Markets live chat transcript for the chat ending at 15:51 on 21 Jan 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Okay — here we go
PM: One of our rare post-lunch outings here on Markets Live
NH: Dad’s Army Live
NH: did u check the new masthead on FT.com
NH: last week we were mocked up in Newscastle United shirts
NH: and today we have been given tin hats
PM: Sky Line Neil !!! get with the Interweb 2lingo!
PM: 
NH: which makes us look like Captain Mainwaring and Private Pike
NH: from Dad’s Army
PM: ive got a bit more hair than Mainwaring — albeit not a lot more
NH: and if this continues….
NH: anyway, the message don’t panic
PM: 
NH: don’t panic Mr Mainwaring
PM: Actually maybe we should — stocks turned south again
PM: Current quiote?
NH: now down JUST 236.3 at 5,665.4
NH: still a loss of 4%
PM: Actually i think we should stiffen our backs here
PM: Look whats going on elsewhere
PM: CAC – complete CAC – off 4.9%
PM: Hang Seng was off 5.55 overnight
PM: Ibex – 4.95%
PM: Straits Time – off 6% overnight
PM: Dax – down 6%
PM: 6%???
NH: actually we lost 20 points while u have just typed that in
PM: And what are we?
NH: 243 points down at 5,657.9
PM: So what have you been picking up in the market place — body parts?
NH: well a number of things since we last talked
NH: first volume is not that heavy
NH: most of the trading desks are not frantic
PM: trade never heavy when prices fall v sharply — cos no one buys
NH: in fact most of the business at the big banks today has been from hedge funds on their DMA machines
NH: just cutting positions and getting out
PM: DMA — direct market access — (smarty pants Neil)
NH: not real selling by the long only funds
NH: most of this seems to have been futures driven
PM: Quickest way to trade when market overall moving fast
PM: For those who were not on earlier we should perhaps run through the underlying reasons for the weakness of the indices
PM: The big prop which has been removed here in London is the mining sector
PM: Falls here are absolutely horrible
PM: Santa — there are a good number of short-specialist funds out there
PM: And yes, some people will be making a killing
NH: futures driven – means that it is selling of futures contracts that has pulled the market lower
PM: tail wagging dog
NH: these have to hedged in the cash market
NH: and so people sell the underlying equity
PM: Miners — just look at some of these figures
PM: BLT:lse
Kazakhmys (KAZ:LSE): Last: 1,067, down 88 (-7.62%), High: 1,142, Low: 1,050, Volume: 2.43m
BHP Billiton (BLT:LSE): Last: 1,283, down 95 (-6.89%), High: 1,328, Low: 1,254, Volume: 23.34m
Rio Tinto (RIO:LSE): Last: 4,400, down 300 (-6.38%), High: 4,533, Low: 4,264, Volume: 8.48m
NH: right, the other thing I have been picking up on my trawl round the market
NH: is that the thing that has really worried people is the Ambac stuff
PM: Ok — this is one of the big monoline insurers — hanging by a thread to their credit ratings
PM: In fact Ambac was downgraded to AA by fitch on friday night
NH: that’s right. 7 AAA rated monolines and Ambac is the first to be downgraded
NH: people are only just getting their heads round this
NH: and the statement from Dexia, the Franco Belgium insurer
NH: spelt out what that could mean
NH: Dexia has a portfolio of stuff that is insured by Ambac
NH: if that insurance is wortheless, the assets go down and Ambac takes a write off
PM: Cant believe people didnt see this coming. Do they not read G Tett and P Davies (not to mention Sam Jones and Helen Thomas)?????????
NH: which is pretty similar to the worries we were going on about on the UK banks this morning
PM: Should mention that it was Merrill Lynch that drew attention to this thru the transparency of its reporting last week
PM: Took a write down against ints Ambac insurance
PM: As someone mentioned this morning, this is like getting someone lower down the hill to insurer you against flooding
PM:
NH: on top of the Ambac there is more doom and gloom coming in about the US economy
PM: tell me
NH: got this from Citi at lunchtime
NH: Equities slide this morning as US recession fears really start to take hold. Our US colleagues have now given a more detailed
picture of the changes to our US growth forecasts. We now expect the Fed funds rate to get to 2.5% by the summer
(previous range 2.5% to 3%) with more if the economy fails to respond. We look for GDP growth this year of c1% from our
previous forecast of 2.3% with a negative first quarter. But with this marked response by the Fed we see something of a
(flattish) “V” shaped recovery with growth annualised growth of c2% in the fourth quarter. Our forecasts currently don’t include
any impact from a fiscal package but should this emerge in practise, then it would add to expectations for the rebound in
growth.
PM: WOT!!!
PM: GDP growth of 1% forecast by Citi !!! 
PM: Negative first quarter
PM: Not openly forecasting recession (2 quarters) yet
NH: but on the positive side, they are looking for a V shaped recovery as the Fed slashes rates to 2.5%
NH: and here is some comment from Citi on what has been happening on the trading floor
NH: Flows remain light across the floor this morning despite big mark downs which
some traders believe may be due to program selling. Even defensives utilities like E.ON and RWE are down c7%. The
insurance sector led the market lower as the market worries over credit exposure but our traders have not seen aggressive
selling of the sector this morning. Overall we are seeing very little institutional flow in any sector.
PM: NJS is dead right on the monolines below
PM: Got seduced by the glamour of insuring plastic credit
PM: Study war no more has it in for HeliBen
PM: Synthetic foundations built during the Maestro’s era, tho
PM: greenspan
NH: 
NH: got some more bearish comments from Richard Crossley at NCB
PM: Neil is determined to knock another 20 points off the Footsie before we’re dun today
NH: here we go
NH: Turning Tides
Weakness in prospect in global
Financials has been one of the main
investment themes here for a long time,
and it continues to be so.
NH: The global Financials sector is shown below
NH: The Banks component of that sector is shown below.
NH: Note that the charts above do not take into account Financials’
weakness in the Far Eastern centres overnight or in the
European centres at the time of writing. The charts have of
course, moved well into new low ground – tomorrow’s volume
scans will be looked at with even more than usual interest.
NH: And, in another familiar theme, that of strength in prospect
in the global oil-relateds, some worrying developments:
NH: A break below the December ‘low’ would create a
clear top formation.
NH: And closely watched here, the American Oil-services sector is
beginning to show some worrying patterns:
NH: The price has gone.
Not yet a breakdown on the market-relative, but very close and
will be the subject of an alert if appropriate.
NH: One instinctively knew that the current year
would bring some big calls, but not quite as
early as 21st January
NH: P.S
Turning Tides
“I think – tide turning – see, as I remember – I was raised in the desert, but tides
kind of – it’s easy to see a tide turn – did I say those words?”
Magnificent, even by his standards.
We are clearly in the safest of hands.
G. Bush, Washington, D.C.; June 14, 2006
PM: No
PM: f
PM: way
PM:
PM: Quickly to answer CJF — cant do charts at the mo cos this is Instant mesg tech
NH: right, there is something more volatile that the wider market today
NH: and that’s Xstrata
NH: while we have been off air
NH: the stock has gone another wild rollcoaster ride
NH: and Vale have made a mockery of the UK regulatory system
PM: 
NH: as we came off air, Xta was down
NH: but then it rallied as the wires got hold of an email
NH: Vale was circulating
NH: VALE makes clear on negotiations
NH: Rio de Janeiro, January 21, 2008 – Companhia Vale do Rio Doce (VALE) is
constantly analyzing options for organic growth and/or acquisitions of
assets
and companies as part of its continuous search for shareholder value
creation.
NH: In an environment of a global consolidation of the mining industry, VALE
has
been maintaining a dialogue with Xstrata Plc management. At the moment,
these
discussions had not produced any material result yet.
NH: On the other hand, VALE continues to analyze several other options,
involving
different mining assets. Similarly, these negotiations did not generate
any
concrete result yet.
PM: Neil is getting the prose…
NH: Simultaneously, VALE has been exploring with banks several ways to
support its
growth initiatives in the event it decides to effectively pursue one of
the
above-mentioned options.
NH: VALE considers that the current conditions prevailing in the global
financial
markets may constrain the realization of a major strategic move.
Therefore, it
will keep the prudential posture that has been one of the hallmarks of
its
management over the years.
NH: VALE informs that any decision on acquisitions requires the approval of
its
corporate governance bodies and it will be publicly announced.
NH: Right, so a couple of interesting things in there
NH: first, there have been talks
NH: but they have not produced any material result
NH: and then
NH: Vale says it onsiders that the current conditions prevailing in the global
financial
markets may constrain the realization of a major strategic move.
NH: reading between the lines, this means it can’t raise the funding to have a pop at XTA
NH: so the shares came rattling back off as the market digested pen-ultimate para
NH: Xta now off 138p at £32.35
PM: Neil – you know you said the Crossly stuff would slice another 20 points off the Footisie — well is now 270 points down.
PM: So you were wrong — it was 30 points 
NH: oh, sorry about that
PM: Actually — 40 now off 280
NH: anyway, Vale have not put this statement out on RNS
NH: which has caused all manner of confusion
NH:
NH: but through all the gloom, one stock is (if you will forgive the pun) still rock solid
NH: The CROCK
Readers may also know this former bank as Northern Rock.
PM: more than that — up 42 sparkling per cent
PM: The Kingman effect — treasury said its rubbish and shareholder will get nowt
PM: market said — thanks for the gov guarantee
PM: now definitely gilt-edged
PM: Price is up 26p at 90p
PM:
NH: right, got some futures prices below
NH: looks like the Dow will take a pasting tomorrow
NH: down 292 now
PM: Oh my
NH: perhaps will are going to see a real sell off into the close
NH: particularly if some of the more exotic derivative contracts have to be re-hedged
PM: yeah — but look at things like Rio Tinto — its down four quid
NH: like variance swaps
PM: Oh yes, variance swaps — tied to volatility
PM: Hegehog — you make us blush
PM: We jsut repeat what people tell us
NH: not sure everyone would agree
NH:
NH: but there are still some odd moves out there today
NH: seems to be real sellings that have outperformed
NH: miners, stocks like Amec and Autonomy
NH: but people are actually picking up some beaten down cyclicals
NH: there are two house builders in positive territory – in this market
Barratt Developments (BDEV:LSE): Last: 403.25, up 11.25 (+2.87%), High: 408.00, Low: 370.50, Volume: 8.41m
NH: and Taylor Wimpey up 2.3p at 183p
NH: think Cazenove is pushing the stock today
NH: and the sector today
PM: We are not sure what happened to our Barratt French bid story. Guess they are sitting on their hands. as neil said think today’s gains are broker research related
PM:
PM: Just got the Vix index up – Chicago contract, so closed to day, however…
PM: Headline no is 27
PM: We went thru 30 in both august and early Nov
PM: We’d have to guess that it goes through that level once more tomorrow
PM: it does not seem that long ago when we were talking here about it being below 10 and how it couldnt stay there
PM: Tell you what i would look for tomorrow
NH: what???
PM: China
PM: Shanghai was off 2.5 per cent over night i think
PM: just above 5k
PM: I bet (and it is a blind bet) there is a panic over there
PM: Watch for a 10% drop
PM: that will spook people
PM: Subprime to Chinese gambling contagion
PM: Ah — Chrispy — thanks for that
PM: We take your guidance
NH: right I need to dash. got to write some stuff for the paper
NH: and it is not going to be easy coming up with something fresh amid all the doom and gloom
PM: Someone asked about M&S below
PM: Here’s a quick note from Dresdner Kleinwort
PM: They are bulls !
NH: good luck
PM: Poor Q3 sales (9 Jan) did serious damage to estimates, investor
confidence and the share price. M&S is relatively mature but the model is
not broken – the implication of 9.4x P/E, which falls to 8.7x post a 10%
buy-back or c4x ex-property. Sales visibility is poor but low gearing means
a 5% sales miss would be required to lift the P/E to say 11x. The 5.5% yield
(>10Y high) is secure (1.9x cover).
PM: M&S has not proved as resilient as hoped with share gains stalling in Food and
Clothing and a sharp UK Retail slowdown in Q4 2007. Together with the cycle,
there are structural issues (eg, Food) and also self-inflicted damage (eg,
quantum of deflation) and over-optimism (eg, returns from refurbs).
However, the estate is very well invested, there is opportunity to improve
clothing product / pricing and Food should benefit from the (relatively) new MD
(Steve Esom). Sales visibility is poor but low operational gearing means a sales
collapse is required to raise the P/E to expensive levels.
Testing our estimates, 2008/9 Non-Food LFLs -8.5% and Food LFLs -3.5%
would be required to raise the P/E to 12x. Cancelling 10% of the equity
pre-July’s AGM would lift EPS 6% and authority should be renewed for 2008/09.
Buy-backs are both EPS and cash flow enhancing (yield > post tax cost of debt).
As with the sector, near term catalysts are absent but the P/E is a 10 year trough
- 9.4x headline, 8.7x post a 10% buy-back, c4x ex-property – which prices M&S
for decline in perpetuity. This looks very premature. 510p TP based on 12x
March-09 P/E pre-buy-backs. Next news: prelims, 20 May.
Online research:
NH: not sure, we can attribute the quote to Chrispy. think the sub editors might take that one out
PM: Lunch, Chrispy — lunch
NH: must go
NH: see u all tomorrow
NH: tin hats on
NH: and remember DONT PANIC MR MAINWARING
PM:
PM: right — Neil has gone off to do his report
PM: I know from experience that doing market reports on days like this is v difficult
PM: For one reason
PM: There’s only one topic – gloom
PM: And it is difficult to stretch that across 1000 words or so
PM: doom doom doom doom doom doom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doomdoom doom doom doom doom
PM: see what i mean
PM: We failed in our mission to push the Footsie 300 points lower.
PM: Im off
PM: Thanks v much for joining us on this special edition of Markets live
PM: Tomorrow’s opening anyone’s guess – CJF
PM: Interesting stuff from Marketwatch Al
PM: Feel free to continue this conversation here…
PM: After i have saved the chat you can pick it up again on the Alphaville home page (after a minute or two)
PM: In the meantime, Neil and I will be back for our regular session at 11am tomorrow
PM: Cheers
PM:
PM: I’m watching you wheniwereyoung! 