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Markets live transcript 13 May 2008

Markets live chat transcript for the chat ending at 12:07 on 13 May 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH) The Grim Reaper (GR)

PM:

Welcome to Markets Live

PM:

This is FT Alphaville’s daily stock market discussion.

PM:

Neil Hume is with me

NH:

Hats back on, boys and girls.

PM:

Lots and lots and lots and lots

PM:

To get thru this morning/

PM:

Where are we kicking off Neil?

NH:

I don’t think we can avoid the banks can we??

PM:

Cant avoid A&E that’s for sure

PM:

Meant A&L — not accident and emergency

PM:

Although some shareholders might feel like that

PM:

PM:

dismal trading statement from Alliance & Leicester

NH:

yep

NH:

stock being crushed at the moment

NH:

down 60.2p at 450p

NH:

drop of 12%

NH:

reading between the lines of this morning’s statement

NH:

analysts reckon A&L actually lost money in the first quarter of the year

PM:

how much?

NH:

around £60m

PM:

hang on a minute

PM:

I thought A&L said profits would be flat

NH:

yeah but that’s before all the bad stuff, which we like to include

NH:

call us old fashioned if you like but the extra cost of funding (£150m per annum) is ‘core’ to a bank

NH:

especially one that has to borrow in the wholesale market

PM:

You do have wonder who writes these trading statements

NH:

and there are £192m of write downs and impairment charges which have been taken through the P&L

NH:

and on top of that a £199m post tax balance sheet hit to its treasury asset holdings

NH:

No comment on the dividend

NH:

the market was looking for the company to at least reiterated their intention to hold FY DPS constant at 55p per share

NH:

Margins remain under pressure and the group forecasts a Net Interest Margin of about 1% this year.

NH:

The core retail loan book looks like it is shrinking.

NH:

deposits remains very weak with growth in balances of a little over 1%

PM:

is there any good news??

NH:

not much

NH:

No deterioration in the asset quality of our customer loans and advances

NH:

but look, the real reason this stock is getting smashed is because it is horrendously overvalued

NH:

and that’s because there is takeover premium in the price

NH:

or there was, it’s coming out now

PM:

NH:

rightly or wrongly people believe Santander or another European bank might step in bid

NH:

personally I can’t see why and note that one previous bidder Credit Agricole has announced a fund raising this morning

PM:

ok

NH:

look, book value for A&L is a touch over 400p

NH:

why should it trade at a big premium to book??

PM:

None at all, it seems

PM:

alright, can we have some analyst comment

NH:

there’s plenty of around, but I think we should have a look at some of the feedback from the conference

NH:

which by all accounts was an unmitigated disaster

PM:

NH:

A&L’s conference call on their trading update was
very downbeat with their franchise shrinking faster than their expectations and
all the questions regarding capital and dividend sustainability.

They are shrinking their franchise in order to protect it from the negative scenario of
rising unemployment and house prices falling by more than their 10% forecast.

NH:

However, they feel they are getting fully compensated for this as asset spreads
have increased far more. We continue to remain negative on A&L as we believe
that the unwind of the capital and funding leverage by cutting the dividend and
shrinking the asset base will cause earnings to fall over the next three years.
Our target price is 458p.

In terms of looking at the dividend, A&L have three drivers

NH:

1. Ongoing underlying earnings power - where they comment they remain
Comfortable

2. Size of treasury write-downs - key is whether fixed income markets/pricing
stabilise as they seem to have done in May or whether the capital base is
impacted further

3. SIV impairments - due to their risk weighting and writedowns receiving tax
relief - A&L gets a boost to capital from the SIV write-downs

We currently forecast a 20% cut in the dividend in 2008, in order that they can
maintain core capital ratios above 6% on an ongoing basis. However, the
cyclicality of Basel II (ie House prices fall in the UK risk weightings on
mortgages increase) is likely to put further pressure on capital ratios and the
dividend sustainability.

NH:

here’s some more

NH:

&L call just finished. Absolutely dismal. Will make a loss H1, ongoing level of
earnings severely under pressure. Capital ratios under pressure as not
generating any new capital. Mortgage book to be running off by about 10% this
year with material brand/franchise damage. Suggested to management they rather
than asking shareholders for more capital, given teh absence of an investable
propositions they would be better moving the business to run off. Every chance
this stock will continue to fall through book value of 424p.

PM:

oh. dear. me.

NH:

and this is from ABN

NH:

A&L (sell): extremely uncomfortable conference call. Reiterate Sell, and
downward pressure to our 29p & 55p EPS. The core negative today though is the
sharp decline in Tangible Common Equity: we see £3.12 FY08F from £3.80 FY07
and negative implication for dividend sustainability. We forecast a 50% cut to
28p, as pressure grows both from an earnings cover and, if house prices down
20%, RWA acceleration as loan/RWA ratio rises from 9% to 14% ie a 56%
mortgage RWA uplift. This is NOT in current capital ratio guidance, as don’t
expect house prices to go down by 20%.

NH:

Detail:
1) treasury write downs much bigger than we expected; magnitude is sufficiently
large to impact dividend sustainability, which is “walking a tightrope”
2) base case RWA expectation is flat FY08F, but rises sharply if house prices
fall by more than they anticipate (down 5% FY08F & FY09F)
3) Shrinking loan book performance Q108 to continue for rest of year, as
position in anticipation of credit quality deterioration in both mortgages &
ersonal loans
4) renewed focus on costs due to difficult operating environment
5) corporate deposits down from £7.5bn FY07 to £6.1bn, with c£2bn at risk if
further ratings downgrades
6) P&L mortgage charge FY09F will be “somewhat higher” than FY08, though
struggle to see write offs > 10bp (this doesn’t take into account credit loss
reserve rebuild that would also come through, and which could add >20bp pa
for a couple of years)

PM:

Goodness. V painful — but we msut move on

PM:

PM:

before doing other banks I think people want to talk inflation

NH:

OK, and the CPI number has had quite an affect on the wider market

PM:

Footsie was up earlier no?

NH:

it was on the back of Wall Street’s sprightly overnight performance

NH:

traded as high as 6,268.1

NH:

but then the CPI data came out and we were slammed into reverse

NH:

now off 62.3 points at 6,158

NH:

been as low as 6,142

NH:

after yesterday’s dreadful PPI number

NH:

this morning’s CPI was another blow

NH:

a huge blow for anyone expecting a rate cut in june

PM:

presumably sterling has rallied

NH:

well it did for a while

NH:

but it has come back

NH:

because everyone is worried about stagflation

NH:

which is about as ugly as it gets for a currency

PM:

now trading at 1.9457 against dollar

NH:

great

NH:

just when need it to be strong

NH:

because of our trip to New York

PM:

— early June to Pick up brace of Webbys

NH:

it starts to tank

PM:

should have a look at the CPI numbers in more detail

NH:

indeed

NH:

and the dreadful retail and housing reports that are out this morning

NH:

all in all they make for a pretty toxic combination

NH:

STAGFLATION ALERT

NH:

consumer prices rose by 0.8% in April, that was above expectations for a 0.5 per cent rise

NH:

annual inflation leaped to 3% - and that’s almost letter writing time for Merve the Swerve

NH:

economists were forecasting a 2.6% annual rise

PM:

right, so higher energy and food price are starting to come through in the CPI data

NH:

looks that way

NH:

This is another horrible surprise on the inflation front, following on from the disturbing April producer price data. Given that the Monetary Policy Committee had the consumer price inflation data last week, it is no wonder that they kept interest rates on hold. Indeed, the chances of a June interest rate cut are rapidly diminishing

NH:

The jump in consumer price inflation to 3.0% was way above expectations and Mervyn King is on the verge of having to write a second “Dear Alistair” letter. Higher utility and food prices pushed up inflation, but core inflation also climbed from 1.2% to 1.4%. While core inflation is still pretty muted, April’s rise will nevertheless raise concern that higher energy and food prices are filtering through to have increased second round effects.

NH:

Consumer price inflation seems set to move above 3.0% next month and then remain there over the summer as rising utility bills, high petrol and food prices, and a weaker pound continue to impact. Sharply rising producer input and output prices in April - as well as widespread survey evidence showing that companies are currently still striving to increase prices to support their margins - indicate that inflationary pressures are currently elevated through the supply chain. Furthermore, the Bank of England will be very concerned that April’s jump in inflation will lead to a further spike up in inflation expectations, with possible negative repercussions regarding the behaviour of wage and price setters.

NH:

Latest data highlight the extremely difficult position that the Bank of England is in. Consumer price inflation is markeldy above target and rising, while the very weak BRC retail sales monitor and RICS housing market survey for April reinforce concern that the economic downturn is deepening. Consequently, the Bank of England will have to tread very carefully on monetary policy. While extended below-trend growth should increasingly dilute companies’ pricing power and limit wage growth over the coming months, the danger is that the retreat in inflation later on this year will be slower than had seemed likely and from a higher starting base. This means that further falls in interest rates are likely to be gradual, and possibly more back-loaded to late-2008 and 2009.

PM:

thanks for that

PM:

Let’s just have a quick look at the retail sales data

NH:

on the face of it, it was not catastropic

NH:

retail sales values fell for a second month – down by an annual 1.5% on March

NH:

but that figure was helped by good food sales

NH:

drill down a bit and there some truly awful figures

PM:

such as??

NH:

value of clothing and footwear sales were at their lowest in eight years

PM:

Whoa

NH:

here’s is some more comment from Howard Archer

NH:

Significance: Retail sales were surprisingly resilient in the first quarter according to hard data from the national statistics office, but the April BRC survey suggests that the consumer is now struggling markedly. This follows on from a sharply weaker distributive trades survey for April from the Confederation of British Industry (CBI). Indeed, there have been some doubts cast as to whether retail sales were really as strong as the hard data show in the first quarter, and the April BRC and CBI surveys certainly fuel suspicion that we are in for an extended period of serious consumer retrenchment.

NH:

Going forward, we expect consumer spending will be seriously hit by the major headwinds which has seen confidence fall to a fifteen-and-a-half-year low. These headwinds include muted real disposable income growth, tight lending conditions, a substantially softer housing market, lower equity prices and increased debt levels.

Meanwhile, household purchasing power is being dented by higher utility bills and
elevated food prices, while many home owners are re-fixing their mortgages at significantly higher rates. Furthermore, elevated concerns about the economic outlook are likely to cause consumers to tighten their belts. Finally, we suspect that unemployment will start to rise later in 2008. Likely further gradual Bank of England interest rate reductions will help the consumer, but will only partially offset these major headwinds.

PM:

ta

PM:

PM:

right any more doom and gloom??

NH:

plenty more

NH:

another really negative RICS survey

NH:

and another profits warning from the house building sector

NH:

this one is from Redrow

PM:

yep, saw that

PM:

things look to be getting worse

NH:

they do

NH:

here’s some highlights - if that’s the right word - from the Redrow statement

NH:

Sales activity and net selling prices under increasing pressure as market conditions deteriorate driven by weaker customer confidence and the severe restriction in the availability of mortgage finance

NH:

As at the end of April, our order book in the Homes operations was 26.5% down on last year. In the second half of our financial year, net reservations to date have been running at just under 50% below the levels secured in the same period last year. This partly reflects our cautious approach to the use of part exchange and shared equity or deferred consideration incentives.

NH:

Until recently, cancellation rates have been running at just over 20% but we have experienced a marked increase since Easter. It is becoming increasingly difficult to predict accurately reservation and cancellation rates.

PM:

that’s really bearish

PM:

They can’t forecast cancellation rates

PM:

generalised meltdown

NH:

like the share price of Redrow

NH:

off a further 16p at 277p

NH:

that’a fall of over 5%

NH:

but surprisingly that is not the worst performer in the sector

NH:

Barratt Developments has been for most of the morning

NH:

currently off 12p at 263p

NH:

now one of the big banks is putting around a story this morning that there is an imminent rights issue on the way

NH:

and Barratt is due to provide a trading update tomorrow

PM:

NH:

so we could get it then

PM:

NH:

do u want some comment on the Redrow update???

PM:

yeah — what ever you have got

NH:

this is from Simon Brown at Landsbanki

NH:

Retaining HOLD due to takeover support - target price stays at 320p.
Not a very inspiring update for the group’s first IMS with clear concerns over the rate of decline in reservations and little benefit expected from a modest level of new site openings.

NH:

The decline in activity for Redrow and other participants in the housing market is driven, in the main, by the paucity of mortgage finance. The companies are relatively ill equipped to deal with these problems and are reliant on the finance taps being turned back on, even by a modest degree, to stage any recovery. This is not expected this side of 2009.

NH:

The precipitate fall in sales in the last 5 weeks has severe implications for ROCE and much weaker margins both at the gross and operating level despite ongoing reductions in overhead costs. Their rate of decline following a 30% fall in sales volume and 29% decrease in turnover will be far worse than in the better land banked and the historically higher margin volume businesses. This is an IM statement aimed at bringing expectations down to a low level following the group’s weak strategy on land and site structures already apparent to investors even ahead of the current slowdown. The strategy weakness places the group in a weaker position than many of its peer group.

NH:

Redrow’s order book is 26.5% down on last year with net reservations down a little over 50% in the second half. The group sold 2,111 units in 1H07/08 down 5% from the 2,214 from the comparable period a year earlier. This decline was driven primarily by the funding issues in the mortgage market but was a workable rate of sales decline within the normal ebb and flow of the cycle, the current position is out of the control of Redrow and its peers being principally a mortgage funding issue.

The margin is under severe pressure at under 12.4% operating in H207/08, down significantly from the 16.5% margin seen in 1H06/07.

NH:

This implies an operating profit of £93m for the full year but with overhead costs increasingly hard to recover, the pressure on margins will remain intense and may have a further negative impact to end June 2008 and certainly in the following year.

In terms of overall impression, this is a trading statement clearly aimed at revealing all the implications of the dreadful state of funding in the housing market. From a below average peer group performer in the year to June 2007, this market is going to be a really tough experience. It will be interesting to see what Barratt have to say tomorrow, one suspects a rather more effective sales effort will show its benefits even in this market.

NH:

RECOMMENDATION – We retain the HOLD recommendation due to the persistent rumours of potential corporate activity involving Redrow. Despite the fact it is far too early for any incumbent to regard the market as ripe for further consolidation, the speed of decline in funding for mortgage applicants could reverse relatively quickly and the corporate stories will return ahead of the visible signs of greater transaction activity in the housing market. Redrow was already somewhat weakened by its strategic change in direction through the last two years and it could well have become a bid candidate for that reason without the current slowdown. As a mid-cap builder with a weakening cash flow structure, the share price will be supported by the NAV of 368p historic and the current relatively small scale of the market capitalisation at £468m plus the confirmation of the dividend for the full year at 18.7p offering a prospective yield of 6.4% covered 1.8x on current numbers.

NH:

and this is from the mighty house of Caz

NH:

by Jeremy Withers Green

NH:

Following the IMS put out by Bovis last week, there are few surprises in the statement made by Redrow. Sales activity and net selling prices are under increasing pressure as market conditions deteriorate driven by weaker customer confidence and the severe restriction in the availability of mortgage finance. We believe that if mortgage availability and terms do not improve there is little chance of consumer confidence returning and have therefore assumed that volumes remain constrained in 2008/9, hence our estimate reduction.

We have retained our DPS estimate for 2009E despite the dividend being marginally uncovered in that year. The decision as to whether the dividend needs to be rebased will not need to be made until February 2009 at the earliest and the board’s decision will be influenced by market conditions in the spring of next year. The dividend cost is c. £30m

Sales activity and net selling prices have come under increased pressure as 2007/8 has progressed

NH:

As at the end of April the Homes operations’ order book was down 26.5%
Since January 2008 net reservations have been running at just under 50% below the levels seen in the first four months of 2007. Since Easter 2008 (23rd March) reservations are down c. 60%

Cancellation rates having run at just over 20% have seen a marked increase since Easter 2008 (23rd March) and have been running at over 30% in recent weeks

The group’s sales rate has in part been impacted by its cautious approach to incentives particularly part exchange (committed currently £16m) and shared equity or deferred consideration

Legal completions are now expected to be 10% below previous guidance (4200) at 3800 for 2007/8. We were estimating 3900

Net selling prices are under pressure and this is leading to lower gross margins. This impact will be partly offset in H2 by improved overhead recovery and the H2 weighting of land sales

Land sale profits are still expected to be at similar levels to 2006/7 at £17m

NH:

Management focus is on cost and cash control with land expenditure limited in the main to identifying longer term land opportunities and promoting the forward land bank through the planning system

The recent deterioration in the sales market has led to increased work in progress levels than previously anticipated and gearing is set to be slightly higher than previously expected. We now anticipate year end debt of £240m (gearing 40%). The group has committed bank facilities of £480m available until at least October 2009

PM:

ta for that

PM:

PM:

Can we go back to the backs for a moment.

PM:

Barclays has bounced a little

NH:

yeah but still in the doldrums

PM:

I just took a call from an agency felt – speaking for Barcl ays.

NH:

Oh yeah

NH:

what did he say??

PM:

He said: “Are you happy with the answers you got from Barclays this morning?”

PM:

NH:

This is relating to the intriguing story that Barclays has “updated” the consensus EPS forecasts on its website.

NH:

That’s updated as in ‘cut’ or ‘lowered’ or ‘reduced’ or ‘downgraded’

PM:

Downdated

NH:

And you said?

PM:

“Fine”

NH:

And that was it?

PM:

Yes, I was waiting for him to say – “Well, we’re not very happy with what you’ve written”

PM:

But he didn’t

PM:

Basically here Barclays is saying – look, the EPS numbers were updated cos we got a raft of new research in from various analysts – people updating their numbers after the AGM and ahead of this week’s interim management statement.

PM:

Automatic thing blah blah.

NH:

But the market doesn’t see it quite like that.

NH:

It suspects Barclays is quietly massaging its numbers down ahead of the statement on Thursday.

NH:

So that day John Varley can stand up and say – “Yes, we are happy with the consensus estimates.”

NH:

Even tho those consensus numbers are suddenly 15 per cent lower than they were.

PM:

Hmm. Helps get them off the hook that Robert Diamante, who runs Barcap, put in place earlier in the year.

PM:

But we are not saying that, are we Neil?

NH:

No of course not. These are consensus numbers – they reflect what analysts at rival banks are saying about Barclays.

NH:

They are not Barclays’ numbers. Got that

PM:

Of course they’re not.

PM:

I’m glad we’ve got that straight.

NH:

actually got a very amusing note from Citi

NH:

on Barclays

NH:

as readers of ML we know, they lowered forecasts yesterday

NH:

because of concerns about the outlook for BarCap

NH:

well, they have had to revise their numbers again in light of today’s ‘downdate’

PM:

Suppose a downdate is better than a blinddate

PM:

Sorry, will stand in the corner

PM:

NH:

This is now my third note on a Barclays sell. The first was post a meeting where we met the CFO and came away with worries on capital, writedowns, BarCap’s future growth potential and the credit cycle and the second was a look
at their AGM statement where they seemed to be guiding down significantly for the year. Since then we have heard the CFO presenting at a competitors conference saying that they will not rule out a rights issue and we have put our
a notewith cuts to earnings
taking us to 17% below consensus for 2008 and 33% for 2009. The note also looked
into the potential for a rights issue, £6-12bn and the resulting dilution.

NH:

Today on the back of weak results and call from A&L and a rights issue
announcement from CASA (€5.9bn) I will draw your attention back to the rights
issue with the Q1 trading update coming up on Thursday. I attach a table that
many of you will recognise looking at capital ratios for the banks (this version
has been updated for recent issuance). Our top 4 for those with biggest capital
deficits as a percentage of market cap are Hypo, DB, Barclays and CASA. The
banks that have announced rights issues to date have not seen performance
recover as many had mooted with RBS off 10%, HBOS performing in line and CASA
off 6% this morning. We are not seeing capital raised for the purposes of growth
only to plug capital deficiencies and this, rightly is holding people back. A&L
this morning remind us that credit quality has so far held firm but with the
RICs data today the worst on record and this mornings inflation data being well
ahead of expectations, we are still forecasting a weakening of retail credit
impairments going forward and a tougher trading environment for the banks.
Underlying earnings are under threat and capital is still a big immediate
concern, there are too many headwinds to ignore and I would be a seller. I also
remain concerned on where BarCap is heading going forward with fixed income the
major exposure, interest rate products kept the numbers solid for the first two
months of the year but fell off in march and the recovery has not been as
significant as would be needed. I remind you that this was the growth driver for
Barclays in the boom years and without it I feel the rest of the business looks
vulnerable.

NH:

vulnerable.
Valuation - the stock is now on 1.9x price to tangible book vs the rest of the
sector on 1.8x both of which feel a bit punchy in the environment.
Sell Barclays.

We are also negative on A&L, B&B and HBOS, buyers but concerned on Lloyds, with
the only genuine buy on HSBC

PM:

that is very funny indeed

NH:

while we are on the banks, the kind folks at Data Explorers have just sent over a short interest update on Alliance & Leciester

NH:

looks 20% of issued share cap still on loan

PM:

Uh-oh

PM:

of course they might all get burnt on Thursday

PM:

And we should also mention that barcap have raided ABN this morning

PM:

Hoovering up corporate financiers — about 40 i believe

PM:

Cheaper than buying the bank

PM:

NH:

What other banks stuff is there?

PM:

Fortis – awful

PM:

SocGen – awful

PM:

Credit Agricole – whopping great €5.9bn rights issue.

NH:

Good hit that by Les Echos in france – who got the story.

NH:

Our former sister newspaper.

PM:

But that is not “former” as in the Alphaville “former” sense.

PM:

Just that Les echos used to be owned by Pearon.

PM:

Anyway

NH:

Bradford & Bingley getting a shoeing as well this morning

NH:

down 13.25p at 160p

NH:

a drop of 7.5%

PM:

PM:

Are B&B just being hit on the back of A&L?

NH:

Well there is also a note from Credit Suisse on B&B.

NH:

Jonathan Pierce done a note this morning. – cut his B&B target from 190p to 135p.

NH:

First, mortgage impairment. We’ve written on this before and believe that a
10% fall in house prices would require banks to increase provision requirements
by around 23bps. But the relationship is non-linear and we estimate a 20% fall
in house prices would increase this towards 89bps, leading to a 45bps increase
in impairment charges if taken over two years. But for some it could be a lot
worse, in our view. We discuss in this research how individual tranches of loans
performed into the last downturn and while qualitatively the results are obvious
– banks exposed to specialist, high LTV, and recently originated loans stand to
fare worst - we’ve managed to look at this numerically and the differences are
stark. For example, self-certification mortgages, written in 1989, saw cumulative
repossession rates of 18%, whereas standard mortgages written in 1987 saw
repossession rates of just 3%.

NH:

For these reasons we have downgraded our B&B 12-month target price to
135p from 190p reflecting our concerns on the impairment outlook. This
reflects a blend of scenarios. Indeed, if we assume a 20% fall in house prices
we get closer to 110p. It remains our most negative pick in the UK banks sector
and we continue to place a high probability on equity issuance in due course.

NH:

Second, unsecured impairment. Homeowners account for about 65% of
unsecured loans in the UK, but we think a much smaller proportion of bad debts.
Historically, this was partly a function of access to mortgage equity withdrawal,
but such activity is slowing sharply. Combined with the pressure on renters, we
think there’s a good chance unsecured impairment charges will start to increase
again in H2 2008. Mortgage equity withdrawal has also added significantly to
consumer income in recent years, and a sharp slowdown could have wider
economic implications (in turn hitting corporate impairments).

NH:

Finally, Basel II capital requirements. We continue to believe that falling
house prices could lead to a sharp increase in expected losses and mortgage
RWA, forcing down equity tier 1 ratios across the sector. Indeed, our work
suggests that a 10% fall in house prices could lead to a 60% increase in
mortgage RWA this year alone.

NH:

Overall, given the numerous linkages between house prices and the UK
banks, we remain cautious on the sector, in particular B&B and HBOS.

PM:

So that’s hit HBOS as well ?

NH:

Yep they are off more than 5 per cent.

NH:

down 27p at 477p

PM:

Very interesting point from Bohemia below

PM:

Idea that one or two extreme forecasts may have skewed barclays figures

PM:

Not Barclays fault — obviously

NH:

yes. but leaving in the outliers has one advantage

NH:

it brings down the average

NH:

which is useful if you want to say earnings are in line with forecasts

PM:

But just to recap here — Barclays have not changed anything — it is analysts at other banks that have changed their numbers

PM:

VP mentions BP point below — good point

NH:

but I think this stuff at Barclays is fascinating

NH:

brokers who I have been talking to, say there are real tensions at the top

NH:

obviously the COO is leaving

PM:

yes, keep meaning to run some notes i have about him — Paul Idzik

PM:

Will run later.

PM:

PM:

Right – I advertised this earlier

PM:

END OF THE WORLD

NH:

What’s this, the Hinge of History??

PM:

it is

NH:

came out last week

PM:

Still worth reading tho

PM:

Comes from Donald G. M. Coxe

PM:

Global Portfolio Strategist, BMO Financial Group

PM:

We’ve only got Part II. But think some readers might like this.

PM:

It’s about 40 pages – but here is a taste.

PM:

Last month we published the first part of a study of the bipolar financial
and economic power shift which is simultaneously creating new global
economic leaders, dethroning Wall Street as the ruler of the international
financial system, and spawning a financial crisis and recession.

It is our thesis that Wall Street’s two cynical campaigns to enrich itself by
inflating bubbles and draining investor savings (the tech mania and housing
bubble) have done more than spawn two unnecessary recessions and a
global financial crisis: they force investors to rethink their risk appraisals and
investment policies.

PM:

Those Wall Street-created disasters came at a time major new economic powers
were emerging across the Pacific. The investment thesis for participation in
these spectacular growth stories isn’t based on something as insubstantial
as the fraudulent tech accounting and flawed CDO formulas peddled by
Wall Street shills and mountebanks: it is based on the global scarcities of
food, fuels and metals as millions of new consumers are added to the global
economy. The shares of the companies that the world relies on to find and
produce what Asia must have should no longer be rated as low-investmentquality
cyclicals. They deserve higher investment ratings than Wall Street
banks, because they do what is necessary and they have real, clear assets and real, clear earnings.
fraudulent tech accounting and flawed CDO formulas peddled by

Wall Street shills and mountebanks!!

NH:

Georgeous, isn’t it?

PM:

it is

PM:

This month, we conclude our arguments about the relative merits of investing
in firms that are viable only because of Fed and Treasury interventions,
compared with those which are our low-risk ways to benefit from the
continuing global scarcities of energy, metal and food.

We are leaving our cautious Recommended Asset Mix unchanged. We believe
the US and most global stock markets are in bear markets, and that the worst is yet to come from the fallout of Wall Street’s financial follies.

NH:

Hats back on, boys and girls.

NH:

PM:

Just leafing thru this stuff. Its wonderful.

PM:

It’s so withering.

PM:

There’s too much to put up –drop me a line want a copy.

PM:

We have to confess to deriving some guilty pleasure from the stories of these leaking SIVs. Like many other critics of market misbehavior, we revel in tales of bankerly cupidity and bankerly stupidity. These SIVs will become treasured tales for future historians, if only because so many of them managed to achieve the banking double play: losing by borrowing short to lend long, and losing by borrowing short to lend badly. Apart from outright theft, or rogue traders, those are the only two ways banks can go bust, and the SIVs proved to be splendidly efficient at combining both blunders in one package, thereby saving on staffing costs.

PM:

More:

PM:

The financial debauchery in this decade is on a scale that even a Marx or Castro would find improbable.

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:

Martin Wolf and Willem Buiter get plenty of citations.

NH:

Oooh!

NH:

New word!

NH:

Register the website NOW!

PM:

Go on – what is it?

NH:

Farmageddon

PM:

PM:

Copyright Coxe

NH:

our new hero has his own website

PM:

get him in our blog roll

NH:

http://www.donaldcoxe.com/aboutdonald.html

NH:

requently called “a Renaissance man” for his wide-ranging interests and knowledge, Donald Coxe is renowned for his ability to enliven investment concepts with a diverting array of quotations and analogies drawn from economics, history, law, the classics, music, literature and theater.

A sought-after speaker, he has delighted and captivated audiences across North America and abroad with his understanding and humor.

PM:

Well captivated you and i this morning

PM:

PM:

Right — hungry — anything RAW??

PM:

to snack on that is

NH:

one piece

NH:

Misys

NH:

now some very educated market players are convinced something is going on

NH:

PM:

right……

PM:

Neil is just on the phone

PM:

bear with

NH:

sorry it was nothing, the ramblings of an idiot

NH:

right, where were we

PM:

Misys — wots going on?

NH:

er, bid rumours

NH:

and there are few names in the frame

NH:

and here they are

NH:

Temenos – that’s a Swiss software company

NH:

trouble is they would not bid for all of Misys – they would only want to the banking division

PM:

but they could get involved in a break up bid

NH:

yep

NH:

Misys’ other division is healthcare and that is being merger witha US rival

PM:

(Justin — email me on paul.murphy@ft.com)

GR:

NH:

hello GR

NH:

any thoughts

PM:

Grim reaper has joined us. I’m scared

PM:

Actually — Grim — I should explain. Your details were logged into out system - -and because of registration changes recently you now getting logged in automatically

PM:

or somethign like that

PM:

Just be careful which buttons you press

PM:

NH:

back on Misys, the other name that is doing the rounds is an Indian company called I-Flex

PM:

never heard of

NH:

nor had until earlier

NH:

I little research on Google revealed the following

NH:

I-flex provides comprehensive IT solutions exclusively to the financial services industry worldwide.
We have serviced over 810 customers in more than 130 countries through our portfolio of products and services. i-flex’s de-risked revenue model continues to deliver consistent results despite changing global economic conditions. The company is not overly dependent on any one country or geographical region and has a diversified revenue stream from a widespread customer base.

NH:

now, the interesting thing about this company is its biggest shareholder

PM:

Microsoft?

NH:

nope

NH:

Oracle

NH:

corporate structure Oracle Global (Mauritius) Ltd., Foreign Promoter of the Company, holds 67,481,698 shares aggregating to 80.58% of the total paid up capital of the company as on December 31, 2007.

Shareholding of the following category as of December 31, 2007 is:
Foreign Promoter (Oracle Global (Mauritius) Ltd. 80.58%
FII & FMF 1.18%
ESPS Trust 0.49%
Others 17.75%

NH:

actually I-flex is about to change its names to Oracle Financial Solutions

PM:

right

PM:

so by the looks of things they would only be interested in Misys’ financial divisions

PM:

back office banking software etc

NH:

yep

NH:

but remember, Misys are in the midst of merging their healthcare business with a US rival called Allscripts

PM:

yes I remember, that’s the deal they denied

NH:

it was

PM:

what’s Iflex market cap??

NH:

dunno, can’t find it

PM:

and Misys shares, what are they doing at the moment??

NH:

up 5.25p at 173p

NH:

be honest I am not sure what to make of this story

NH:

any bid for Misys needs the backing of its biggest shareholder - Valueact

NH:

they control around a quarter of the company

NH:

and one of their former men is CEO of Misys

NH:

Now, Valueact does have form when comes it putting companies into play

NH:

it has done it a couple of times in the US

NH:

but given that they backed Misys’ recent fund raising and the deal with Allscripts

NH:

I can’t see why they would sell out now

NH:

not when their average in price is over 200p

NH:

and there are some other reasons for thinking a deal may not happen

PM:

What are they?

NH:

management would not sell out for anything less than 225p

NH:

that’s when the incentive packages kick in

NH:

between 225p and 400p

NH:

anyway, this note came out of Landsbanki last week, when the rumours first surfaced

NH:

We doubt a trade buyer would be interested in Misys as it is in the
middle of the deal to merge with Allscripts and is a tricky acquisition in
the sense that it has operations in both Healthcare and Financial Services
(and there is earnings risk at the latter). Equally we think it is tricky
for private equity to get involved as ValueAct owns 26% of the shares
(in-price 204p) and private equity typically does not like such a large
presence. As for ValueAct we would be surprised rumours of a bid with such
an exact price range would not have forced such a large holder to disclose
that it was “in talks”. The absence of such a disclosure makes us think it
is not ValueAct. As for Misys, a price of 210p to 220p would be below the
levels at which CEO Lawrie is incentivised (his shares kick in at 225p all
the way up to 400p) and so this would not be of interest. So overall we
can’t really give the rumours much credence and continue with our reduce
recommendation.

NH:

before we move on, worth noting that the IT sector is doing pretty well this morning

NH:

in the wake of HP’s bid for EDS

PM:

to recap – HP are offering $13bn (not including debt) for EDS

PM:

which was founded by one Ross Perot

NH:

Logica up 3.25p to 125.5p

NH:

this deal is interesting because it is one big player buying another bid player

PM:

right

PM:

so what’s the read across to Logica, which certainly is not a top tier player

NH:

true

NH:

but for someone looking to bulk up, it could make an attractive target

NH:

an Indian company could also look at them

NH:

here’s a quick note on the read across

NH:

the first is from Evolution Securities

NH:

EVO TAKE - We see Logica as having the greatest M&A attraction of all UK IT large cap on a two year view, and the HP/EDS news underscores that. However, in the short term the shares have had a great run, and tomorrow’s 1Q IMS should little potential to drive the shares further. We fundamentally like the turnaround story but the shares are starting to look up with events in the short term.

DETAILS - EDS shares jumped 28% overnight as HP revealed advanced talks to buy the IT services group, with a valuation being mooted of c$13bn (not including debt which we estimate is currently $300m net). The deal is a mega-merger in enterprise IT, a rarity in being a Tier 1 player buying another Tier 1 player, with the rationale being to add scale in IT services for HP’s relatively low key offering and compete more effectively with arch-rival IBM (which has been much more successful in IT services). EDS will add systems integration and bulk to HP’s existing infrastructure services business, and take the group ahead of IBM in terms of total revenue (albeit not in IT services). The read-across is mostly relevant to Logica; the deal effectively highlights that US IT conglomerates may yet be an interested M&A party in the group, as well as private equity and offshorers looking to add European footprint. In the short term acquisition disruption may bring competitive benefits as EDS is the UK’s largest systems integration house.

NH:

VALUATION AND RECOMMENDATION - With forecast EBIT of $1.2bn Dec 08E, an enterprise value of $13.3bn suggests an EV/NOPAT of c16x. By comparison, Logica is rated at 13.5x Dec 08E on our estimates. EDS is something of a different animal with much greater scale and outsourcing revenues, and different end-market exposure; however, it is interesting that once again a bid for IT services is in the +15x range, following on from the Northgate-KKR deal. This has the potential to improve the Euro IT Services average of 13.1x as a whole.

We fundamentally like the turnaround story and end-market exposure that Logica has, but after a c35% rise in two months the shares look to have made all the easy gains and substantive progress now needs to be demonstrated. The shares have once again moved past our target price (118p), which is currently under review.

NH:

is this is from Altium

NH:

M&A likely to continue There has been a significant amount of merger and
acquisition activity in the UK software and IT services sector over the past few months,
particularly focused around the IT services subsector. Companies taken off the market
by either trade or financial buyers in the past year include Xansa, Northgate
Information Solutions, Vega, Coda, Civica, Computerland and Chelford, to name but a
few. Others, such as Anite (BUY, SP: 51p, TP: 60p) and IBS OPENSystems (BUY,
SP: 150p, TP: 180p), are currently in bid discussions. These transactions and
discussions suggest that long-term relationships and revenue visibility are highly
sought after by both trade and financial buyers. They also put paid to the notion that
business models based on IT services rather than software have little strategic value.
With valuations close to multi-year lows and the demand picture across most end
markets remaining relatively robust, it is our view that merger and acquisition activity
across the sector will continue in the year ahead. While we do not formulate our
recommendations purely on the basis of a company’s likelihood to be acquired, we
believe that there are several companies in the sector that are looking vulnerable at
the moment.

NH:

Who’s next? We would highlight Phoenix IT (BUY, SP: 315p, TP: 400p) and
Innovation Group (BUY, SP: 28p, TP: 36p) in particular as companies that combine
good revenue visibility and structural growth with attractive valuations. Some have
suggested Dimension Data (SELL, SP: 51p, TP: 35p) as a potential target but we
would argue that HP’s approach for EDS makes this less likely as HP would have
been one of the most obvious potential acquirers for DiData. We are also not
convinced that Axon (BUY, SP: 515p, TP: 575p) is an obvious target at this stage of
the cycle given concerns about the medium term prospects for spending on
consultancy, particularly after the recent price recovery. That said, there are plenty of
other companies that are looking vulnerable, especially the ones that seem stuck
below the £50m market capitalisation level, and we look forward to continued
consolidation in the sector over the coming months.

PM:

Thanks for all that

PM:

Misys stuff was RAW of course

NH:

it was, but as with Carphone a few weeks back their is too much noise for something not to be going on

NH:

and there are serious people who are thinking that way

PM:

PM:

We are almost done — but quickly to some requests below

NH:

Bohemia, we have not really looked at Informa because it was in the Times

NH:

a bit childish but we could dig something out, hang on

NH:

this is from kaupthing

NH:

Informa (Buy) - Bid?
With the sector having seen plenty of M&A activity it would not surprise if the report in The Times this morning is true. This suggests that APAX (recently bought EMAP B2B) and Carlyle are interested. The last bid for Informa was by Candover backed SSBM for 630p at the end of 2006. This was rejected by board when company was on front foot. Since then CEO and FD have left leaving the chairman to take up CEO role and market has been concerned about high leverage. Whilst we are comfortable with debt and cyclical issues (see March note) the market remains cautious. In terms of potential price we suggest the APAX EMAP as a benchmark. The business sold on a 12.6x prospective EBITDA. Applying this to Informa suggests close to 700p.

NH:

and this is from Oriel

NH:

Bid Rumours
• White Times reports that the Carlyle Group and Apax are considering a bid but no offer
has been made
• Apax already owns Incisive and Emap’s old B2B businesses. Group has also pinched
Informa’s CEO David Gilbertson
• Private Equity backed Springer failed with a 630p bid in Nov 2006
• However we expect a bid at above 500p could have more success in the current climate
• Stock trades on 9.7x Dec 2008e - BUY

PM:

thanks for that

PM:

Neil is just trying to get hold of Sain short position

PM:

bear with

NH:

also someone asking earlier about Premier Foods

NH:

here’s what Citi made of the update

NH:

Sales — Sales ahead 6.3%, with pricing achieved to recover the £35m of
annualised cost inflation that remained outstanding at the turn of the year.
 SAP — The core ‘orders to cash’ module of SAP has been successfully
installed over the Easter period.
 Factories — 7 factory closures are now expected this year (completing the
programme), with 2 closures brought forward from 2009.
 Pension Contributions — Agreement has been reached with the trustees on
revised pension contributions for the next 3 years. Against the existing
schedule, we estimate a £20m p.a. pre-tax reduction in contributions.
 Guidance — Expectations for the year remain unchanged and as previously
advised, progress will be H208 weighted (we expect H108 trading profits to be
broadly flat). “We are pleased with our progress so far this year.”
 Conclusion — While news of a further bread price increase is a concern,
today’s statement is positive on a number of fronts. We believe that Premier is
taking further strides along the road to redemption.

PM:

Fitz - we dont have anythign on Morgan crucible — but never like the sight of chunky director sales

PM:

They tend to be clairvoyant of course

NH:

and we had a query about Minerva earlier this morning

NH:

seems that a lot of people don’t think the deal will happen

NH:

and are betting against it

NH:

heard some really outlandish theories

NH:

that Limitless are not interested in bidding

NH:

in that case, why did they hire UBS to look at it??

NH:

anyway, shares down 0.5p at 116p this morning

PM:

Right — we are done

PM:

Sainsbury short position has not arrived

PM:

Sorry — Bohemia put it up

PM:

We are off - that’s me . Neil and Grim

PM:

back tomorrow at 11am

PM:

Thanks for joining and thanks for all the comments

NH:

see ya

This entry was posted by Paul Murphy on Tuesday, May 13th, 2008 at 11:02 and is filed under Uncategorised. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

1. May 13   12:05 Posted by maximus [report]

   suspect that Grim Reaper is actually the Stig from Top Gear

2. May 13   12:05 Posted by TJB [report]

   Disapointed by Grim’s contribution to ML today. I realise it’s a busy time for his profession in the corporate sector but no RAW tips on who to short?

3. May 13   12:03 Posted by Fitz [report]

   Cheers. Cant imagine that inflation/interest picture helping much either.

4. May 13   12:02 Posted by Promethius [report]

   Thanks - Re SBRY

5. May 13   12:02 Posted by Bohemia [report]

   29.2% short in SBRY!

6. May 13   12:00 Posted by Bohemia [report]

   thanks

7. May 13   11:59 Posted by Fitz [report]

   V sorry for late post.

   Do you have any comment on MGCR? Price down 4.2% after director sold 10,000/41,320 shares yesterday.

8. May 13   11:56 Posted by Bohemia [report]

   Any thoughts on Informa?

9. May 13   11:53 Posted by rahodeb [report]

   I-Flex worth about $2.5bn

10. May 13   11:51 Posted by VP [report]

    Aren’t MSY raising cash at 175p via major s/holder?

11. May 13   11:50 Posted by A Moger [report]

    Indeed Monkey; I know who I’d rather wake up next to..

12. May 13   11:50 Posted by Promethius [report]

    .
    Sainsbury - Results Tomorrow - whats the stock on loan position now - Anyone ?
    .

13. May 13   11:49 Posted by Monkey [report]

    Is the Grim Reaper Helen’s replacement? - because if so I have to say I preferred Helen

14. May 13   11:48 Posted by Harry Hindsight [report]

    index option expiry this week

15. May 13   11:48 Posted by Justin [report]

    ah ok caught up- thanks

16. May 13   11:47 Posted by Tradebot [report]

    the indices will rally until you cut your shorts and go long. Then they will drop like no tomorrow.

17. May 13   11:46 Posted by Justin [report]

    sorry if I’m being slow, where can I get a copy of this defining piece of 21st century history???!!!

18. May 13   11:44 Posted by G Cox [report]

    Standard procedure on consensus earnings these days should be to express them as change in EPS and remove the oldest 50%. Life is changing too fast to include old estimates.

19. May 13   11:41 Posted by Super SWF [report]

    Nice one…a Bohemian geek

20. May 13   11:40 Posted by TJB [report]

    sub 5,000? sacre bleu!

21. May 13   11:39 Posted by Bohemia [report]

    If you want the old numbers, this links shows the cached page from google: http://tinyurl.com/3ha8nb

    New version: http://www.investorrelations.barclays.co.uk/BRC1/jsp/brccontrol?task=articleFWgroup&site=inv&value=1186&menu=382

22. May 13   11:39 Posted by Chrispy [report]

    VP -this is standard practice in the States - espcially tech names, cisco, intc etc..and it allows Bberg TV to highlight that as many firms beat estimates as this time last year - a nonsensical figure.

23. May 13   11:39 Posted by Justin [report]

    There has been far too much optimism in the markets in the last couple of months-
    the old warlords like buffet and soros have been trying to keep people realistic but it just wasn’t happening

    it’s about time the FTSE fell back sub 5,000

24. May 13   11:39 Posted by OJ@home [report]

    what about premier foods any reaction

25. May 13   11:37 Posted by fxtrader [report]

    i should have added - standard for data providers.

26. May 13   11:37 Posted by fxtrader [report]

    i believe it’s standard procedure to exclude the highest and lowest estimates from consensus.

27. May 13   11:36 Posted by VP [report]

    No one’s mentioned BP doing the same as Barclays recently - though they then subsequently smashed the cut ests.

28. May 13   11:33 Posted by Bohemia [report]

    If you look at the Barlays estimates, most are PBT 6-8bn. But there’s a new one at just 390m, can’t tell you who from. Bloomberg strip it out of “consensus” but looks like Barclays have included it.

29. May 13   11:33 Posted by Finlay [report]

    On Barclays - didn’t Sainsbury get in a whole heap of trouble for doing something similar a few years ago

30. May 13   11:32 Posted by fxtrader [report]

    Monkey - Thank you!!!

31. May 13   11:31 Posted by PC [report]

    Need a lot of heat and pressure to make artificial diamonds - guess they won’t be in short supply

32. May 13   11:31 Posted by Monkey [report]

    Just found this story on Sky - found it amusing - thought it might lighten the mood!
    http://news.sky.com/skynews/article/0,,91059-1315823,00.html

33. May 13   11:29 Posted by Chrispy [report]

    he might be known as Bob Zirconia after thursday

34. May 13   11:28 Posted by Tim [report]

    S/b Roberto Diamonique - “might be real stones but sure ain’t diamonds in the heart of Barcap”

35. May 13   11:26 Posted by Lemmy [report]

    Nice downward guidance from Barclays. To a selective audience!

36. May 13   11:24 Posted by ss [report]

    Good for my allotment = more spuds = less spending

37. May 13   11:23 Posted by herman teppis [report]

    thank you bbc 5-day forecast…

38. May 13   11:23 Posted by Pakora Mix [report]

    Last time I checked Minerva was slightly up - any views among the brokers etc ?

39. May 13   11:22 Posted by andy pandy [report]

    Heavy showers predicted on Thursday

40. May 13   11:21 Posted by fxtrader [report]

    Oh well, at least it’s sunny in London!

41. May 13   11:21 Posted by VP [report]

    Oh, and unemployment - the final piece in the jigsaw.

42. May 13   11:20 Posted by VP [report]

    Fascinating times, economically. Everything’s dire except the FTSE.

43. May 13   11:19 Posted by Bohemia [report]

    re RICS: it’s the ve % less the -ve %. So -95 might be 1% ve, 3% flat, 96% -ve.

    But it’s also seasonally adjusted (of course!). In reality it was -81 NSA, with 1% ve and 82% negative.

44. May 13   11:17 Posted by TJB [report]

    Hyper inflation is great way to prevent too much negative equity in a downturn! can’t see falling demand denting inflationary pressures in the foreseable. uh oh….

45. May 13   11:17 Posted by Monkey [report]

    Guys - perhaps you should engage in some currency forward to hedge your FX exposure re your webby trip. What’s the amount you need £50,000? Perhaps fxtrader can sort you out! But then again if the FT is paying (as I assume they are) you probably dont care

46. May 13   11:17 Posted by Harry Hindsight [report]

    never mind the tiddlers

    RBS and Barclays on/at/near March lows

47. May 13   11:15 Posted by Super SWF [report]

    inflation is bad for banks. Value of financial assets is eroded away, and what do banks have on their balance sheet? 99% financial assets, ….oh and some goodwill, from buying other banks

48. May 13   11:13 Posted by R Pope [report]

    ok same thing…

49. May 13   11:13 Posted by R Pope [report]

    …would it not be more like 33 ve/66-ve (out of 100) ??

50. May 13   11:10 Posted by wheniwereyoung [report]

    @OJ - as I understand it, its 95% /more/ surveyors, not 95% /of / surveyors.(I take it you’re referring to the RICS report)
    Thus, if 100 see prices rising 195 see prices falling.

51. May 13   11:09 Posted by andy pandy [report]

    BNP Paribas: RPI jumped to 4.2% y/y from 3.8% y/y. The main culprits were food and beverages and alcohol and tobacco. For the first time in over 6 months core inflation surprised to the upside, up to 1.4% y/y from 1.2% y/y. Up until now, the main driving forces behind higher inflation have been food and energy. However, this release is showing signs of more broad based inflationary pressures. One example of this is higher food pushing up restaurant and hotel price inflation.

    The MPC knew this number at the May MPC meeting. It is a racing certainty that
    inflation will go higher than 3% y/y this year, provoking a letter from BoE
    Governor King to the Chancellor. It is looking more and more likely that
    inflation will stay above 3% for more than 3 months, triggering a second letter
    - for the first time ever.

    Simply horrific numbers and casting considerable doubt over a cut at the June
    meeting. More clues on that in tomorrow’s Inflation Report.

52. May 13   11:09 Posted by G Cox [report]

    The £150 extra borrowing costs was really left out of ‘core’?

53. May 13   11:08 Posted by maximus [report]

    plus the ongoing LIBOR fixing saga with BBA to appear before parliamentary committee

54. May 13   11:08 Posted by andy pandy [report]

    BNP Paribas: >

55. May 13   11:06 Posted by ss [report]

    Except rail strike possible later this month

56. May 13   11:05 Posted by VP [report]

    About the only good thing with the dire inflation figs is that the economy’s so weak, there’s unlikely to be a wage/price spiral.

57. May 13   11:05 Posted by ss [report]

    How long will it be till employment starts dropping do you think?

58. May 13   11:04 Posted by Justin [report]

    oh dear, its hitting the fan?!

59. May 13   11:04 Posted by OJ@Home [report]

    when 95% of estate agents say things are going down, you’ve got to think…
    what?

60. May 13   11:03 Posted by Monkey [report]

    Premier Foods positive statement - good news for them re: passing on wheat costs. Bad news for us re: prices of food and inflation!