Markets live chat transcript for the chat ending at 12:09 on 22 Sep 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Welcome!
PM:
This is Markets Live, FT Alphaville’s daily markets chat.
PM:
Lots to get thru
PM:
While Neil is logging on I can reveal the winner of the smashing Lehman competition.
NH:
Good morning
PM:
Sorry, the competition to smash Lehman – that happened last week.
PM:
I mean the competition here to win a fabulous steel Lehman Cube.
PM:
I noticed that there are a load of similar cubes fetting fifty quid or more on eBay – but those are the common versions.
PM:
Inscribed with Lehman ethics.
PM:
This is an ultra rare press event Lehman cube –with media sayings on the sides.
PM:
Anyway – the lucky winner is one:
PM:
AA
PM:
AA – we have dispatched a note to your gmail account. But get in touch, as we cant post your cube to gmail.
PM:
Anonymity guaranteed, etc.
PM:
But congratulations and well done.
PM:
NH:
well done
PM:
Monkey — welcome back
PM:
I think these cubes come from a media dinner Lehman held with the British financial press each year.
PM:
Reminded me of the one I went to when I was at the Guardian.
NH:
not the best two weeks to go away
PM:
The seat next to Jeremy Isaacs was empty – and it turned out that Charlie Pretzlik, the the FT’s companies editor now at Caz, had cried off at the last mo. The Lehman felts were not amused.
PM:
Anyway, after the dinner I went for a further drink with the Leh felts in Soho. At about midnight, who should call me on my mobile, but Charlie P – saying “You out for a drink?”
PM:
I said – “sure – having quiet drink in Soho, come along..” So he did – not realising all these furious Leh felts were waiting for him.
PM:
And I just went home, leaving CP to make his grovelling apologies.
NH:
PM:
PM:
Let’s start with a bank watch
NH:
the banks you mean
NH:
well, can you believe this??
NH:
someone is selling HSBC
PM:
eh????
NH:
look shares down 29.5p at 890p
PM:
How/why can this be??
NH:
that’s not on
NH:
not sure why HBSC are so weak
NH:
rest of the sector is fine, which is good news for us all
NH:
RBS had a good move
Royal Bank of Scotland Group (RBS:LSE): Last: 220.25, up 6.75 (+3.16%), High: 226.25, Low: 210.50, Volume: 36.95m
Barclays (BARC:LSE): Last: 397.00, up 8 (+2.06%), High: 402.75, Low: 371.50, Volume: 18.60m
NH:
however,
NH:
traders reckon this short selling ban
NH:
has been put in plce to allow the banking sector to raise more capital
NH:
that’s the quid pro quo from the regulators
NH:
so Friday we have Lloyds raising £760m on Friday
NH:
in the middle of an offer period,which I have never seen before
PM:
Bizarre — raising cash in an artificial rally arranged by the authorities
PM:
Maoist markets
NH:
before that we had Barclays
NH:
tapping its shareholders not one but twice
NH:
and today Deutsche Bank have raised EUR2bn in a placing
NH:
gonna be lots more of this
PM:
Big theme this morning is the idea that the TARP brings forward the moment at which banks will raise fresh capital
PM:
Turns out the US treasury didn’t like out MOABB name
PM:
Wants TARP instead. So we’ll do as we’re told. We’re keeping our head down at the mo – in case someone tries to cut it off.
PM:
On this id note a shrewd comment put up on the site earlier by Mr Myopia:
PM:
Good question. Specifically, does the US taxpayer buy fire sale assets at bargain prices from de facto bankrupt institutions that can then be kept alive, or does it buy them at supportive prices? If the former, then I don’t see that it’s a rescue at all: it’s just a state-managed insolvency process. If the latter, then I don’t see how it can be politically possible.
Its a tight rope affair. The losses haven’t gone away. It’s a question of making sure that the banks continue to own as many of their losses as poss without actually being destroyed. And that means that banks are a) impossible to value and b) impossible to invest in.
Its a tight rope affair. The losses haven’t gone away. It’s a question of making sure that the banks continue to own as many of their losses as poss without actually being destroyed. And that means that banks are a) impossible to value and b) impossible to invest in.
PM:
Pricing will be key
NH:
it will be and surely, the Treasury will have to buy them at supportive prices
NH:
if they don’t what’s the point??
PM:
JPM were saying earlier that the the UK banks will need to raise abotu £38bn
NH:
ah, yes you put that note up on the site earlier
NH:
is it worth re-running??
PM:
Hmm — combination of Lloyds and HBOS will be thirsty for £16bn
NH:
wow
NH:
some major asset sales to come then and prehaps another capital raise
PM:
here u go
PM:
Brevity of downturn depends on addressing capital shortage –
JPMe £38bn for the system; Lloyds TSB/HBOS (£16bn), RBS
(£12bn), Barclays (£10bn). We remain UW until action is taken.
• Analysis of pro-cyclicality of ‘total’ capital demands reveals (i)
banks will limit credit exposure to corporates; (ii) higher pricing,
but limited profitability gains; (iii) returns in investment banking
to remain under pressure due to higher capital demands.
• Cutting sector estimates by 39% in 09E, 47% in 10E to reflect
full downturn (see summary in Table 21. With the sector trading
on 1.7x 09E JPM P/NAV we have ranked UK banks, by least
preferred:
JPMe £38bn for the system; Lloyds TSB/HBOS (£16bn), RBS
(£12bn), Barclays (£10bn). We remain UW until action is taken.
• Analysis of pro-cyclicality of ‘total’ capital demands reveals (i)
banks will limit credit exposure to corporates; (ii) higher pricing,
but limited profitability gains; (iii) returns in investment banking
to remain under pressure due to higher capital demands.
• Cutting sector estimates by 39% in 09E, 47% in 10E to reflect
full downturn (see summary in Table 21. With the sector trading
on 1.7x 09E JPM P/NAV we have ranked UK banks, by least
preferred:
PM:
1. B&B – Remains UW – Removing TP – We do not believe it
is a viable standalone entity;
2. Lloyds TSB – D/g from N to UW – New TP 180p -
Unattractive combination with HBOS, high risk of revenue
attrition. Top UW in Europe;
3. RBS – D/g from N to UW – New TP 120p – Capital
constrained, suffers from a poor earnings mix and ABN
synergies do not appear feasible;
4. Barclays – D/g from N to UW – New TP 210p – More
investment banking means lower returns. Economic profit
target looks unattainable;
5. HSBC – Remains UW –TP 720p – In a Global banking
context, but within UK, we believe healthy capital gives it a
competitive advantage.
is a viable standalone entity;
2. Lloyds TSB – D/g from N to UW – New TP 180p -
Unattractive combination with HBOS, high risk of revenue
attrition. Top UW in Europe;
3. RBS – D/g from N to UW – New TP 120p – Capital
constrained, suffers from a poor earnings mix and ABN
synergies do not appear feasible;
4. Barclays – D/g from N to UW – New TP 210p – More
investment banking means lower returns. Economic profit
target looks unattainable;
5. HSBC – Remains UW –TP 720p – In a Global banking
context, but within UK, we believe healthy capital gives it a
competitive advantage.
NH:
check the line on B&B
NH:
that’s not us saying that – it’s JP Morgan
PM:
There’s fifty pages of this thing from Carla Antunes da Silva
PM:
here’s a quote from Nout Wellink,
NH:
who??
NH:
Nout??
PM:
yeah — Nout — the Nout that chairs the Basel committe on banking supervision
PM:
stupid
PM:
Supervisors can not predict the next crisis but they can carry forward the lessons
from recent events to promote a more resilient banking system that can weather
shocks, whatever the source. The key building blocks to core bank resiliency are
strong capital cushions, robust liquidity buffers, strong risk management and
supervision.”
from recent events to promote a more resilient banking system that can weather
shocks, whatever the source. The key building blocks to core bank resiliency are
strong capital cushions, robust liquidity buffers, strong risk management and
supervision.”
PM:
from the summer
NH:
plenty of other comment around this morning
NH:
some good stuff from Simon Pilkington at Caz
NH:
on the TARP
NH:
The authority will expire after two years.
The thorny issue of pricing is left largely unaddressed. Thus far the plan states it will be established through “market mechanisms where possible, such as reverse auctions”.
Private managers will manage the assets, either holding to maturity or selling in the market. Any surplus will go to the Treasury.
The plan is to report updates after three months and then semi-annually thereafter.
The thorny issue of pricing is left largely unaddressed. Thus far the plan states it will be established through “market mechanisms where possible, such as reverse auctions”.
Private managers will manage the assets, either holding to maturity or selling in the market. Any surplus will go to the Treasury.
The plan is to report updates after three months and then semi-annually thereafter.
NH:
Comment
In the space of a week, US Treasury Secretary Hank Paulson has committed to $1 trillion of assistance (up to $200bn for Fannie Mae and Freddie Mac, $85bn to AIG). If the TARP gets congressional approval it will provide substantial help to the financial markets.
In the space of a week, US Treasury Secretary Hank Paulson has committed to $1 trillion of assistance (up to $200bn for Fannie Mae and Freddie Mac, $85bn to AIG). If the TARP gets congressional approval it will provide substantial help to the financial markets.
NH:
The Bank of England estimates that at the end of the first quarter Western financial institutions held $914bn of troubled assets (specifically US sub-prime, other US MBS and ABS, CMBS, leveraged loans and monoline guarantees) of which US securities houses ($295bn) and US commercial banks ($195bn) held $490bn. As it currently stands the scheme appears to extend to non-bank financial institutions but covers a narrower range of troubled assets though as yet all US mortgages appear eligible including prime.
NH:
There are $12,000bn of US mortgages outstanding of which nearly half are covered by the GSEs though presumably the scheme will target those assets that have fallen furthest in price and so will not acquire prime loans.
NH:
Most of the UK banks are beneficiaries, if not directly then indirectly from the removal of unwanted assets from the system and price-formation.
In our view Congress will want to see further write-downs taken before assets are bought by the TARP. We see the scheme as helping banks to raise more capital rather displace the need for capital.
NH:
Most of the UK banks are beneficiaries, if not directly then indirectly from the removal of unwanted assets from the system and price-formation.
In our view Congress will want to see further write-downs taken before assets are bought by the TARP. We see the scheme as helping banks to raise more capital rather displace the need for capital.
NH:
and this from Oriel
NH:
UK Banks – That was the week that was
Having stepped off the roller-coaster ride last week, regaining some composure and feeling less nauseous we would highlight five significant factors for the banks
The coordinated injection of liquidity by central banks
The proposed $700bn penitentiary for toxic assets by the US Treasury
The temporary ban on short selling of financials stocks
Goldman Sachs and Morgan Stanley establishing holding bank structures enabling them to raise commercial deposits
Having stepped off the roller-coaster ride last week, regaining some composure and feeling less nauseous we would highlight five significant factors for the banks
The coordinated injection of liquidity by central banks
The proposed $700bn penitentiary for toxic assets by the US Treasury
The temporary ban on short selling of financials stocks
Goldman Sachs and Morgan Stanley establishing holding bank structures enabling them to raise commercial deposits
NH:
The dramatic rescues by Barclays and Lloyds TSB of Lehman and HBOS respectively
The combination of (i) regulatory intervention and (ii) strong acquirers identifying value in weak competitors provides a more positive back-drop for UK financials
We therefore believe that Friday’s rally does not provide a profit-taking opportunity, but instead establishes a new level for the banks
Whether this is sustainable hinges on three factors (i) the real economy – interest rates, £/US$ (ii) US house prices and impact on asset values – turning point mid-2009 remains the best estimate (iii) perhaps most significantly – total capital raising has not replaced total capital written-off, there is a global capital shortfall and banks are deleveraging
The combination of (i) regulatory intervention and (ii) strong acquirers identifying value in weak competitors provides a more positive back-drop for UK financials
We therefore believe that Friday’s rally does not provide a profit-taking opportunity, but instead establishes a new level for the banks
Whether this is sustainable hinges on three factors (i) the real economy – interest rates, £/US$ (ii) US house prices and impact on asset values – turning point mid-2009 remains the best estimate (iii) perhaps most significantly – total capital raising has not replaced total capital written-off, there is a global capital shortfall and banks are deleveraging
NH:
The process of deleveraging will in varying degrees impact asset values and potential further write-downs for the banks
Stocks – HSBC (Add) within 3% of target valuation, but in these tricky times we would stick with it. Barclays (Add) deserves to rerate higher (our target price is 430p per share) and looks poised to acquire Lehman Europe equities business, although this is a more price competitive situation than the Lehman US acquisition. Lloyds TSB is reduced to Hold as it acquires HBOS’s higher risk balance – medium term we are positive on its outlook. Bradford & Bingley (Reduce) appears like a distant planet on the valuation screen, may well be regarded as NOT too big to fail, despite Darling’s request for White Knights.
Stocks – HSBC (Add) within 3% of target valuation, but in these tricky times we would stick with it. Barclays (Add) deserves to rerate higher (our target price is 430p per share) and looks poised to acquire Lehman Europe equities business, although this is a more price competitive situation than the Lehman US acquisition. Lloyds TSB is reduced to Hold as it acquires HBOS’s higher risk balance – medium term we are positive on its outlook. Bradford & Bingley (Reduce) appears like a distant planet on the valuation screen, may well be regarded as NOT too big to fail, despite Darling’s request for White Knights.
NH:
RBS (Hold) deserves to trade better based on regulatory intervention above, ABN synergies, but US earnings will continue to be a drag on overall group earnings.
Finally, note the Lloyds TSB share placing impacts the HBOS acquisition share ratio (now 0.833). HBOS continues to trade around 23p light of its see-through price
Finally, note the Lloyds TSB share placing impacts the HBOS acquisition share ratio (now 0.833). HBOS continues to trade around 23p light of its see-through price
PM:
Thanks for that
PM:
Let me post a bit mmore fromthis JPM note
PM:
This is on regulatory top-ups in capital being demanded by the FSA
PM:
Pillar 2 is an additional capital requirement determined qualitatively by the
regulators. The aim of Pillar 2 is to account for any risks not captured by the Pillar 1
capital requirement. While the Pillar 2 process is technically the result of a wideranging
review of risks not covered under Pillar 1, we think that in practice and given
some of our conversations with industry specialists, it looks increasingly likely that,
at least initially, the FSA will take a high level judgement and blanket approach on
the overall risk profile of the UK banks and will wait to have more information until
making a differentiated charge on each bank. From our Pillar 2 analysis we conclude;
regulators. The aim of Pillar 2 is to account for any risks not captured by the Pillar 1
capital requirement. While the Pillar 2 process is technically the result of a wideranging
review of risks not covered under Pillar 1, we think that in practice and given
some of our conversations with industry specialists, it looks increasingly likely that,
at least initially, the FSA will take a high level judgement and blanket approach on
the overall risk profile of the UK banks and will wait to have more information until
making a differentiated charge on each bank. From our Pillar 2 analysis we conclude;
PM:
1. We believe the FSA is currently applying a blanket c.25% surcharge to all
of the UK banks. This is particularly onerous to HSBC, RBS, and Barclays, and
we do not expect it to last very long as it does not take into account
diversification benefit.
2. As banks provide more information, we expect this charge to be lower for
the larger more diversified banks, where we expect to see Pillar 2 charge 10-
20% and significantly higher for mono-liners. Although regulators have
admittedly had additional capital requirements in the past, our new methodology
is based off Pillar 1 requirement, which in turn is calculated at 6% of risk
weighted assets, not the 8% the regulator uses. We believe there will be a greater
focus on both the quality and quantity of capital. The following table illustrates
the range of potential Pillar II charges based on banks’ ARROW ratings.
of the UK banks. This is particularly onerous to HSBC, RBS, and Barclays, and
we do not expect it to last very long as it does not take into account
diversification benefit.
2. As banks provide more information, we expect this charge to be lower for
the larger more diversified banks, where we expect to see Pillar 2 charge 10-
20% and significantly higher for mono-liners. Although regulators have
admittedly had additional capital requirements in the past, our new methodology
is based off Pillar 1 requirement, which in turn is calculated at 6% of risk
weighted assets, not the 8% the regulator uses. We believe there will be a greater
focus on both the quality and quantity of capital. The following table illustrates
the range of potential Pillar II charges based on banks’ ARROW ratings.
PM:
3. Capital buffers held by banks over and above the requirement as well as
improving the ‘quality’ of capital are key to determining the extent and
duration of the current economic crisis. Without strict capital buffers at this
stage, the ‘recovery’ will likely take much longer. But at the same time, the risk
for strict capital charges will further deplete the already vulnerable capital
resources of the UK banks and have a knock-on effect on earnings and returns.
improving the ‘quality’ of capital are key to determining the extent and
duration of the current economic crisis. Without strict capital buffers at this
stage, the ‘recovery’ will likely take much longer. But at the same time, the risk
for strict capital charges will further deplete the already vulnerable capital
resources of the UK banks and have a knock-on effect on earnings and returns.
PM:
Despite companies’ focus on Tier 1 ratios, we encourage the reader to think of future
capital demands as the SUM OF Pillar 1, Pillar 2, and Pillar 3. Since there is a
significant level of uncertainty and opaqueness with regards to Pillar 2, we have
found a sensitivity exercise to be useful. Table 4 shows the capital shortfall
capital demands as the SUM OF Pillar 1, Pillar 2, and Pillar 3. Since there is a
significant level of uncertainty and opaqueness with regards to Pillar 2, we have
found a sensitivity exercise to be useful. Table 4 shows the capital shortfall
PM:
sensitivities of the UK banks given different changes of Pillar 2. The results reinforce
our belief that the magnitude of Pillar 2 capital charge can significantly impact
capital shortfalls of the UK banks and will be crucial in determining the extent and
duration of the economic woes of the UK economy. Note we have boxed our base
case scenarios for each bank.
our belief that the magnitude of Pillar 2 capital charge can significantly impact
capital shortfalls of the UK banks and will be crucial in determining the extent and
duration of the economic woes of the UK economy. Note we have boxed our base
case scenarios for each bank.
PM:
I think this will be a big big theme
PM:
The raw weight of new regulation
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH:
right, we should have a discussion about the end of investment banking
NH:
before we do
NH:
some interesting stuff out on lloyds this morning
NH:
and the predicted cost savings from the deal
NH:
now, Lloyds said they were going to £1bn and more
NH:
which analysts said we ridiculously low
NH:
clearly there were two reasons Lloyds did not come up with a more realistic number
NH:
one, it would annoy the govt – whose blessing is crucial to getting this deal past the regulators
NH:
and the second
NH:
as the deal was cobbled together in 48hours
NH:
they probably did not have time to come up with anything more precise
NH:
anyway
NH:
this is funny note from James Hamilton at Numis Securities
NH:
With 21% of the network overlapping, the prospect of most of the costs being removed from Insight which we think will be merged into SWIP, most of the head office and group functions of HBOS being removed, most of the back office Life assurance and GI costs being removed from one of the operations, plus material savings within the corporate bank being removed overall cost savings should be £2bn+. The only area where we do not see significant savings in within the HBOS Australian operations which may well be sold.
NH:
Savings of £1bn against H1 2008 annualised combined costs of £11.2bn would be a pathetically low level even if there was not a huge geographical overlap.
Given the Independent on Sunday article stating that up to 700 branches could be closed we thought you may like to see the analysis of the branch overlap that we have conducted.
NH:
UK Wide
NH:
Number of HBOS Branches Identified 986
Number of LLOY Branches Identified 2147
Total existing HBOS + LLOY 3133
Number of overlapping branches 651
Percentage overlap 21%
Number of LLOY Branches Identified 2147
Total existing HBOS + LLOY 3133
Number of overlapping branches 651
Percentage overlap 21%
NH:
Large Towns/Cities ex. London
PM:
Jeepers 21%
NH:
Number of HBOS Branches Identified 67
Number of LLOY Branches Identified 121
Total existing HBOS + LLOY 188
Number of overlapping branches 38
Percentage overlap 20%
Number of LLOY Branches Identified 121
Total existing HBOS + LLOY 188
Number of overlapping branches 38
Percentage overlap 20%
NH:
London (within high level postcodes)
Number of HBOS Branches Identified 75
Number of LLOY Branches Identified 123
Total existing HBOS + LLOY 198
Number of overlapping branches 38
Percentage overlap 19%
Number of HBOS Branches Identified 75
Number of LLOY Branches Identified 123
Total existing HBOS + LLOY 198
Number of overlapping branches 38
Percentage overlap 19%
NH:
I wonder if those figs will get a mention at the Labour conference
NH:
while everyone is busy slapping themselves on the back for resucing HBOS from those monsters in mayfair
PM:
What are the branches going to turn on to??
PM:
one quid book shops?
NH:
coffee shops
PM:
Not estate agencies, that’s tfor sure
NH:
Costa has a big expansion programme
NH:
All Bar One
PM:
charity shops, i reckon
PM:
Or Everythings a quid shops
PM:
700 and odd branches overlap
PM:
So everyone has to do their bit to saave the financial system
PM:
PM:
NH:
Hockey Mum – not to sure what to so day about that post – Amid Market Turmoil, Some Journalists Try to Tone Down
NH:
although we did receive some customer feedback last week
NH:
and it’s fair to say some of the older generation – old school brokers – were not happy with the Alpha coverage
PM:
Btw, I got a call from friend at the FSA late on Friday.
NH:
did he mention Monkey Sants??
PM:
hmmm
PM:
Think it was the first time he’s got home in five days.
NH:
What did he have to say.
PM:
He said:
PM:
JEEZALPHACRAPVILLLERUBBISHPEDDLINGEFFINGNONSENSEGITGITGITEFFINTROUBLEMAKEER
NH:
Positive feedback then?
PM:
Then he sent me a txt:
PM:
What did you do in the war, daddy? I took the side of the spivs and speculators, son.
PM:
Sorry — should have put that in quotes
PM:
NH:
no, we took the side of the free maket
NH:
NH:
good point below
NH:
what will these Goldman Sachs retail banks look like??
PM:
Dour
PM:
No pics on the wall, beige carpets, etc
PM:
Like their Wall St op
PM:
No flash wotsoever
PM:
As for Morgan Stanley…
NH:
we are of course referring to the overnight news that GS and MS have been given bank status
NH:
regulated bank status
NH:
of course, that has a number of other advantages
NH:
aside from being able to take retail deposits
NH:
it means these companies will have stricter regulatory oversight and will not be able to leverage 23 times
NH:
The death of investment banking
NH:
n a statement, Goldman said: “We view regulation by the Federal Reserve Board as appropriate and in the best interests of protecting and growing our franchise across our diverse range of businesses.”
Lloyd Blankfein, chairman and chief executive, said: “While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides [our] members with full prudential supervision and access to permanent liquidity and funding.”
Morgan Stanley said in a statement that it had sought the change in status in order to provide “maximum flexibility and stability to pursue new business opportunities as the financial marketplace undergoes rapid and profound changes.
NH:
that went up on FT.com earlier
PM:
Also , being banks, they get direct regular access to the Fed
NH:
and note that GS and MS will not be regulated by the Fed not the SEC
NH:
i wonder if something similar should happen over here
PM:
In what sense?
NH:
that the BoE should take regulatory controls of the banks
PM:
Oooh
NH:
and the FSA should be left with misselling and markets stuff
PM:
Anyway, i thought we were taking over all the regulation?
PM:
PM:
Right — the wider market
PM:
how’s the footsie looking?
NH:
well, Friday’s powerful rally is just about holding
NH:
we are off just 13 points at 5,298.3
NH:
which is very resillient
NH:
everyone waiting for more details on the TARP
NH:
and at what price the Treasury will buy all this toxic mortgage stuff
PM:
Quick bit of history
PM:
Friday’s gain on the Footsie was largest in history.
PM:
Well, largest since 1984, when the FTSE 100 was launched.
PM:
8.8percent pop.
PM:
Heres some parallels from Robert parkes at HSBC
PM:
Friday, 19 September 2008 will go down in history as the
date the FTSE 100 recorded its biggest ever one-day gain.
The index gained 8.8% (or 431 index points) and surpassed
the previous record gain of 7.9% registered 21 years ago in
October 2007.
date the FTSE 100 recorded its biggest ever one-day gain.
The index gained 8.8% (or 431 index points) and surpassed
the previous record gain of 7.9% registered 21 years ago in
October 2007.
All very interesting, but does it tell us anything about the
likely direction of the market from here? After all, moves of
anything like this magnitude are extremely rare – the index
has been in existence since 1984 and has recorded a gain of
more than 5% in a day on only five previous occasions.
Our analysis below investigates these other periods to see if
a move of this magnitude has generally transmitted some
type of signal about the likely direction of the market.
The results (see table) are mixed. In four of the five cases the
move did not mark the low and the market resumed its
downward path and fell a further 11% to 20%. The one
exception was 13 March 2003 when the move signalled the
end of the three-year bear market…
…And what is particularly interesting about this period is
that, like now, it was also preceded by the emergence of a
positive yield gap (a higher trailing dividend yield than the
10-year gilt yield).
Are we seeing a re-run of 2003? Only time will tell. A 9%
gain will undoubtedly help, as should many of the valuation
indicators (see charts below), if confidence in them ever
returns, that is. But the economy looks to be either already in
or on the brink of a recession and the housing market is
crashing. This poor economic outlook doesn’t bode well for
earnings and we may need to see some signs of stabilisation
in this area for the market to stage a sustained rally.
PM:
So in four out of the five previous occasions when we’ve seen a pop of more than 5 percent on the Footsie, the market has subsequently gone to fresh lows.
PM:
except in 2003, when the dividend yield was also higher than the 10 year gilt.
PM:
Big buy signal that cross over on the divi yield – as you pointed out on Friday.
NH:
I did
NH:
suggests to me that the market might have found a floor
NH:
and we could be in for a bit of range bound trading interspersed with a load of capital raisings
PM:
A Crisp signal in the divi yield v 10 year gilts
PM:
PM:
Why is MAN going down — its financial
PM:
Taking a bit of a battering – down 29 at 440p.
PM:
Whats going on?
NH:
well, it is not on the banned list
NH:
it’s an evil hedge fund and they receive no protection whatsoever from the govt and the FSA
PM:
Actually tehre is another reason
PM:
its more this citi note – reduced their target from 7.20 to 6.50.
PM:
Also cut their AUM forecast – which is prob more significant.
PM:
H109 Pre-Close on 29 September — Ahead of Man Group’s trading statement,
we reduce our AUM forecasts to reflect AHL investment performance (down
11% July and August), RMF and Glenwood (both down 4%), MGS (down 7% in
July), and the negative impact of a stronger US$ on the ~30% of AUM in other
currencies. We now forecast $73.8bn AUM at end September 2008, up 8%
year on year but down 7% from $79.5bn at end June 2008.
10% Earnings Downgrade — This reduces forecast Mar09 AUM by 6% from
$90.0bn to $81.6bn, and FY09E EPS by 14% to 79.7c. This reflects a 14%
reduction in forecast PBT, comprising a 9% reduction in management fee PBT
to $1,193m and 25% reduction in performance fee PBT to $510m. Our
performance fee PBT forecast assumes that AHL is the main contributor, and
that it can return to 8% above high water marks by end March 2009.
650p target price — Following these changes to our earnings forecasts, we
reduce our target price by 10% from 720p to 650p. This reduction is less than
the change in EPS forecasts, reflecting the recent US$ strength vs. Sterling.
Buying Opportunity — Despite our downgrades, we believe the recent fall in
Man Group share price (down 24% since 1 August) is over-done. We forecast
10% three-year EPS CAGR, driven by demand for alternative investments and
Man’s strong position as a large scale established player. This is supplemented
by a well-covered 6% dividend and the prospect of share buybacks using some
part of the group’s $1.6bn surplus capital (13% of market cap). We reiterate
our Buy / Medium Risk (1M) recommendation ahead of the trading statement.
we reduce our AUM forecasts to reflect AHL investment performance (down
11% July and August), RMF and Glenwood (both down 4%), MGS (down 7% in
July), and the negative impact of a stronger US$ on the ~30% of AUM in other
currencies. We now forecast $73.8bn AUM at end September 2008, up 8%
year on year but down 7% from $79.5bn at end June 2008.
10% Earnings Downgrade — This reduces forecast Mar09 AUM by 6% from
$90.0bn to $81.6bn, and FY09E EPS by 14% to 79.7c. This reflects a 14%
reduction in forecast PBT, comprising a 9% reduction in management fee PBT
to $1,193m and 25% reduction in performance fee PBT to $510m. Our
performance fee PBT forecast assumes that AHL is the main contributor, and
that it can return to 8% above high water marks by end March 2009.
650p target price — Following these changes to our earnings forecasts, we
reduce our target price by 10% from 720p to 650p. This reduction is less than
the change in EPS forecasts, reflecting the recent US$ strength vs. Sterling.
Buying Opportunity — Despite our downgrades, we believe the recent fall in
Man Group share price (down 24% since 1 August) is over-done. We forecast
10% three-year EPS CAGR, driven by demand for alternative investments and
Man’s strong position as a large scale established player. This is supplemented
by a well-covered 6% dividend and the prospect of share buybacks using some
part of the group’s $1.6bn surplus capital (13% of market cap). We reiterate
our Buy / Medium Risk (1M) recommendation ahead of the trading statement.
NH:
one has to think that this shorting ban will hit Man’s black box
NH:
in fact there is so much on this shorting ban that remains unclear
NH:
perhaps the biggest is whether one can short index futures
NH:
the guidance from the FSA is not clear
PM:
I dont think anyone is quite sure yet
PM:
It seems to be that you can so long as you can convince the FSA that you are not doing it to bring down HBOS
PM:
How that works have no idea
PM:
Tuna — please watch it –
PM:
Fair trial and all that
PM:
NH:
NH:
here’s something odd
PM:
Go on
NH:
press release from Kaupthing
NH:
His Highness Sheikh Mohammed Bin Khalifa Al-Thani acquires 5% stake in Kaupthing Bank
NH:
H.H. Sheikh Mohammed is a member of the royal family which has been the governing family of Qatar since the nineteenth century.
NH:
H.H. Sheikh Mohammed:
“We have followed Kaupthing closely for some time and consider this to be a good investment. Kaupthing’s position is strong and we believe in the bank’s strategy and management team, as Kaupthing has performed well in the current market turbulence and has proven it can change and adapt to a new reality in banking. We view our stake in Kaupthing as a long-term investment and look forward to a close relationship with the bank in the future.”
“We have followed Kaupthing closely for some time and consider this to be a good investment. Kaupthing’s position is strong and we believe in the bank’s strategy and management team, as Kaupthing has performed well in the current market turbulence and has proven it can change and adapt to a new reality in banking. We view our stake in Kaupthing as a long-term investment and look forward to a close relationship with the bank in the future.”
NH:
Sigurdur Einarsson, Chairman:
“We are delighted to welcome H.H. Sheikh Mohammed Bin Khalifa Al-Thani as a shareholder of Kaupthing Bank. We are continually focused on attracting new investors to the bank and we are happy to see that our strategy of increasing the diversity of our shareholder base has proven fruitful. We look forward to working with H.H. Sheikh Mohammed in the future.”
“We are delighted to welcome H.H. Sheikh Mohammed Bin Khalifa Al-Thani as a shareholder of Kaupthing Bank. We are continually focused on attracting new investors to the bank and we are happy to see that our strategy of increasing the diversity of our shareholder base has proven fruitful. We look forward to working with H.H. Sheikh Mohammed in the future.”
PM:
what’s strange about that??
PM:
The SWF’s are making lots of investments in leading financial institutions
PM:
Barclays
PM:
Citigroup
PM:
Iceland
PM:
Need for a diverse portfolio and all that
NH:
but Iceland??
NH:
hmmm
NH:
lots of conspiracy theories flying around on why they have decided to take an interest in Kaupthing
PM:
Such as?
NH:
well, it all goes back to Sainsbury
NH:
the QIA is the biggest shareholder in Sainsbury, right
PM:
yes, with 27%
NH:
and Kaupthing owns 10% of Sainsbury
PM:
Does it
NH:
yes for Robbie Tchenguiz
NH:
apparently it lent him the money and has written his CFDs
PM:
and?
NH:
well, the theory is that the QIA were understandably keen that the stake should not come on to the market in an disorderly fashion
PM:
so they took at 5% stake in Kaupthing
NH:
yes
PM:
NH:
however, there are a couple of major flaws in theory
NH:
The QIA have bought stock in the market
NH:
so Kaupthing does not get any cash
NH:
and the QIA have invested in another Icelandic bank recently
PM:
Which one?
NH:
told it was BYR Bank
NH:
although I can’t find any reference to it on our databases
NH:
anyway, BYR Bank has announced this morning that it is in merger talks with another Iceland bank called Glitnir
PM:
so, consolidation in the Icelandic banking sector
NH:
yup and perhaps the QIA wants to play kingmaker
PM:
Er, possibly
NH:
a touch weaker as we speak
NH:
down 5.75p at 364p
PM:
thanks for that
PM:
interesting conspiracy
PM:
and what about Landsbanki
PM:
anyone looking to scoop them up
NH:
er, better not comment on that one
NH:
a few people at Landsbanki might not like that
PM:
Okay — i take back the question, though im not sure why
NH:
NH:
LIBOR fixes
NH:
3month sterling is 6.01 vs 6.0%
NH:
overnight dollar down – 2.968% vs 3.25%
NH:
not much change there, although Stacy tells CDS market has tightened slightly
PM:
NH:
right, we have some corporate news this morning
NH:
having ignored everything outside of the financials last week
NH:
there are one or two things going on this morning that are worth looking at
PM:
Such as?
NH:
Yell
NH:
: have a look at this statement
NH:
most contradictory statement I have read in a long time
NH:
OK, so it starts off nice and positive
NH:
and you think, wow a big rally could follow
NH:
Following the announcement on 24 July, 2008 of its financial results for the three months ended 30 June, 2008, Yell Group plc confirms that its trading and financial performance continue to be on track to meet market expectations, with strong cash generation leading to lower levels of indebtedness. Yell also confirms that it is operating within its financial covenants.
NH:
so far, so good
NH:
but this follows
NH:
In order to achieve an appropriate level of flexibility for the business and given the continuing challenging conditions in the credit markets and the wider economy, the Board of Yell today announces the following.
PM:
sounds ominous
NH:
it is
NH:
First, Yell aims to reduce its indebtedness to under 4 times EBITDA as rapidly as it may. Secondly, with this in mind, the Board of Yell is suspending dividend payments until this target level of indebtedness has been reached. Thirdly, Yell intends to seek additional financial flexibility from its lenders through an increase in its future covenant headroom.
NH:
Yell has entered into conversations with a number of its largest lenders who have already pre-approved this request in principle and HSBC, as facility agent, is today contacting the remaining lenders for their consent, a process which is expected to take several weeks.
PM:
PM:
Right, so the statement goes from trading in line with expectations, cash flows strong, debt being paid down and covenants OK
PM:
to divi goes
PM:
and the company wants to renegotiate its banking covs
PM:
NH:
I know
NH:
either things are going well, or they are not
NH:
Yell can’t have both
NH:
a very confusing statement
NH:
and must leave shareholders wondering what an earth is going on
NH:
but then Yell has been living in denial for quite a while
NH:
the CEO John Condron has been banging on for months about the share price
NH:
saying it is not a reflection of the business he runs
NH:
and that might be true
NH:
but when you have as much debt as Yell does, it does need to be addressed
NH:
anyway, the shares have bounced a bit on the statement
NH:
the fact Yell’s lenders are prepared to renegotiate is obviously a good thing
NH:
although the terms of the new lending facility are obviously going to be more expensive
NH:
Yell:LSE
NH:
: here’s some broker reaction
NH:
Yell – confirms talks with lenders [Yell.l, Yell ln] 90.5p Stock – In Line, Sector – Neutral
Yell has issued a short press release this morning confirming that the group is in talks with its lenders about re-setting debt covenants (a number of the largest lenders have already approved this). In addition, management has decided to suspend dividend payments until the group’s indebtedness is reduced to under 4x EBITDA (5.1x at end of March 2008).
NH:
As we have previously highlighted Yell’s balance sheet is very tight with only 7% headroom to covenants this year falling to 1% next year on our estimates.
Press reports over the weekend (FT, Times) suggest Yell may have to pay an additional 100-200bp in interest costs per year in order to re-set the covenants. In our view this would be a very favourable outcome for Yell as EPS would remain in the mid-thirties from low-forties currently and the concern about the group’s leverage would be significantly reduced.
Press reports over the weekend (FT, Times) suggest Yell may have to pay an additional 100-200bp in interest costs per year in order to re-set the covenants. In our view this would be a very favourable outcome for Yell as EPS would remain in the mid-thirties from low-forties currently and the concern about the group’s leverage would be significantly reduced.
Based on a re-rating back to 5 to 6x EPS the shares could trade above 175p in our view against Friday’s close of 90.5p
PM:
Any RAW before we go?
PM:
By the way — good hit on Arcelor Mittal on Friday
PM:
Shame we dont know waht the statement means
NH:
yeah
NH:
anyway a few bid rumours doing the rounds this morning
NH:
but I am not sure how easy it is to finance a deal in the current environment
NH:
a buzz around in ITV this morning
NH:
shares up 2p at 47p
PM:
NH:
and there has been some very educated buying of its bonds
NH:
which have some very pro-takeover clauses in them
PM:
ok
PM:
Any names in the frame this time??
NH:
the usual
NH:
Mediaset
NH:
Bertlesmann
NH:
but a few maker punters think a deal could be close
NH:
elsewhere
NH:
we found out this morning what all the noise around German cement maker Holcim was about
PM:
and?
NH:
a Russian company has taken a stake
NH:
but apparently it has not plans to be – at least not at the moment
NH:
that has driven the Holcim price down
NH:
however, it did have a big move on Friday
NH:
stock currently off 13.7% at eur94.0
NH:
and here’s a bit more on the mystery stake builder
NH:
ZURICH, Sept 22 (Reuters) – Eurocement:
* Eurocement holding CEO says has no intention to make public offer for Holcim Ltd
* Eurocement holding CEO says does want a controlling stake, seats on Holcim
board
* Eurocement holding CEO says sees investment in Holcim as purely financial
* Eurocement holding CEO says sees no operational collaboration with Holcim
NH:
and
NH:
ZURICH, Sept 22 (Reuters) – Holcim Ltd, the world’s second-largest cement maker, views Russian cement maker Eurocement Group’s purchase of a 6.5 percent stake as friendly, the Swiss-based company said on Monday.
“We assume this is a friendly approach and that this is a long-term investment,” a spokesman for Holcim said.
Privately owned Eurocement is Russia’s largest cement group.
Eurocement was not immediately available for comment.
The Russian group operates cement plants in Russia, Ukraine and Uzbekistan, as well as concrete mix plants, concrete goods plants and aggregates-mining quarries, according to its website.
NH:
Last week, shares in Holcim rose over 10 percent on speculation that a Russian investor was building up a stake in the group, which competes with France’s Lafarge SA.
PM:
PM:
anything else??
PM:
Im hungry
NH:
carphone warehouse
NH:
looks like it is back in the running for Tiscali with a lowball bid
NH:
if it wins the auction – and there is a strong change that Tiscali will knock back these new offers – I am told it could presage the break up of Carphone
NH:
basically the rest of the retail arm would be sold to BestBuy
NH:
and the Charles Dunstone would control the beefed up internet arm
NH:
he might even take it private
NH:
if the shares continue to languish in the dolrums
NH:
apparently Dunstone is quite peeved by the performance of the shares
NH:
shares down 1.75p at 187.25p
NH:
here’s a quick bit of analyst comment on Tiscali
NH:
from Investec
NH:
Back at the table with Tiscali?
Weekend press has reported that Carphone Warehouse is back at the table
with Tiscali, bidding <£450m for its UK operations. At £245 per broadband sub
this would be inline with previous deals/our expectations. While there would
be challenges integrating Tiscali’s jumble of platforms, CPW would become
the No.1 ISP in the UK with significant scale.
Weekend press has reported that Carphone Warehouse is back at the table
with Tiscali, bidding <£450m for its UK operations. At £245 per broadband sub
this would be inline with previous deals/our expectations. While there would
be challenges integrating Tiscali’s jumble of platforms, CPW would become
the No.1 ISP in the UK with significant scale.
NH:
We continue to believe, longer
term, a spin-off or sale of the broadband business will create value. BUYWeekend press reports suggest that Carphone Warehouse is back in talks with
Tiscali over a bid for its UK operations. Tiscali UK has 1.8m broadband
subscribers and 0.6m narrowband subscribers and is the fourth largest UK ISP.
term, a spin-off or sale of the broadband business will create value. BUYWeekend press reports suggest that Carphone Warehouse is back in talks with
Tiscali over a bid for its UK operations. Tiscali UK has 1.8m broadband
subscribers and 0.6m narrowband subscribers and is the fourth largest UK ISP.
NH:
The article reports that the bid is below £450m, inline with our previous
expectations of a £425-510m range. This is well below the price being rumoured
in April that suggested a very aggressive £550-650m price tag. At an implied
£245 per broadband sub, this is very close to the AOL deal (£247 per sub).
expectations of a £425-510m range. This is well below the price being rumoured
in April that suggested a very aggressive £550-650m price tag. At an implied
£245 per broadband sub, this is very close to the AOL deal (£247 per sub).
We believe that at this price level, the deal would stack up for CPW. It would
make them the number one broadband operator in the UK with 29.6% market
share (BT is on 24.0%). The company would benefit greatly from increased
scale, especially if it successfully converted a significant proportion of Tiscali
subs onto full LLU, taking line rental and voice services.
NH:
At the same time this move would eliminate CPW’s main competitor in the
“value” end of the broadband market. Tiscali UK has been extremely aggressive
in its pricing for some time, and removing this would bring greater stability to the
broadband market as a whole. But it should be remembered that Tiscali UK is a
jumble of several platforms (Pipex, Homechoice, Bulldog, Tiscali, etc) so
integration would be a complex and potentially costly operation.
“value” end of the broadband market. Tiscali UK has been extremely aggressive
in its pricing for some time, and removing this would bring greater stability to the
broadband market as a whole. But it should be remembered that Tiscali UK is a
jumble of several platforms (Pipex, Homechoice, Bulldog, Tiscali, etc) so
integration would be a complex and potentially costly operation.
With the change in reporting structure from the Best Buy deal as well as slower
broadband growth, we cut FY09E EPS to 18.9p (was 23.6p) and our DCF-based
price target to 225p (v. 350p). We continue to believe that, longer-term, retail will
consolidate with Best Buy and CPW will spin-off or sell the broadband business,
creating value for shareholders. With this in mind, we reiterate our BUY.
PM:
PM:
– any more RAW — or can i escape?
NH:
few bits, then we will finish
NH:
continued rumours that Nestle is looking to do some sort of deal with Hershey
NH:
and also Halliburton
NH:
don’t know what the story is but there was heavy buying on Friday
NH:
shares ended 8.6% higher at $37.62
NH:
now Halliburton is a huge company
NH:
market cap $33bn
NH:
so I can only presume that a major oil company might be looking at them
PM:
Well that’s a a helluva deal…
PM:
….to finish off on
PM:
PM:
Thank you for joining us today. Thanks for all the comments.
PM:
AA get in touch to claim your prize
PM:
We will be back tomorrow at 11am
NH:
see you then