: seem to be pretty relaxed about the debt market as they claim their investments are long term

PM: Who do we think the non-executive director selling is??

NH: dunno but the non-exec’s are Michael Benson – he is chairman

NH: the others are Nick Land and Jon Moulton

PM: Jon Moulton, the Alchemy guy??

NH: Yep

PM: and how have Ashmore shares taken news of the placing

NH: not very well, off 13.75p at 241p – that’s a fall of 5.4%

PM:

PM: Just a quick bit of news forwarded by Andy Slade — news editor…

PM: (Bloomberg) — The European Central Bank loaned banks an additional 75 billion euros ($104 billion) for three months to reduce the cost of longer-term credit in money markets.

PM: So, while Mervyn King is sitting with his arms folded, the ECB has its cheque book open again

NH: the difference in the stance being taken by the ECB to that of the BoE is really quite striking

PM: Hmm. back to individual stocks….

PM:

PM: We had better look at ITV

NH: yes, Michael Grade has unveiled his long-awaited strategic plan this morning

NH: and it has proved to be something of damp squibb if the share price is any guide

PM: What’s it doing — the stock

NH: down 1.8p at 110.8p

PM: Pretty muted reaction then?

NH: I think the review is what most people expected

PM: So what’s Mr Grade’s vision for the company?

PM: Glancing at the statement….

PM: one of the most important things he saying is that ITV must be self funding

PM: Sorry — it is self funding

PM: ITV should be able to hold dividend, apparently

PM: That is despite Grade planning to increase in-house production from 54% to 75%

PM: ITV will develop it external content sales

PM: this all sounds pretty basic

NH: it does

PM: any news on current trading??

NH: Yep and the picture is mixed

NH: Looks slightly better in 3Q with ITV1 sales +2% vs previous target +1% though this is boosted by World Cup Rugby and Formula 1

NH: Figures for year to Oct, at -6%, which is not brilliant

PM: Broker comment?

NH: this is Lorna Tilban at Numis

NH: Michael Grade has released his long-awaited review and provided a trading update. We find the review coherent and eminently sensible and are pleased to note that it is self-funding, enabling ITV to hold its dividend. Encouragingly, advertising continues to firm. We had built a c.£20m cushion into our forecasts, but believe there is scope to upgrade our below consensus estimates this morning; we don’t expect a material move in consensus. We are firm supporters of the ITV turnaround, but believe this is largely discounted in the price.

NH: Trading: At the interims in August, ITV stated that ITV1 NAR was up +1% in Q3 while ITV plc NAR (including Multichannel) was up +4%. These growth forecasts have been revised upwards to +2% and +5%, respectively this morning.

NH: Forecasts: We left our forecasts unchanged at the interims pending the outcome of this review, with a c.+2pt improvement in NAR (from -9% to -7%) acting as a £20m cushion should ITV decide to increase investment. However, this morning ITV has stated that its new strategy is ‘self-funding’ and also that acquisitions/investments will be paid for by disposals of non-core assets. We therefore expect to raise our bottom-end forecasts (2007 £235m/4.2p, 2008 £255m/4.5p) though we do not expect a material change in consensus forecasts. We are supportive of the strategy, though on >20x 2008 EPS believe this is largely captured in the current share price.

PM: This is from Investec Securities

PM: Overall, at first glance, this looks positive with some more punchy revenue
growth plans, but only £20m new programme spend for ITV2 and the suggestion
that overall programme spend of c. £1bn will not rise.
􀂄 Clearly much will rest in delivery and whether drop through of incremental
revenue is as strong as it should be, but if so, longer term forecasts should
move up, though we already have some decent recovery assumptions in our
numbers.
􀂄 Our sense is that we will have to reduce 2008E forecasts by c. £20m but with
revenue payback by 2009E making subsequent numbers unchanged or even tweaked up slightly.

PM: So it seems Mr Grade still has a lot of work to do

NH: yep

PM:

NH: just had a call on Northern Crock

PM: Our favourite mortgage bank

PM: Synthetic financial house

NH: told there is a HUGE short position

PM: Stock is currently trading unchanged at 672

NH: around18% of the company’s issued share capital is on loan

PM: Goodness

PM: I know we’ve been pretty bearish on crock — but 18%!

PM: short positiion

NH: and it seems that people are trying to squeeze the bears

PM: How — what’s the story?

PM: Why a potential squeeze??

NH: bid rumours

NH: big note out from MFGlobal this morning.

PM: Go on

PM: So big it is taking its time loading on Neil’s state of the art kit

NH: right got it

PM: THANK YOU Yonathan!

NH: want to see some of it???

PM: Yes please

NH: Northern Rock’s shares have fallen sharply as rising funding costs depress the
margin. However, the bank remains the most efficient provider of mortgages in the UK
and has an above average credit record. There are similarities with both Woolwich
and Household prior to those institutions being taken-over and there are a number of
potential suitors both from the UK and beyond.

NH: Stock price correction and earnings downgrades. Northern Rock is down 48% from its
high in the second week of February. We have downgraded earnings dramatically (see UK
Mortgage Banks: Surviving the Squeeze 28 August 2007) to include volume growth
funded only by deposit inflow, net interest margin squeeze and £20m write off of US sub
prime exposure. Our 2008 EPS forecast of 72.7p sits 32% below the Bloomberg consensus

NH: Correction reminiscent of Woolwich. In the late nineties Woolwich was perceived as the
leading mortgage monoline and a possible bid candidate and outperformed both UK banks
and the FTSE100 from the beginning of 1998 through mid June 1999. From there it fell 41%
to late July 2000, under performing both indices, which proved sufficient to tempt Barclays to
buy the bank. The stock was suspended in the third week of October 2000, having recovered
46%.

PM: Ah, the return of Fantasy M&A!

PM: How exciting

NH: HSBC bought Household in 2003 after high
interest rates drove the future cost of Household’s liabilities to levels where refinancing could
have made the lender unprofitable. HSBC realised immediate synergies from refinancing
Household’s debt backed by its own superior credit rating. Household was an efficient
provider of sub prime mortgages that granted HSBC expertise that it did not have.
Household had a track record of high but predictable bad debts, a reputation only sullied
when its new management became a buyer of other institutions’ sub prime loans.

NH: Northern Rock is efficient and has above average credit quality. Northern Rock has
expertise in designing and manufacturing innovative mortgage products and has mastered
distribution through the critical broker channel, which accounts for around three-quarters of
UK sales. It would bring immediate critical mass in UK mortgages to an overseas buyer and
be an attractive add-on for a larger UK bank, with only HBOS likely to face regulatory
hurdles. To date the Rock has a superior credit track record relative to peers.

PM: “expertise in designing and manufacturing innovative mortgage products” — sounds downright dangerous!

NH: but i think the idea that Barclays might bid for NRK as a consolation prize if it does not get ABN is odd

PM: Hmm. consolation prize?

PM: Bobby prize, more like

PM:

NH: i mean Woolwich was a disaster for barclays. can’t see them going there again

PM: Certain was — took about a decade to integrate

PM: And to answer rahodeb’s point below…

PM: cant agree more

NH: anyway the squeeze is not working yet - shares down 1p at 671p

PM:

PM: Right — off to Germany for a quick visit…

NH: we are and visiting Tui again

PM: bucket travel

NH: news this morning that Norwegian/English/Cypriot shipping billionaire John F has upped his stake again

PM: Ah

NH: gone from 3.07% to 5.12%

PM: So this is Shipping Freddie, who we were totally wrong to suggest might be considering pushing for a break up of Tui, right?

NH: totally wrong according to the Tui press office

PM:

NH: they said that John F has not mentioned any break up plan in their discussions

PM: No, he’s just want you might call an active passive investor, clearly

NH: and this morning’s comment from the spinners at Tui is

NH: they have not held any strategic talk

NH: now that comment met with guffaws of laughter round the city

NH: as if John F is going to discuss his plans with the company

PM:

PM:

PM: NEWS FLASH

PM: Reuters — Russia’s President Putin accepts government resignation

NH: no reaction from the market

PM:

PM: let’s turn to the small caps — cheer ourselves up

PM: Neil?

NH: been looking at Ceres Power this morning

NH: now this stock is a darling of the retail punters

NH: loads of postings on the iii site and ADVFN

PM: What does it do?

NH: well it claims to have developed a next generation domestic boiler

PM: next generation domestic boiler?

PM: How exciting!

NH: don’t knock it

NH: got a good two-way pull in this stock

NH: real battle between the and the

NH: the company claims this boiler can produce heat and electricity, which can be fed back into the grid

PM: right…..

NH: the company claims the produce will lower gas bills, help the environment and allow utilities companies distribute electricity more effiencently

NH: apparently you loose a lot of electricity when it is transmitted across a network

NH: : so if it can be generated close to where it is being consumer there is scope for some real cost savings

PM: I’ll take your word for it

PM: so its concept stock, then

NH: very much so and punters tend to get very emotive over these stocks

NH: and it doesn’t help that the boss of Ceres peter Bance is a consumate salesman

NH: anyway yesterday the company invited a load of analysts down to its HQ in West Sussex to see the boiler in the action

NH: or those who went it was the first time they got to see it

PM: Did it work?

NH: yep. Think they used it to boil a kettle or something like that

PM:

NH: anyway the shares shot up to 330p in the wake of the demo

NH: but then yesterday afternoon they started to come off the boil, if you will forgive the pun

NH: and they have taken another whack this morning

PM: Why’s that?

NH: apparently analysts were disappointed that the company did not provide more technical data

NH: this has led some to conclude that while the boiler works it is never going to be a commercially viable proposition

NH: here’s what the company’s former broker Numis Securities had to say to its clients this morning

NH: The Ceres demonstration yesterday showed a working prototype of a combined heat and power boiler, with management were keen to emphasise the volume potential. However, detail in other areas was lacking, in particular around the economics. We can see the potential for excitement with the story to drive the shares higher but believe management’s claimed end user economics and environmental benefits look highly questionable

NH: Working unit demonstrated & manufacturing process outlined: Ceres showed a working unit, integrated into a box little larger than a conventional wall-mounted boiler. The demonstration included a small change in output to demonstrate load following capabilities.

NH: Ceres has clearly done a lot of work engineering the fuel cell stack for volume manufacture, and provided outline plans for the new volume manufacturing ‘mother plant

NH: But economics don’t add up: Ceres claims a £300pa saving for a typical household. Our calculations disagree significantly and suggest that the real figure is likely to be less than half of this, for a potential outlay of several thousand pounds. It is worth bearing in mind that for every kWh of electricity generated, a Ceres boiler will have to burn 2.5kWh of gas, thus a decrease in electricity bill will be partly offset by a rise in the gas bill.

NH: In addition, the claimed 2.5t of CO2 savings look highly optimistic to us, given that generating all the electricity for a typical home produces only 1.8t of CO2.

NH: Changes to numbers: Our forecasts were starting to look quite exposed; we have moved
our expectations out by 2 years although the demonstration of a working prototype means a
key milestone in our model is achieved thus TP moves up to 267p (from 257p). Hold.

PM: This is from the “former broker” — ouch!

PM: Guess we’d put them in the camp

NH: and in the bull camp is heavyweight broker Morgan Stanley

PM: Ah….

NH: here’s their note

NH: Product showcase marks important milestone:
Ceres Power held a product showcase of its fully
integrated wall-mountable fuel cell CHP system and
gave a tour of its production facility. We believe this to be
a world first, marking a final milestone in its contract with
British Gas and highlighting its industry leadership. We
re-iterate our Overweight-V rating and raise our price
target to 380p.

NH: Value proposition confirmed: Based on initial
measurements on a limited number of test units, Ceres
expects the CHP unit to deliver savings of £300/year for
a typical UK household, with a payback period of 2-4
years. This is in line with previous guidance, although
final validation of this will only come from a statistically
meaningful sample data from commercial field trials.

NH: Operational targets remain on track and on budget:
Ceres remains on track to meet its operational targets.
The company’s production facility will be commissioned
by year-end and has sufficient capacity to produce a few
hundred CHP units per year. The ‘mother plant’ will be
operational in 2009 and will have capacity to produce
over 20,000 units per year. Estimates for initial CAPEX
costs for the mother plant remain unchanged at £5
million.

NH: Next catalyst is a commercial contract for mass roll
out: Now that all milestones have been met for the
existing British Gas contract, Ceres retains complete
commercial freedom to negotiate a new contract to
cover mass roll out. We would expect it to negotiate
shortly either an extension to the contract or even further
opportunities.

PM: Split opinion then — and who’s winning today — out of Numis and the Might Morgan Stanley??

NH: well i guess the answer will be whether BG decides to roll out the boiler. if it doesn’t we can assume the economics do not stack up

PM: Price is down 19.7p at 276

PM: Don’t suppose we should make any jokes about Morgan Stanley running a boiler operation on this one

NH: NO. Anyway, I hear Evil Knievil is penning a note on the company for his website

PM:

NH: he reckons the company is seriously overvalued

PM: Sorry — that should be a broken lightbulb

NH: market cap of £160m

PM: That’s punchy for a co not generating any sales

NH: still, its great fun though

PM:

PM: Quickly to FXtrader below

PM: Dont give the Times credit for that story please — it was in the WSJ yesterday

PM:

PM: before we finish…

PM: Got any more clown stocks for us today?

NH: didn’t call Ceres a clown stock

NH: i said it was a concept stock

PM: Oh, sorry

PM:

NH: but yes I do have a real clown stock for you

PM: go on

NH: I assume you’ve seen Z Group.

PM: How could I miss it!

NH: Price down 5p at 13.5p

NH: Here’s the statement..

NH: Trading for the first half of the financial year was better than budget, due to ONSPEED continuing to perform well.

PM: right….

NH: Management expectations for trading for the full year to 28 February 2008 include a substantial contribution from the Company’s investment in OnShare Limited.

NH: At the present time the Board is not confident that those expectations will be fulfilled as take-up of the product by consumers has been lower than anticipated. The Board is looking at alternative ways to generate revenue from the underlying OnShare technology. As a prudent measure, we expect to be writing off our investment in this product in this financial year and our results for the year will be adversely affected by both of these issues.

PM: Oh dear

NH: Our monthly average cash burn in the first half was around £115,000 and the Company had a cash balance of £1.6 million at 31 August 2007. This compares with a monthly average cash burn in the prior year of approximately £160,000. Action is being taken to reduce the Company’s monthly cash burn rate further.

NH: Basically this company does compression software that people use to speed up their internet connections. Guess it was a good idea when most people had dial up tech. Less so now.

NH: But they’ve moved into file compression for ipods etc.

PM: But what’s this Onshare thingy that’s screwed up?

NH: Seems to be software for doing secure chat networks or something similar.

PM: I Googled Z group and got this intro to its official site…

PM: Z GROUP PLC is an established, profitable, marketing-led internet technology services company. Bridging the gap between exciting new technology and …

NH: It’s not profitable at all

PM: To be fair when you get to the actual site, they’ve removed the word “profitable” from the blurb.

PM: Z GROUP PLC is an established, marketing-led internet technology services company. Z GROUP has acquired over 750,000 customers since its inception in 2002.

PM: I also came across this on a Yahoo message board

PM: I have been advised by my broker to buy Z Group (ZGP) and it was emphasised that I should put all of my investment fund into it. He strongly believes with the worldwide exclusive “Shrinkmytunes” for Iphones, Ipods and MP3’s and the Onspeed agreement in India that this is grossly underpriced and the Shrinkmytunes launch will be in September.

PM: That was posted by somebody called gareth_rrrr at the end of July

NH: Well maybe gareth_rrrr needs to get himself a new broker.

PM: Hmmm. Well someone called john_rothschild offered gareth_rrrr the following advice back then….

PM: Hi,

Rumour in the US is that there are several large players interested in putting in an offer for Z Group at a massively higher premium than the meagre 26p per share it is at the moment. Suppose it makes sense, as their exclusive technology enhances the Iphone, mobiles, ipods and mp3’s. Also, it’s net asset value is at 36p per share. I am invested in it and I think we’ll see some huge jumps in the price above the 100p mark.

I think your broker gave sound advice and the piece you referred to emphasising only 24 million shares in circulation is an important point. The majority of performing stocks (100% +++++ increase in a short space of times) have less than 100 million shares which means any good news on a stock has a far greater effect on it’s price advance.

PM: Sadly the price seems to be jumping down rather than up.

PM:

NH: FX Trader. you may be getting a free copy of the WSJ sooner than u thinnk

NH: rumours around that murdoch will give away a free copy of the european edition with the Times every day

PM: So people can say “Murdoch paid $5bn for this?!”

NH: hang on. that’s a bit harsh

PM: The euro edition is not a patch on the Wall st edition

PM: Like a flimsy taster

NH: yeah but with the euro edition u get a password to their good website

PM: Ok

PM: That’s enough promoting the competition

PM: Fitzsimons — note your comment on Ceres

PM: Neil is just trying to find another note

NH: can’t find one but i will tell you something

PM: Looks a tad dangerous to me — but then I’m a nervous soul

NH: company is showing off the boiler in the foyer of the LSE building on Friday

NH: i have been invited to take a look

NH: apparently it will not be working -but we will be able to peak inside

PM: So wont be able to boil any kettles then

NH: no but we should be able to quiz management about the points Numis have made this morning

NH: i know i get all the best corporate freebies

PM:

NH: sorry that’s a response to FX trader’s comment

PM: Right — we are off. Thanks for joining. Thanks for all the comments. We will be back tomorrow at 11am

NH: bye