Markets live chat transcript for the chat ending at 11:57 on 7 Dec 2007. Participants in this chat were: Paul Murphy (PM) Robert Orr (RO)
PM: It’s Friday
PM: So we must welcome Robert Orr on to Markets Live, Alphaville’s stock knock about.
RO: Hello
RO: Plenty to discuss this morning.
PM: First, just wanted to invite readers’ views on this Bush plan to freeze interest rates for subprime borrowers that can afford a refix.
PM: But even before that we need to go LIVE and unrehearsted on Xstrata
RO: I’m just watching the price
RO: This lit up about half a hour ago. Quote is currently £35.54 – up 167p.
RO: That’s 5 per cent
PM: Vol a bit over 4m
RO: Which on a 35 quid stock is pretty chunky.
RO: Has been as high as £36.16 at one stage.
PM: We had a quick ring round the banditos on this one..
PM: 
PM: And we have some stuff to report.
RO: However, it is v v RAW.
PM: We are just going to report what is going round the market – the raw gossip that is driving this price.
PM: We were talking here yesterday about how people seemed to have the Xstrata story upside down a little — some people expected a bid by Xstrata for Anglo American
PM: We suggested that Xstrata itself was actually up for sale
PM: Willing seller in a sellers market — post Rio / BHP
PM: So today the story has gone round that Xstrata is much more advanced than previously thought
RO: What - selling to Anglo American?
PM: No — the rumour now is the Brazilians
RO: CVRD?
PM: Hmmm. Seems so
RO: Is this just a Friday rumour?
PM: Well I just don’t know
PM: But it is doing the rounds
PM: I do believe Mick davies is ready to sell Xstrata
RO: That is a big change from a few moths ago isn’t it?
PM: Certainly is
PM: How far he might have travelled towards actually doing a sale I do not know
RO: Anyway, Xstrata stock currently up 167p at £35.35
PM: lets move on
PM: 
PM: Let’s look at the wider market
RO: FTSE 100 is currently up 63 points to 6,548.1
RO: That is after a strong finish on Wall Street overnight, where the Dow Jones Industrial Average closed up 175 points, which is 1.3 per cent.
RO: Wall Street seemed to welcome this plan by President Bush to halt subprime foreclosures.
PM: Am I (along with FX trader below) the only person who thinks it’s daft, that it won’t work,
PM: That it simply masks a problem.
RO: Oh, fine, nice way to go into the weekend Paul – a thoughtful plan, carefully put together by President Bush to soften the blow for about 1.2m stretched Americans
RO: A plan that also promises to help avert a sharp slowdown in the world’s largest economy
RO: And all you can say is – Huh, won’t work. Sell.
RO: Perma Bear
RO: 
PM: Oh, I know. I do come across as a miserable scratched record – but I just don’t understand the “win win” argument on this.
RO: Er, well ….. Bank makes temporary concessions to struggling borrower…..
RO: … struggling borrower doesn’t go bust ….
RO: …forced house sale averted…
RO: ….house prices do not crash…
RO: …borrower gets back on his/her feet…
RO: …bank gets money back, with interest…
RO: ….everyone’s happy.
PM: Yeah, sure, but the key thing here is really opaque – and it is to do with the pricing of mortgage backed securities.
PM: Here’s some stuff from a blogger called Felix Salmon. He’s very good, if a tad self-confident.
PM: As we all know, marking to this particular market is very hard, because the tranche sizes are tiny and liquidity is nonexistent. That’s why banks mark to model. They plug in the parameters of the debt issue in question, put them all into a black box, and out the other end comes a valuation. If you change only one variable, and reduce the interest rate paid on performing loans from say 10% to 7%, then the model will spit out a lower valuation. On the other hand, if along with a lower interest rate you also put in a lower foreclosure rate, then you’ll probably end up with a higher valuation, especially if your loss given foreclosure was high enough to begin with. And if the general discount rate you use comes down on the grounds that the mortgage freeze has reduced downside risks to the housing market as a whole, then your model’s valuation will go up even further.
PM: That’s why the American Securitization Forum has found it so easy to embrace this proposal: all its buy-side members are likely to look at it and decide that net-net they’re going to make money, not lose money, from it. To be sure, there will be a tranche or two here or there which, at the margin, is a loser. But those tranches will be more than offset by other tranches which are gainers.
PM: The actual post is here:
PM: But I think Salmon’s key point is this:
PM: The subprime freeze is extremely careful to slice up the universe of mortgages so that only those which increase in value upon modification are eligible for that modification.
RO: At the end of the day, the market is already pricing in Armageddon in housing – so if there is even a small chance of Armageddon being averted, that has immediate present day value
PM: And here’s a good link posted by Carlomagno earlier
PM: that’s from Calculated Risk — and well worth a read
PM: Certainly for sceptics such as myself — and some people below — oh and bsb, who was commenting on Alphaville earleir
PM: Anyway, I don’t know why I’m allowing mayself to be talked round by felix salmon
RO: Why’s that?
PM: Well he will never mention Alphaville in any of his posts – just the names of the authors – Helen Thomas, Sam Jones, etc.
RO: Why’s that?
PM: Er, cos we cut our full fat RSS feed to a partial feed – extracts so you have to click through to the site to read the piece.
RO: Right
PM: It’s a long argument – and life is too short. But look, for anyone who really really wants the full fat RSS feed, here it is…
PM: http://ftalphaville.ft.com/blog/feed?abstractlen=-1
RO: Oh right, thanks for that
PM:
PM: Argument has kicked off below — which is nice for us spectators
RO: We’ll have Pesto joining in next
RO: let’s not go there again.
PM: Ah, but we can go to Northern Rock
PM: the poor north eastern mortgage lender that’s had a bit of hiccup with its financing.
RO: Yes, interesting to see the markets reaction to two key pieces of news – JC Flowers has withdrawn its bid, and Olivant – Luqman Arnold’s non-private equity group - has fleshed out its non-takeover bid.
PM: And the reaction?
RO: Nothing.
PM: Nothing?
RO: Nothing in share price terms – stock is currently flat at 103p
PM: 1. Most people have stopped trying to trade this stock now. it is just too expensive to short
PM: 2. It remains impossible to properly value Arnold’s proposals
RO: Well, institutions maybe aren’t trading, but think punters stil are.
RO: if you look at the most traders stocks, N Rock is still in the top five buys.
RO: Whether that’s sensible or not is another matter
PM: Well for them I do have one piece of bullish research on Rock
PM: Dont all die laughing — this is a former Crock, remember now
Readers may also know this former bank as Northern Rock.
PM: Northern RockRO: KBW, can’t just dismiss them Paul.
PM: No no — wasnt doing that
PM: Think their key point is that Arnold et al deal cuts book value to 224p — and that is a lot better than virgin’s proposal
PM: But you also have to remember that one Jon Wood and one Philip Richards prossibly become controlling shareholders
RO: paul, what’s the definition of a long-term investment?
PM: A short term speculation gone wrong!
RO: boom boom
PM:
RO: anyway, as VP says below, slightly odd that Olivant wants to keep the N Rock brand.
PM: No they’re not — they are changing it back to Northern Rock
PM: let’s move on
PM:
PM: See the market is even higher now
PM: Footsie now up 74 at 6561
RO: Within 200 points of a new seven-year high.
PM: Crisis, what crisis eh.
RO: Absolutely.
PM: Still puzzled by the market’s reaction to yesterday’s rate cut.
RO: Very odd wasn’t it.
RO: FTSE ended lower and house builders got hammered after the first rate cut in two years.
PM: Expectations of two more cuts by the middle of the year.
RO: On a slight tangent, an interesting note just dropped into my inbox from Goldman Sachs.
RO: They are saying they prefer FTSE 100 to the German Dax.
RO: Here is some of it.
RO: We believe that a further adjustment to economic growth expectations is likely to push equity prices lower in the near term. We have adjusted our country portfolio to reflect this view, downgrading the more growth sensitive DAX and upgrading the FTSE 100 & SMI. The FTSE should also benefit as rates continue to come down.
RO: Upgrade FTSE to Overweight
Further rate cuts by the MPC should lend support to the FTSE 100 in 2008. Recent underperformance means it now looks cheap versus the rest of Europe, especially on a price to book vs. ROE. It is also the index with the least sensitivity to further downward revisions in economic growth. The biggest risk is a sharp downturn in the UK consumer. We upgrade to an Overweight from Neutral.
RO: Downgrade DAX to Underweight
The DAX is up strongly this year pushing the market multiple up; it was once one of the cheapest indices in Europe, but is now around average on most measures. It is the most sensitive market to any downward revisions in GDP, and would be hit badly under a hard-landing scenario, in our view. We also expect the strength of the euro to start affecting the exporter
PM: Hmmm - my bearish views on the market are well documented.
RO: Don’t we know it.
RO: Anyway, all eyes will be on the non-farm payroll numbers out later.
PM: What are we expecting?
RO: Consensus is for about 80,000 new jobs created in November, although the spread is huge.
RO: In fact, there seems to be very little consensus at all.
PM: this have a bearing on next week’s Fed meeting?
RO: Definitely. A very low payroll number will raise the chance of a US rate cut next week.
RO: Look at the UK – everyone was sure the MPC was going to hold rates until the last few days when a slew of negative data seems to have convinced them to act.
PM: Housebuilders and property stocks all higher today I see.
RO: Obviously there is a delayed reaction to yesterday’s rate cut in there.
RO: And don’t forget how bombed out some of these housebuilding stocks really are.
RO: Taylor Wimpey, for example, was worth 520p in April.
RO: Less than half that now – even though up 15p to 214p this morning.
RO: Taylor Wimpey not long for the FTSE 100 though – due for demotion to the FTSE 250 at the next reshuffle later this month.
RO: Interim figures from Berkeley Group have also helped stabilise the sector today
PM: What are they saying?
RO: Well, profits are up and the group is returning about £240m to shareholders.
RO: The comments from management are interesting.
RO: Looking at the housing market, the “feel-good” factor has been impacted by the current credit conditions and concerns over affordability, but will benefit from yesterday’s decision by the Bank of England to reduce rates by a quarter per cent. Most importantly, the fundamentals of the market remain unchanged, particularly in Berkeley’s core market of London and the South-East, with a shortage of supply, historically low interest rates, high employment and forecast economic growth.
RO: Copying this off Reuters.
RO: From managing director Tony Pidgley.
RO: “We had a very strong market for 12 months and the market is currently taking a breather. Current signs are that it is actually soft landing and going back to a normal market, which we welcome.
“The sentiment has definitely weakened but . . . we had a very good trading in November and started December very well and we are very happy with it…Currently the UK economy is generally in very good health and I think we’ll see a steady (housing) market.”
PM: Slight case of talking his own book here don’t you think
RO: I guess so. It is also important to point out that Berkeley is a specialist in London and the south east. And the housing market down here is clearly very different from the rest of the UK.
RO: Anyway, Taylor Wimpey is up 15p to 215p, Persimmon is up 50.5p to 801p and Barratt Developments is 13p higher at 461p.
PM: British Land is up as well.
RO: It is - 55p higher at 986.5p.
RO: Was looking through a note from JP Morgan this morning saying that next year might not be as back as some people think for real estate.
RO: Follows that bullish note from Lehman Brothers yesterday of course.
RO: JPM picks out British Land and Segro as top picks.
RO: And, like the housebuilders, this sector has also been hammered in 2007.
RO: Anyway, here’s the note
RO: Too early to swing back
But time may come in 08 and our top picks Unibail,
British Land and SEGRO already look attractive
RO: European property stocks have fallen 29% YTD, underperforming
MSCI Europe by 35%. We remain UW into 08 and reiterate it is too
early to buy the sector, given the downward spiral in property
valuations and continued spillover from banks. However, we believe 08
will be a better year for property stocks and our top picks, Unibail-
Rodamco, British Land and SEGRO, already look attractive because of
their defensive positioning, with a (severe) downturn priced in.
RO: But time to buy may come in 08. Lessons from the 90-92 crash
include: first year of stock returns are the worst, a property crash
needs time to elapse, valuations have to become ‘cheap’ first and
banks recover 1-2 years earlier than property. We believe 1H08 will
be tough, but remain optimistic for full 08, as ‘a time to buy the
sector’ may crystallize if economic growth sustains, share prices drop
by 14% or bond yields fall significantly. If 1H08 proceeds ‘according
to plan’, i.e. recession avoided, we see 12% upside.
RO: Paul’s on the phone
RO: To Vegas
RO: Clearly his contact likes boxing
RO: Good luck to Ricky Hatton tomorrow
PM: No — he might be an east ender, but he’s not from that boxing community
PM:
RO: Xstrata keeps getting higher
RO: Up 200p to £35.90!
PM: Hmm — reuters now running the speculation about Xstrata and Anglo American
PM: But that is NOT the rumour we are hearing — that concerns the Brazilians — CVRD
PM: But we are still trying to check it — it could jsut be friday rubbish
PM:
PM: What’s going on with the dairy groups today? Saw we had a story about that this morning.
RO: The Office of Fair Trading has handed down fines of £116m for collusion between supermarkets and dairy groups between 2002 and 2003.
RO: OFT seems to have reached agreement with Sainsbury and Asda and Morrison on the one hand and Dairy Crest on the other.
RO: This lot have accepted liability in principle – and seem to have been given lighter fines as a result.
RO: Dairy Crest shares, for example, are up 39p to 578p this morning on the back of this case being settled.
PM: What about Tesco – they were involved too weren’t they?
RO: So the OFT says, but Tesco is denying any involvement.
RO: According to Reuters, Tesco said:
RO: “We acted independently and we did not collude with anyone. Our position is different from our competitors and we are defending our own case vigorously.”
PM: Interesting tactics from Tesco here. They would obviously hate to be seen doing anything against the interests of customers.
RO: Unless of course they are really innocent.
PM: Of course. That too.
RO: Anyway, Sainsbury (which admitted price fixing) is up 0.5p to 443.75p and Tesco (which didn’t) is up 0.75p to 480.25p.
PM: A storm in a teacup?
RO: Let’s move on.
PM:
RO: Quick mention of Emap.
RO: Down 63p to 762p on news that it is selling its consumer magazine and radio assets to focus on its B2B business.
RO: When many people thought it was going to be the other way round.
PM: Come as something as a surprise
PM: Talking of media — how is BSkyB reacting to the big shake up?
RO: Biggest FTSE 100 faller
RO: Down 17p to 587p
PM: Ironic really — price fell heavily when Murdoch Jr was appointed — spent his time winning the City round — adn now it falls when he leaves
PM: Also quite entertaining the way that Murdoch Snr treats Sky as fully-owned subsidiary
PM: got any research on Sky??
RO: From Cazenove
RO: James Murdoch is stepping up from CEO of Sky to become head of News Corp’s Asian and European operations. News Corp owns 39% of Sky and James will replace his father as nonexecutive chairman. Jeremy Darroch, Sky’s CFO, is expected to become CEO. Whilst James was increasingly seen as favourite to take over from his father at News Corp, the timing will still surprise investors. Despite initial concerns regarding James’s appointment at Sky, he has won over investors and his strategy is seen as being hugely successful and well executed. Investors will be disappointed he is moving into an non-executive role and concerns over News Corp’s influence will once again re-emerge.
RO: That said, Jeremy Darroch is well known by investors and very much part of the recently much improved business momentum. Sky’s shares have come under pressure this quarter, retreating some 14% compared with a volatile but ultimately broadly flat market and only a 5% fall in the European Media sector. We had expected Sky’s shares to run into some profit-taking but with the shares down 15% from their high for the year (713p), we would have questioned whether this may have run too far.
RO: However, today’s news is likely to result in further share price weakness, in our view. With the various regulatory reviews pending, we were reluctant to upgrade the shares back to outperform but would stress that Sky should prove more defensive than some fear should the UK experience a sharp consumer slow-down. We still view Sky as having an excellent long term growth potential with its strong operating performance and business momentum providing support for its strategy and execution.
RO: Valuation - Whilst Sky’s near-term valuation metrics remain high (EV/EBITDA 10.5x and a PE of 19x for calendar 2008E), these fall rapidly by 2010E (EV/EBITDA of 6.5x and PE of 11.2x) as broadband losses disappear and Sky moves towards its longer term guidance for subscriber targets (10m subs) and operating margins (25%-29% in pay-tv). However, financial headwinds including the Virgin carriage dispute, increased Premier League costs and the loss of PremPlus revenue together with the costs of growth will limit any progress in the current financial year with only 2% growth in operating profits forecast for 2007/08E. Our fair value remains 770p, based on terminal pay-tv operating margins of 23%, reflecting our assumption that long-run sustainable margins will be below the level achieved in 2010.
RO: However, limited progress towards this target is likely in the current financial year, given the financial head-winds being faced. Other than on the regulatory front, next news from Sky will be its Q2 results around 6 February. Profitability trends should be much improved from Q1 due to both the anniversary of broadband investment and a slow-down/reduced upgrade cost associated with Sky+ following its decision to reduce the subsidy in this area. Finally, a positive surprise might be a new deal with Virgin Media on carriage, which is currently costing Sky some £60m annually on reduced advertising and wholesale revenues. There has been no suggestion of this but we note that Neil Burkett, Virgin Media’s acting CEO, appears more pragmatic than his predecessor and would also stand to benefit from such a move
PM: Right — thanks for all that — courtesey of Cazenove
PM:
RO: Looking at the small caps – Begbies Traynor.
RO: Insolvency specialist.
RO: Down 55p to 86p after a profit warning.
RO: Activity in its core sector down 5 per cent in the first half compared with last year.
RO: “This has been one of the quietest periods for corporate insolvency for nearly 20 years, reflecting the ready availability of easy credit up until the autumn of this year.”
RO: But, hold on, bad news is good for these lads.
RO: However, we are beginning to see the first signs of an upswing in the numbers
of instructions from UK businesses facing financial difficulties, which, if
sustained, will lead to an improvement in our market in the New Year.
RO: Thank goodness for the credit squeeze.
PM:
RO: Here’s a note from Landsbanki.
RO: Begbies Traynor (General Financial, Hold from Buy) - Market slowdown and
expansion costs to hit profits
Begbies has issued a trading statement ahead of its end-January interim
results. Corporate insolvency activity was down by 5%, against a 13%
downturn year-on-year in official statistics for the nine months to
September. It therefore expects first half revenues to be broadly flat. With
an increased resources base and expansion costs, operating costs will be
lower.
Taking this forward to the second half, although there are signs of an
upturn in activity, the Company is not confident that the shortfall can be
recovered and is therefore operating profit 20% below last year’s looking
at operating profit 20% below last year’s £10.8m. This is a 30% downgrade
from our £12.2m forecast.
We are downgrading our recommendation to Hold, and placing forecasts under
review.
PM: Thanks for that
PM:
PM: To some comments/questions…
PM: No, FX, dont go! We like your stuff
PM: We are watching for Libor
PM: As for the rest of the conversation (including row about french house prices) — Rob and I feel rather left out
RO: Like a private party going on down there
RO: Interesting thoughts tho
PM: Readers Live! (incorporating ….)
PM:
PM: What about this William Ransom.
RO: More bad news from the “oldest independent pharmaceutical company” in the UK.
RO: Makes herbal remedies like ginseng and echinacea. Founded by Quakers you know.
RO: Anyway, inspectors from the Medicine and Healthcare products Regulatory Agency found evidence of “deficiencies in the company’s control and investigation of microbial contamination of the purified water supply used in the manufacture of certain products”.
RO: That’s at its manufacturing site in Essex.
PM: Oh right!
PM: that’s really scary
PM: What sort of microbial contamination i wonder
RO: could be anything.
RO: mind boggles
RO: feel sick
RO: Anyway, they have had to recall certain products.
RO: Shares have been hammered – down 8p to 9.5p.
PM: great
PM:
PM: Straight to Libor…
PM: One month sterling is 6.6575 v 6.7475
PM: So down a good bit!
PM: Still waiting for overnight and 3m
PM: Quick up date on Xstrata before we go. Price is now 221p higher 36.05
PM: One to watch for the rest of the day, I suspect
PM: Now look — dont want to interrupt conversation below — but I have to go.
PM: Got an early lunch
RO: where this time?
PM: The Don
PM: Nice place — City branch of the brillian Bleeder
PM: Bleed Heart to find
RO: upstairs or down?
RO: I bet he is downstairs
PM: Good question
RO: where his phone won’t work
RO: and he doesn’t have to come back to office
PM: C — below — what a good idea
PM: Anyone got the live Libor price for us ??
PM: The mouse on my Reuters box has failed
PM: pathetic — but cant get the page up
PM: V good point by anon below on Xstrata!
PM: We are off — thanks for joining us today
PM: Thanks for all the comments and gags
PM: We will be back on Monday at 11am
RO: bye from me
