Markets live chat transcript for the chat ending at 11:59 on 19 Sep 2007. Participants in this chat were: Neil Hume (NH) Paul Murphy (PM)
NH: We are off!
NH: Welcome to Markets Live, FT Alphaville’s daily markets chat.
NH: I’m having to do the intro stuff this morning, cos Paul is just sitting here in some sort of drug-induced stupor
NH: Murph!
PM: It’s ok. I can move my limbs.
NH: So this is some joke about you popping too many Little Bennies last night – and your body is now paying the price.
PM: Ah, those gorgeous Little Bennies – 50 bps apiece – they’re SO MORE-ISH
NH: Paul is referring of course to the double-barrelled rate cut delivered by Fed chairman Ben Bernanke last night
NH: A move that has triggered the most extraordinary rally on both sides of the Atlantic
PM: In share prices – not the dollar!
PM: Well you tell me – you said you were watching CNBC last night – all those blokes on Wall St whooping and high-fiving.
PM: What drugs are they on?
PM: If not cheap money
NH: Yes, it was very funny. Think it’s an American thing. They are just SO bullish.
NH: Just don’t want to sell. In fact they don’t know who to sell. they are hardwired to buy.
PM: Think you are right – Helen was saying earlier, having gone through some of the early commentary on the Fed decision, how the Americans generally saw blue skies and the Brits couldn’t avoid seeing clouds.
NH: And I guess you’d class yourself a Brit
NH: And not an Irishman.
PM: That right. Suspect the Irish would be with the Yanks on this one.
PM: But look – let’s cut to it – let’s impart some news.
NH: FTSE 100 up 129 points at 6,412.3
NH: has traded at 6,443.6
PM: The big rally here followed an even bigger one in New York overnight, where the Dow put on 2.5%.
NH: and Nasdaq up 2.7%
PM: It’s a Bull Market!
PM: 
NH: before we move on to Crock Watch
NH: here is a question that some of the sceptical UK brokers are asking this morning
NH: S&P ONLY 2.3% OFF IT’S HIGH, WHAT’S GOING TO PUSH IT FROM HERE??
PM: Well i can’t answer that
NH: nor can I
PM:
PM: Let’s go to something we do know a little about — Crock, the former bank
NH: pretty much everything in London is up this morning but not the former bank
PM: Very good comment from OJ earlier — X falls on bid spec!
NH: yep, the Crock is the only stock in London at the moment that could fall on a bid story
PM: Shares are currently down 26p at 280p
NH: but they have been as low as 246.25p
PM: So what’s going on?
NH: rumours of deeply discounted bids for the former bank
PM: From who?
NH: talk that Lloyds has lobbed in an offer 200p a share for the former bank
NH: and HBOS 100p
PM: 
PM: Do we believe this?
NH: Not sure
NH: but I reckon the Bank of England would not stand in the way of a low-ball bid
NH: after all the criticism they have taken it would allow Mr King to stand a bit taller and say he does not bail out shareholders for making poor investment decisions
PM: thats true
PM: but would shareholders except it?
NH: I think 100p is unlikely given that the loan book is reckoned to be worth 180p in run off
NH: hang on a minute just got another email on the Crock
PM: What does it say?
NH: that today’s fall may have nothing to do with low ball bids
NH: apparently there are concerns that NRK have “other debt” investments that can’t mark to market.
PM: Such as?
NH: NRK have some SIV lites
PM: Oh no!
NH: and they also have a £8bn “available for sale” portfolio
NH: which may not be worth £8bn any more
PM: Do we have any further detail on this portfolio
NH: am working on it
PM: Let me know
NH: hang on a v smart broker has just dug the stuff up for me
NH: Available For Sale (AFS) gains were £38m H1 07. Northern Rock has a c£8bn portfolio of assets on which it expects tor ecord gains, however the vast majority seems to be dependent on falling rates for a gain to be realised. Management suggested in the H1 analysts’ presentation that an AFS loss recorded in the P&L would be impossible (instead they would hold assets to maturity). However, this is rather contradicted by the £3m AFS loss recorded in H1 06.
NH: here’s some more
NH: Although management have pointed to ‘hedges’, we continue to be troubled by
the £8bn ‘Available for Sale’ (AFS) portfolio. At the H1 analyst presentation,
management said that losses on this portfolio would not be recognised in the
P&L (as the assets would simply be held to maturity). This statement is rather
contradicted by the £3m AFS loss in H1 06, restated in the P&L this year. There
was a £31m negative markdown in reserves in H1 last year, which did not go
through the P&L, but was an adjustment to equity. While our 30% discount to
book value implies a c£600m write-down, which might be too negative, we
believe the burden of proof lies with the management
PM: Excellent — let me know when you’ve worked out what that means
NH: yeah will do. may take some time
PM: I notice the Crock jitters have also pulled down Alliance & Leicester
NH: yep, its shares were trading as high as 855p earlier this morning. They are now down 10.5p at 782.5p
NH: : how’s that for volatility
PM:
PM: Right — we are finding it difficult to keep up here!
PM: Neil’s on the phone
PM: Too many comments!
PM: B v funny — Hello Alice!
PM: 
PM: This move by the Bank of England on the auction….
PM: Just announced that it will accept wider selection of collateral
PM: The Brit banks have been begging the bank to allow this for weeks
PM: As pointed out below
PM: VP updating our prices for us below….
PM: Alliance & L is currently up 19.5p at 812p — having swung round dramatically
NH: we can’t keep pace with these share price moves
PM: Never mind the coments
NH: actually just had a call on A&L
NH: someone filling me on the movements of chairman Derek Higgs last night
PM: Oh yeah ? 
NH: First he turned up to an A&L press party
NH: then he left to attend a UBS old boys renuinon at Claridges
PM:
NH: according those in attendance he was in good spirits
PM:
PM: 
NH: and thought the recent fluctuations in the A&L share price ridiculous
NH: people who I have been talking to say it showed quite a bit of guts to turn up
NH: but the message seems to be that A&L are quite relaxed about their business
PM: Hmm. V interesting
PM: Could also paste up a quick market rumour
PM: This is RAW
PM: mkt rmr - B of E to pump GBP10bn into the 3 month LBR
PM: Now — is that bullish — or should we have our hats back on?
NH: if your Amercian its bullish. if u are European you will be asking “what do they know that we don’t”
NH: still should help the Crock
NH:
NH: right from one car crash - Northern Pebble - we move on to another
PM: Absolute Capital Management
PM: AbCap — but not so fabulous
NH: Absolute Capital Scandal you mean.
NH: Stock slumped 70 % yesterday.
PM: Dear oh dear. That was after the leading light at this hedge fund manager – Florian Homm – flounced out. Citing philosophical differences.
NH: Well the price is down another 48% today.
NH: It’s off 57p at about 62p.
PM: What do you mean, “about”
NH: Well the bid offer spread is 58-65
PM: Right……….
NH: This follows a formal statement from the company indicating that the philosophical differences ran rather deep…
NH: Homm was punting almost half his equity funds in US pink sheets and bulletin board stocks.
NH: You know the sort of things that get sold by high pressure salesmen – Penny Cent dreadfuls
NH: house broker Panmure have published a pretty damning note
PM: Got some detail?
NH: called “illiquid positions”
NH: The ACMH board has discovered that ex-CIO Florian Homm had not
properly marked-to-market large portions of the funds that he managed. In
current markets, this could prove fatal for the equity funds. We cut our price
target from 750p to 150p, which reflects only the value of the Argo debt funds.
Litigation risk is also a major threat to earnings.
NH: Following co-CIO Florian Homm’s resignation yesterday, the ACMH board has
discovered that 7 of the 8 equity funds contain investments which “are not immediately
realisable at their stated values due to their illiquid nature.” ACMH estimates that $440m
to $530m of the equity funds’ assets (of a total estimated $3.5bn in total Group AUM) are
affected in this way.
NH: ACMH intends to implement a restructuring of the equity funds whereby the illiquid
assets would be transferred to a “side-pocket”, leaving the liquid portions intact. A 12-
month lock-in would be imposed, subject to approval from affected fund investors.
ACMH has discussed this restructuring with large investors in the funds, who have
indicated their preliminary support for the proposal.
NH: Implications. In current markets, we do not think approval of the equity funds’
restructuring, especially the 12-month lock-in, can be a foregone conclusion, making it
possible that ACMH will face major redemptions. We also highlight the risk of investor
lawsuits as an unquantifiable threat to earnings.
NH: Valuation. If we eliminate the equity funds in our valuation, this leaves us with the Argo
debt funds, which we valued at 200-250p previously. Even at distressed valuations, we see
Argo at 150p per share. And we point out that the ACMH balance sheet had 30p per
share in cash as at 30 June 2007. This makes us set a worst-case price target of 150p.
NH: and check out this table
PM: 
NH: Absolute equity funds – illiquid positions
AUM (, 31-Aug) Illiquid positions (% AUM)
Absolute Return Europe Fund 490 35-40%
Absolute European Catalyst Fund 273 25-30%
Absolute Germany Fund 381 1-5%
Absolute East-West Fund 222 15-20%
Absolute Octane Fund 342 40-45%
Absolute Large-Cap Fund 137 0%
Absolute India Fund 18 1-5%
Absolute Activist Value Fund 241 10-15%
PM:
NH: look at the Octane - 45% of it is in illiquid positions
PM: We should state that we do not want to suggest that Mr Homm — a popular fellow — has done anything untoward
PM: But this is bound bring back memories of similar troubles at Morgan Grenfell some time back
NH: ah you mean peter young??
PM: He quietly invested a big portion of his funds in little hopefuls — and they went badly wrong
PM: Then he went badly wrong.
PM: http://www.guardian.co.uk/uk_news/story/0,3604,639119,00.html
PM:
NH: The BoE really are in FULL U-TURN mode.
PM: Yes — that 10bn injection brief earlier has just been confirmed
PM: So our man in Threadneedle St is obviously well plugged in
NH: I am not sure his reptutation will survive this
PM: Merv - that is
PM:
PM: What else is in focus?
NH: Strange goings on at Smiths Group
PM: Go on
NH: surprise announcement from the company this morning
NH: shelved its detection joint venture with GE
PM: Why’s that?
NH: the official line is a disagreement over strategic vision
NH: mind you investors are starting to wonder if there is something more sinister behind it
NH: but what is clear is that there seems to have been one hell of a bust up
NH: remember this deal was announced six months ago and was part of a larger transaction that saw Smiths sell its aerospace business to GE
PM: This is very embarrassing for management
NH: yep and rumours are already swirling that Smiths’ chief executive Keith Butler-Wheelhouse may depart earlier than expected
PM: When’s he off?
NH: his term expires in July 2008.
NH: and they could do a lot worse than look for a break up specialist
PM: V interesting
NH: you see, the wider point here is that today’s news will put pressure on management to consider a break up of what is a sleepy engineering conglomerate
PM: Does it make it more vulnerable to a bid?
NH: I suppose it does
NH: and a top broker told me this morning that their understanding having talked to Smiths is that GE is now free to bid for the entire company of the detection business
PM: What does the detection business do??
NH: makes screening devices for airports. Some of the technology is very sophisticated
PM: so a good market to be in
NH: yep
PM: Shares on this new?
NH: up 22.5p at £10.21
PM: news, even
NH: which is about in line with the wider market
PM: Hmm
NH: personally I think the shares should have kicked on a bit further on news
PM: Why?
NH: well, the proposed JV seemed to add little value to the group in relation to the loss of control
NH: and the deal came with a call option that acted as an effective poison pill
PM: Oh yeah?
NH: This allowed GE to call Smiths’ share of the JV in the first 30 months if Smiths changed control. In the following 30 months, GE could put its share if Smiths changes control.
PM: Any analysts comment on this?
NH: this is from Landsbanki
NH: Break up pressure to intensify?
NH: Smiths has announced this morning that the previously announced Detection joint venture with US multi-industrial General Electric has been called off. It is not clear why the transaction has been cancelled, but May’s news that margin forecasts for the incoming GE Homeland Protection business had to be reduced can’t have helped. We had ‘baked in’ the joint venture in our forecasts, and these are likely to need to come down modestly today.
NH: However, we expect investors to focus more on management credibility, and rumours of activist stake building are likely to surface again (according to 29 June’s Financial Times, billionaire investor and LSE agitator Samual Heyman has amassed a holding).
NH: In our initiation note, Much to deliver – we initiate with a Neutral (11 April 2007), we calculated that Smiths shares could be worth 1125p on a break up (versus the closing 999p), based on the very valuable Medical and Detection businesses. While leveraged loan markets are clearly more difficult than they were back then, we suspect that a break up is still possible.
We retain our Hold recommendation but plan to review this and our forecasts today
PM: Ah — that’s nice of the analyst — appears to be quoting you
NH: good to know their are people out there who still read the print edition
NH: this is from Numis Securities
NH: In a surprise announcement Smiths and GE have decided not to proceed with the planned Detection JV. This is a disappointment but could stimulate the break-up argument.
NH: Disappointing: The combined Smiths / GE entity was seen as the global number 1 player in the growing detection and security market, generating significant value for shareholders. The businesses will now effectively continue to compete against each other.
NH: Comparing our sum-of-the-parts valuation before the announcement of the proposed JV to now, we estimate the valuation uplift of the deal would have been worth around 35p. Having recently reduced our PT to 975p following a weak trading update a few weeks ago we are reducing our price target by a further 25p to 950p to reflect today’s announcement.
NH: Fundamental investment view: We have been largely neutral on Smiths throughout the year while growth has lagged the sector and corporate activity (disposal of Aerospace) failed to optimise value potential in our view.
NH: Break up? The bull argument remains break-up. Abandonment of the JV is likely to fuel the call for a full break-up. In our previous analysis we estimated a break-up value of 1250- 1300p (25-30% upside).
PM:
PM: Notice OJ’s on top form this morning — with his PYoung-esque tale
PM:
PM:
PM: any other standout features???
NH: Sage are a bit weak
NH: down 3.5p at 245p
PM: Why’s that?
NH: profit taking sparked by news that Infosys are not interested in buying the accountancy software company
NH: that has reclaimed its position as Newcastle’s biggest quoted company
PM: Ah — bigger than the Crock
NH: profit taking sparked by news that Infosys are not interested in buying the accountancy software company
NH: yep. This was on Bloomberg earlier
NH: By Chitra Somayaji and Harichandan Arakali
Sept. 19 (Bloomberg) — Infosys Technologies Ltd. Chief
Financial Officer V. Balakrishnan denied reports that India’s
second-largest software maker is in talks to buy Sage Group Plc
or Atos Origin SA.
Bangalore-based Infosys also isn’t negotiating with Cap
Gemini SA about buying any part of the company, he said in an
interview from Bangalore
PM: hmmm
PM: but we still think someone is looking at Sage don’t we?
NH: yep. We were steered away from Infosys Monday afternoon but were told to keep digging on this story because there is SOMEONE out there trying to put a deal together
PM:
NH: block trade just gone through the ticker in Ab Fab Management
NH: almost 390,000 shares at…………
NH: wait for it……………
NH: 35p!!!!!!!!!!!!!!
PM: Oh dear oh dear oh dear
PM: That’s against a supposed market price of ?
NH: 63-5
PM: SOmeone cuting a running
NH: while there is still some value left
PM: But we were having a discussion in the office earlier about whether this was quite a smart emergency scheme they have put together
NH: explain
PM: bascally ringfenced to crock stock — sorry the pink sheet stuff
PM: And then kept all the liquid investments in a separate vehicle
PM: Investors will get two classes of shares — investors in the hedge funds, that is
NH: yeah but as a manager
PM: Sure — not much upside!
PM:
NH: Hi gonesouth. told Deutsche holding in NRK is a prime broking position. possibily a hedge for a CFD/derivative position
PM:
NH: Another stock that’s worth a quick mention today is Carphone Warehouse
NH: stock rose almost 6% yesterday but off 12.75p at 357.5p this morning
NH: that followed news that Best Buy, the biggest electricals retailer in the US, had talen a 3% stake in Carphone
PM: So why the reversal this morning?
NH: a number of brokers are telling clients that a Best Buy bid for Carphone is not likely in the short term
PM: Why?
NH: Best Buy is focused on expanding in emerging markets
NH: it has a huge buyback programme in operation and it has just announced a big divi hike
PM: so, not a lot of cash left to pursue a bid for Carphone?
NH: this is what Cazenove had to say about the bid rumours this morning
NH: CPW shares closed up 6% yesterday after Best Buy announced that it had acquired a 3% stake in the company. This came after some profit-taking following the iPhone deal which was perhaps a case of travelling vs. arriving with the limited details available largely in line with expectations.
NH: Within its press release and on the conference call Best Buy indicated that its investment is a sign of its commitment to its relationship with CPW. Whilst we cannot rule out further stake-building by Best Buy, we expect this would be modest and not a precursor for a full bid for CPW:
NH: Best Buy’s commitment in June to a $5.5bn share buyback (around 25% of its market cap at the time) together with a 30% increase in its dividend likely demonstrates that its priority lies more with shareholder remuneration at this stage
NH: Our conversations with Best Buy suggest its M&A interest is focused more on faster growing/emerging markets (such as China, Mexico and Turkey)
NH: We believe that the resulting 3x pro forma net debt/EBITDA were Best Buy to complete both the buyback and an all-cash bid for CPW would be viewed as excessive given the wider credit concerns and specifically for a company that was in a net cash position at the start of the year
NH: Finally, we do not believe that Charles Dunstone is a seller at this stage and nor do we think he would want to lose his autonomy as part of a larger organisation.
PM: thanks for that
PM:
NH: just got through the latest short interest data on the crock
NH: no remember this is a couple of days out of date but it is the most up to date stuff out there
NH: since the BoE bail out. the amount of NRK’s issued share capital on loan has jumped from 20% to 30%
PM: V interesting
NH: got some figs for A&L and B&B too
NH: A&L just 4%. looks to have risen from 3%
NH: B&B gone up from just under 6% to just over 7%
PM: Thanks for that
PM: Should say thanks to tradbot for posting Libor — which has collapsed!
PM: Down from 6.75% no? to 6.55
NH: that’s right
PM: That follows the Bank of England’s move to inject 10bn.
PM: Belatedly.
PM: But look — Neil we are being FAR too bearish here
PM: It’s a blue sky day.
PM: We were gonig to presend to be Americans!
NH: well my tin hat is coming off
PM: We must have an UP story to finish off with
PM: This is a BULL MARKET
NH: in that case I have a bid story for you
PM:
NH: raw market info
NH: but from 
PM:
PM: Ok — three’s good
PM: What did he/she/it have to say?
NH: he is convinced a bid is about to emerge for Alfred Mcalpine
PM: That’s the construction company that had big accounting probs in its slate division
PM: And the subject of a Dubliners’ song
NH: Yep on the back of that news it was forced to break itself up
PM: But thinks a bid is on the way?
NH: yep he is hearing that Carillion is set to offer 550p in a mixture of cash and shares
NH: He says that the Carillion have been waiting for its share price to stabilise and now that it has they are ready to strike
PM: Whoa
PM: Remeber this is RAW market info — untested!
NH: but look at the shares up 21.7p at 478p - that’s a rise of 4.8%
PM: Certainly is 
PM:
PM: Right — we are off. Thanks again for all the comments. Meant to say thanks also for the Dead Zoo — earlier!
PM: Thanks for joining us. We wil be back tomorrow at 11am.
NH: bye
