Markets live chat transcript for the chat ending at 12:09 on 11 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: It is understood that Rob Orr is with me.
RO: We’ve given Neil time to recharge his batteries.
RO: And what’s this about it being “understood that” im here. It’s more than understood. Its fact.
PM: Well there’s been a move by Robert Shrimsley, the FT’s news editor, to ban certain clichés and journalese.
PM: And “it is understood that” is now ….
a phrase whose time has passed.
PM: For the moment anyway, according to two people familiar with the matter, Bloomberg reported
PM: So do you understand that Rob?
RO: Err, yes.
PM: Neil Hume is not leaving btw.
PM: Realised after attending the British Press Awards earlier in the week that lots of people think Neil is defecting to the world brokerdom.
PM: Not true, i understand. He’s staying put. And in fact in recognition of that we can announce that in additional to his regular duties at the FT, we are going to make Neil chairman of something
RO: Chairman of Alphaville perhaps
PM: Im chairman and chief executive of AV
RO: You can’t be both! that’s against the combined code
RO: what am I? a consultant?
PM: You re jsut a vp like everyone else
RO: wish I got paid a consultancy fee for this!
PM: 
PM: Anyway — first a big thanks to those who voted for us in the Webby awards
PM: We were rather touched — and we are now a bit embarrassed cos we are in the lead
PM: With 44% of the vote
RO: 19 comments so far – all postive!
PM: Still three weeks to go, so we should probably cool it 
RO: It’s a marathon Paul, not a sprint
PM:
PM: Equity market well up today
PM: But as the early comments below indicate that is a key debate to be held here
RO: The Big Debate. Are we hats off or hats on?
PM: Are we on the mend or have we discharged ourselves from hospital too early?
PM: Tuna –of Kerry — important question here:
PM: Hats on or off
PM: (ds — http://pv.webbyawards.com/ballot/home/1/39/49#entry2111528324 )
PM: I meant to get loads of evidence for each case – but I haven’t had the time.
PM: Hey, lads. Pack it in below. Please
PM: Rob has just gone to get some evidence
PM: Evidence for removing your headgear:
RO: Lloyd Blankfein, Goldman Sachs’ chief executive, yesterday said there was “light at the end of the tunnel” for the investors and financial firms hit by the credit crunch – the latest sign of Wall Street’s belief the current turmoil may be nearing its end.
Speaking to investors at Goldman’s annual shareholder meeting Mr Blankfein said the financial crisis was “closer to the end than the beginning” – an echo of the views expressed by John Mack, his Morgan Stanley counterpart, earlier this week.
“I think we’re getting to that point where people are seeing the light at the end of the tunnel,” he added.
However, Mr Blankfein’s upbeat comments were countered by new predictions of job cuts at a number of firms including Goldman Sachs, a negative analyst’s note on Lehman Brothers, and renewed fears of huge writedowns when Citigroup and Merrill Lynch report results next week
PM: That was just a snippet from a Goldman strat note
PM: The US equity market bounced back yesterday, helped by stronger discount retail sales reports, a decline in jobless claims, a successful TSLF auction and the VIX continued to decline. Bonds sold off modestly in sympathy, and the dollar rallied, while commodities including oil generally pulled back from recent highs.
RO: That post from me is our story from today.
PM: Of course
RO: I also got this email yesterday.
RO: From John Pattullo at Henderson. Manages various bond funds.
RO: Have credit markets finally hit the bottom? I think so, and there are a number of reasons why.
Sentiment looks to be on the way back up. There has been a rally in synthetic credit indices such as the iTraxx Crossover Index. The forced sellers (private equity and hedge funds) that were putting such a damper on sentiment appear to have now been flushed out of the system, and new bonds that have recently come to the market are performing reasonably well.
Bear Sterns – if ever an economics undergraduate wanted an example of how the capitalist structure worked in practice, this is it. The US Federal Reserve is prepared to cushion the blow of market excess by underwriting the big brokers as well as the big banks, because they are simply too large to fail. But what does this mean for investors?
Bearn Stearns will be part of JP Morgan, which offers some degree of comfort for the bondholders. However, those left holding equity in the company will not enjoy the same security and despite an improved buyout offer from JPM will see the value of their investment severely discounted – a painful but timely reminder that the value of shares “can go down as well as up”.
RO: UBS rights issue – the announcement from UBS of further credit write-downs and a new rights issue was met favourably by markets, but I still think this announcement is much more positive for creditors rather than shareholders. I’m still backing Banking sector debt in my portfolios, as the valuations still look cheap on any risk-adjusted basis.
Loan market movement – at last the indigestion in the loans market is easing. In Wednesday’s Financial Times Citigroup announced it was working out the details of a deal to offload $12bn in leveraged loans to private equity, albeit at a discount. This appears to demonstrate that the market is starting to stabilise and appetite is slowly returning, further proof that the economic cycle cannot remain static for too long before the wheels start to turn again.
We expect earnings newsflow will continue to deteriorate (we remain short of the heavy cyclical industrial names), and although the LIBOR rate is still elevated, today’s rate cut from the Bank of England should ease some of the pressure.
RO: The valuations in some bonds have been compelling for some time, but with technicals approaching equilibrium and momentum levelling off, now would be a prudent time for investors to get back into bonds.
PM: That is certianly upbeat on the credit side
PM: But then he’s been upbeat for a few weeks now — and probably turned bullish for credit a month too early
PM: Here’s some more evidence
PM: MF Global have relaxed their margin requirements.
PM: Here’s what they said on March 19
PM: CFD Initial Margins
Please note that with immediate effect we are changing CFD initial margins to the following levels:
FTSE 100 No Change
FTSE 250 75%
FTSE Others (Outside 350) 90%
All US 90%
All Europe 75%
PM: Today:
PM: FTSE 250 stocks now back to 15%, ex 250 25-40%
RO: this is from Wells Capital Management in the US
RO: Jim Paulsen
Chief Investment Strategist
RO: Summary and Investment
Recommendations!!??
It’s too late to invest for recession, even if the economy is in or
still entering recession. Both the stock and bond markets have
already experienced a recession. Even though the economy is
now showing signs of faltering, the financial markets appear
to be looking forward to an eventual economic recovery. We
think the stock market could still enjoy a healthy rally before
the year is out. The combination of excessive investor fears,
massive policy stimulus, a significantly cheaper stock market
relative to bonds and our belief the economy is likely to
outpace expectations in the second half of this year, keep us
bullish on stocks!
Fear is overpriced today! To be “comfortable”, investors
need to accept incredibly low treasury bill or bond yields or
overweight economically-defensive stock sectors like consumer
staples or utilities which have already been bid up in price.
Think recovery! Underweight bonds and overweight stocks.
Overweight the most economically-sensitive areas including
the industrials, transports, consumer discretionary and financial
sectors. Small cap stocks should also regain leadership once the
stock market regains its footing.
We expect the U.S. dollar to rally once crisis fears erode. This
could bring short-term selling pressures to bear on commodity
prices and basic materials stocks which have soared during this
crisis. Longer-term we expect renewed U.S. dollar weakness,
especially against emerging world currencies. But the return of
U.S. confidence should soon provide short-term relief for the
U.S. dollar.
Finally, our expectation of a U.S. stock market recovery
combined with a stronger dollar suggests an underweight in
international developed stock markets for a period. We would
maintain overweighed positions, however, among emerging
stock markets. Our most important advice? Don’t get caught
sitting on the sidelines when Wall Street finally decides “the
King after all does have clothes!”
PM: Liek that line —
Fear is overpriced today!
PM: I will add one important piece of evidence in favour of the bull case:
PM: Monkey fells the worse is over — he posted somewhere yesterday. gut instinct stuff
PM: (Thanks Fitz — saw that — and saw interesting filter treatment)
RO: Interesting comment below from Theword
PM: Tho of course GS writedowns were not as bad as the rest
PM: but….
RO: Back to the Great Debate – Evidence for tightening the strap
PM: Spain is in a mess. I know I went on about this yesterday in relation to the German landesbanks.
PM: Citi have a biggish note on the subjection this morning.
PM: Spanish Economy Slowing Apace — Spanish growth has slowed over 2007, with
GDP growth of 3.5% for 4Q07 compared to 4.0% for 4Q06. However, the IMF now
expects Spain to grow by just 1.8% in 2008 and 1.7% in 2009. Business
confidence indicators across the region have fallen back.
Concerns for Domestic Banking Growth — Weaker economic growth has led to a
slowdown in banking system growth. Lending volume growth has halved to 15%
relative to 2006 peaks. Asset margins are increasing, though deposit margins are
under pressure.
RO: This is from John Kemp at Sempra a couple of days ago:
RO: I was born on 21 November 1974, the night the Provisional IRA bombed two pubs in Birmingham, killing 21 people and injuring 182, so I am too young to remember the Great Inflation of the 1970s. But the parallels with the present are striking and worrying:
In both instances, a huge increase in the price of crude oil and other commodities began to percolate through the rest of the economy.
In both instances, commentators and policymakers preferred to focus on the specific reasons for individual price rises rather than accept there was a generalised inflation problem.
In both instances, the monetary authorities felt unable to raise interest rates to counter inflation because they feared it would drive the economy into deep recession and push unemployment up to unacceptable levels.
In both cases, liberalisation and rapid financial innovation within the banking sector led to a banking crisis when overlending, especially to the property sector, when sour as interest rates rose and credit became more expensive (forcing the Bank of England to launch the famous “lifeboat” to rescue the secondary banks by organising support from the major clearers).
In both cases, the Federal Reserve was led by a respected academic economist who had specialised in the study of the business cycle and the dynamics of earlier downturns, banking crises and credit crunches.
In both cases, many governments preferred to deal with the inflation problem by imposing wage and price controls designed to limit individual price increases and break the price-wage-inflation cycle rather than inflict tighter monetary and fiscal policies. Price controls have fallen out of favour in the western world, but remain an attractive option for policymakers across China, India and much of the rest of Asia and the Middle East.
RO: That’s the intro to four pages of analysis.
RO: Also, can’t believe he’s only two months older than me!
PM: Yes, reading his stuff I always assumed he had a few grey hairs.
RO: Anyway, here’s his last couple of pars. Pretty chilling.
RO: Households and investors have already begun to doubt the Fed’s resolve in countering inflation, and measures of consumer and market expectations about future inflation rates have been rising for some time. If the inflation-fighting credibility of the Fed were to be fatally damaged, a substantial repricing of assets to account for inflation and macroeconomic risks would ensue. US Treasury prices (and yields) might not
suffer much — since fears about inflation (driving yields higher) might be largely offset by a flight to safety (driving yields lower). But corporate credit spreads would almost certainly widen substantially, and downward pressure on the USD would intensify. Foreign investors are already showing signs of increasing frustration at the expropriation of wealth resulting from a sustained slide in the currency, and it could easily become a vicious spiral. If credit spreads rose, equity prices came under pressure, and the USD fell, financial conditions around the world would tighten, even if actual monetary policy was unchanged or eased further.
RO: This is what former Fed Chairman Paul Volcker meant when he warned this week that a financial crisis was usually rooted in imbalances in the real economy, the United States could not inflate its way out of the problem, and that the slide in the USD’s value was deeply destabilising. Arthur Burns has gone down in history as a very poor chairman of the central bank (perhaps unfairly since his policies were supported by
most of the economic and political establishment at the time). Eighteen months later, he was succeeded by Paul Volcker, who dealt with the inherited inflation problem by raising interest rates to undreamed of levels and squeezing inflation out of the system at the cost of huge levels of unemployment and a deep recession in 1980-81. Arthur Burns believed that the public would not tolerate an unemployment rate of 6%. Under
Volcker’s Fed, the unemployment rate peaked at 10.8% in Nov and Dec 1982.
PM: hmmm — thanks for that
PM: We should also slot in a mention of Draaisma here
PM: But we have aired that enough i think
PM: His latest line is to target stocks that have big rescue rights issues
PM: Bigger the discount, bigger the recovery — history stays
PM: apparently
PM: As for this Goldman debate below — all true — Sam did couple of interesting posts on this yesterday
PM: (Fitz )
PM:
PM: lets move on
PM: A few individual stocks — for whoever mentioned GOO — i have a call lodged…
PM: But first to bigger fish
PM: , where shall we start?
PM: Go on — obviously live story
RO: Could start with British Energy.
RO: It was this time last week that this bid story really got going.
RO: EDF on France was the name in the frame then.
RO: Since them we’re learnt that RWE of Germany made an indicative cash offer of close to 700p a share for the nuclear power group, which is about £11bn.
RO: And that others – EDF, Centrica – are also looking.
RO: Which brings us to today and a story in the Times saying EDF is going to offer more than 700p a share for British Energy.
RO: Reuters, eanwhile, is saying that EDF will not overpay and will also offer less than 700p a share for British Energy.
PM: Confusing. So who’s right?
RO: Well, our reporters on both sides of the channel have been chasing this one pretty hard.
RO: We still think that the offers are less than 700p a share.
RO: And that talk of anything above is premature
RO: I say premature, because our own Lex Column thinks British Energy will be sold for more than 700p
PM: yeah — give em a free Lex — lots of ML regs are not subscribers
RO: This is from yesterday
RO: The battle for British Energy is heating up.
RWE, Germany’s second-largest utility company, approached the UK nuclear operator earlier this year and is now poring over its books. At just under 700p a share, an RWE bid could value British Energy’s equity, once the government converted its right to 35 per cent of cash flows into shares, at £11bn and its enterprise value, including net cash, at £10bn.
In spite of the poor quality of many of its assets, British Energy makes sense for RWE. The UK company may own a bunch of ageing and unreliable power stations now, but it will benefit hugely from the government’s plans for new nuclear reactors. RWE would like to dilute its carbon-intensive portfolio and cement its position in the UK, where it already owns Npower. That said, shares in RWE have already fallen substantially on worries that the German group may be about to embark on an acquisition spree. Bulking up may be the only way for RWE to avoid falling prey itself, casting doubt over new chief executive Jürgen Grossman’s stated commitment to organic growth.
RWE shares fell further yesterday – down 3 per cent – while British Energy’s rose 5 per cent to 739½p. The moves tell their own story. Most of the vertically-integrated European utilities are both big enough to buy British Energy outright and would love to have first dibs on the new building programme. A 700p-a-share bid would represent a 16 per cent premium to the share price in mid-March before news of a potential takeover broke. At about 33 times estimated forward earnings, the eye-watering valuation is reminiscent of the heady days before the credit crunch. Given the competition and lack of other attractive utility assets in Europe, the final price will be much higher
RO: I wouldn’t disagree with any of the above.
PM: Sure –
PM: Separately — would people like us to give you a Free Lex each day ???
PM: As in In today’s Markets Live, free Lex!!
RO: 
PM: One of the higher ups here might stop us — but we can see how long we can get away with it
PM:
PM: Let’s go to some of the points / questions below
PM: Neil has just tipped up here with news on FKI
PM: He’s used the word “understood” and immediately admonished himself
PM: So people in the know say:
PM: NH: Melrose has sorted out its rights issue , which will be at a smallish discount, and will formally move on FKI on Monday.
PM: Allegedly
PM: NH: There is also a counter rumour that Blackstone are going to offer 95p — ref-ed below
PM: We are not buyers of that story — has a whiff of 
about it
RO: As for Global Trader
RO: We did get a full document yesterday explaining its travails
RO: from smith & williamson
RO: sadly, it is in a PDF format so I can’t paste it up here.
RO: but if you really want it – email me and i can send
PM: Yes, there is also a Global trader discussion site somewhere on the web — someone can put it up there — if not there already
RO: robert.orr@ft.com
PM:
PM: Thanks VP — Breaking News
PM: GE warns on outlook
RO: *GE CUTS 2008 EPS OUTLOOK TO RANGE OF $2.20 TO $2.30
PM: Can make asset sales — impairment charges
PM: etc
RO: *GE 1Q NET EPS 43C
RO: *GE 1Q TF AVG EST 51C
RO: that is v bad
PM: Dollar under pressure on that
PM: Footsie coming off
PM: We were substantially above 6k earlier
PM: Footsie now up just 1.8 at 5966.9
RO: Will be under water very soon
RO: General Electric Says Profit Fell, Citing Financial Markets
^c.2008 Bloomberg News
By Rachel Layne
April 11 (Bloomberg) — General Electric Co., the world’s biggest maker of power-plant turbines and jet engines, said first-quarter profit fell because it couldn’t complete asset sales and higher financial losses due to disruptions in financial markets. GE reduced its full-year forecast.
Profit from continuing operations declined to $4.36 billion, or 44 cents a share, from $4.9 billion, or 48 cents, a year ago, Fairfield, Connecticut-based GE said today in a statement, trailing the average analyst estimate. Revenue rose 8 percent to $44.2 billion. GE gets more than half its sales from outside the U.S.
–With reporting from Greg Miles in New York. Editor: Kevin Miller, Chapin Wright
To contact the reporter on this story: Rachel Layne in Boston at +1-617-512-0534, or rlayne@bloomberg.net
To contact the editor responsible for this story: Kevin Miller +1-312-443-5959 or kmiller@bloomberg.net;
-0- Apr/11/2008 10:36 GMT 04-11-08 0636EDT
RO: Thanks Bloomberg
PM: (eagle-eyed — if when looking at all five nominees, hover over teh right hand col)
PM: Footsie now down 8 pionts
PM: 10 points
PM: At moments like this i should point out that the Live Prices box to the upper right here can come in useful
PM: Effectively futures prices from City index
RO: That GE news is obviously a biggie
RO: Makes Cadbury Schwepess trading update seem a bit dull
PM: Indeed
RO: But we should prob go there anyway
RO: Seems reasonable update.
RO: Confectionery revenue growth of 7 per cent.
RO: Continued double-digit growth in gum and emerging markets
RO: Price increases implemented to offset higher commodity costs
RO: But . . . . .seems heavy discounting on Easter eggs by some of its rivals dented growth
PM: I see. Anything on the demerger?
RO: Demerger of US beverages is still on track for the end of the month.
RO: Here’s what they said on that division.
RO: Americas Beverages first quarter revenues were ahead by 1% on a like-for-like basis. In carbonated soft drinks (CSDs), share fell modestly in the quarter reflecting higher pricing to offset commodity cost pressures. We confirm our previous 2008 guidance of business revenue growth of 3-5% and underlying margins modestly lower year-on-year.
PM: 1 per cent like-for-like growth is not great.
RO: No, and there is some sense among the analysts that this was not the knockout update that had hoped for.
RO: Which is probably why the shares are off 15p to 563p.
RO: This is from Investec.
RO: Cadbury’s IMS indicates a solid start to 2008. However we don’t think it’s quite
the unequivocal statement that the company would have been hoping for,
given the market’s implied rating on confectionery, the ticking clock on the
march to mid-teens confectionery margins and the impending listing of DPSG.
We see no reason to change our confectionery forecasts on these numbers
(which we view as conservative), but will review our DPSG forecasts.
RO: