Markets live chat transcript for the chat ending at 12:01 on 15 Aug 2008. Participants in this chat were: Paul Murphy (PM) Bryce Elder (BE)
PM:
Welcome
PM:
This is FT Alphaville’s daily markets commentary – Markets Live.
BE:
Morning.
PM:
Usual rush around this morning.
PM:
I need a holiday.
BE:
Strange strange market today.
PM:
Everyone says things are really bad – US probs clearly spreading to the rest of the world, biggest threat of recession is in the UK.
PM:
So what happens? The dollar goes THRU THE ROOF.
BE:
The $ is at a six month high against the euro.
PM:
And against sterling??
BE:
Er….just looking.
BE:
Back at levels not seen since October 2006.
BE:
It’s crashed through every technical level in sight.
PM:
And this is because everyone is betting that we are now in worse shape than the Yanks.
BE:
It’s also about commodities of course.
PM:
Course it is.
BE:
Big falls in oil.
BE:
Huge fall in gold – off three per cent.
BE:
Talk of big positions being liquidated across the commods. That in itself actually supports the dollar.
PM:
Hmm
PM:
Right – Peter Garnham’s been in touch – our forex man on the markets desk.
PM:
Think he’s rather busy – but here’s what he’s saying:
PM:
The bottom line is that market thinks global decoupling has finally been exposed as a myth – and it means all those bets against the dollar still sitting there – especially amongst the emerging markets and Asia generally – are now being taken off with some speed..
PM:
As for the majors, well it is clear that the market thinks the ECB made a mistake hiking rates and will punish the euro, similarly everybody thinks the Bank of England is going to have cut rates, while Australia has already started and Japan is headed for recession.
The key is that the US is not doing brilliantly, but they have already cut rates and provided a fiscal stimulus – so a better bet to come out the other side quicker.
PM:
One more thing is that real money managers have not yet turned their positions around. When they do – and it could be soon and violent – it could push the dollar higher.
PM:
He likes this guy Maurice Pomery at IdeaGlobal
PM:
The credit crunch is in danger of becoming worse and I note with concern the rise in the 3month $ LIBOR rate. With what the central banks have thrown at the liquidity issue, one would have assumed a move in the other direction. There is a major problem here as the crunch has now hit the consumer and he is not about to spend as his job is under threat and his bills are soaring. This will see house prices fall further, even in the US and this will heap further problems on the lenders who in turn will tighten lending again and face further write-downs. Those that thought the worst is behind us should be very worried.
PM:
This is why I still hate equities and although I am bullish the Dollar, I do not see any rally sustained in global equities for a while yet. As I continually remind you, de-coupling is a myth and I see major issues in the unwind in Asia and the EM space. These are small exits and the position build up has been over an extended period. The rush out of the door could cause carnage and at the same time some countries will bite the bullet and raise rates just when they need cutting and the surprise will be how quickly demand dries up, economies stall and this includes China and India
BE:
Also got some interesting, albeit noodly, stuff in the new Morgan Stanley FX Pulse
BE:
Dollar’s Dog Days Done?
Godot Has Arrived. The dollar has entered an important new phase, but the road ahead is less clear. Investors should play for further USD strength against currencies where the market has yet to catch up with underlying macroeconomic deterioration.
Godot Has Arrived. The dollar has entered an important new phase, but the road ahead is less clear. Investors should play for further USD strength against currencies where the market has yet to catch up with underlying macroeconomic deterioration.
BE:
That’s from their analyst Ned Rumpeltin, who put out an epic note on the greenback yesterday
PM:
Rumpeltin?????????
BE:
Say it three times in a mirror and he appears, apparently.
BE:
Anyway, here’s the salient points.
PM:
BE:
Our economists continue to believe the worst is still ahead for the US economy, however, and have repeated their call “for a real, albeit mild, US recession and a bust in corporate profits,” with GDP growth expected to turn negative on a sequential basis in Q4 2008 and Q1 2009.
Expectations for lackluster economic performance ahead has us believing the recent USD bounce has been more about weakness in the rest of the world, which we see as substantially different from confidence that the US will outperform over the months ahead. Indeed, it appears the USD has very much rallied by default, not by merit.2 In our view, the current environment can best be characterized as a “bear market for USD shorts”, and not as a “bull market for USD longs”. We think this is an important distinction. We see the USD’s climb motivated by a desire to sell currencies where the domestic economy risks a rapid deceleration. We are mindful that asset prices often begin to recover well before fundamentals find their trough.
BE:
But, until the US economy’s growth prospects brighten, we think additional USD gains will be fueled by covering outstanding dollar shorts rather than ambitions to buy USD on its own accord.
BE:
The Road Ahead
In addition to the constructive macro backdrop described above, the USD rebound was also supported by a favorable turn in interest rate differentials. We expect this to continue to play an essential role going forward. The spread between USD denominated 2-year swap rates and those of its G10 counterparts has provided a reliable signpost for USD developments on a broad basis. Since reaching a low on 17 March of this year, this spread has been heading steadily in
favor of USD appreciation, a trend which has accelerated in recent weeks.
In addition to the constructive macro backdrop described above, the USD rebound was also supported by a favorable turn in interest rate differentials. We expect this to continue to play an essential role going forward. The spread between USD denominated 2-year swap rates and those of its G10 counterparts has provided a reliable signpost for USD developments on a broad basis. Since reaching a low on 17 March of this year, this spread has been heading steadily in
favor of USD appreciation, a trend which has accelerated in recent weeks.
Drilling down, it appears that USD may be reaping the benefit of a steep rise in real rates—specifically, a surge in real policy rates. Market participants have substantially marked down their expectations for US inflation over the last several weeks.
Breakeven inflation over a two-year period, as measured using TIPS yields has dropped by over 100 bps since the beginning of July. One-year breakeven inflation rates have collapsed by nearly 350 bps. Using an average of these two measures to deflate the fed funds target rate, as a crude approximation of monetary policy over the Fed’s policyrelevant time horizon, real “forward-looking” policy rates rose sharply just before the USD took its big step higher. With such a high degree of uncertainty prevailing in the global economy, we expect developments in real interest rates, as opposed to nominal, will continue to determine the USD’s fate in the foreseeable future.
BE:
Has the Train Left the Station?
With the sharp move higher catching a lot of market participants by surprise, the temptation may be to hold off and wait for an opportunity to “buy on a dip.” We suspect this is a popular view right now, leading us to think that any dips over the next few weeks could be shallow and short-lived. Looking ahead, we think the market will differentiate further among currencies on the basis of domestic fundamentals. We prefer to short currencies of economies where growth momentum is fading, but where monetary policy intentions have yet to signal any inclination to support growth. With AUD, NZD, and GBP suffering steep losses already, some of the more conventional candidates have already taken a big leg lower and scope for further declines may be more limited.
BE:
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
BE:
Plenty to chew on there.
PM:
excellent — thanks for that
PM:
PM:
How about the metals?
BE:
Yup – it’s all tied together with the dollar of course.
BE:
Gold’s below $800/oz, down about 20% in the past month on lessening bling demand. (Do the young folks still talk about bling?)
PM:
oh yeah!
BE:
Silver’s lost 11.5% in the same time, and has dropped 42% from its peak.
PM:
does silver bling?
BE:
It does at Elisabeth Duke.
PM:
PM:
Thats the Argo jeweler of course
BE:
Anyway, here’s what UBS make of it.
BE:
Is a stronger US$ here to stay?
The recent strengthening of the US$ has driven gold to its lowest levels for 2008. Silver, the “high beta” gold has stayed true to its character, by correcting more sharply, and is now trading at a ratio of 56.4 versus gold, which is also near the upper end of the range in 2008. Silver could of course de-rate further against gold, should the US$ continue to strengthen, but we expect silver to trade more
toward the average of c.53x as the US$ stabilises. Our FX team view the recent gains in the US$ as sustainable. Worsening growth expectations outside the US,
shifting yield differentials, falling commodity prices and strong capital flows are all dollar-supportive. The FX team in a note entitled “Dollar Strength to Stay”, do express the concern that a rebound in oil and commodity prices could trigger a partial reversal of recent moves in the US$. We are expecting commodity prices to rebound in Q4 of this year and into 2009E, and inflation to be a continuing policy challenge, which we believe will be supportive for gold and
silver prices in general.
The recent strengthening of the US$ has driven gold to its lowest levels for 2008. Silver, the “high beta” gold has stayed true to its character, by correcting more sharply, and is now trading at a ratio of 56.4 versus gold, which is also near the upper end of the range in 2008. Silver could of course de-rate further against gold, should the US$ continue to strengthen, but we expect silver to trade more
toward the average of c.53x as the US$ stabilises. Our FX team view the recent gains in the US$ as sustainable. Worsening growth expectations outside the US,
shifting yield differentials, falling commodity prices and strong capital flows are all dollar-supportive. The FX team in a note entitled “Dollar Strength to Stay”, do express the concern that a rebound in oil and commodity prices could trigger a partial reversal of recent moves in the US$. We are expecting commodity prices to rebound in Q4 of this year and into 2009E, and inflation to be a continuing policy challenge, which we believe will be supportive for gold and
silver prices in general.
BE:
That’s from a note previewing Hochschild and Fresnillo – both silver miners – which post numbers next week .
BE:
They’ve been hammered along with the silver price in recent months – down 40% or thereabouts.
BE:
While the diversifieds are all taking a bit of a bath today, after a decent run yesterday.
PM:
miners
PM:
Worzel below thinks that gold follows oil follows the dollar
PM:
But just to be clear here, we are now sure that gold is down cos bling is out of fashion
PM:
PM:
anyway — lets get into some stock stuff
PM:
How about the Footsie.?
BE:
We’re up 18 points at 5515 at the moment.
BE:
As noted below, it was an options expiry morning
BE:
So we had the usual pop up, and now volumes have dropped off
PM:
okay
BE:
Seen UBS has cut its FTSE year-end target?
BE:
To 6100.
PM:
that’s still 10%+ in four months. Seems a bit optimistic.
BE:
Indeed. And they’re looking for 6500 in 2009, which looks even more Panglossian after you read their note …
BE:
… the gist of which is to expect an earnings recession next year.
PM:
Can we have a look?
BE:
Following the changes our US colleagues have recently made to their outlook for US GDP and EPS, and the generally disappointing results we’ve been seeing, this week we review our top-down UK earnings forecast and, in turn, our index targets. In blunt summary, we are forecasting 3.6% growth in earnings in 2008 (previously 4.5%). Our first pass on 2009 is for a 4.1% fall in earnings. We are setting our 2008 end-year target for the FTSE 100 at 6,100 (previously 6,500) and see it rising to 6,500 by the end of 2009. Earnings weakness will inevitably cap returns in 2009, but provided inflation falls back then the prospect of rate cuts should allow the market to look through the downgrades and generate a positive return. With the headwind of rising real interest rates this will involve a significant re-rating of equities relative to bonds.
PM:
Ouch. Earnings down 4.1%.
BE:
Yup. Worth noting also that the IBES consensus – which is a bottom-up measure – is looking for earnings to grow by 9% in 2009 after a 5.5% increase this year.
BE:
This all goes back to the old theory that the teenage scribblers are next to useless during hard times.
BE:
They spend their time talking to companies, who always say “we’re defensive, we’re well positioned, we’re the model of efficiency and are going to prevail while our rivals suffer”.
BE:
Saw some research on this a while back suggesting that sell-side analysts always, no matter what, forecast about 10% earnings growth.
BE:
That estimate tends to undershoot by a point or two in the boom times, and overshoot by about 40 points in the downturns.
BE:
Anyway, UBS has put together a rather nice charts, including a “surprise ratio” for blue-chips beating consensus over the past few years, and whether forecasts going up or down after trading statements …
BE:
… none of which I’m able to post here.
BE:
So you’ll have to make do with the summary:
PM:
I will try and post the charts on AV later.
BE:
First-quarter results (announced in the period March 1 to 30 June 2008) were good (surprise ratio 65%) countering what looked to be a deteriorating trend. However, secondquarter results so far (announced from end-June to 13 August) have seen a return to the critical 50% level (we last saw the surprise ratio drop below 50% in 2005).
BE:
This is matched by an equally depressing picture on trading statements. Only this year have we started to record the general health of trading statements, but
they have already helped to add more colour to the earnings picture. Compared with the previous quarter, the proportion of trading statements coming through better than UBS analysts’ expectations has dropped from 34.5% to 16.7%.
they have already helped to add more colour to the earnings picture. Compared with the previous quarter, the proportion of trading statements coming through better than UBS analysts’ expectations has dropped from 34.5% to 16.7%.
PM:
I see. Ideal conditions for the FTSE to tag on nearly 18 per cent inside 16 months.
BE:
Their optimism’s pinned on inflation easing, allowing the BOE to bail us out.
BE:
The main reason for the 400-point cut to our end-2008 forecast is that we have taken the risk premium higher (raising the yield gap by 50bp, to 750bp from 700bp) to better reflect the recent expansion, the hump in inflation we are now forecasting (peaking at 5.5% in September) and the likely deterioration in earnings momentum on the way.
The arithmetic that goes into generating our index target for 2009 is put under considerable strain by the combination of rising real yields (from 0.9% to 3.1%) and falling earnings (down 4.1%). A positive market return can only be justified if the risk premium falls (and the multiple expands).
BE:
We are comfortable with forecasting such a re-rating (yield gap to contract from 750bp to 450bp) because our forecast is for inflation to fall back sharply into 2009. This should allow the BoE to contemplate rate cuts, encouraging investors to focus on the potential for recovery rather than the potential for stagflation and
deep recession. The modest decline that we forecast in gilt yields (5.4% to 5.1%), even with the sharp fall in inflation we are forecasting, reflects the increasing supply of gilts plus the potential for US economic recovery. The resulting increase in real yields inevitably forces the yield gap to close. The multiple implied by this closure is 13x, which would represent a return to 2007 levels, but with the
difference that this time it’s a recovery multiple.
deep recession. The modest decline that we forecast in gilt yields (5.4% to 5.1%), even with the sharp fall in inflation we are forecasting, reflects the increasing supply of gilts plus the potential for US economic recovery. The resulting increase in real yields inevitably forces the yield gap to close. The multiple implied by this closure is 13x, which would represent a return to 2007 levels, but with the
difference that this time it’s a recovery multiple.
PM:
Thanks for all that.
PM:
love that line…
PM:
The arithmetic that goes into generating our index target for 2009 is put under considerable strain >>>
BE:
BE:
On to the precious few questions we’ve had below.
PM:
yes…
BE:
On RSA. Not a lot to add to the story in today’s paper.
BE:
Can’t say who the potential bidder is – a finger of suspicion points at ZFS though.
BE:
And there’s no reason to believe anything’s imminent.
BE:
The feedback we were getting yesterday was it’s being talked about somewhere. But you could have said the same at any point over the past year or so.
BE:
The only twist seems to be that the CEO recently picked his first non-exec job, joining ITV.
BE:
Which seems to have led some folk to think he’s going to do a Cowdery – he joined British Land six months before selling Resolution.
BE:
As I say, it’s all gossip and heresay at the moment.
PM:
ta
PM:
Got to confess i have nothing more on Camec
PM:
Was distracted – apols
PM:
As for Informa — did see telegraph piece
PM:
The sense from ourside is that the financing for this PE bid for Informa has been more or less there for several weeks — despite the markets scepticism
PM:
Providence has been ready to widen the PE consortium from day one — we believe
PM:
But we have had no fresh updates on the state of negotiations
PM:
Providence should have def finished DD by now
PM:
due diligence was due to last three weeks
PM:
Regal Petroleum — one for the reckless in my view
PM:
But not a close watcher!
PM:
PM:
Michael Page being discussed below
BE:
It is, as Worsel points out, all a bit barmy.
PM:
Analysts are pretty bearish on the whole staffing sector
PM:
Here’s a short note from Kaupthing
PM:
Michael Page (Not Rated): In a remarkably full and frank RNS, Michael Page has rejected Adecco’s unsolicited preliminary approach for the business and provided detailed information about the offer.
After four weeks of discussions, Adecco made an offer of 400p in cash to the Board subject to number of waivable pre-conditions including the recommendation of the Board and due diligence. Page concluded that this “materially undervalued” the group and rejected it. Perplexingly, their revised proposal was less generous – the 400p valuation was maintained but Michael Page would issue new ordinary shares to Adecco until their shareholding increased to 50.1%. Page shareholders would receive 200p in cash and retain a minority holding in a quoted entity.
Michael Page has now ended discussions and intends to approach the Takeover Panel to agree a formal timetable under which Adecco must announce its intention to make a firm offer. Given that Adecco has consistently flagged its determination to seek friendly discussions, we believe it is unlikely to go hostile.
Staffing share prices rallied sharply after Page/Adecco bid discussions were announced as the market anticipated a wave of consolidation across the sector. Given deteriorating trading momentum, we anticipate further downgrades during autumn trading updates and the strongest ralliers look most vulnerable to a correction – Michael Page (+26% since bid announced), Hays (+14%) and Sthree (+7%).
After four weeks of discussions, Adecco made an offer of 400p in cash to the Board subject to number of waivable pre-conditions including the recommendation of the Board and due diligence. Page concluded that this “materially undervalued” the group and rejected it. Perplexingly, their revised proposal was less generous – the 400p valuation was maintained but Michael Page would issue new ordinary shares to Adecco until their shareholding increased to 50.1%. Page shareholders would receive 200p in cash and retain a minority holding in a quoted entity.
Michael Page has now ended discussions and intends to approach the Takeover Panel to agree a formal timetable under which Adecco must announce its intention to make a firm offer. Given that Adecco has consistently flagged its determination to seek friendly discussions, we believe it is unlikely to go hostile.
Staffing share prices rallied sharply after Page/Adecco bid discussions were announced as the market anticipated a wave of consolidation across the sector. Given deteriorating trading momentum, we anticipate further downgrades during autumn trading updates and the strongest ralliers look most vulnerable to a correction – Michael Page (+26% since bid announced), Hays (+14%) and Sthree (+7%).
BE:
It is a remarkably open statement from Page.
BE:
It’s perhaps a pity they didn’t take the same approach when recieving the first indication of interest several months ago.
BE:
Anyway, here’s Panmure
BE:
Talks between Adecco and Michael Page appear to have
ended, with Michael Page rejecting a 400p bid. This appears generous to us given the
stage at the cycle we are currently at, and the downside risk to forecasts. We believe it
would be difficult for Adecco to improve this offer and justify it to its own shareholders.
There is likely to be short term speculation as to whether Adecco will turn its attention
to Hays or Robert Walters. We would not bank on this given that Adecco appeared to be
most interested in Michael Pages brand, exposure to permanent recruitment and
specialist model.
! Valuation: At current levels the shares are trading on 8.8x 2008E EPS falling to 9.9x
2009E, with forecast risk still weighted towards the downside in our view. With visibility
very limited at this stage (45 weeks maximum), our confidence in these forecasts is low.
! Sector read-across: With Randstad also recently effectively putting itself out of the
running for further acquisitions, we do not believe there will be the heightened
consolidation activity some expect in this sub-sector. Focusing on the fundamentals, we
remain negative on Hays (Sell, target price 66p), Sthree (Sell, target price 130p) and
Robert Walters (Sell, target price 100p).
ended, with Michael Page rejecting a 400p bid. This appears generous to us given the
stage at the cycle we are currently at, and the downside risk to forecasts. We believe it
would be difficult for Adecco to improve this offer and justify it to its own shareholders.
There is likely to be short term speculation as to whether Adecco will turn its attention
to Hays or Robert Walters. We would not bank on this given that Adecco appeared to be
most interested in Michael Pages brand, exposure to permanent recruitment and
specialist model.
! Valuation: At current levels the shares are trading on 8.8x 2008E EPS falling to 9.9x
2009E, with forecast risk still weighted towards the downside in our view. With visibility
very limited at this stage (45 weeks maximum), our confidence in these forecasts is low.
! Sector read-across: With Randstad also recently effectively putting itself out of the
running for further acquisitions, we do not believe there will be the heightened
consolidation activity some expect in this sub-sector. Focusing on the fundamentals, we
remain negative on Hays (Sell, target price 66p), Sthree (Sell, target price 130p) and
Robert Walters (Sell, target price 100p).
BE:
And Altium make some similar points
BE:
Rejection of Adecco offer We note management’s rejection of the full and partial offer (50.1%,
with 200p per share returned to shareholders) of 400p per share from Adecco. The ball is now in
Adecco’s court but would think that anything below 500p per share would be rejected by
shareholders. Our belief is that while the medium term is likely to prove challenging, the potential
in the next cycle could well see a peak share price of closer to 1000p, rather than the 600p or so
in the current cycle.
§ Interims on 18 August MPI releases interim results on 18 August. Within the recent trading
update the UK was by far the weakest performer of the four regions in which the group operates,
with NFI rising just 1.2% during Q2 (representing a slowing from growth levels experienced in
Q1). While headcount grew during H1 by 3.6%, we believe that the majority of this occurred in
Q1, with resources increasingly focused on less mature overseas offices.
§ Non-UK strong by comparison With the exception of the Netherlands and Spain, all countries
within EMEA grew strongly, driven by a combination of prior year and current year office
openings and a 13.1% increase in headcount during the period. What was noticeable was that
across all countries with EMEA, growth in Q1 was ahead of Q2, despite the benefit of Easter
falling in Q1. Of the strong uplift, the appreciation of the euro accounted for almost 20% of the
increase. Similarly, Asia Pacific and the Americas preformed strongly, for the same reasons as
in EMEA, with Australia the driving force in the former and the emerging economies of Brazil
and Argentina the stronger in the latter region.
§ Change to estimates We have taken the opportunity to revisit estimates. We think that while
levels of growth in most regions will slip during H2, MPI is likely to still turn in a strong
performance (despite our expectation of declining conversion rates in the UK for the year as a
whole) leading to an EPS upgrade of 3.5%. We think that during FY2009E that trading is likely to
become more challenging overseas, with the UK and US already in recession in all likelihood. In
view of the high gross margins owing to the very strong perm bias and operationally geared
model we have reduced expectations for FY2009E and FY2010E by 14.9% and 45.2%,
respectively. We believe there is also downside risk to Robert Walters (SP: 126p, TP: 100p,
HOLD) estimates.
with 200p per share returned to shareholders) of 400p per share from Adecco. The ball is now in
Adecco’s court but would think that anything below 500p per share would be rejected by
shareholders. Our belief is that while the medium term is likely to prove challenging, the potential
in the next cycle could well see a peak share price of closer to 1000p, rather than the 600p or so
in the current cycle.
§ Interims on 18 August MPI releases interim results on 18 August. Within the recent trading
update the UK was by far the weakest performer of the four regions in which the group operates,
with NFI rising just 1.2% during Q2 (representing a slowing from growth levels experienced in
Q1). While headcount grew during H1 by 3.6%, we believe that the majority of this occurred in
Q1, with resources increasingly focused on less mature overseas offices.
§ Non-UK strong by comparison With the exception of the Netherlands and Spain, all countries
within EMEA grew strongly, driven by a combination of prior year and current year office
openings and a 13.1% increase in headcount during the period. What was noticeable was that
across all countries with EMEA, growth in Q1 was ahead of Q2, despite the benefit of Easter
falling in Q1. Of the strong uplift, the appreciation of the euro accounted for almost 20% of the
increase. Similarly, Asia Pacific and the Americas preformed strongly, for the same reasons as
in EMEA, with Australia the driving force in the former and the emerging economies of Brazil
and Argentina the stronger in the latter region.
§ Change to estimates We have taken the opportunity to revisit estimates. We think that while
levels of growth in most regions will slip during H2, MPI is likely to still turn in a strong
performance (despite our expectation of declining conversion rates in the UK for the year as a
whole) leading to an EPS upgrade of 3.5%. We think that during FY2009E that trading is likely to
become more challenging overseas, with the UK and US already in recession in all likelihood. In
view of the high gross margins owing to the very strong perm bias and operationally geared
model we have reduced expectations for FY2009E and FY2010E by 14.9% and 45.2%,
respectively. We believe there is also downside risk to Robert Walters (SP: 126p, TP: 100p,
HOLD) estimates.
BE:
And, just for the sake of overload, here’s RBS:
BE:
Announcement on the wire this morning: MPI is ending disucssions with Adecco. Quite a detailed statement: Initial approach
made in May 2008, followed up by a written offer in June at 400p per share. This was rejected as materially undervaluing the
company, but there were further discussions. In August, MPI received a new proposal. MPI would issue new shares to Adecco
who would own 50.1%. MPI would remain listed with Adecco as the majority shareholder. Again the value would be equivalent to
400p, but with only 200p cash element. The theory was this would reduce the difficulties from integrating 2 distinct people
businesses. This offer was rejected as still undervaluing the company and being unattractive to shareholders. Further dicussions
taken place this week, but there has been no increase in the offer so the MPI is now ending discussions. This confirms our
sceptical view on the bid – it makes sense from an Adecco point of view but there were always significant issues in cultural fit and
valuation. 400p was always too low – our FV for MPI is 445p. WHAT NEXT – first sight, it is difficult to see the prospects of a
revised bid from Adecco in the near future. This week Adecco has emphasised to the market that they will proceed with financial
discipline. They have also said that any approach for MPI would have to be friendly. In terms of the shares, we would expect MPI
to head towards its prebid trading range of 250-280p. I would expect Hays to fall as well on the back of this. Likewise on Adecco,
there was some post-bid excitement initially pushing it above 50SFr and I can see it dropping into the 45-50 SFr range again. In
all cases, the market will probably focus on underlying trading. Adecco reported a very cautious 2H outlook on Tuesday. We hear
from MPI on Monday.
made in May 2008, followed up by a written offer in June at 400p per share. This was rejected as materially undervaluing the
company, but there were further discussions. In August, MPI received a new proposal. MPI would issue new shares to Adecco
who would own 50.1%. MPI would remain listed with Adecco as the majority shareholder. Again the value would be equivalent to
400p, but with only 200p cash element. The theory was this would reduce the difficulties from integrating 2 distinct people
businesses. This offer was rejected as still undervaluing the company and being unattractive to shareholders. Further dicussions
taken place this week, but there has been no increase in the offer so the MPI is now ending discussions. This confirms our
sceptical view on the bid – it makes sense from an Adecco point of view but there were always significant issues in cultural fit and
valuation. 400p was always too low – our FV for MPI is 445p. WHAT NEXT – first sight, it is difficult to see the prospects of a
revised bid from Adecco in the near future. This week Adecco has emphasised to the market that they will proceed with financial
discipline. They have also said that any approach for MPI would have to be friendly. In terms of the shares, we would expect MPI
to head towards its prebid trading range of 250-280p. I would expect Hays to fall as well on the back of this. Likewise on Adecco,
there was some post-bid excitement initially pushing it above 50SFr and I can see it dropping into the 45-50 SFr range again. In
all cases, the market will probably focus on underlying trading. Adecco reported a very cautious 2H outlook on Tuesday. We hear
from MPI on Monday.
BE:
That’s probably plenty for now.
BE:
PM:
We should go back to the miners
PM:
It was mentioned below that lots of Footsie constituents are dollar earners
PM:
But those dollar earnings have not been doing to well today, no?
BE:
Mixed, to be honest.
BE:
Rolls-Royce having a bit of a rally again, although that’s put on 30% in a month or so.
BE:
But yeah, the miners are the main focus here.
BE:
How’s Xstrata doing by the way?
Xstrata (XTA:LSE): Last: 2,952, down 98 (-3.21%), High: 3,020, Low: 2,919, Volume: 2.71m
PM:
there you go — down 3.2%
PM:
Why do you ask?
BE:
Oh, it’s probably nothing. But the Xstrata Dec08 4000/4800 call spread on Liffe was very active yesterday.
BE:
Now obviously, that’s ahead of BHP and Rio results over the next week or so.
BE:
And its own results last week, which were uninspiring but decent enough.
BE:
And Macquarie – while it can’t comment specifically as it is advising on the Lonmin bid – had a reasonably upbeat note out on them overnight:
BE:
Following the recent sector sell-off, feedback from our client base indicates widespread pessimism amongst many investors over global growth and demand destruction. Within the context of our confidence in a fundamentally robust commodity outlook and sustainable higher earnings profiles for the major miners, we believe that the major miners are trading at discounted multiples, and the level of pessimism at present provides an opportunity to gain further exposure to the sector.
BE:
And we should probably note that Vale has been playing down the chances of it going for another major.
BE:
Here’s the Dow Jones story last week:
BE:
Cia. Vale do Rio Doce, the world’s biggest iron-ore producer, said its “main strategy” is to grow by expanding and building its own projects rather than through acquisitions.
“Acquisitions are possible but not probable,” Chief Executive Officer Roger Agnelli said today on a conference call. “We want to speed up our organic growth. That is our main strategy now.”
Still, Vale may buy small- or medium-sized operations to speed up growth and could make an acquisition “immediately” if the opportunity arises, Agnelli said
BE:
Anyway, despite today’s price action there’s a fair bit of optimism that BHP and Rio can surprise next week.
BE:
And of course there’s still the bid in the background, the EC ruling on which is on December 9th.
BE:
Interesting note through from Liberum on this theme today:
BE:
We feel that RIO’s superior medium term EPS
momentum provides rationale for a bump to current relative offer terms, but that absolute valuation metrics imply it will be easy to attain a much higher absolute take-out bid.
momentum provides rationale for a bump to current relative offer terms, but that absolute valuation metrics imply it will be easy to attain a much higher absolute take-out bid.
BE:
The Aussie press bangs on every other day about BHP sweetening its offer, so you’d assume that will continue post the results.
PM:
sure
PM:
PM:
while we are on this sector…
PM:
Why’s Kazakhmys down?
BE:
All the miners are down – there’s a big comods sell off, remember?
PM:
Oh yeah.
BE:
You were
BE:
Kaz bought about 3 per cent in ENRC – taking it over 25 per cent.
BE:
You were away when that happened.
PM:
Hmm
BE:
Effectively it means Kaz can stop ENRC bidding for it, cos it can veto special resolutions and big share issues, etc.
PM:
I was talking to someone about this. I think there is some controversy in the background about where Kaz got the ENRC stock from.
BE:
What are you alluding to?
PM:
Well, nothing underhand. Just a bit mysterious.
PM:
Remember very very little of ENRC is in free circulation.
PM:
And apparently there was not print of the trades at the time.
PM:
The betting is that this was all quietly done using the Boat system – by Goldman Sachs I think.
PM:
It is being cited as a clear example of how the Mifid reforms actually make the market less transparent.
BE:
Hmmm.
PM:
Anyway, one to watch I think.
PM:
BE:
Not much raw around this morning it seems
BE:
Our only reasonable story in the paper overnight was a bid for Travelzest …
PM:
M&A wise
BE:
… and they’ve only gone and confirmed it this morning, the spoilsports.
BE:
Hearing it’s from Tui, just in case anyone’s interested.
BE:
Anyway, picking up a bit of chat around another tiddler
BE:
Oxford Biomedica
BE:
Some theory about takeover interest.
BE:
coming out of the States
PM:
You are too late bryce
PM:
its just come out!
BE:
Damn! There goes another one.
PM:
Genethera indicative approach
BE:
That’s the second biotech bid this week. After Protherics.
BE:
And it seems Genethera were a bit too open about their intentions …
BE:
We evaluated more than 10 target companies predominantly located in the UK. We decided to focus our effort on Oxford Biomedica PLC, a biotechnology company trading on the London stock exchange. Oxford Biomedica is a gene therapy company working on several DNA vaccine related therapeutics in different phases of clinical trials. One of these clinical trials — Trovax — targets renal cancer patients. Oxford Biomedica has an agreement with Sanofi-Aventis to commercialize this vaccine. However, this clinical trial was halted last month because it failed to show efficacy when compared to existing treatments.
On July 25th Dr. Milici and his collaborators met scientists and management of Oxford Biomedica in Oxford, England. The previously scheduled 2-hour meeting lasted 4.5 hours. At the request of Oxford Biomedical’s CEO, GeneThera representatives agreed to keep the proceedings of the meeting confidential. After the meeting, Dr. Milici felt that GeneThera might be in the position to address the issues related to the failure of the Trovax clinical trial, and possibly restart the clinical trial utilizing GeneThera’s more powerful technology.
Based on this premises, a formal offer to purchase Oxford Biomedica was tendered to the Board of Directors. However, Oxford Biomedica’s Board of Directors rejected the offer without presenting it to its shareholders. GeneThera’s Board of Directors is presently evaluating its available options.
On July 25th Dr. Milici and his collaborators met scientists and management of Oxford Biomedica in Oxford, England. The previously scheduled 2-hour meeting lasted 4.5 hours. At the request of Oxford Biomedical’s CEO, GeneThera representatives agreed to keep the proceedings of the meeting confidential. After the meeting, Dr. Milici felt that GeneThera might be in the position to address the issues related to the failure of the Trovax clinical trial, and possibly restart the clinical trial utilizing GeneThera’s more powerful technology.
Based on this premises, a formal offer to purchase Oxford Biomedica was tendered to the Board of Directors. However, Oxford Biomedica’s Board of Directors rejected the offer without presenting it to its shareholders. GeneThera’s Board of Directors is presently evaluating its available options.
PM:
VP is dead right below
BE:
Indeed. It all looks very peculiar, so I’m sure this one’s got a lot further to run …
PM:
PM:
Ehwotay — simply my point on Boat is that the fragmentation of reporting procedures makes it very difficult for market participants generally to keep an eye on things
PM:
Well, journos find it tough!
PM:
PM:
We are not going to go thru this session without looking at the banks.
BE:
Of course not.
PM:
What have you got.?
BE:
This came through from KBW this morning
BE:
UK Banks 1H08 results review
1H08 wrap-up – Not yet out of the woods
The results threw up few surprises, the major issues having been well
highlighted in advance. Domestic bank adjusted profits, albeit including the
market dislocation, were down by an average 62% yoy. However, the dislocation
appears to have steadied in 2Q on 1Q. Loan impairments remained reasonably
benign, albeit NPLs are rising. Core capital ratios stand at c.5.9% on average,
and margins have started to stabilise. However, it is still too early, in our
opinion, to be bullish on the sector given the likely risks of: (1) rising credit
impairments; (2) sustained pedestrian business volumes; (3) further structured
finance hits; and (4) the risk to capital ratios from the aforementioned points.
Despite c.20% outperformance over the last quarter, we remain Outperform on
HSBC for the time being given its diversity and superior capital and funding
strengths. We retain our Underperform on Standard given continued questions
over growth sustainability and capital strength.
1H08 wrap-up – Not yet out of the woods
The results threw up few surprises, the major issues having been well
highlighted in advance. Domestic bank adjusted profits, albeit including the
market dislocation, were down by an average 62% yoy. However, the dislocation
appears to have steadied in 2Q on 1Q. Loan impairments remained reasonably
benign, albeit NPLs are rising. Core capital ratios stand at c.5.9% on average,
and margins have started to stabilise. However, it is still too early, in our
opinion, to be bullish on the sector given the likely risks of: (1) rising credit
impairments; (2) sustained pedestrian business volumes; (3) further structured
finance hits; and (4) the risk to capital ratios from the aforementioned points.
Despite c.20% outperformance over the last quarter, we remain Outperform on
HSBC for the time being given its diversity and superior capital and funding
strengths. We retain our Underperform on Standard given continued questions
over growth sustainability and capital strength.
BE:
Credit risk. Mortgage risk will continue to rise as core inflation captures share of
wallet (arrears 133bp 1H08, 110bp 2007) and falling house prices gear up provisions,
albeit risk remained relatively benign 1H08. We see charges in the mid 20bps in
2009E (c.45bp early 1990s). Commercial loan books, rich in property (c.42%), are
showing early signs of deterioration (KBWe 82bp for 2009 from 54bp today).
Market dislocation steadying. Dislocation in 1H08 was stable to modestly higher
based on the 1Q disclosure, an encouraging trend. The focus, we believe, will remain
on Barclay’s prudence versus RBS, although we agree that the quality of Barclays’
book is arguably better than that of its peer. Lloyds’ exposure remains modest, and
HSBC’s strong capital position continues to give it an advantage over peers (albeit the
purchase of KEB would see e.75bp off capital).
wallet (arrears 133bp 1H08, 110bp 2007) and falling house prices gear up provisions,
albeit risk remained relatively benign 1H08. We see charges in the mid 20bps in
2009E (c.45bp early 1990s). Commercial loan books, rich in property (c.42%), are
showing early signs of deterioration (KBWe 82bp for 2009 from 54bp today).
Market dislocation steadying. Dislocation in 1H08 was stable to modestly higher
based on the 1Q disclosure, an encouraging trend. The focus, we believe, will remain
on Barclay’s prudence versus RBS, although we agree that the quality of Barclays’
book is arguably better than that of its peer. Lloyds’ exposure remains modest, and
HSBC’s strong capital position continues to give it an advantage over peers (albeit the
purchase of KEB would see e.75bp off capital).
BE:
Capital sensitivity. We see sector core T1 at c.5.9% on average. Lloyds’ 6.2% in
1H08 falls to 4.9% excluding 50% EV, and the debate will no doubt continue over
capital adequacy here, although we believe Lloyds will continue to manage to the
6.2% metric near term. Overall, we note marks to reserves (not yet taken against
regulatory capital) could knock an average 70bp off sector core T1 ratios, while rising
bad debts will deliver a more geared impact on the capital ratios of the smaller, less
diversified monolines (together with mortgage RWA rises).
1H08 falls to 4.9% excluding 50% EV, and the debate will no doubt continue over
capital adequacy here, although we believe Lloyds will continue to manage to the
6.2% metric near term. Overall, we note marks to reserves (not yet taken against
regulatory capital) could knock an average 70bp off sector core T1 ratios, while rising
bad debts will deliver a more geared impact on the capital ratios of the smaller, less
diversified monolines (together with mortgage RWA rises).
PM:
All sensibly bearish
BE:
Margins stabilising. We note that margin attrition in 1H08/2H07 was far less dramatic
than 1H08/1H07 as asset spreads caught up with rising funding costs (the move to lower
risk assets having some detrimental mix impact on margins). We see sector margins
broadly stable from here on in, with some banks guiding towards spread expansion in
2009E. In terms of liquidity, the larger, more diversified players (Barclays, Lloyds, RBS,
HSBC) have taken share, with HSBC remaining the strongest in terms of funding.
Lending modest. Mortgage volumes continue to ease, and we see just 4% balance
growth this year (£50bn net). Unsecured growth remains modest. Commercial loan
growth remained strong in 1H driven by property-related drawdowns, though we
anticipate this easing in 2H08.
than 1H08/1H07 as asset spreads caught up with rising funding costs (the move to lower
risk assets having some detrimental mix impact on margins). We see sector margins
broadly stable from here on in, with some banks guiding towards spread expansion in
2009E. In terms of liquidity, the larger, more diversified players (Barclays, Lloyds, RBS,
HSBC) have taken share, with HSBC remaining the strongest in terms of funding.
Lending modest. Mortgage volumes continue to ease, and we see just 4% balance
growth this year (£50bn net). Unsecured growth remains modest. Commercial loan
growth remained strong in 1H driven by property-related drawdowns, though we
anticipate this easing in 2H08.
PM:
Which takes us to housing…
BE:
repossession figs this morning – up 24 per cent year on year.
PM:
28k houses — lovely news for those households affected.
PM:
have some interesting commentary from John kemp on this:
PM:
JK of RBS Sempra
PM:
UK county courts issued almost 29,000 possession orders during Q2 2008 for mortgage lenders to take possession of residential properties as collateral for loans on which borrowers had defaulted.
PM:
Not all court orders will actually lead to repossession of the property. Historical data shows only a proportion of orders will actually be executed. But the number of possession orders has doubled since the start of 2005 (14,500) and tripled since the start of 2003 (9,500). Moreover, the proportion of orders actually executed appears to have risen from around 25% earlier in the decade to around 40% in the last six months as it becomes progressively harder for troubled households to solve their debt problems. So the 29,000 possession orders granted during Q2 will probably result in around 11,500 households losing their home. This rate is consistent with Council of Mortgage Lenders (CML) forecasts showing that 42,000 homes will be repossessed in 2008 as a whole.
PM:
Possession orders are rising much faster in the economically troubled regions of the Midlands (+32%), North-West (+30%) and Wales (+32%), while the core areas of the economy in the South-East (+19%), South-West (+22%) and London (+3%) have been affected much less so far.
PM:
Possessions in the property markets of London and the South-East, which are often portrayed as the most overheated and subject to bubble-like conditions, have actually not risen very much to date. Instead, the rise is concentrated in a swathe of midlands and northern industrial towns. Like the United States, it appears that the debt crisis is concentrated among lower-income and sub-prime borrowerss, and often in areas where incomes were relatively modest and which were drawn into the later stages of the property boom.
PM:
The largest percentage increases in possession orders have hit the citites of Haverfordwest (+147%), Mold (+143%), Brecon (+118%), Salisbury (+104%), Lancaster (+77%), Lincoln (+71%), Norwich (+65%), Peterborough (+64%), Nuneaton (+63%), Barnstaple (+58%), Manchester (+56%), Chichester (+55%), Macclesfield (+52%), Dudley (+52%), Blackburn (+51%), Birmgham (+50%), Salford (+50%), Burnley (+48%), Coventry (+48%), South Shields (+47%), Liverpool (+47%), Warrington (+47%), Teesside (+46%), Skipton (+45%), Cambridge (+45%) and Sheffield (+44%). These increases are all far in excess of the national average of just +21% and the London average of just +3%.
BE:
Where’s Haverfordwest?
PM:
In the sht
PM:
No sorry!
PM:
It’s in Wales
BE:
… and a big hello to all our Welsh readers.
BE:
Don’t want this to go all Anne Robinson.
PM:
BE:
Anyway, I guess we can have a wee look at the housebuilders again.
BE:
This was through from Kaupthing this morning:
BE:
Time to Smell the Coffee Again
BE:
We have issued a sector update this morning highlighting the reality check in the
shape of the coming reporting season which could in our view halt and reverse
the recent strong recovery in share prices.
shape of the coming reporting season which could in our view halt and reverse
the recent strong recovery in share prices.