Markets live chat transcript for the chat ending at 12:18 on 8 Sep 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Hi there
PM:
Welcome to Markets Suspended.
PM:
As you can image, Alphaville HQ has been a picture of tranquillity this morning.
PM:
The only noteworthy things that have happened is that the US treasury has launched the biggest bailout in history and the London Stock Exchange is broken.
PM:
Neil and I are keeping out heads down. And we think some of the readers should as well.
NH:
You know that there’s a real chance that someone has come on here during one of our regular glitches – and then they’ve gone and traded on the SETS order book or something – and they’ve infected the WHOLE London stock exchange system.
PM:
NH:
*LSE SAYS `CONNECTIVITY ISSUE’ IS AFFECTING SOME CUSTOMERS
PM:
random pic for you
NH:
some questions below about this morning’s outage
NH:
including will there be an auction to get things going again
NH:
and when will that be
NH:
we don’t know
NH:
but the LSE has set up an incident website
NH:
which suggests things could be getting going soon
PM:
connectivity will be enabled yet) All order book stocks have now been placed in a continuous auction phase and quote driven markets in a non mandatory period.
NH:
we are in an auction now
NH:
update on the incident site
NH:
Bryce has posted it below
NH:
FTSE 100 still being shown by the LSE as up 199.5 points at 5,440.2.
PM:
But you can use the City Index price to right here — FTSE rooing bet quoted at 5492
PM:
that is effectively the Footsie future
PM:
PM:
Anyway, along with the rest of the market we have thrown our tin hats into the air this morning.
PM:
Celebrating the smashing news that the US government has had to put $100bn a piece behind each of Fannie Mac and Freddie Mae.
NH:
It’s the other way around.
PM:
What do you mean? How could they put anything behind the government? They’re bust.
NH:
NO – its Fannie Mae and Freddie Mac.
PM:
Oh
PM:
Fecked and Fooked , for short.
NH:
Oooooooh. Nice one.
PM:
oh, i dont know actually
NH:
NH:
going back to Fred and Fran
NH:
I think we should put up some research for the readers
NH:
who’s done some good stuff??
PM:
I will start with Goldman Sachs
PM:
US Treasury places GSEs into conservatorship
The US Treasury announced it has placed both Fannie Mae and Freddie
Mac into conservatorship due to safety and soundness concerns.
Specifically, the GSEs will suspend all dividends for existing common and
preferred stock. The Treasury will also invest $1 billion upfront in senior
preferred stock into each GSE with potentially further investments to cover
future negative equity positions (from a GAAP standpoint).
The Treasury has committed to covering negative equity positions with
periodic senior preferred stock investments up to $100 billion per GSE. The
senior preferred stock will be senior to all existing common and preferred
stock, and carry a 10% coupon rate paid quarterly. In addition, the
Treasury immediately receives warrants equivalent to a 79.9% ownership
stake in each GSE going forward, and is entitled to a quarterly “fee”
starting in 2010. The details regarding the fee are yet to be determined.
The US Treasury announced it has placed both Fannie Mae and Freddie
Mac into conservatorship due to safety and soundness concerns.
Specifically, the GSEs will suspend all dividends for existing common and
preferred stock. The Treasury will also invest $1 billion upfront in senior
preferred stock into each GSE with potentially further investments to cover
future negative equity positions (from a GAAP standpoint).
The Treasury has committed to covering negative equity positions with
periodic senior preferred stock investments up to $100 billion per GSE. The
senior preferred stock will be senior to all existing common and preferred
stock, and carry a 10% coupon rate paid quarterly. In addition, the
Treasury immediately receives warrants equivalent to a 79.9% ownership
stake in each GSE going forward, and is entitled to a quarterly “fee”
starting in 2010. The details regarding the fee are yet to be determined.
PM:
A boost of short-term liquidity to the mortgage markets
As we highlighted in our August 29 note titled “Capital preservation over
growth in July; adjusting estimates” the GSE’s slowed their mortgage
purchases in July and had lowered expectations for future growth. The
Treasury’s support should increase portfolio growth assumptions in the
short-run, and hence liquidity to the mortgage market. Specifically, the
Treasury is committed to investing in agency MBS, and the GSE’s retained
portfolios can grow to $850 billion each through the end of 2009.
As we highlighted in our August 29 note titled “Capital preservation over
growth in July; adjusting estimates” the GSE’s slowed their mortgage
purchases in July and had lowered expectations for future growth. The
Treasury’s support should increase portfolio growth assumptions in the
short-run, and hence liquidity to the mortgage market. Specifically, the
Treasury is committed to investing in agency MBS, and the GSE’s retained
portfolios can grow to $850 billion each through the end of 2009.
PM:
Materially dilutive to existing shareholders
Upon this announcement, the Treasury will essentially dilute common
shareholders by 79.9%, and will be entitled to “fees” beyond 2009. After
factoring in share dilution, coupon payments on the senior preferred
shares (offset by the elimination of existing preferred dividends), and the
Treasury fees, we adjust EPS estimates for 2008-2011 for Fannie to -$5.40, -
$0.05, $0.25 and $0.40 from -$7.15, -$0.50, $1.70 and $2.60 previously. For
Freddie, we change estimates to -$2.65, -$0.25, $0.20 and $0.35 from -
$4.90, -$1.50, $1.25 and $2.25. We lower our 12-month EVA derived PT’s to
$1 for Fannie (from $6) and to $1 for Freddie (from $5). We maintain Sell
ratings on both Fannie and Freddie. The major risk to our rating is better
than expected credit performance at both companies. However, even if
credit is better than expected, the upside to common shareholders is
limited given the level of dilution from the Treasury program.
Upon this announcement, the Treasury will essentially dilute common
shareholders by 79.9%, and will be entitled to “fees” beyond 2009. After
factoring in share dilution, coupon payments on the senior preferred
shares (offset by the elimination of existing preferred dividends), and the
Treasury fees, we adjust EPS estimates for 2008-2011 for Fannie to -$5.40, -
$0.05, $0.25 and $0.40 from -$7.15, -$0.50, $1.70 and $2.60 previously. For
Freddie, we change estimates to -$2.65, -$0.25, $0.20 and $0.35 from -
$4.90, -$1.50, $1.25 and $2.25. We lower our 12-month EVA derived PT’s to
$1 for Fannie (from $6) and to $1 for Freddie (from $5). We maintain Sell
ratings on both Fannie and Freddie. The major risk to our rating is better
than expected credit performance at both companies. However, even if
credit is better than expected, the upside to common shareholders is
limited given the level of dilution from the Treasury program.
PM:
Here’s Citibanks summary
PM:
Constraints of Conservatorship – Downgrading GSEs to Sell
Cut To Sell — We’re cutting our ratings on FNM and FRE from Buy (Speculative)
to Sell (Speculative) and lowering our Target Prices for both companies due to the
federal government’s plan to place the GSEs into conservatorship.
Extreme Actions — While we stick-by our recent GSE credit/capital analysis, we
noted that there was greater risk that policymakers may take extraordinary actions
and we are surprised that such measures are deemed necessary at this time.
Federal Takeover — We believe one possible catalyst could be pressure from non-
U.S. investors in agency debt forcing a government takeover as the ultimate show
of support. The plan includes: 1) a preferred stock purchase agreement and
warrants (at a nominal price and 80% dilutive); 2) a secured credit lending
facility; and 3) an agency MBS purchase agreement.
Protecting Taxpayers — In a conservatorship, the GSEs will be operated by the
director of the FHFA who has the legal responsibility (over management and the
board) in order to organize or rehabilitate the company. New CEOs were appointed
for both institutions and growth rates and risks will be significantly curtailed.
At Shareholders Expense — Since the July backstop plan, uncertainty surrounding
possible Treasury actions has pressured GSEs’ shares and reduced financial
flexibility. The conservatorship clarifies the government’s near-term intentions: the
GSEs will no longer be managed with strategies to maximize common shareholder
returns. Accordingly, and in light of significant uncertainty surrounding their
future structure, we are lowering our TPs on FNM and FRE to $0.32 and $0.31.
Cut To Sell — We’re cutting our ratings on FNM and FRE from Buy (Speculative)
to Sell (Speculative) and lowering our Target Prices for both companies due to the
federal government’s plan to place the GSEs into conservatorship.
Extreme Actions — While we stick-by our recent GSE credit/capital analysis, we
noted that there was greater risk that policymakers may take extraordinary actions
and we are surprised that such measures are deemed necessary at this time.
Federal Takeover — We believe one possible catalyst could be pressure from non-
U.S. investors in agency debt forcing a government takeover as the ultimate show
of support. The plan includes: 1) a preferred stock purchase agreement and
warrants (at a nominal price and 80% dilutive); 2) a secured credit lending
facility; and 3) an agency MBS purchase agreement.
Protecting Taxpayers — In a conservatorship, the GSEs will be operated by the
director of the FHFA who has the legal responsibility (over management and the
board) in order to organize or rehabilitate the company. New CEOs were appointed
for both institutions and growth rates and risks will be significantly curtailed.
At Shareholders Expense — Since the July backstop plan, uncertainty surrounding
possible Treasury actions has pressured GSEs’ shares and reduced financial
flexibility. The conservatorship clarifies the government’s near-term intentions: the
GSEs will no longer be managed with strategies to maximize common shareholder
returns. Accordingly, and in light of significant uncertainty surrounding their
future structure, we are lowering our TPs on FNM and FRE to $0.32 and $0.31.
PM:
And Lehman
PM:
Investment Conclusion
The Treasury and FHFA have decided to put both
GSEs into conservatorship. The action was taken
“after examining all options available, and
determining that this comprehensive and
complementary set of actions best meets our three
objectives of market stability, mortgage availability
and taxpayer protection”. The Treasury will own
79.9% of the each company through new
warrants, and will buy senior preferred stock as
needed to maintain GAAP equity ratios. Our
preliminary estimate of the dilution to equity
holders is shown in Figure 1. We roughly estimate
the warrants would reduce estimated year end
2008 core common book value per share from $19
to $4 per share at Fannie Mae, and from $21 to $6
per share at Freddie Mac. We still estimate the
companies will return to profitability in 2010, but
now estimate 2010 EPS of only $0.23 for FNM
and $0.53 for FRE. To account for the substantial
dilution and risk to future dilution from additional
regulatory action, we are cutting our price-targets
for both stocks to $4 and downgrading to our
rating to 2-Equal weight.
The Treasury and FHFA have decided to put both
GSEs into conservatorship. The action was taken
“after examining all options available, and
determining that this comprehensive and
complementary set of actions best meets our three
objectives of market stability, mortgage availability
and taxpayer protection”. The Treasury will own
79.9% of the each company through new
warrants, and will buy senior preferred stock as
needed to maintain GAAP equity ratios. Our
preliminary estimate of the dilution to equity
holders is shown in Figure 1. We roughly estimate
the warrants would reduce estimated year end
2008 core common book value per share from $19
to $4 per share at Fannie Mae, and from $21 to $6
per share at Freddie Mac. We still estimate the
companies will return to profitability in 2010, but
now estimate 2010 EPS of only $0.23 for FNM
and $0.53 for FRE. To account for the substantial
dilution and risk to future dilution from additional
regulatory action, we are cutting our price-targets
for both stocks to $4 and downgrading to our
rating to 2-Equal weight.
NH:
here’s some Merrill stuff on the implications for US banks
NH:
and this is quite bearish
NH:
they are still looking for a further 15-20% drop in US house prices
NH:
Our US economists and strategists believe the GSE conservatorship will
significantly improve the affordability of mortgage financing in the US. However,
they believe the housing markets will still suffer from a lack of buyer demand, and
they still expect 15-20% further house price drops in the US.
significantly improve the affordability of mortgage financing in the US. However,
they believe the housing markets will still suffer from a lack of buyer demand, and
they still expect 15-20% further house price drops in the US.
NH:
Based on previous
market reactions to government actions, we can expect a strong rally in European
banks. In the short-term, this will go against our call for increased dispersion, as
low quality stocks will likely bounce the hardest. However, we still believe the
sector faces many years of de-leveraging and that it must contend with a large
volume of term debt refinancing in the coming months. Once the initial relief rally
fades, we expect to see greater differentiation between those banks which merely
face the cyclical headwinds and those which also face structural changes to their
business models.
market reactions to government actions, we can expect a strong rally in European
banks. In the short-term, this will go against our call for increased dispersion, as
low quality stocks will likely bounce the hardest. However, we still believe the
sector faces many years of de-leveraging and that it must contend with a large
volume of term debt refinancing in the coming months. Once the initial relief rally
fades, we expect to see greater differentiation between those banks which merely
face the cyclical headwinds and those which also face structural changes to their
business models.
NH:
and this is from Bruce Packard at Pali
NH:
With the news that Fannie Mae and Freddie Mac are to be nationalised (sorry “conservatorship-erized”) widely reported in the press, thought it might be worth sending round once again my piece on the Nordic banking crisis resolution (attached). Ambrose Evans Pritchard wrote (back in April in the Telegraph) that Fed was examining a Nordic style nationalisation (see link and article below).
NH:
The key message is: banks do not trade at substantial discounts to book for long, either they recover or they get nationalised. We estimate tangible book end 2008F for BARC 306p (Neutral), RBS 213p (Neutral) and HBOS 395p (BUY). We rate BB/ SELL zero pence target price.
NH:
For the UK banks, much depends on whether CDS spreads begin to fall back down now, as they had blown out again over the last month, perhaps because of debt market concerns about what was going on in the US. For instance HBOS 5 year senior CDS were above 200bp last week, compared to a March peak of c. 250bp.
NH:
have we got any CDS prices from this morning
NH:
they had blow out in the past couple of weeks
NH:
have they come back today??
PM:
I have got the price for the financials
PM:
But ther is a general tightening
PM:
This is from Barcap
PM:
Markets are rallying this morning with the main c.10bp tighter and crossover
c.30bp tighter on the opening after the US Treasury announced moves to
temporary nationalise the GSEs (“conservatorship”). Clearly, given their size in
terms of outstandings, the GSEs were too big to fail and speculation on this had
been building over the past few weeks. We would expect such a
rally/stabilisation effect to continue as Freddie Mac and Fannie Mae senior
credit becomes closer aligned to that of the US treasury and Ginnie Mae (which
has always been explicitly guaranteed by the government). Clearly,
Fannie/Freddie subordinated bonds and equity holders will have to take some
sort of haircut. This remains to be seen as the terms of the bailout become
clear. Also, given that both presidential candidates have been briefed on the
situation, this bailout package leaves the new administration the option to take
an appropriate course as it deems fit in 2009 for any longer-term solution.
c.30bp tighter on the opening after the US Treasury announced moves to
temporary nationalise the GSEs (“conservatorship”). Clearly, given their size in
terms of outstandings, the GSEs were too big to fail and speculation on this had
been building over the past few weeks. We would expect such a
rally/stabilisation effect to continue as Freddie Mac and Fannie Mae senior
credit becomes closer aligned to that of the US treasury and Ginnie Mae (which
has always been explicitly guaranteed by the government). Clearly,
Fannie/Freddie subordinated bonds and equity holders will have to take some
sort of haircut. This remains to be seen as the terms of the bailout become
clear. Also, given that both presidential candidates have been briefed on the
situation, this bailout package leaves the new administration the option to take
an appropriate course as it deems fit in 2009 for any longer-term solution.
PM:
However, in our financial sector analyst’s view, the short to medium-term
outlook for financial services has not changed appreciably. They also expect to
see the housing market bubble to continue to correct, with negative HPA
working its way through the US and more charge offs of consumer and other
commercial loans through this downturn in the credit cycle. Hence, banks
ongoing profitability/revenue opportunities will be capped for the foreseeable
future if credit provision keeps contracting. On the corporate side, fundamentals
continue to deteriorate going into 2009, making us stick with our strategic
underweight on credit, despite the potential short-term rally in spreads
outlook for financial services has not changed appreciably. They also expect to
see the housing market bubble to continue to correct, with negative HPA
working its way through the US and more charge offs of consumer and other
commercial loans through this downturn in the credit cycle. Hence, banks
ongoing profitability/revenue opportunities will be capped for the foreseeable
future if credit provision keeps contracting. On the corporate side, fundamentals
continue to deteriorate going into 2009, making us stick with our strategic
underweight on credit, despite the potential short-term rally in spreads
PM:
Still strategic underweight on credit
PM:
Here’s Citi on European banks
PM:
Over the hill – We believe the European Bank Sector has seen its best days. In the years prior to the credit crunch, the sector enjoyed average returns on equity of 20%, a level that a decade earlier – when returns were barely double digits – would have seemed fanciful.
§ Marched to the top of the hill – However, things were not quite as they seemed. At sector level, the powerful ROE expansion was driven entirely by leverage, which jumped from 25x a decade ago to peak at 39x in 2007. Leverage adjusted, returns have flat-lined for a decade, despite a benign credit environment.
§ And back down again – With the sector now deleveraging, returns are falling. But how far will profitability contract and what does that mean for valuations? Our bottom up analysis suggests that – post deleveraging – the sector’s sustainable through-the-cycle ROE is likely to fall back to c14%. This is hardly a disaster, but is a big step down from recent levels.
§ Is it in the price? – Built bottom up, we estimate that on this returns profile the sector should be valued on a price to tangible book value of c1.5x. Whilst well below the heady 2.5x that characterised the period before Summer 2007, this implies limited sector-wide downside from here.
§ Substantial earnings risk – But that’s not the end of it. If c14% is indeed the through-the-cycle average, then as we enter the weak part of the cycle, returns are likely to fall well below that. Our analysis shows that incorporating the average credit cycle experienced in the early 1980s, early 1990s and early 2000s would lower sector ROE to just 7%. Consensus ROE for the 2008-10E period is currently over 18%, suggesting significant downside risk.
§ Do you trust book values? – Moreover, there is another filter that we need to consider – whether book value itself is vulnerable to either the credit cycle, deleveraging and/or more structured write-downs. Building on our earlier work1, we analyse each bank on a sustainable “ROE/book value you can trust” basis.
§ Stocks – Combining normalised returns/valuations with the level of trust of book values, we view Intesa, Santander, KBC, HSBC and much of Greece as attractive. However, we would remain cautious on many “value traps”, including Barclays, Deutsche Bank, Hypo Real Estate, Dexia and much of Spain and Ireland.
§ Marched to the top of the hill – However, things were not quite as they seemed. At sector level, the powerful ROE expansion was driven entirely by leverage, which jumped from 25x a decade ago to peak at 39x in 2007. Leverage adjusted, returns have flat-lined for a decade, despite a benign credit environment.
§ And back down again – With the sector now deleveraging, returns are falling. But how far will profitability contract and what does that mean for valuations? Our bottom up analysis suggests that – post deleveraging – the sector’s sustainable through-the-cycle ROE is likely to fall back to c14%. This is hardly a disaster, but is a big step down from recent levels.
§ Is it in the price? – Built bottom up, we estimate that on this returns profile the sector should be valued on a price to tangible book value of c1.5x. Whilst well below the heady 2.5x that characterised the period before Summer 2007, this implies limited sector-wide downside from here.
§ Substantial earnings risk – But that’s not the end of it. If c14% is indeed the through-the-cycle average, then as we enter the weak part of the cycle, returns are likely to fall well below that. Our analysis shows that incorporating the average credit cycle experienced in the early 1980s, early 1990s and early 2000s would lower sector ROE to just 7%. Consensus ROE for the 2008-10E period is currently over 18%, suggesting significant downside risk.
§ Do you trust book values? – Moreover, there is another filter that we need to consider – whether book value itself is vulnerable to either the credit cycle, deleveraging and/or more structured write-downs. Building on our earlier work1, we analyse each bank on a sustainable “ROE/book value you can trust” basis.
§ Stocks – Combining normalised returns/valuations with the level of trust of book values, we view Intesa, Santander, KBC, HSBC and much of Greece as attractive. However, we would remain cautious on many “value traps”, including Barclays, Deutsche Bank, Hypo Real Estate, Dexia and much of Spain and Ireland.
PM:
Barclays a value trap, apparenlty
NH:
they love Barclays at Citigroup
NH:
NH:
right we should have a look at sterling
NH:
that’s one market where we can get a reliable quote this morning
NH:
and the dollar
NH:
which was weak first thing
NH:
the idea being the Fred and Fran bailout will mean the US govt issuing a truck loads of new bonds
NH:
here were some quotes that went up at 9.30am
NH:
dollar had risen to Y108.57 from Y107.14 late Friday in New York, according to EBS.
The euro also rose to Y154.43 from Y152.53 as carry trades came back into vogue.
The euro also pushed ahead initially but then eased back to trade at $1.4217 from $1.4237. The dollar also rebounded to CHF1.1273 from CHF1.1172.
The pound also reversed some of its early gains but remains up at $1.7646 from
$1.7633.
NH:
but that’s all changed round now
NH:
at least it was when I last looked
NH:
sterling back at $1.7601
NH:
and $1.4190 against the euro
NH:
so any idea that the dollar rally would be stopped in tracks by the bail out have been confounded already
NH:
weird
PM:
How about oil — what’s that doing?
NH:
er, think it is weaker after a good start. bit like the dollar, which is no surprise really
NH:
1 month crude still higher – up 91 at $105
NH:
traded as a high as $106.90
NH:
of course, this all comes ahead of the OPEC meeting
NH:
and our commodities correspondent has been over to tell us something interesting about the meeting
PM:
Apparently, cos its Ramadam, the meeting does not get underway until 10pm on Tuesday
PM:
Announcements are being scheduled for 1.30 am Wednesday
PM:
So Javier — our comods expert — has to stay up all night
PM:
Poor chap.
NH:
where’s the meeting Vienna??
PM:
not sure
NH:
NH:
can we just go back to something on Fred and Fran??
NH:
about the prefs
NH:
you put a post up earlier detailing US bank exposure to the prefs
NH:
what about the UK banks
NH:
does anyone have some??
PM:
(thanks for the correction s tax loss — Ramadan
NH:
presumably if anyone has they will have to make a statement
PM:
So you would have thought — the US banks are expected to write the holdings down to 15 cents in the dollar
PM:
We trading at circa 50 cents
NH:
ouch
PM:
I wonder also about Chinese and Japanese holders
PM:
Chinese certainly big holders of the debt
PM:
Influenced structure of the bailout
NH:
however, what we do know is the UK banks large positions in is Fred and Fran senior debt
NH:
RBS has around £26bn on its balance sheet
NH:
now, a lot of this morning’s rally in the banking sector – whatever it actually is – can be put down to the fact that these assets are underpinned by the US govt
PM:
which is what everyone presumed earlier
NH:
true
NH:
but in Fred and Fran’s new capital structure, these assets will rank before the grillions of new Prefs the US govt should get
NH:
and that I guess is good news
NH:
and this weekend’s move could make these assets more liquid
NH:
here’s some data on the banks holding of Fred and Fran debt
NH:
from a friendly analyst and Alphaville reader
NH:
RBS had £62bn of Mortgage Backed Securities on b/s, of which £26bn was GSE as of H1 08.
NH:
BARC I couldn’t find a number for this H1, but as of the Dec 07 they had £37bn of Mortgage and Asset Backed Securities, in their trading book. Presumably a large amount of this was GSE MBS.
BARC I couldn’t find a number for this H1, but as of the Dec 07 they had £37bn of Mortgage and Asset Backed Securities, in their trading book. Presumably a large amount of this was GSE MBS.
NH:
If the market has decided that GSE MBS is equally as valuable as US government debt, it could mean that there is a sounder basis for the banks “mark to model” level II assets.
NH:
hang a bit confused here
NH:
obviously the good news here is that the US govt has committed to buy GSE MBS in the market
NH:
and some new stuff I think
PM:
Yes — but i think there is some confusion over this
PM:
lack of clarity
PM:
Which MBS is the US treasury saying it is going to buy — old stuff, such as that sitting on RBS’s books — or new stuff to be issued by FredandFan???
PM:
I believe it is the latter
PM:
Even tho there is of course a knock-on bump the percieved value of the old stuff — that is not what the US treasury is buying directly
PM:
maybe im wrong
NH:
this might clear things up
NH:
it’s the statement that came out of the US Treasury yesterday on the MBS purchases
NH:
Treasury announced a program today to help improve the availability of mortgage credit to American
homebuyers and mitigate pressures on mortgage rates. To promote the stability of the mortgage market,
Treasury will purchase Government Sponsored Enterprise (GSE) mortgage-backed securities (MBS) in
the open market. By purchasing these guaranteed securities, Treasury seeks to broaden access to
mortgage funding for current and prospective homeowners as well as to promote market stability.
Scope of Program. Treasury is committed to investing in agency MBS with the size and timing subject
to the discretion of the Treasury Secretary. The scale of the program will be based on developments in
the capital markets and housing markets.
• Congress granted Treasury authority to purchase MBS in the Housing and Economic Recovery
Act of 2008. The authority expires on December 31, 2009.
• Treasury will begin later this month by investing in new GSE MBS, which are credit-guaranteed
by the GSEs. Additional purchases will be made as deemed appropriate.
• Treasury can hold this portfolio of MBS to maturity and, based on mortgage market conditions,
Treasury may make adjustments to the portfolio.
homebuyers and mitigate pressures on mortgage rates. To promote the stability of the mortgage market,
Treasury will purchase Government Sponsored Enterprise (GSE) mortgage-backed securities (MBS) in
the open market. By purchasing these guaranteed securities, Treasury seeks to broaden access to
mortgage funding for current and prospective homeowners as well as to promote market stability.
Scope of Program. Treasury is committed to investing in agency MBS with the size and timing subject
to the discretion of the Treasury Secretary. The scale of the program will be based on developments in
the capital markets and housing markets.
• Congress granted Treasury authority to purchase MBS in the Housing and Economic Recovery
Act of 2008. The authority expires on December 31, 2009.
• Treasury will begin later this month by investing in new GSE MBS, which are credit-guaranteed
by the GSEs. Additional purchases will be made as deemed appropriate.
• Treasury can hold this portfolio of MBS to maturity and, based on mortgage market conditions,
Treasury may make adjustments to the portfolio.
NH:
for more on this see yesterday’s site
NH:
Paul put up the PDF’s on the pref’s, mbs and other statements
NH:
in order to get a handle on what’s going on. these need to be read
NH:
NH:
some good points below
NH:
on CDS’ and whether the bail out
NH:
is an “event”
NH:
view seems to be the US Treasury has crept round this
NH:
even though, Fred and Fran have been effectively nationalised
PM:
If this is a credit event, the payouts would be huge — no?
NH:
one would think the payouts could be huge. this could be the law of unintented consequences
NH:
and any benefit the banks get from gains could be offset by payments on CDS
PM:
Ok — we seem to be looking at a re-start with London stocks
PM:
In a couple of minutes
NH:
hang on just checking the incident website
NH:
I wonder if it’s at New Scotland yard
NH:
and it confirms market to start at 11.45am
NH:
Connectivity will be re-enabled at approx. 11.45. All order book segments are in an auction phase.
Continuous trading will re-commence at the end of that auction period, which will be at least 15 minutes after the next update
NH:
Once connectivity is established orders can be entered and deleted, but no electronic execution will occur until the uncrossing and commencement of continuous trading.
NH:
we may have to stay on air past 12.00pm to look at some prices
PM:
We can manage it Neil !
PM:
Im sure
NH:
anyone, who has not logged on to the incident website
NH:
here is the link
NH:
LSE fiasco in real time
NH:
what price the LSE when it reopens??
NH:
currently stuck at
London Stock Exchange Group (LSE:LSE): Last: 815.50, up 57 (+7.51%), High: 837.50, Low: 789.00, Volume: 268.03k
PM:
VP — its seems there will be a 15 min auction – and only then will we get prices on screen
NH:
NH:
looks like Meredith Whitney at Oppenhiemer is giving the investment banks a bear of beating
PM:
Oh, good , what is she saying???
NH:
cutting estimates across the board
NH:
just looking at the Lehman note
NH:
here it is
NH:
We are lowering our 3Q08 EPS estimate to a loss of $2.70 from a gain of $0.23 (vs.
consensus loss of $2.49) to incorporate the weak capital markets and estimated
write-downs. We lower our 4Q08 EPS estimate to a gain of $0.36 from a gain of
$0.40 (vs. consensus loss of $0.23). Our FY2008 EPS estimate goes to a loss of
$6.67 vs. our prior estimate of a loss of $3.70 (vs. consensus loss of $6.45). We
lower our FY2009 EPS estimate to $1.70 from our prior estimate of $1.80 (vs.
consensus $3.20).
consensus loss of $2.49) to incorporate the weak capital markets and estimated
write-downs. We lower our 4Q08 EPS estimate to a gain of $0.36 from a gain of
$0.40 (vs. consensus loss of $0.23). Our FY2008 EPS estimate goes to a loss of
$6.67 vs. our prior estimate of a loss of $3.70 (vs. consensus loss of $6.45). We
lower our FY2009 EPS estimate to $1.70 from our prior estimate of $1.80 (vs.
consensus $3.20).
NH:
The primary drivers for these revisions are write-downs, customer volumes,
overall weak global equity markets, and weak advisory and underwriting
revenues.
n Our estimates include an estimated total write-down of $4 billion to residential
mortgage related positions, commercial mortgage related positions, and
leveraged finance exposures.
overall weak global equity markets, and weak advisory and underwriting
revenues.
n Our estimates include an estimated total write-down of $4 billion to residential
mortgage related positions, commercial mortgage related positions, and
leveraged finance exposures.
NH:
As of the end of 3Q08, global debt underwriting activity was down 46% YoY and
37% QoQ. Global equity debt underwriting activity was down 18% YoY and 8%
QoQ. Global announced M&A activity was down 15% YoY but up 20% QoQ.
Global completed M&A activity was down 36% YoY and 11% QoQ.
n Trading volumes for the equity markets and fixed income were weaker as well in
3Q08. The major global indices continue to be down in excess of 9% for the
year.
37% QoQ. Global equity debt underwriting activity was down 18% YoY and 8%
QoQ. Global announced M&A activity was down 15% YoY but up 20% QoQ.
Global completed M&A activity was down 36% YoY and 11% QoQ.
n Trading volumes for the equity markets and fixed income were weaker as well in
3Q08. The major global indices continue to be down in excess of 9% for the
year.
NH:
just bringing up the notes on Merrill, Morgan Stanley and Goldman
NH:
Exhibit1. Opco Estimated Write-downs
Risk Exposures
Gross
Exposures
2Q08 ($B)
Residential mortgage-related positions 24.9 (2.7) -11%
Commercial mortgage and real
estate-related investments 29.4 (1.1) -4%
Acquisition finance facilities (funded
and unfunded) 18.0 (0.2) -1%
Total 72.3 (4.0)
Est. Net Markdown
Source: Company reports and Oppenheimer & Co. Inc.
Risk Exposures
Gross
Exposures
2Q08 ($B)
Residential mortgage-related positions 24.9 (2.7) -11%
Commercial mortgage and real
estate-related investments 29.4 (1.1) -4%
Acquisition finance facilities (funded
and unfunded) 18.0 (0.2) -1%
Total 72.3 (4.0)
Est. Net Markdown
Source: Company reports and Oppenheimer & Co. Inc.
NH:
For 3Q08, we estimate a total net write-down of $4 billion to residential mortgage related
positions, commercial mortage related positions, and leveraged finance exposures.
For the fiscal 3Q08, the on-the-run ABX AAA index was down ~15% and the ABX BBBindex
was down ~6%. Lehman’s residential mortgage-related positions were $24.9 billion
as of the end of 2Q08. This includes $10.2 billion in U.S. Alt-A/Prime, $2.8 billion in U.S.
subprime/second lien, and $9.3 billion in Europe. We estimate a net write-down of ~$2.7
billion to residential mortgage-related positions or an 11% markdown
positions, commercial mortage related positions, and leveraged finance exposures.
For the fiscal 3Q08, the on-the-run ABX AAA index was down ~15% and the ABX BBBindex
was down ~6%. Lehman’s residential mortgage-related positions were $24.9 billion
as of the end of 2Q08. This includes $10.2 billion in U.S. Alt-A/Prime, $2.8 billion in U.S.
subprime/second lien, and $9.3 billion in Europe. We estimate a net write-down of ~$2.7
billion to residential mortgage-related positions or an 11% markdown
NH:
estimate for residential mortgage related positions assumes a 10% hedge effectiveness
which is worse than the ~73% hedge effectiveness in 1Q08 and the ~17% in 2Q08
which is worse than the ~73% hedge effectiveness in 1Q08 and the ~17% in 2Q08
PM:
oooooh
PM:
She’s taken a sharp knife to others as well
NH:
she has
NH:
here’s Merrill
NH:
We are lowering our 3Q08 EPS estimate to a loss of $4.60 from a loss of $2.93 (vs.
consensus loss of $3.75). Our FY2008 EPS estimate goes to a loss of $11.42 vs.
our prior estimate loss of $10.50 (vs. consensus loss $10.55). Our FY2009 EPS
estimate remains at a gain of $1.27 (vs. consensus gain of $2.62).
consensus loss of $3.75). Our FY2008 EPS estimate goes to a loss of $11.42 vs.
our prior estimate loss of $10.50 (vs. consensus loss $10.55). Our FY2009 EPS
estimate remains at a gain of $1.27 (vs. consensus gain of $2.62).
NH:
The primary drivers for these revisions are write-downs, customer volumes,
overall weak global equity markets, and weak advisory and underwriting
revenues
overall weak global equity markets, and weak advisory and underwriting
revenues
NH:
Our estimates include an estimated total write-down of $8.2 billion (inclusive of
the pre-announced $5.7 billion write-down due to the sale of CDOs to an affiliate
of Lone Star) on residential mortgage related positions, commercial mortgage
related positions, and leveraged finance exposures.
the pre-announced $5.7 billion write-down due to the sale of CDOs to an affiliate
of Lone Star) on residential mortgage related positions, commercial mortgage
related positions, and leveraged finance exposures.
NH:
As of the end of 3Q08, global debt underwriting activity was down 46% YoY and
37% QoQ. Global equity debt underwriting activity was down 18% YoY and 8%
QoQ. Global announced M&A activity was down 15% YoY but up 20% QoQ.
Global completed M&A activity was down 36% YoY and 11% QoQ.
37% QoQ. Global equity debt underwriting activity was down 18% YoY and 8%
QoQ. Global announced M&A activity was down 15% YoY but up 20% QoQ.
Global completed M&A activity was down 36% YoY and 11% QoQ.
NH:
Trading volumes for equity markets and fixed income were weaker as well in
3Q08. The major global indices continue to be down in excess of 9% for the
year.
3Q08. The major global indices continue to be down in excess of 9% for the
year.
NH:
want some more
PM:
Sure –
NH:
here’s her thoughts on Goldman
NH:
We are lowering our 3Q08 EPS estimate to $1.55 from $2.15 (vs. consensus $2.16)
and 4Q08 estimate to $3.45 from $4.35 (vs. consensus $4.39). Our FY2008 EPS
estimate goes to $12.82 vs. our prior revised estimate of $14.32 (vs. consensus
$14.73). We lower our FY2009 EPS estimate to $14.00 from our prior revised
estimate of $14.90 (vs. consensus $18.21).
and 4Q08 estimate to $3.45 from $4.35 (vs. consensus $4.39). Our FY2008 EPS
estimate goes to $12.82 vs. our prior revised estimate of $14.32 (vs. consensus
$14.73). We lower our FY2009 EPS estimate to $14.00 from our prior revised
estimate of $14.90 (vs. consensus $18.21).
NH:
The primary drivers for these revisions are customer volumes, overall weak
global equity markets, a highly challenging trading environment, and weak
advisory and underwriting revenues.
n As of the end of 3Q08, global debt underwriting activity was down 46% YoY and
37% QoQ. Global equity debt underwriting activity was down 18% YoY and 8%
QoQ. Global announced M&A activity was down 15% YoY but up 20% QoQ.
Global completed M&A activity was down 36% YoY and 11% QoQ.
n Trading volumes for the equity markets and fixed income were weaker as well in
3Q08. The major global indices continue to be down in excess of 9% for the
year
global equity markets, a highly challenging trading environment, and weak
advisory and underwriting revenues.
n As of the end of 3Q08, global debt underwriting activity was down 46% YoY and
37% QoQ. Global equity debt underwriting activity was down 18% YoY and 8%
QoQ. Global announced M&A activity was down 15% YoY but up 20% QoQ.
Global completed M&A activity was down 36% YoY and 11% QoQ.
n Trading volumes for the equity markets and fixed income were weaker as well in
3Q08. The major global indices continue to be down in excess of 9% for the
year
NH:
As GS revenues are relatively the most equity-linked of its broker peers, the fact
that broad global equity market indices are all down double-digits will have a
meaningful effect on the company’s earnings.
that broad global equity market indices are all down double-digits will have a
meaningful effect on the company’s earnings.
PM:
cheers for taht
PM:
PM:
Bit on Informa….
We don’t know what’s going on. The original source that detailed the Providence approach for Informa will not talk to us at present. If you own the shares and are worried that the bid will fail, sell the shares and stop worrying.
PM:
What’s the price?
PM:
Up a bit — pre-lse probs
PM:
390
PM:
But we should just re-iterate that our sources do not believe we will see a hike in the PE offer
PM:
450p was rejected — the market has fallen v heavily since then (notwithstanding today’s rally)
PM:
Apparently the two sides are still talking — but it is out of “politeness” apparently
PM:
The debt package for this took so long to put together — they’d have to go thru the whole process again for a bid that was substantially abvoe the terms that have been rejected
NH:
thanks for that. st
NH:
NH:
got Libor quotes now
NH:
no real change
NH:
three month sterling at 5.737 vs 5.7388
NH:
dollar 3 month 2.816% vs 2.814%
PM:
and no change at all in euro libor — 4.955
NH:
the bail out does not seem to have having much impact
NH:
PM:
Welcome back Montesquieu — below
NH:
yes, good to hear from you again
NH:
and for once you agree with us
PM:
NH:
excellent
NH:
NH:
right we have some trading activity
PM:
do we??
NH:
at last
NH:
what looks to be happening is that the orders that were on the book before the big freeze are being auctioned
NH:
presumably that will give us a price at which trading can start again
NH:
HBOS for example
NH:
indiciative auction prices is 311.5p
PM:
RBS is 245
PM:
barc — 355
NH:
of course, we should stress no new orders are going in
NH:
this is just the old ones being sorted out
PM:
oh, i see
NH:
and they do not dramatically different from the frozen ones
NH:
at the moment
PM:
We’re just trying to get a handle on this
PM:
In the meantime — back to the credit default situ on GSE CDS….
PM:
Thirteen “major” dealers of credit-default swaps agreed “unanimously” that the rescue constitutes a credit event triggering payment or delivery of the companies’ bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said.
PM:
I should say thank you to Alea for pointing that out
NH:
NH:
right picking up rumours of further tech issues at the LSE
PM:
Very funny Throg
NH:
one of the big banks saying it will not be up and running until 3pm and the market will remain open to 7.00pm
NH:
which will screw our prices page and print run
PM:
no way!
NH:
er
NH:
the HBOS quote
NH:
looks like it has frozen again
NH:
oh no
NH:
nothing new from the incident room
NH:
hang on, the quote had just moved
NH:
we may be alright
NH:
yes, Chi-X and Tuquoise are working
NH:
but remember these platforms do no process anything like the volumes of the LSE
NH:
and the spread on HBOS quote on Chi-X earlier was quite wide
NH:
around 7p
PM:
Okay — we’ve found the quotes — but we are not permissioned
PM:
PM:
Thanks fo rthe link for Chi-x
NH:
got a price
NH:
we are enabled
NH:
but it was under instinet
NH:
Chi spread is 311-317p
NH:
seems quite wide
NH:
for a FTSE 100 company
NH:
RBS 246-248p on Chi-X
NH:
12.00pm has been and gone and all of the FTSE 100 and 250 are still in auction period
NH:
NH:
OK, that’s it for today
NH:
if there is more choas this afternoon we could be back
NH:
but before we go
NH:
a Draasisma has just landed
NH:
and he’s an energy bull
NH:
gone OVERWEIGHT energy
NH:
We wrote in Sector Rotation: The Snapback May Not Be Far Away on July 7 that long Commodities short Financials was a popular and expensive trade that could quickly turn around on the prospect of lower inflation, lower oil and an EM slowdown. When we wrote that, little did we know that the snapback would be as quick and as violent as it has been. In July, we did move Energy down to neutral from overweight and Financials up to a small overweight (through Insurance) from underweight.
NH:
Now, with the oil price down ~30% from the peak, and with the Energy sector having underperformed by more than 10%, we think it is time to buy the Energy sector back again. In a market that is embarking on a 30% earnings recession and in which low leverage will continue to be rewarded, we think oil stocks will outperform on a 12-month view. Energy stocks have lower valuations and leverage, and better earnings prospects than the market overall. We think a stable oil price would be sufficient for the oil sector to outperform the market on a 12-month view. We go back overweight Energy by adding 2% through buying overweight-rated BP. We recognize that the risk to our view is the oil price correction may continue in the near-term due to further unwinding of some crowded trades as well as global demand destruction.
NH:
In our European Model Portfolio we raise the money by selling Glaxo and Carnival, thus reducing our Healthcare and Consumer Discretionary weights by 1% each – but Healthcare remains our biggest overweight. Our sector overweights are now mostly in Defensives and Commodity-related sectors: Healthcare, Energy, Telcos, Materials and Insurance, versus underweights in Cyclicals and Consumer-related sectors: Industrials, Tech, Consumer Staples and Discretionary, and other Financials.
NH:
Today’s change does not represent a change of view regarding our tactical overweight equities and we stick to our small overweight in Financials overall (see Back To School Thoughts from 4 September 2008 for more detail on our market view: a bear market rally within an earnings-recession-driven bear market). The GSE rescue, while widely expected, is a near-term positive for European equity market direction, in our view, and confirms our belief that financial Armageddon will be avoided. Note that as of last Friday our CVI was at -1.5, our combined market timing indicator at -0.5, and the trailing PE for MSCI Europe 10x. In the past, following these kind of levels on our market timing indicators, European equity markets have been up in the next 6 months in more than 80% of observations, thus confirming our bear market rally view, within an earnings recession-driven bear market.
NH:
Right. that’s it for now
NH:
Paul has gone and I am off now
NH:
to try and find out what the hell has happened at the LSE
NH:
and for those of you who missed
NH:
Clara Furse fired off an interesting letter in the FT this morning
NH:
really let fly at her critics
NH:
the timing could not be worse
NH:
here’s the link
NH:
happy reading
NH:
http://www.ft.com/cms/s/0/6c7dc4a4-7d3c-11dd-8d59-000077b07658.html
NH:
see you tomorrow