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Markets live chat transcript for the chat ending at 11:57 on 14 Nov 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)

PM:

PM:

PM:

NH: As you can see, Murphy has been gagged.

PM:

PM:

NH: Which will come as a relief to quite a few readers

NH: For those of you who don’t know we’ve spent the last 24 hours locked in a fierce legal battle.

PM: We have! And I am not gagged!

NH: Just restricted

PM: But not from welcoming new readers to Markets Live – such as those from Schillings.

NH: Schillings being the law firm representing Northern Rock, who sought an injunction on us yesterday.

PM: Yes, was just looking at their website. Apparently they are a “Ruthlessly & spectacularly efficient media law firm.”

PM: That’s near the top of their home page – a quote from the Indie.

NH: that’s quite a boast

PM: So, to all our readers..including those from Shillings

NH: THE Ruthlessly & spectacularly efficient media law firm

PM: Welcome to CastoutthebagVille – our daily discussion of what’s moving and why.

NH: So what can we say here – now?

PM: Not a lot while the mighty wheels of justice turn.

PM: Regular readers will know that certain information pertaining to a certain mortgage bank (previously known here as a former bank, Wreck, Crocket, etc), appeared here on FT Alphaville yesterday.

PM: It is not here anymore because of a ruling made in the High Court at around 6.50pm on Tuesday. We are currently covered by a partial, temporary injunction covering the contents of a sale memorandum sent out to about 50 potential acquirers of Northern Rock. It runs until next Tuesday, where upon full evidence in the case will be heard.

PM: In publishing information from the sale memorandum, we took the view here at FT Alphaville that the shareholders of Northern Rock and the market generally were entitled to know the assessment of the financial position of the bank - an institution that has had to borrow something north of £20bn from the Bank of England.

PM: In response, Northern Rock sought an injunction which would prevent the whole of the media from reporting anything about the sale memorandum.
The FT’s crack legal squad vigorously resisted this and, as a result, the scope of the injunction sought was considerably narrowed. For example, Northern Rock wanted the injunction to prevent publication of the names of those who had been provided with the sale memorandum, notwithstanding the fact that names of potential bidders have already been widely published.

PM: Northern Rock also sought an order that would have prevented disclosure of the fact that it had obtained an injunction. The FT resisted this and the order was refused.
Northern Rock intended that an injunction should be obtained anonymously, but this was also unsuccessful.

PM: In view of the fact that the hearing went on so late, the judge granted a temporary injunction lasting seven days in order to preserve the position until he could hear full evidence. The FT argued that there was a substantial public interest in the story and that it was extremely important that shareholders were entitled to know where they stand. The Judge took the view that at an emergency hearing he would give priority to the fact that the sale memorandum contained a written confidentiality undertaking entered into by the original recipients of the document, and that he would protect this pending a full hearing of all the evidence.

NH: You’ve just copied that from the Alphaville home page

PM: Yeah, I know. It’s been legalled.

PM:

PM: Basically – we can’t quote the detail from Rock’s memo, but we can report what other people have written about the stuff we published.

NH: Eh?

PM: But only up until 7pm last night.

NH: how does that work??

PM: I know I know –

PM: So in this digital age, where you might put something like Northern Rock and Citywire into Google you might get a certain linke which….

PM: The lawyer has just informed me that I cant post

PM: I cant put the link up

NH: are we allowed to discuss why Crock shares should be suspended??

PM: I think we can — trading in iRock is completely mangled

NH: its blindingly obvious there is a false market in the shares

NH: they can’t be shorted effectively

NH: which in effect is propping up the share price

PM: Cant be shorted at all

NH: basically there are so few institutional holders now that there is just no stock to lend

NH: hence the LSE issuing that big notice yesterday

PM: Yeap — and of the big holders like RAB Capital — well they arent going to lend their stock to anyone

NH: so here we have a situation where a troubled company cannot be shorted

NH: does that make for a false market??

PM: Well it is certainly not efficient

NH: anyway, Crock shares currently 1p lower at 151p

PM: Sam’s just mentioned that the LSE reckon a “double figure” percentage of crock stock is unsettled presently

PM: But let’s move on

PM:

PM: Right, what’s moving this morning?

NH: Er…. the whole market

NH: FTSE 100 up 84.6 points at 6,447.2

NH: that’s a gain of 1.4% and of course follows Wall Street’s big rally overnight

PM: Quite rally here then

PM: Just a quick note to commenters blow…

PM: Thanks VP — sure lots of people share that opinion — but don’t get us unplugged!

PM: Anyway — i should mention to readers (including those from Shilling)

PM: If you notice a comment below that you object to simply click the “report” link at it will be dealt with

PM: Welcome to the interweb!

NH: seen these comments from Mervyn King???

PM: Well — jsut seen the flashes

PM: He’s on the box

NH: BoE looks to signalling that it will need to cut interest rates next year - at least once - to reach its inflation target as growth slows

NH: here’s a quick snap from Bloomie

NH: The inflation rate will settle to the bank’s 2 percent goal
in 2009 after rising above it next year, the central bank said.
Its forecasts are based on market assumptions the bank will cut
the main rate by 25 basis points to 5.5 percent in the first
quarter and that the rate will average 5.3 percent in the second
half of 2008. Growth risks are “on the downside'’ and inflation
risks are “balanced,'’ the bank said.

NH: `The central projection is for growth to slow sharply in
the next year,'’ Bank of England Governor Mervyn King said at a
press conference in London today. “There has been some
tightening of credit. Residential and commercial property
investment are likely to moderate, possibly quite sharply. The
near term outlook is less benign for both inflation and growth.'’

PM: Thanks for those

PM: C&C has a point below — how come everyone so upbeat in the face of bigger than expected writedowns from HSBC , BofA etc

NH: am not so sure they are bigger than expected

NH: there was some really scary numbers doing the rounds last week

NH: i think today’s bounce in the HSBC share price is simply relief

NH: that it has not suffered a huge blow up

PM: Hmm

PM: And good point from OJ below

PM:

PM: At the stock specific level, w hat’s moving?

NH: Friends Provident

NH: shares have risen 9.9p to 169.5p – a gain of 6.2%

NH: and that follows news that chief executive Philip Moore has been axed

NH: sorry, sorry, sorry resigned

NH: don’t want another legal letter!

PM: It always makes me laugh when a share prices jumps following a senior resignation

PM: Sort of shows you what the market thought of the director

NH: in this case investors are almost hanging out the flags

PM: Do we have any idea why he has gone??

NH: here’s the statement

NH: Friends Provident plc (Friends Provident) announces that Philip Moore, the Group Chief Executive of Friends Provident, will be leaving the group. Until a full time successor is appointed, Sir Adrian Montague will take on the role of Executive Chairman.

NH: Jim Smart, the Group Finance Director, will work with Sir Adrian Montague to
lead a detailed review of the group’s strategic options in order to maximise
value for shareholders. Ben Gunn and Alain Grisay will continue to lead,
respectively, the group’s life & pensions and asset management businesses. The
Board intends to update shareholders on the strategic review by the time of the
fourth quarter new business results at the end of January.

NH: Sir Adrian Montague said: “This has been a challenging year for the group and
its management team. We remain confident of the group’s prospects. However, it
is right that we should take a hard look at the group’s strategy to ensure that
we are delivering the highest value available to our shareholders. The Board has
concluded that this requires a change in the management team. Philip Moore has
been with the group since 2003, first as Group Finance Director and then as
Group Chief Executive. I would like to thank Philip for the substantial
contribution he has made to Friends Provident and wish him well for the future.”

PM: Is that all the thanks he gets?!

NH: yep

NH: he might get a pocket watch

PM:

NH: although looking at the statement perhaps not

PM: So Moore has been booted out for failing to push through the merger with RSl

NH: looks that way

NH: and it also looks like the proposed deal with RSL has exposed the weaknesses in FP’s business and strategy

NH: although the company will argue otherwise, everyone believes FP is capital constrained

NH: and does not have the cash to write all the new business its wants to

NH: obviously this morning’s news also makes FP vulnerable to a bid

NH: now we know that Zurich Financial Services have done all the prep work on a bid

NH: in fact they could launch an offer tomorrow if they wanted to

NH: and one has to think that if no one bids for FP now then they never will

NH: company has no CEO and the shares trade at a discount to embedded value, which is very rare for a life company

NH: in fact even at the nadir of the bear market in 2003, they did not trade at a discount to NAV

PM: apart from ZFS could there be any other bidders?

NH: well a few people think Standard Life might be interested

PM: so, the two jilted parties in the RSL get hitched

NH: yeah

PM: Ok

PM: analyst comment?

NH: here’s James Pearce at Cazenove

NH: We expect the FP share price to react very positively to the announcement of a strategic review under the leadership of Adrian Montague (now executive Chairman) and Jim Smart (CFO). The review will report by the end of January and it looks like all options will be considered. CEO Philip Moore leaves the board. The stock is trading at a 10% discount to its June embedded value of 177p.

NH: With RSL.L being acquired at a 19% premium to EV, if in the extreme case the group closes to new business it could presumably sell itself for 210p

NH: However, more realistically we would expect the group to cut back its UK life new business to an unchallengeably profitable core, and command a further goodwill premium above this.

NH: At present 2007E reported new business profit of 6.8p could merit goodwill of say 30p in addition, suggesting a blue sky takeout price of say 240p, 50% upside. In reality we suspect that there could be restructuring costs and the like to offset this, but it is clear in our view that the current share price significantly undervalues the group and the strategic review is a clear catalyst to close the gap. Accordingly we are resuming coverage with an OUTPERFORM rating.

NH: FP shareholders have experienced a roller-coaster year. Their current travails can be dated back to a presentation in October 2006 when they targeted a trebling of UK life new business profit from 2005 levels by 2008. This growth would be helped by an expansion of investment business, facilitated by Wraps, with product launches planned for mid 2007. The funding requirement of this ambitious growth programme would be contained at just £150m, while development costs would increase to £40-50m per annum. The company spoke with all the authority of “a company which does what it says it will do”.

NH: By the end of the Resolution process each of the core components of the October 2006 view had been stripped away. The growth target had been well and truly dropped. Far from driving growth, investment sales fell 25% in the first nine months of 2007.
The growth outlook was no better, given the embarrassing postponement of the Wrap launch until Q1 2008.

NH: The group’s capital needs had ballooned from £150m to £400m, but the news that actual plans were to issue £500m may suggest that £400m is not the final figure. FF’s announcement that surplus capital would be returned to shareholders rather than ploughed into FP’s growth did not give comfort that FP’s pricing had totally convinced Cowdery. In this comtext the strategic review looks inevitable.

NH: and this is from KBW

NH: Friends Provident has announced the resignation of its CEO. He will be temporarily replaced by the current CFO. The chairman will also become an executive chairman. There will now be a strategic review, to be completed by the end of January 08 and released with the 4Q07 sales figures. We reiterate our Outperform recommendation as we believe short-term operational headwinds (sales at Lombard and in protection products expected to be weak short term) will be dominated by takeout speculation. At a price to fair value of 79%, the company is at the bottom of the peer group valuation range (European sector average of 84%). In addition, we believe there is currently a technical short squeeze in the stock, which as it reverses, should further help the share price.

NH: Speculation around potential acquirers. There will be significant synergies if Friends Provident and Standard Life tie up, though the new group is likely to have a tight cash flow situation. Out of the European players, Generali’s name is likely to come up as there is some European overlap, and its high IFRS PE (24x 08E) would make digesting Friends Provident’s high IFRS PE (18x 08E) more palatable for continental European investors

NH: Short squeeze to reverse. In early December 2007, Friends Provident will convert debt leading to an 8% increase in the issued shares. We are of the view that, over the last 12 months, debt investors who did not want to end up with Friends Provident shares would have already shorted Friends Provident shares. However, we believe some hedge funds started buying convertible debt and shorting Friends Provident shares aggressively last week, trying to maximise a top-up payment that could be also be paid under the terms of the debt. A top-up payment could be paid equal to 171p less the average share price for 30 working days up to 5 December.

NH: Rights issue would be a positive. We believe that the share price already includes a haircut for a potential rights issue. We also believe that management could get by on the planned £500mn new debt issue to finance its new business strain. However, we believe they might decide to “kitchen sink” by issuing another £500mn of equity. That said, we believe this could be taken positively as it would free up investors to increase the franchise value of the firm. We are of the view that both the life protection and top-end group pensions franchise (despite its long payback period) of Friends Provident are long term winners.

PM: Thanks for all that

PM: FLASH

PM: It seems that someone in the US has copied the Rock memo stuff from here yesterday and posted it up in the states

PM: We will be consulting our lawyers

PM: How dare they breach our copy right

NH: hang on a mo

NH: if it has been uploaded in the US does that mean we can quote from it???

PM: No

NH: but the whole world can now see it

PM: Sure — but we can only report on stuff that had been uploaded elsewhere prior to 7pm last night

PM: Got it?

NH: understand

NH: but if I want to look at the memo I can now log on to a site in the US and browse away

PM: Look !! Get the hell off the subject!

PM:

NH: right let’s back to the market

PM: Moving on, we have had results from Sainsbury this morning

NH: we have

NH: and on first glance they looked fine

NH: but the market seems to have a different view

NH: Shares currently down 9p at 417p

NH: which makes Sainsbury the second biggest faller in the FTSE 100

PM: So stock down just over 2%

PM: so what’s happening ?

NH: the view out there is that SBRY is expensive

NH: and there is better value elsewhere in the sector

PM: Such as?

NH: Morrison

NH: in fact they are a couple of upgrades around for Morrison this morning

PM: OK, let’s get to the figures

NH: right, half year PBT came in at £240m

NH: which was above most estimates – they were pitched around £231m

NH: So profits are up 27% on a year ago

NH: the main driver being an improvement in EBIT margin, which is up 45bps year-on-year to 2.88%

NH: No statement on current trading this morning, which is usual

NH: But Justin King seems to be fairly confident ahead of Xmas

NH: Saying people will trade up to premium food if they do not go out

PM: anything on property??

NH: nothing to get the pulse racing

NH: A JV with Land Secs but not much else

PM: Any analyst comment?

NH: got a good note from Caz which explains why the shares are weak despite the good figures and earnings upgrades that are starting to come through

NH: The interim results are, perhaps predictably, ahead of consensus and forecasts will most likely move up by 2-3% to reflect this (Caz FY08E EPS 18.1p likely to rise to c.18.5p).

NH: Whilst we do regard the shares as being oversold following the collapse of the Qatari bid (fair value is at c.480p in our view) the dead weight of selling pressure on the shares is likely to remain in the short term as arb/event funds exit the scene and traditional long investors are unlikely to be in a hurry to repopulate the register given the issues the business faces (most obviously the morale of key personnel running into the Christmas trading period).

NH: Property-based activism seems highly likely to restart although we would expect the board to resist this at least until the operating margin has made more positive headway. Ultimately this combination of negative operational and technical factors, together with our view (supported by yesterday’s market share data) that Morrison’s is a more compelling turnaround story leaves us disinclined to move off an In-Line recommendation.

PM: Thanks for that

PM:

NH: GP on Rio

NH: one slightlly odd rumour doing the rounds this morning

NH: and it goes like this

NH: Xstrata and Anglo American to join forces and bid £60 a share

NH: can’t see it myself

PM: you never know in this sector

NH: i think the angle to look for in this deal is whether the chinese take a blocking stake

NH: or a stake that gets them a seat at the table and helps in iron ore negotiations

PM: That would be v interesting indeed — do you really think the Chinese would be that aggresive?

NH: why not?

PM: Hmm

NH: they are not biddding

NH: could just raid the London market

NH: take 15% and sit on it

NH: and insist on being cut in

PM: I think they are highly sensitive on the political front tho

NH: true

PM: You mentioned Land Secs earlier

PM: they have announced some radical surgery this morning

NH: they have

NH: announced plans to split the company in three

NH: its outsourcing business, its retail business and its London office business are to be demerged in three quoted companies

NH: when market conditions are favourable

PM: and how has the market responded?

NH: well, the first thing to say is that none of this is a surprise

NH: this break up has been extensively leaked

NH: shares currently down 36p to £15.32

PM: Hmm — that’s quite a fall

PM: that will be something of a disappointment for Paul Myners, chairman, and Francis Salway

NH: well I don’t think they were so naïve to think that today’s news would trigger a re-rating of the shares

NH: after all investors just won’t go near the property sector at the moment

PM: Well they would say that wouldn’t they

NH: true

NH: but for me today’s news has one interesting implication

NH: Land Secs are effectively saying that conglomerate property companies don’t work

NH: And that has implications for British land

NH: if their biggest rival is saying the conglomerate structure does not work, what next for British Land???

PM: Interesting point

PM: although B Land is not as sprawling as Land Secs is it??

NH: interestingly British Land have got figures tomorrow and you can bet they are going to be asked about this

NH: actually Hammerson could come under pressure too

PM: But what about the figures from Land Secs this morning??

PM: What’s their outlook on the prop market?

NH: haven’t had time to go through the statement

PM: Neil’s is just trying to pull it up

NH: internet v slow

NH: We had anticipated a weakening in the pricing of property investments and so
accelerated our programme of property sales in the first half of the calendar
year. We expect the current weak trend in property investment pricing to
continue, but we believe that the greatest impact will be experienced on
secondary properties where, in recent years, yield pricing has not fully
reflected the risks associated with lower quality properties. We therefore
expect our shareholders to benefit, in relative terms, as a result of the high
quality of our portfolio.

PM: Hmm — quite careful

PM: Thanks for that

PM:

PM: You know we really should do HSBC

NH: yep

PM: Figs this morning

PM: And the stock has ZOOOMED

NH: well, its only up 22p at 864.5p at the moment

PM: Right — its come back

NH: i thought the statement was quite depressing esp on the outlook for the US

NH: but the shares have rallied

PM: Why?

NH: and i suppose that’s on relief that there is no blow up

NH: HSBC have increased the bad debt charge related to its US consumer business to $3.4bn for the third quarter, which the bank says is around $1.4bn more than implied by the trends in the first half of the year

PM: $3.4bn is way below some of the scary figures that have been doing the rounds in recent days

NH: yep and HSBC shares have underperformed during that time so it is no surprise to see them bounce this morning

NH: got a good take on today’s numbers from MF Global

PM: Do share

NH: Weak US means 8% downgrade
- HSBC message:
- US provisions ahead of expectation as problems spread to cards and unsecured.
- US growth to slow, (business to be scaled down), provisions to remain high.
- Asian / Latam growth de-coupling from US and sustainable.
- Global financial de-leveraging to continue.
- Further market shocks possible, HSBC has minimal CDO exposure & no deterioration in this
portfolio since September.
- US consumer finance losses $3.4bn
- $1.4bn worse than H1 trends, half due to mortgages, half cards and unsecured
- Mortgages with two or more missed payments:
- bought in 8.2% from 6.2% in June
- own branch 3.2% from 2.3%

NH: - WRITE DOWNS in Q3 2007 (of which US$600 million arose in CIBM in New York.)
1) US$750 million on securities, including wholesale-purchased sub-prime
residential mortgages ($2bn not yet securitised) and structured credit
trading positions held on balance sheet
2) US$175 million (net of fees) in respect of non-syndicated committed
facilities in the leveraged acquisition finance business.
- Rest of business compensating for higher losses in US
- Revenue growth in Q3 faster than H1, cost growth slightly lower
- Q3 profit up YoY
- HSBC Outlook: ‘It is particularly difficult to assess the outlook for the rest of the year and into 2008.’
- HSBC see risks to US economic growth if housing problems persist

NH: Valuation:
- Expect earnings downgrades of some 8% from higher provisions charges, putting HSBC on
11.6x 07 EPS
- 45% premium to UK peers and a 30% discount to STAN.
SELL on Strength, we prefer higher beta UK names such as BB/ and BARC

PM: Er, that is rather bearish

PM: Sell into the rally

PM: Can’t believe the shares are up

NH: actually have u seen the price of RBS today??

PM: no go on

NH: stock hit 480p earlier

NH: currently up 9.25p at 466p

NH: now on Friday this was trading at 400p

PM: Hmm — just looking — v fast trade

NH: so in two and a half trading sessions it has risen nearly 20%

NH: and this is a £40bn bank

PM: I know — spectacular the way the market cannot value cos of this size confidently

NH: and against that backdrop u can sort of understand why they have not put out a trading update

NH: what’s the point when the market is that irrational

PM: Irrational on the upside as much as the downside tho

PM: Quick note to hedgehog below

PM: Headgear intact at this end

PM:

NH: according to the charting guys I talk to the recent rally in the banks is very much of the dead cat variety

PM: Dead Cat Banks

NH: the trends that have been in place for the past year - sell banks, buy miners and telecos

NH: are still in place

NH: from time to time there is a bit of switching as people lock in profits but there is no reason to suggest this trade has ended

PM: have you got any stuff from your friendly irish chartist

PM: Richard Crosley — he’s widely followed

NH: i have

NH: and BSB, Mr Crossley talks in enhlish not chart speak

NH: here’s today’s thoughts

NH: Harold Wilson famously observed that a week
was a long time in politics.
In global stock markets, two days is even longer.
Last week saw global Financials, in broad terms, fall
by 10%, global Mines, in broad terms, rise by 10%.
In the last two trading days, much of this rotation (though
perhaps not as much as might have been perceived)

NH: Is the rotational change of the last two sessions any more
sustainable than the same rotational change which took place
in August of this year ?
For starters, volume in the last two sessions are unconvincing
(given the quantum of the advance), less than they were at the
time of the August attempt at rotation :

NH: The outbreak of hope implicit in the last two
sessions looks unlikely to persist.
As commented in Monday’s note, referring to the
American Banks sector, “ the Banks sector is
beginning to find some sort of level, an oversold
rally perhaps overdue ”.
The note made the same opinion of the UK. and
Japanese Banks sectors.

NH: The conclusion of the note was that a rally would be “ not
more than short-term and unconvincing, changing nothing
of the long-held bearish stance on the sector “.
There seems no reason to change this.

NH: The conclusion of the note was that a rally would be “ not
more than short-term and unconvincing, changing nothing
of the long-held bearish stance on the sector “.
There seems no reason to change this.
As a post scriptum, the chart below, referred to over many
months, made a new low yesterday :

NH: A.A. Rated
ABX HE AA 07-02
This index is based on a basket of AAA rated subprime residential mortgage backed securities
(that is, near highest grade bonds) constructed by Markit. A new index is created twice yearly so
the 07-02 index was created in July 2007 and reflects bonds issued in H1 2007.

PM: Thank you for all that Neil. Most helpful

PM:

PM: yes hedgehog — but we dont have the fancy spikes that you’ve got

PM: Right Neil — can we finish up with a bit of RAW

PM: Note to Shillings! RAW means untested market info

PM: You might know it better as “speculation”

NH: Well yesterday’s stake building story in Minerva has turned into a bid rumour

NH: getting slightly sceptical on this whole Minerva thing

NH: : number 2 came on this morning and note that Merrill Lynch had cleared out a big seller the other day

PM: That’s bandit number two — a source of RAW information

PM:

NH: and since then hedge funds had been all over the stock

NH: and spreading lots of stories

NH: shares up 5.5p at 171p at the moment

NH: vols is heavy though - 2.5m traded at the moment

PM:

PM: Need a health warning on this one

NH: that’s fair, although MRN shares have come back a long way so they could be looking cheap

PM: What else??

NH: rubbishy rumours in the bookmaking world

NH: Rank for Ladbrokes – again

PM:

NH: and talk of 680p a share bid for William Hill

NH: both very low quality RAW it has to be said

PM: Ok — thanks for all that

PM: ive been called to another legal huddle

PM: About You Know Who

NH: what fun

PM: Thanks to every for joining us today

PM: Thanks for the comments. v funny

NH: has just been on

PM: Hold on

PM: Scottish taxi driver

NH: guess what????

PM: Go on — whats the news??

NH: he is hearing talk of a bid for Minerva

PM:

PM:

NH: amazing

NH: and on that note I will bid u all farewell for today

PM: cheers — we will be back tomorrow at 11am — High Court rullings permitting