Markets live chat transcript for the chat ending at 12:03 on 4 Apr 2008. Participants in this chat were: Paul Murphy (PM) Robert Orr (RO)
PM: Hi there. Welcome to Markets Live
PM: This is FT Alphaville’s daily discussion on stocks and other stuff.
PM: Rob Orr is with me. DeHumed the place for the day.
RO: Good morning
PM: Right, where shall we start? Lots going on
RO: Could start with the biggest riser.
RO: British Energy.
PM: Price is up 36.5p at 699p
RO: Which is 5.5 per cent
PM: So what’s the story here?
RO: Reports from France suggest a bid could be on the way.
PM: Rightio
RO: From La Tribune.
RO: Which is reporting that the French group’s board has been given the green light to launch a bid for the nuclear power generator.
PM: I was chatting with Andrew Slade from the FT news desk this mo
PM: Think Peggy Hollinger in Paris is going to file something soon
PM: So shouldnt spoil that
PM: Suffice to say at one level the market is probably calling this right
RO: Thanks Lemmy – I didn’t even say who the bidder was. EDF
PM: What’s the background here?
RO: Well, company has effectively put itself up for sale.
RO: Here’s the story by Lina Saigol and Ed Crooks few weeks ago . . . .
RO: Britain’s leading energy suppliers have been approached by the government to sound out interest in its 35.2 per cent stake in British Energy, the country’s biggest power generator and owner of most of its nuclear power plants.
Eon and RWE of Germany, Electricite de France, Iberdrola of Spain and Centrica of the UK have all been asked if they would be interested in acquiring part of the stake, worth at least Pounds 2bn, people close to the situation said.
The government has mandated UBS to help with a potential sale. British Energy has appointed NM Rothschild as its adviser.
Under takeover rules, any company that buys the whole stake would automatically be forced to make a full takeover bid for British Energy.
The government declined to comment, but one insider said: “Of course, we would look at any offer carefully.”
The government is unlikely to want British Energy to be bought outright. It controls many of the best sites for building new reactors and the government hopes to get as many companies as possible to share in the huge investment needed for a new generation of nuclear power stations.
Rob Cormie, who leads work on the nuclear industry for KPMG, said: “The government wants to maintain a degree of competition between nuclear suppliers and it is unlikely they would let a single consortium buy British Energy.”
RO: Read last two pars. Very important.
PM: All very interesting. Any move by EDF would lead others to bid as well wouldn’t it? Not to mention the competition issues?
RO: There would almost certainly be other bidders.
RO: The other leading European power group would also be interested.
RO: There could also well be competition issues if EDF was to own almost all of the UK’s nuclear power stations.
RO: EDF is already a leading distributor
RO: Although Scottish & Southern Energy both produces and distributes power so perhaps not.
PM: There would also be a lot of unease at this
RO: There would
RO: Here’s the follow up story that our Rebecca Bream wrote a few days later.
RO: Energy companies yesterday expressed concern about the prospect of a takeover of British Energy, fearing it could lead to one company having a monopoly over the best UK sites for new nuclear reactors.
After a report in the Financial Times that UBS had contacted energy companies to gauge interest in buying the UK government’s 35.2 per cent stake in British Energy, the nuclear group yesterday confirmed it was in talks with “interested parties”.
It said these discussions were in the context of British Energy’s “future and its plans to take a pivotal role in any new nuclear programme” and “could lead to a business combination or an offer for the company”.
Shares in British Energy rose 11 per cent to close at a 12-month high of 635 1/2p on the news, in contrast with the rest of the market.
British Energy has been in talks with a number of energy companies since last year about potentially forming joint ventures to build new nuclear reactors in the UK. The company owns eight of the UK’s 10 functioning nuclear reactors. The reactor sites are seen as the best places to build new ones thanks to factors such as local support for nuclear power and the availability of connections to the national grid.
A person close to British Energy said the strength of interest from potential investors had led the government to consider selling its 35.2 per cent stake. RWE, Eon, EDF, Centrica and Iberdrola have been approached. If any of these companies bought the government’s stake it would trigger an offer for the whole of British Energy.
It is understood that Centrica and Eon were focusing on joint ventures rather than putting together bids for British Energy. Sources at several companies said yesterday that they were concerned about the prospect of a takeover.
“If one company buys British Energy, how would it affect new build?” asked a person at one of the companies. “There would surely need to be some sort of safeguard to protect any new-build agreements that British Energy might sign.”
The UK Department for Business, Enterprise and Regulatory Reform said: “The Government is monitoring developments closely and will consider its position in relation to any proposal in the public interest, having regard to its objectives in relation to energy policy and its obligations to the taxpayer. BE is a company whose shares are listed on the stock market and it would be inappropriate to comment further.”
RO: EDF is clearly a French company
PM: Arm of the French state, no less
RO: Do you think a British company would be able to buy 90 per cent of France’s nuclear power producing capacity?
PM: Er, no
RO: Anyway, this is all very suspicious.
PM: Why so?
RO: Well, first we had John Hutton telling is why we need to build loads more nuclear power stations.
PM: Yes…
RO: Then we had a visit from Nicholas Sarkozy and his lovely wife.
PM: I think I know where this is going . . . .
RO: And now we are being told EDF are poised to bid.
PM: And it all somehow adds up
PM: To what, tho im not sure!
PM: 
PM: To the wider market in a mo….
PM: First to pick up on early questions
PM: Rob?? ITM ??? for Fitz
RO: Err, nothing specific to add on ITM. Although they are working on a home refueling system that is true
PM: Sorry Fitz
PM: I am also now going to ask readers to leave poor Robert Peston alone
PM: he is a friends — and a very good hack
PM: And I am also going to ask that readers keep their comments clean
RO: BBC iplayer is really good. is is the channel 4 version.
PM: Throg
PM: 
PM: Otherwise we will get unplugged
PM: To the wider market….
PM: Wot is the footsie doing Rob?
RO: FTSE 100 is up 25.4 points at 5916.7
RO: That claws back the losses from yesterday.
RO: And means the index has gained 9 per cent from its low of mid-March
RO: So are we out of the worst of it Paul?
PM: ???
RO: You were talking earlier about the financial markets being so relieved to have seen some sort of bottom with the Bear Stearns implosion that they’d forgotten to look at the real economy.
PM: Yes, well that’s suddenly the theme, isn’t it.
PM: Here’s some stuff from Citigroup which came out yesterday.
PM: Meantime, back in the real world…: What happens to banks in recessions?
PM: It’s the economy, stupid – As the threat of a liquidity-induced banking apocalypse following the collapse of Bear Stearns recedes, attention is turning back to the real world – a world of slowing growth, declining property prices and possible recession.
How do bank share prices do? – Recent GDP downgrades for both the European and US economies have been severe. Historically, however, in periods of GDP downgrades and in recessions themselves there has been no clear pattern to bank sector performance.
How do bank businesses perform? – Our analysis shows that previous peak-to-trough profit declines for European banks have been c35%, driven by increased bad debt provisions and rising cost:income ratios.
Is it in the numbers? – Not yet. Consensus 2008 and 2009 earnings estimates have only fallen 8%-10%, compared to c.30% falls in 2002-03. If repeated in this cycle, this would imply that the 2008E PE rating for the sector could rise from 9x to 12x.
Screening for strength and weakness in a downturn – In a recession, you typically want to avoid banks with high levels of both operating and financial leverage. Segmenting the sector along these axes indicates that HSBC, Santander, KBC and Intesa Sanpaolo might represent good defensive picks in a downturn. Conversely, the banks most vulnerable to a reduction in economic activity are RBS, Hypo Real Estate, Barclays and Alliance & Leicester.
PM: And then this bad tempered piece from Goldman Sachs arrived this morning.
PM: It is titled The Stupidity of the R Word
PM: From Ed McKelvey
PM: We continue to believe that the US economy is in recession, a view strengthened by this morning’s jump in claims for jobless insurance benefits. Although Chairman Bernanke declined to go this far in yesterday’s testimony, his assessment of the near-term economic outlook was the closest he has come to recognizing recession as a possibility.
Having reiterated our view that a recession is in progress, we devote this comment to an argument that debating the point may itself be pointless. As Chairman Bernanke noted, the National Bureau of Economic Research (NBER) ultimately decides these matters. The inevitable lag in making that decision has exposed some of his predecessors to embarrassing claims about recessions that were unlikely even though they were already well underway.
The embarrassment is compounded by the fact that the end result of the NBER’s exercise is merely a label that does nothing to change the behavior of the economy. More to the point, public officials who downplay the likelihood of recession may commit policy mistakes with genuine adverse consequences if, as part of the denial, they truly misread the situation or fail to address it promptly. For its part, the economics profession should consider whether it pays to spill a lot of ink essentially to forecast what a few of its number will eventually say happened.
PM: There’s several pages of that – but you get the drift.
RO: Well sort of – but it does raise a couple of questions. . . .
PM: Such as ?
RO: Well, firstly, Goldman are saying, aggressively, that the US is in recession – so it is part of the debate and prolonging the debate by repeatedly stating that.
PM: Er, yes, that’s true.
RO: And secondly, if debating whether the US is in recession is a waste of ink or pixels or whatever, isn’t it an even greater waste debating whether you should even debate whether the US is in recession.
PM: You are right! We are wasting our readers time here. Let’s move on.
PM:
PM: Got anything bullish to cheer us up??
RO: Well, I would like to copy some of this note from Graham Secker at Morgan Stanley.
PM: A colleague of Teun Draaisma, i believe — but on the UK side
RO: He is. And he believes the FTSE 100 could be in a bear market rally and the index could go as high as 6,300 in the coming weeks.
PM: Bold call
RO: We put a taster in today’s market report but here is the rest.
PM: 
RO:
Bear market rally up to 6200-6300
The recent up-tick in stock prices suggests that the bear
market rally that we’ve been anticipating is finally upon us.
We think that, having risen 8% from its March 17 low, the
FTSE100 can move higher over the coming weeks; we
highlight 6200-6300 as the likely upper end of this rally.
UK equities on trailing P/E of 10.7, 3.9% dividend yield
There are three main factors behind our call for a bear market
rally. First, equity valuations are attractive, in our opinion,
with the MSCI UK index on a trailing P/E of 10.7 and a trailing
dividend yield of 3.9%. Further, at a reading of -1.7, our DVI
currently suggests that equities are comfortably within ‘buy’
territory.
RO:
Sentiment remains cautious
Our second reason to be positive in the short term is that
investor sentiment remains bearish. The put/call ratio
remains over 1 ( a good buy signal), our capitulation indicator
still shows a -2 standard deviation event (a good buy signal),
hedge fund net exposure is at its lowest level in six or seven
years and fund managers are sitting on lots of cash. Further,
retail investors are pulling money out of equities, particularly
in continental Europe, where 4Q07 outflows were the worst
ever, and this trend appears to be accelerating. If the rate of
outflows from Spanish equity mutual funds seen in January
and February continues, by the end of this year there would
be no Spanish equity mutual fund business left at all!
RO: Authorities are intervening to limit downside risks
Third, the authorities are intervening aggressively to try to
stabilise the situation. Although they may not be able to
succeed in reflating the economy and/or asset prices, their
actions should at least reduce the downside risk to more
manageable levels. While such actions are most evident in
the US to date, we think any signs that the authorities/central
banks in the UK and Europe will adopt a more market friendly
stance should be taken positively by equity investors.
Our credit strategists have also turned more bullish
Our credit strategists have turned more positive on higherquality
assets in the last couple of weeks, and the ongoing
improvement in credit spreads should support stocks. Against
this, we continue to watch LIBOR spreads, and any further
rises in this space could undermine both credit and equity
prices.
RO: Rally led by financials and consumer cyclicals
Sector performance in the first stages of this rally is as we
anticipated in Bear Market Rally, January 24, 2008 with
financials and consumer cyclicals leading the market higher
since March 17. While this trend may run further in the near
term, we would be conscious not to push these sectors too far
and ultimately believe higher share prices in this space
represent a better selling opportunity.
When considering Banks, look to the 1980s
When considering the UK banks today we believe that
investors should pay close attention to events in the 1980s.
As illustrated in Exhibit 1, the last time the UK banks sector
underperformed in any one-year period by the same degree
as it has over the last year was between 4Q81 and 4Q82.
The thicker line in Exhibit 2 illustrates the relative performance
of the UK banks sector through much of the 1980s and makes
two important points, in our view. First, having
underperformed by 30% to the trough in November 1982, UK
banks then outperformed by 18% over the next four months.
Second, this short period of outperformance was a precursor
to a further six years of underperformance (albeit with a
number of lengthy countertrend rallies) before the sector
finally troughed in 1989 — a further 25% (in relative terms)
below the November 1982 lows.
PM: Should give people a mo to read that
PM: Bickie
Reminder to readers – if you arrived late and want to stop the dialogue ‘jumping’ as you catch up, hit the ‘pause auto-scrolling’ tab at the bottom right hand corner
PM:
PM: Actually — how are the banks doing ??
PM: More specifically — how is UBS doing this morning?
RO: UK banks are lower, but UBS is on the rise
RO: UBS up 3.8 per cet to SFr33.62
RO: On the back of our front page story today
PM: Hmm
PM: This is the news that Luqman Arnold, who was forced out of UBS seven years ago, is now back on the share register as an activist investor
PM: He’s written a long letter. that is worth reading in full
PM: Link is on the Alphaville home page
RO: What do you think he’s up to Paul?
PM: I haven’t looked at it deeply enough – but a glance suggests its classic activism. If UBS did start offloading non-core businesses I think its price would go up.
PM: And, along the way, I suspect Luqman expects to have some fun here.
PM: Revenge is a dish best served cold. etc
PM: Very funny joke from Thro g below
PM:
RO: Throg has redeemed himself.
PM: Can come out of the corner
PM: Indeed, Helen says you can have a gold star
PM:
RO: You had promised the readers something on oil earlier. Had you forgotten.
PM: No – I was just struggling through the report. Crude is not one of my areas of particular expertise.
RO: Oh right. Actually, Murph, what are those?
PM: Don’t be facetious.
RO: 
PM: This is Lehman Brothers whose Edward Morse and team have published an Energy Special Report.
PM: But reading it now I think they are short and wrong – and are now trying to justify their position.
PM: They came out with a note in December saying oil prices would settle at materially lower levels.
PM: Now had to raise their 2008 oil price estimates – but sticking to the line that 2008 will be the peak and that prices will weaken significantly thereafter.
PM: Stronger signals
of weaker oil prices
The oil market has been behaving as though a set of new fundamental factors will
continue to support rising prices. However, based on our analysis of physical markets
and financial flows, we expect oil prices to weaken significantly through the rest of this
decade, after peaking in 2008.
PM: Although we are raising our 2008 oil price estimates (Figure 1), notably because we
believe our estimates for financial demand for oil and commodities have been too low,
we do not discount our original view that the factors that have propelled the upward
march of prices since 1998 will not continue past this year. Moreover, the demand for
commodities outside of end use also looks to slow going forward. As we argued at the
end of 2007 (see “Oil Outlook 2008: Tipping the Scales,” December 10, 2007) the oil
market appears to be on the verge of a turning point, whereupon prices will settle
materially lower than current levels. Short-term factors have begun to contribute to this
turning point, with a radically reduced outlook for global oil demand.
We now see OECD demand falling 100k b/d this year and next, versus our original
projection of a 300k b/d one-off rise this year and flat demand in 2009. The main
difference is a downward revision of US demand of 300k b/d for 2008, putting 2008 and
2009 demand at 20.5m b/d and 20.6m b/d, respectively. Combined with a minor
downward revision to our original China demand projection, we now project total non-
OECD demand growth of 1.2m b/d this year, pulling 2008 total global demand up by
1.1m b/d, a drop of 400k b/d from our original forecast in December (see Appendix). The
main risk on the demand side is for more downward revisions as a US recession could
affect global GDP growth. Meanwhile, even with delays in large OPEC projects, we see the
supply outlook supporting a global build in commercial inventories. In sharp contrast to last
year’s 1m b/d draw, we are now projecting a 2008 inventory build of 300k b/d, accelerating
through the year and reaching a counter-seasonal build of 700k b/d in Q4 (Figure 2).
PM: Ok?
RO: Any more commodities stuff while you are in the grove.
RO: Something from Barclays you promised??
PM: Oh, yeah, but there’s just too much to go thru. It’s as tho we have to keep an eye on the entire blinking world here
PM: … while desking and doing pictures and planning lunch and Helen’s got Sam and I and Gwen on this Airset thing, which sends me an email every five minutes to remind me what I haven’t done on my to-do list.
PM: And its driving me a little mad. My head is going to explode
RO: Oh, come on, stop being melodramatic
RO: I’m sure you’ve got room for a quick first quarter review of commdities, hard and soft, across the range.
RO: These are important matters. And you cant back out of reader commitements.
PM: Pick ’n’ mix