Markets live chat transcript for the chat ending at 12:23 on 21 Jan 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Whoa!
PM: 
PM: Hi
PM: Welcome to Markets Live, FT Alphaville’s daily stock markets chat
PM: Neil Hume is with me.
NH: morning
PM: For those who are new to this discussion, you should know that Neil and I chat randomly about shares and other stuff for about a hour…
NH: And, along the way, the readers correct us where appropriate.
PM: They might help us straight away by explaining what the hell is going on
NH: Well, I am in a COMPELE DAZE.
NH: Punch drunk.
PM: That tin hat’s on too tight. It’s restricting the flow of blood to your head.
PM: In fact, Neil you’re GOING PURPLE.
PM: PULL THE SAFETY CATCH!!
NH: Ohhh. Sorry about that. went to a fifth notch this morning
NH: never down that before
NH: we were at four last weel
PM: Now up to FIVE
PM: EOTWASKI
PM: Missed a W sorry
NH: there’s your answer folks
NH: FTSE 100 currently down 204.7 at 5,697.5
NH: below its August low
NH: that was 5,858
NH: and as readers are saying below the mining sector, which had provided a powerful prop is beinig taken apart
NH: and according to one of the technical guys we follow closley
NH: the bull run in the mining sector is over
PM: This is Richard Crossely — top chartist
PM: NCB Stockbrokers –
NH: works out of the Citi though
NH: above the Northern Rock on Moorgate I think
PM: We will come back to crock
Readers may also know this former bank as Northern Rock.
NH: here’s his alert
NH: went out an hour ago
NH: tin hats to the ready
NH: Thursday’s note referred to the global Mines sector and stated
that ‘the present (technical) conjuncture may be representing a
change of trend’ – the trend referred to being the strongly bullish
trend of the last year, in the case of some individual stocks in
the sector, much longer than that.
NH: Friday’s rally in the global sector was technically completely
unconvincing.
NH: Weakness at the time of writing gives the more correct reading.
At the other end of the performance spectrum, the Foodstuffs
index made a new high, and clearly is going much higher:
NH: A clear picture in prospect,
recession and inflation.
PM: 
PM: Stagflation
NH: have u seen some of the falls in the sector this morning??
PM: Left me queasy just looking at the numbers
Rio Tinto (RIO:LSE): Last: 4,389, down 311 (-6.62%), High: 4,533, Low: 4,338, Volume: 3.59m
BHP Billiton (BLT:LSE): Last: 1,289, down 89 (-6.46%), High: 1,328, Low: 1,279, Volume: 8.06m
Vedanta Resources (VED:LSE): Last: 1,610, down 122 (-7.04%), High: 1,696, Low: 1,560, Volume: 2.94m
Antofagasta (ANTO:LSE): Last: 582.50, down 20 (-3.32%), High: 604.50, Low: 570.00, Volume: 2.29m
NH: real pain
NH: especially for those folk who piled into Rio on Friday going for a increased offer from BLT
PM: Ouch! Always looked dodge that tale
NH: still, one mining stock has avoided the worst of the sell off
PM: It has
NH: Xstrata
NH: hugely volatile trading in its shares this morning
NH: along with everything else is got hammered early doors
NH: stock hit £31.50
NH: and then performed an incredible u-turn
NH: went as high as £35.25
NH: now back at £32.80, a decline of 83p
PM: 2.5% fall — that is a result in this sector this morning
PM: Which shows how bad itreally is out there
PM: Losses of 5-7% common across all the miners
PM: What has caused this volatility?? In Xstrata that is
NH: couple of rumours
NH: first traders picked up on a report published in Brazilian paper
PM: what did it say??
NH: hang on, will just get it
NH: Brazil’s Cia. Vale do Rio Doce may bid up to $90 billion for copper and coal producer Xstrata Plc, daily newspaper Valor Economico reported today.
NH: Part of the offer may be made in preferred stock, the newspaper said. Brazil’s Cia. Vale do Rio Doce may bid up to $90 billion for copper and coal producer Xstrata Plc, daily newspaper Valor Economico reported today.
NH: Part of the offer may be made in preferred stock, the newspaper said.
PM: that’s from one of the wires — bloomie i think
NH: the preferred stock stuff is interesting
NH: one of things we have been wondering about is how Vale would finance a deal
NH: this company has a two tier share structure
NH: The more powerful voting shares are controlling by the founding family
NH: who don’t want to give up control of the company
NH: so that rules out a massive all paper offer
PM: and anyway, if they offered all paper there is no way of knowing that Xstrata’s biggest shareholder – glencore – would accept paper
NH: exactly and raising $90bn for an all cash offer in this market
NH: could prove difficult
PM: 
NH: especially if BLT bids for Rio
NH: because it will have to refinance loads of debt
NH: and I am not sure the big wall street banks will want to lend that much cash while their balance sheets are still under stress
NH: anyway, the brazilian press report is not the only thing driving XTA
NH: there is another story doing the rounds
PM: Go on
NH: well, it’s of a joint bid for Xta from Vale and Anglo American
PM: ah, that’s interesting
PM: Yes lots of time
NH: as we know Anglo has been spending a fair bit of time in Brazil at the moment
PM: it just took a $5bn stake in MMX
PM: the pig iron producer
NH: makes a bit of sponge iron as well
NH: and that story was broken in the Brazilian press, remember
NH: anyway back to this joint Vale/Anglo bid
NH: Vale is on a roadshow at the moment and the feedback from analysts who have been on it is that due diligence on a bid has started
PM: Really?
PM: Not sure about that
NH: nor me
PM: as everyone will recall
PM: we broke the story that Vale had appointed advisers – lehman and Merrill – to look Xta
PM: and had flown over to London to start discusses on a deal
PM: now our sources tell us that DD has not started
PM: But that’s not to say it wont
PM: or that Vale are not interested
PM: just that this would be a complicated deal
NH: that’s all true
NH: but this is the sort of thing that is going round the market this morning
NH: got it from a broker earlier
NH: Our CVRD analyst has been roadshowing in Europe and has
Been picking up strong rumours that CVRD are doing due dilligence on XTA and are looking to alter their own share structure in order to raise the money they need to bid for XTA (obviously nothing conctrete)….
NH: Going alone we think would be too much for CVRD but a carve up could well be more manageable. Anglo save been in Brazil alot of late, putting together their bid for MMX.
NH: CVRD and
XTA are the joint operators of the massive Sudbury basin and have been negotiating the best way to extract the synergies from this operation. XTA have argued for ages that a deal with Anglos would unlock tonnes of value for both sets of shareholders. It seems that Glencore are keen to cash up to some extent so may not be too much of a barrier to such a deal.
PM: 
PM: Thanks for that
PM: Lets go back to the wider market
PM: See the footsie is whipping around
PM: 220 points down about 3 mins ago
PM: Now rallied slightly to a 190 point deficit
NH: looks to be pretty thin out there this morning
NH: remember US markets are shut today
PM: Of course!
NH: so there will be a lack of liquidity in the market
NH: so they explain some of the switch back action we have seen
NH: but the feedback I am getting from brokers is that people are getting really worried about this monoline insurance stuff
PM: ACA got a stay of execution but looks doomed
PM: Ambac downgraded by Fitch on friday night
PM: Real worries now that if and when a monoline defaults it will trigger a fire sale of bond issues across america
PM: Everything — from municipal bonds to finance company debt
PM: This has reinforced generalised worries that the crunch is now spreading to the real economy
NH: true, but I am worried about the impact this will have on the UK banking sector
NH: but before we look at that just have a missive through from out fac strategist
PM: Ah, the Great Teun Draaisma
PM: 
PM: Former inhabitant of the lost land of Draaisma
NH: and check the title of this piece
NH: WE ARE NOT COMPELLED TO BUY DESPITE BEARISH SENTIMENT
PM:
NH: We recognise that sentiment indicators are at levels of extreme bearishness. When markets and sentiment fall, we
become more optimistic on the future of equity prices. As of last Friday, MSCI Europe was down 15% since its peak on June
1, 2007. Yes, sentiment and capitulation indicators are at very low levels, and the odds of a rally are high, based on historical
observations. If this is still a bull market, now is the time to buy for a large rally.
NH: However, if this is a bear market, as we
think, any possible strength is likely to be short-lived, and we would aim to sell into it. Markets don’t move in straight lines.
At some point in next few weeks, also with the help of a big Fed rate cut, there may well be a short squeeze, possibly very big
and fast. We recommend you sell into that strength. Earnings growth is likely to be negative, and that means patience is
key. We believe the trough is not reached yet.
NH: Our market timing indicators say: don’t buy yet. The most important of our four market timing indicators is our CVI,
currently at -0.4. There is still 4% downside to reach a first buy signal -1 standard deviation below fair value, and 11%
downside to -2, which is the more common level reached in recessions and crisis situations. Our risk indicator and our
composite market timing indicators are neutral too. Our fundamental indicator is giving us a first buy signal just below -0.5,
while our capitulation indicator at -2.5 has only twice been lower, in 1998 and 2001, and gives us a buy signal, too.
PM: Morgan Stanley’s chief euro strategist is not a buyer
PM: He’s got himself a capitulation indicator now
PM: Another 4% to go — he reckons
PM: But then he’s got that on the Dax this morning tho!
NH: here’s some more
NH: What Would It Take for Us to Start Buying Equities?
NH: When valuations are cheap enough. Our CVI needs to go below -1 standard deviation cheap, currently at -0.4. There
is still 4% downside to reach a first buy signal in a crisis of -1 standard deviation below fair value, and 11% downside to
-2, which is the more common level reached in recessions and crisis situations. More generally, we will follow our suite
of market timing indicators, of which we view the CVI as the most important
NH: More reflation. Fed fund rates need to be stimulative, some way below 4%, which is the level below which our
economists estimate that monetary policy in the US is stimulative. Other reflationary efforts, such as an ECB rate cut or
further Bank of England action, would help too. Lower inflationary readings and lower inflation expectations would be
bullish as it would allow central banks to cut.
NH: More bad news on global growth. We think it is quite safe not to start buying equities before US economic weakness
clearly spreads. We do not believe in decoupling, and interestingly that is indeed where we get the most investor
pushback currently, showing that recoupling would be a nasty surprise to investors. Investors are well aware of the US
recession, but appear not to be expecting it to spread globally in a meaningful way. We do, and we think that, once that
idea becomes more clear and more mainstream, it may be interesting to buy equities again during that associated
weakness in equity markets.
NH: More realistic expectations. IBES consensus EPS growth estimates for 2008 are +11% in Europe, compared with our
negative growth forecast. Also, according to IBES consensus, some 80% of companies are to increase EBIT margins,
whereas the all-time high share of companies improving their margins was in 1986, when 65% of companies succeeded.
Both expectations need to come down.
NH: And, a surprising historical lesson about timing. Equities could start a bear market rally at the same moment as
European earnings peak in the middle of the year. In our Earnings Recession Guidebook from January 7, 2008, we
showed that European equity markets tend to peak on average 13 months before the earnings peak, historically. This
has happened again, as the MSCI Europe peak was in June 2007 and the earnings peak, we think, will be in the middle
of 2008. We found among the various rules of thumb that there is often a bear market rally starting on average 1 month
post the actual earnings peak, which we expect around the middle of this year. Not a golden rule, but good to be aware
of
PM: So basically he wants politicians running around in a blind panic and half the population down at the Citizens Advice bureau — adn then maybe he’s a buyer
NH: yep, when we get Vince Cable MP on the TV talking rubbish about the stock market then it will be time to pile in
PM: Another indicator — Radio 4 are planning a bear market special for tomorrow at 9am
NH: that would be the time to put everything you own into an index tracker
PM: Steady steady — we are NOT necessarily buyers just yet
PM:
PM: Sorry — you wanted to talk about the banks
NH: this whole bond thing is very scary for the UK banking sector
NH: when they reported trading statements before Xmas
NH: their sub prime/cdo exposure etc
NH: including the positive impact of hedges
NH: if those hedges are worthless
NH: a la Merrill Lynch
NH: then we could have another round of write downs
NH: and if it’s someone like RBS forced to take a write off
NH: we could be see its dividend cut
NH: and a rights issue
PM: or a mandatory convertible with a SWF
NH: actually there was a really good note on this subject
NH: from Sandy Chen, the banking analyst at Panmure on Friday
NH: few brokers picked up on it
NH: and they say it is another big worry for the banking sector
NH: here it is
NH: The read-across from yesterday’s Merrills results is dire for UK banks. We
expect that counterparty default risks will rise, bringing another wave of writedowns.