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Markets live chat transcript for the chat ending at 12:05 on 5 Dec 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

NH: morning

PM: I am jsut staggered by this market

NH: me too

PM: We are in danger of losing the test — and yet the FTSE100 is up a short 80/90 pionts

NH: 82.3 points at 6,397.2 actually

PM:

NH: on rate cut hopes

PM: that right — the general news flow is SO bad that everyone is suddenly convinced that British rates will be cut tomorrow

PM: So that is a Buy signal for stocks

NH: in particular this morning’s PMI data

PM: Getting snaps like

NH: UK service sector growth slowed to its weakest in more than four years in Nov

NH: sterling has slid on the news

NH: and a few economists are now predicting a cut from the BoE tomorrow

PM: here’s some stuff from Dow Jones

PM: The latest factor is the drop in the U.K. services PMI release to 51.9
in
November, from 53.1 in October, and to its weakest level since May 2003.

“Given the domination of services in the U.K. economy, the recent
plunge in
service sector confidence in the last few months underlines the deep
plight for
growth going forwards,” said David Brown at Bear Stearns.
“Given the sharp loss of economic confidence so far this year, we
could be
looking at the outside risk of a U.K. recession next year opening up the way to U.K. rates falling to 4.50% (from current 5.75%) by the end of 2008,” added Brown.

NH: sorry we have some technical probs at the moment

NH: bear with us

NH: anyway there is plenty of stuff like that

PM: Right — we can come back to all that bad news is good news stuff

NH: we can but just getting some interesting rumours on Soc Gen

NH: which could nip any rally in the banking sector in the bud

NH: jsut got this from a broker

NH: Socgen CEO calling an unexpected press conference at midday.

NH: rumour has it E4bn of write-downs

NH: just getting a SG price

NH: stock off 0.7% at EUR100.30

NH: but our price is probably delayed

PM: That is completely RAW rumour of course

PM: Sorry — forgot our european quotes were delayed.

PM: Bit like our batsmen

NH: lost another wicket

NH: defeat looms

PM:

PM: Right let’s do some M&A stuff — had enough crunchie stuff for now

PM: what’s moving this morning??

NH: well apart from the housebuilders which we have touched on

NH: Xstrata

NH: shares were really strong early doors

NH: got up to £34.42

NH: but have eased back a touch

NH: now up 63p at £33.83

NH: and that performance has nothing to do with today’s $850m bid for an Australian coal called Resource Pacific

NH: by Xstrata

PM: No

PM: it’s all down to these rumours of a tie-up with Anglo American

NH: that’s right

NH: and these rumours will just not go away

NH: mind you Xstrata has done nothing to calm the speculation

NH: did you see the comments it made in the wake of Resource Pacific announcement

PM: what this one??

PM: Xstrata CEO says BHP Billiton takeover proposal for Rio created new dynamic for consolidation in the mining sector

PM: From Reuters

NH: that’s a pretty heavy hint that things are being plotted

PM: it is

PM: and the best market intelligence suggest that while an approach has not been made plans for a merger ARE being worked on

NH: with Anglo the aggressor??

NH: paul is having more technical probs so i will take over for a few mins

NH: Anglo is actually the bigger company

NH: but Mick Davis at Xstrata is very acquisitive and extremely aggressive

NH: as such, there is a chance Xstrata could be the aggressor

NH: market caps of the two companies

PM: Back up

NH: are

NH: Anglo £42.4bn

NH: and Xta £33bn

NH: of course, in the wake of Anglo/Rio deal one would expect every mining company to be considering their options

NH: But a tie up between Anglo and Xta does have a lot going for it

PM: true

NH: actually, Credit Suisse, who are very, very bullish on the mining sector, have issued a note this morning looking in to the potential synergies and strategic merits of a merger between Anglo and Xta

NH: analyst Jermey Gray reckons that if Anglo offered £40 a share for Xstrata in a 50/50 cash and share offer it would by 13 per cent earnings accretive

NH: points out that a deal would create the world’s largest copper producer

NH: and Xstrata would bring a top operational team to Anglo

NH: anyway here is that note

NH: Summary: In a lead up to Xstrata’s Capital Markets day today, we are revisiting the prospect of a possible Anglo American /
Xstrata combination and explore the potential earnings accretion to both companies should platinum and copper prices surprise on the upside next year.

NH: Investment thesis : If Anglo were to offer £40 per share for Xstrata in a 50 / 50 cash and share offer, we estimate it could be
13% accretive to their 2008 EPS and would increase their gearing from 18% to 57%. If copper prices rally next year and average $4.00 per pound compared to our current $3.00 per pound forecast, then earnings accretion to Anglos could be as
much as 21%.

NH: On the flipside if the world slips into recession and copper prices average just $2.00 per pound next year then such a deal could be 4% dilutive to Anglo American - timing is everything.

NH: Catalyst : The key catalyst is Glencore. If they agree to dilute their 35% holding in Xstrata in exchange for a share in a larger
group with potential exclusive off take agreements for Anglo’s platinum, copper, nickel, iron ore and coal then a deal could be
possible. Xstrata would bring operational talent, volume growth and help create the world’s largest copper producer.

NH: On the surface it doesn’t seem to make as much sense for Xstrata to bid for Anglos. If Xstrata offer £40 per share on the same 50 / 50 terms it would be 7% dilutive to Xstrata shareholders and increase gearing from 32% to 62%. However, if
platinum prices rally to $2,000 per ounce in 2008 as Anglos potentially misses on production targets, such a deal could be 5% accretive to Xstrata shareholders who would also gain control of the world’s largest platinum resource

PM: The point on Glencore is a good one

NH: it is

NH: but oddly enough there have been rumours in the past week or so that Glencore was looking to sell down some of its stake in Xstrata

PM: Really?

NH: yep

NH: and Mr Gray reckons the deal could be structured in such a way as to get Glencore’s backing

NH: In return, Glencore could potentially receive the off
take agreements for Anglo’s platinum, nickel, copper, coal and iron ore. If Anglo were to
agree a deal with Glencore then some sceptics may argue that this is a sign that we are at
the top of the cycle. We certainly don’t subscribe to such a view, but time will tell how the
cycle plays out

NH: In any bid or merger with Xstrata, Anglos would clearly want to keep
Xstrata’s Swiss domicile given the tax advantage it brings. However since the
Falconbridge acquisition last year, this tax domicile is not as advantageous as before as
more earnings are now derived out of this jurisdiction in the higher taxing Canadian region
(ala Falconbridge).

PM: And what about synergies?

PM: what does Mr Gray have to say about that??

NH: $800m in the first year from the rationalisation of Anglo’s corporate offices
in South Africa and operational synergies from the two companies copper operations in
Chile and coal businesses in Australia.

NH: But he reckons $800 million of synergies are likely to be
conservative.

PM: Interesting

PM:

PM: What’s Carluccio’s doing this morning?

NH: down a penny at 157.5p

NH: why do you ask??

PM: Well we’ve got some clarity on why the restaurants can get away with charging 10 quid for five quid olive oil

NH: go on

PM: Keeps the riff raff out

NH: really

PM: That insight was provided by Robert Shrimsley — main news editor at the FT

PM: And someone who can afford to eat there regularly

NH: 20% of Carluccio’s comes from retail sales

NH: ie expensive olive oil

NH: can that really hold up in a conumer downturn

NH: sure the yummy mummy’s may go their for lunch

NH: but are they going to be taking the oil back with them>???

PM: Good point

NH: this stock trades as a massive premium to the rest of the restaurant sector

NH: just trying to dig up a note from yesterday

NH: that shows how expensive Carl is compared to its rivals

PM: Neil is just trying to find a note on this

PM: In the meantime i will just anwswer question below –

PM: We are actively checking SocGen rumour of press conference at noon — unscheduled

PM: And, yet. we’ve lost the cricket

PM: What a rubbish day — stocks up, wickets down

NH: still trying to find it

PM:

PM: To this Goldman Sachs stuff below

PM: IN my humble opinion…

NH: got the note

PM: The Ben Stein theory is rubbish

PM: Idea that GS economist would try to talk down the market to suit the GS book

NH: will post it in a minute when Paul has stopped writing

NH: and he has stopped now to answer a call

NH: and while he talks

NH: here is the table I wanted to put up

NH: shows the valuation of the restaurant sector

NH: Dominos Pizza 12.0 18.0
Enterprise Inns 12.0 11.8
Fuller, Smith & Turner 10.7 21.0
Punch Taverns 10.4 9.6
Carluccio’s 10.3 19.7
Greene King 10.1 11.8
Marstons 9.8 12.5
Mitchells & Butlers 9.5 15.6
Whitbread 9.0 18.0
JD Wetherspoon 7.4 13.1
Luminar 6.8 12.6
Prezzo 6.5 12.6
Clapham House 8.1 20.0
Individual Restaurant Company 5.9 12.4
Restaurant Group 5.8 11.4
Regent Inns 4.3 6.3

NH: first figure is Ev/EBITDA and the second P/E

NH: and we see from this that Carluccio is on 19.7 times prospective earnings

NH: so it is not just the oil that’s expensive at Carluccio

NH: so are the shares

PM: Yikes! almost 20 times earnings!

PM: Ok — im with you

NH: now, some of that premium probably reflects the fact that some people reckon Richard Caring will bid

NH: and he does have a 10% stake

NH: but…..

PM: Carluccios

NH: with a downturn looming??

NH: 19 times earnings??

NH: and look at the other stock in the sector which had a sky high rating

PM: Which one?

NH: Clapham House

NH: and we all know what happened to that

PM:

PM: Just to report back on that call —

PM: A City heavyweight says:

PM: There is no truth whatsoever in this Xstrata/Anglo rumour

PM: Ok?

PM: No truth

NH: do u believe him???

PM: I need a proper conversation — may well be no truth in rumour that the two are in talks

PM: Doesnt mean a deal is not being drawn up

PM: Also just to finish on Goldman

NH: i got the impressive that this Xta deal was in the early planning stages

PM: This reminds me of when the Times accused Goldman of acting on inside info to trade the British gilt market

PM: Suggested that Gavin Davies had got information direct from the treasury, where his wife worked!!!!

PM: It was a mad suggestion — and was of course corrected

PM:

PM: Any more consumer slowdown stuff to share?

NH: some contrasting news from the retail sector today

PM: Go on

NH: first their is Moss Bros

NH: profits warning

PM: does that count??

NH: what?

PM: well, its hardly a barometer for high street spending is it

NH: suppose not

PM: and its share price has been on the slide for months

NH: it has fallen a bit further this morning

NH: off a another 5.5p at 32.5p a drop of nearly 15%

NH: the company has warned that it is unlikely to meet profit forecasts

NH: because of After a good start to the second half, it has seen lower levels of footfall and sales in the last seven weeks

NH: and

NH: i quote

NH: We still have the key Christmas trading weeks to come which as always, will have a major bearing on the final outcome for the year. However, given the sales performance of the last seven weeks, it seems unlikely that full year profits will reach the current market consensus.

PM: so people are not buying suits

PM: I thought the rule was supposed to be the other way round….

NH: or stuff from Cecil Gee

PM: During downturns, people wear suits to try and get jobs

PM: Used to help make M&S recession proof

PM: But maybe im old fashioned

NH: well Moss also sell Hugo Boss suits

NH: do people buy those in a downturn

NH: this morning’s evidence suggests not

PM: I wouldnt buy Hugo Boss in either an upturn or a downturn

NH: you are more of a Paul Smith fan

PM:

PM: Paul Smith Sale Shop to be precise

NH: ah the one in Chelsea

PM: Mayfair

NH: but it is not all doom and gloom in the retail sector

NH: seen Asos??

PM: No

NH: on.line fashion retailer

NH: sells clothes similar to those worn by celebrities, alongside pictures and stories about stars such as Lindsay Lohan, Sienna Miller and Mischa Barton

PM: didn’t realise you were an avid reader of Heat magazine

NH: yeah, yeah

PM: all that z-list celebrity name dropping

NH: but just look at the figures

PM: ok

NH: Revenues +83% to £31.8m

NH: Profit before Tax £2.4m (£0.3m 6 months to 30 September 2006)

NH: 6m registered users as at 2 December 2007 (1.1m as at 27th November 2006)

NH: Revenues for 9 weeks to 2 December +101%

NH: Confident of another excellent year’s trading and record profits

NH: Sales for the 9 weeks to 2nd December 2007 are 101% ahead year on year and as a result sales for the year to date are 89% ahead. With several peak Christmas
trading weeks and the January sale still to come, it is too early to assess
whether this performance will continue for the remainder of the financial year.

PM: Impressive stuff I suppose

PM: but then it is chav fashion

PM: The bluewater look

PM: and chavs aren’t affected by the fall out from Northern Rock or the sub prime crisis

NH: but their parents might be

PM: true

NH: not sure how much we can read into these numbers if anything

PM:

NH: yesterday there was a post put up about Game Group

NH: which we ignored

NH: someone wanted to know why Game – which sells computer games – had been so weak

NH: well, this morning its shares have zoomed up 26.7p at 207.25p

NH: and that follows a competition commission ruling

NH: the CC has said Game’s merger with Gamestation can go ahead

NH: mind you the ruling was pretty close

NH: but nonetheless it is good news for game

PM: Obvously

PM: big cost savings I suppose

NH: yep

NH: but more importantly Game has a trading statement due on December 11th

NH: ABN Amro reckons it will be highly positive, given particularly strong demand for Wii/DS product (with shortages appearing at retail which are entirely demand-led).

NH: However, with the shares already trading on a PE of 14.0, they reckon that that once through a positive Christmas trading period, the market is likely to start to focus on the scope for intensifying price competition into 2008. Hold.

NH: mind you the Gamestation deal should help offset competition pressures

PM: Interesting — ta for that

PM:

PM: Can avoid it no longer

PM: How’s our favourite former bank now?

NH: Currently off 2p at 101p

PM: Hmm – very strange performance at the opening.

PM: Yesterday, when the FT ran a story on the front page saying the government was preparing administration in case a takeover failed, the stock initially fell about 4% in response.

NH: Which is nothing for the Crock

Readers may also know this former bank as Northern Rock.

PM: Well this morning, when the Telegraph said it might be nationalised the stock fell all the way to 95p – which is a substantial move. Even for the Crock.

NH: Well I think dealings in the Wreck are so screwed up, you can never really gauge the likely reaction to any particular piece of news.

PM: Hmm. My theory is that because the average Telegraph reader is 82, the paper actually has a higher proportion of existing Rock shareholders than any other paper.

PM: Many of these readers have not been able to get from the nursing home to their stockbrokers’ office (they don’t like to use to the telephone for financial matters) – so they are still in Rock.

PM: But the nationalisation stock stirred some into action – and so there was lots of retail selling first thing in the morning.

NH: Well if so, that’s now been soaked up and the price is back to 101

NH: That’s 101 in a pence per share sense as well as an Orwellian – of course

PM: Maybe this is our Room 101 – that we will have to write about the Crock for ever

PM: Carlomagno….

PM:

PM: Truth is — and i write this carefully - we decided to not bother trying to get the temp seven day injunction lifted

PM: All the information we wanted to print had been widely printed

PM: We walked away

NH: thanks to Helen for the post below

NH: explaining what is happening at SocGen

PM: But in theory we are still

NH: perhaps monsuier Bouton will driop a line about a EUR3bn write off

NH: or perhaps not

NH:

NH: right we are going to finish on another of Paul’s pet hates

NH: China

PM: How’d dear Shanghai do overnight?

NH: Pretty sprightly, actually.

NH: Shanghai Composite up 2.6% — back above 5,000.

NH: Why?

PM: Well, I’ve got my hands on a report to clients from David Yarrow at Clareville Capital

NH: Hedge fund manager. Mate of Charles Dunston. Clubbable chap.

PM: That’s the one

PM: Anyway he’s been on a 10 day trip to China and he’s sharing his views with his clients

NH: And now also with our readers.

PM: Er, yes.

PM: Anyway, this thing arrived and I thought…

PM: “Oh, excellent, Yarrow telling us all about the China miracle. This is going to be a hoot. They’ll be more mixed and mangled metaphors than a Jeff Randal column. We’re going to put loads of it up on Alphavile!”

NH: And?

PM: Well, its actually a rather good, sensible, thought-provoking read.

NH: Blimey. You must have been disappointed.

PM: Well, what caught my eye is that he has based is report around a model of Shanghai – a proper model – sitting in the Shanghai Urban Planning Exhibition Centre

PM: I’ve actually been to see this model – and Yarrow is right – it is jaw-dropping.

PM: What I didn’t realise at the time was that this was a model of how Shanghai will look in 2020. I thought the model was just being updated as Shanghai grew.

PM: But this is urban planning – and shanghai’s growth is now seven years into a rigid 20 year plan.

NH: So where is this taking us?

PM: Well, here’s a few random pars form Yarrow’s 12 page “think piece”

PM: The shock now is that the model hasn’t been changed once and it won’t
be. It’s the city that is changing in strict accordance with the model. It is a done deal and the biggest achievement ever in the history of urban development

PM: The relevance of this in my eyes is that much of the future is not open to conjecture. The city government have the next 12 years in hand. No need for these residents to worry about whether it is Boris or Ken in charge. It is a done deal. We know what is happening for the next 150 months of construction.

PM: In twenty years of investment I have never seen a wave of greater force than that exerted by the urbanisation of China and the accompanying and ongoing fixed asset investment. Moreover as the museum’s assured projections highlight, there is security in its sustainability and its execution. Size, sustainability and deliverance is a powerful cocktail that will
in my view be the most important factor in shaping financial markets in the years ahead. It coloured markets in 2007, but on January 1 2008 there will be no change. The Chinese don’t share our calendar, but even if they did, it would make no odds.

NH: So he’s a China bull – plain and simple

PM: I’ll say. But it was this bit that got me thinking – cos it reminded me of my own confusion after visiting Shanghai three years ago….

PM: As I wandered around on my last day in China, I felt that for all the meetings and visits I still hadn’t really got it. I couldn’t find the word or words that convey what is going on and why it is going on. I was missing something

PM: How can this global power shift – the biggest in history – be accompanied with almost no conflict, but with calm? How can the laziest or least motivated people in the world become the hardest working and most productive? Why do students join the Communist party, even though they don’t believe in communism? Why is the relationship with the US as “ good as its ever been” when Chinese tanks are on American lawns? Why also are Chinese relationships with its Asian neighbours so comparatively stable?

PM: Then perhaps it hit me. The Chinese must be by far the most pragmatic race in the world. There is no dogma now, just behaviour dictated by the practical consequences.

NH: Oh no! Spare us!

NH: You’re not going to close your China bear are you ??????????

NH: Not – surely – on the back of emotional piece of travel writing from David Yarrow at Clareville Capital????

NH: Please tell me no!

PM: I would not be so rash. But I’m having a re-think. Here’s Yarrow’s conclusion:

PM: It is dangerous to say too much. It is not a question of whether I am better equipped to have a view now than I had a month go. Nor is it a question of whether the view necessarily matters – it doesn’t to anyone other than us. But at the margin I do believe that those who question the longevity of the Chinese economic cycle will be proved wrong. Those that question the deliverability will be proved wrong .Those that question whether commodity demand will hold up will be proved wrong and those that are aggressive sellers of the oil price will be proved wrong.

PM: The key issue is the sustainability of the fixed asset investment programme in China and the collective hunger of an increasingly educated and motivated population. On both fronts I do now know more than I did.

Go and see that model.

NH: Well I think we should.

PM: Go and see that model?

NH: Let’s take Alphaville to Shanghai.

PM: We can’t. The internet there is too slow and unreliable.

PM: China, remember, still has some growing up to do.

PM:

PM: right we are done

PM: Think we’ve been a bit rubbish this week — Neil and I — apols

NH: yeah

NH: market really quiet this week

NH: total lack of fresh stories

NH: no wants to deal

NH: or take positions

PM: Commenting has been good, tho

PM: Thanks for that

NH: and before we leave some LIBOR fixes

NH: 3-month sterling ticked up to 6.65%

NH: one month sterling now at 6.75%

NH: still rising but at a slower pace

PM: Right — we will be back tomorrow at 11am. Thanks for joining us today.

NH: see ya

PM: Oh — meant to mention this:

PM: (Reuters) - The Oslo Stock Exchange’s chairman Halvor Stenstadvold has resigned after failing to report a share trade on time, the bourse said on Wednesday.

PM: Seeya