Markets live chat transcript for the chat ending at 12:09 on 30 Sep 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Welcome to Markets Live
PM:
This FT Alphaville’s daily markets chat.
PM:
Just locking and loading at this end
PM:
Neil and I are sat here in full fatigues.
PM:
Neil’s also got a pair of wraparound shades.
NH:
We’ve got a financial terror situation goin on with this liquidity sucker
PM:
Fighting on several fronts here.
NH:
And its not just honest Americans that are suffering in this finance liquidity terror issue we’ve got gonin on down there downtown Manhattan.
NH:
Our allies, Gordon Blair and those people in England that stood by us in Iraq and Afghanistan.
PM:
And south Africa as hockey mom pointed out earlier.
NH:
Our allies had financial terror to deal with in Yorkshire on Monday, when the proud institution Bradford & Bungle had to be rescued.
NH:
And our friends in the low countries – and in Germany itself, which is now an alley of ours.
PM:
So we are definitely fighting on several fronts.
NH:
I can report that after the defence of Belgium’s Folly Bank on Monday
NH:
We have had fresh operations earlier on Tuesday, in Holland and Luxembourg with Dexia.
PM:
So we are fighting this war where ever we have to.
NH:
Including Ireland, where the good Irish financiers in the central bank there in Dublin has guaranteed everybody that’s good for their money.
NH:
There are still sparodic out breaks of terror in Yorkshire, which is a difficult part of the world, clearly.
NH:
HBOS still giving some of our people – some of our allies – trouble.
PM:
So anyway – we are just prattling on like this cos we don’t know what’s going on.
NH:
Well, we have some theories.
NH:
before we do we MUST look at HBOS
NH:
spread has exploded this morning
NH:
HBOS currently down 14.2p at 127.8p
PM:
Lloyds meanwhile is up 2.25p at 219.5
NH:
the message from the market is now very clear
NH:
they think this deal is either going to fail, or more likely the terms will be revised
NH:
took an interesting call this morning
NH:
from a broker at a big house
NH:
which was called by Sky News an hour or so ago
NH:
the reporter was asking what would happen if the terms of the deal were changed
NH:
I think he said the HBOS price would do down
NH:
and the Lloyds price rally – for a little while
NH:
anyway, my contact got the impression that Sky have a story
PM:
they are in competition Pestowire
PM:
a domestic newsservice focused primarily on the UK banking sector.
PM:
biggest shareholder HM Treasury
PM:
reports on Pestowire can be up to 4hrs ahead of official statements from the UK banking industry
PM:
Pestowire is broadcast from a bedroom in Muswell Hill, using an ISDN line
PM:
Contact the BBC for more details
NH:
just checked Pestowire
NH:
nothing on the terms being renegotiated – yet…..
NH:
he has filed on Ireland though
NH:
not strictly in pestowires remit but interesting
NH:
The most important markets announcement this morning is that the Irish government has placed an unlimited two-year guarantee on all deposits and some debt in six Irish banks, to “safeguard the Irish financial system”.
The emergency measure follows an extraordinary 26% fall in Irish bank shares yesterday.
This has huge ramifications for us.
NH:
Potentially it puts British banks at a massive competitive disadvantage - especially since other European governments are also taking urgent steps to reassure their citizens that their bank deposits are safe.
There is a widespread perception that the £35,000 limit to deposit protection in the UK is inadequate - and that it makes our banks more at risk of a run on retail deposits.
That has two damaging effects.
It spooks giant global money managers and providers of wholesale funding - and if they were to accelerate their withdrawal of cash from UK banks, well we’d see a domino-effect of horrible banking failures.
Second, it undermines the confidence of investors in our banks shares - which is why their share prices have become so vulnerable to sharp falls.
So top of the list of what this government could do to limit the damage to us from Washington’s bail-out bungle would be to announce with immediate effect that all deposits in UK banks are 100% guaranteed by the government.
The chancellor did this after the run on Northern Rock last September.
There’s a powerful argument that he should do it again
NH:
I have heard that rumour this morning
NH:
people with existing short positions in HBOS
NH:
are going long Lloyds with the intention of voting down the deal
NH:
and remember as this is a scheme of arrangement
NH:
Lloyds needs to get 50% of its shareholders to vote in favour of the deal
NH:
and they way their share price has been wrecked and the divi halved
PM:
Also - re comments below
NH:
I suspect quite a few are going to vote no
PM:
There is a 1per cent break fee - -in Lloyds favour
PM:
HBOS barred from soliciting other offers
PM:
I’d generally be wary of rumours of a counterbid coming out of Scotland
PM:
They are generally livid up there about what has happened to Bank of Scotland
NH:
but renegotiated terms look v possible
PM:
Different matter entirely — renegotiation
NH:
look at the LLoyds price now
NH:
flying, relatively speaking
NH:
is there something on Pestowire??
NH:
rallying before our eyes
PM:
Nope — nothing on robert’s blog
NH:
Taxloss - very funny link
NH:
Life after Ritalin. well worth a look
NH:
FTSE 100 up 7.4 points at 4,826.2
NH:
a big rally from the opening lows
NH:
right, these are all just theories
NH:
we do not neccesarily subscribe to any of them
NH:
but this sort of reflects the mood in the market this morning
NH:
Rumours of co-ordinated rate cuts
NH:
now these are just RUMOURS, and personally I can’t see what good they would do
NH:
but they are keeping people from going short, apparently
NH:
in fact Citi are pushing this rate cut line this morning
NH:
this is what Michael Sanders their chief economist said
NH:
Facing a sharp reaction of financial markets after the rejection of the US rescue package by the House of Representatives yesterday and a further bailout of a Belgium/ French bank overnight, there is a decent chance that European Central Banks (ECB, BoE, SNB, Riksbank and the Danish Central Bank) will make emergency easing soon, perhaps this week, especially if the US Fed is also
ready to cut again.1
NH:
Central banks may well try other measures first, such as liquidity injections. The Irish government has announced it will guarantee deposits and some senior bonds of Irish banks. Other measures may also be forthcoming.
NH:
However, if financial market conditions do not improve soon, then early easing also will be on the agenda. The financial crisis has become so severe that it now seems highly likely that rates will need to be cut soon (in the next few months) in response to risks of extended economic weakness and eventual
inflation undershoot.
NH:
Given that, early easing (i.e. this week or next ) may help reduce risks of a really severe financial collapse and deep recession (depression?). Conversely, given evidence of sharp economic slowdown and downside risks, the risk seems quite
small that early easing could represent excess stimulus that stokes up inflation risks. Longterm inflation exp ectations have fallen
sharply in recent weeks. Costs of central bank inaction now probably outweigh the risks of early easing.
NH:
the rest of that note is up on the site for those who want to read it
NH:
and on that front, the Chancellor, PM, head of BoE and the FSA have met in Downing Street this morning
NH:
and the way the PM was talking last night, it seems they are plotting something
NH:
perhaps a new super version if the SLS
NH:
there is also a feeling that a bill will get passed on Thursday
NH:
in the interim some traders are using that window to pick up battered stocks and then flip them
NH:
that’s particularly true in the mining sector this morning
NH:
which has seen a massive swing from yesterday
Xstrata (XTA:LSE): Last: 1,665, up 87 (+5.51%), High: 1,726, Low: 1,473, Volume: 5.71m
RIO TINTO (RIO:LSE): Last: 3,427, up 117 (+3.53%), High: 3,519, Low: 3,110, Volume: 3.69m
BHP Billiton (BLT:LSE): Last: 1,255, up 23 (+1.87%), High: 1,298, Low: 1,165, Volume: 10.05m
NH:
: in any case a lot of people thought the TARP was poor
NH:
and was dramatically over-hyped
NH:
and the rescue of Wachovia showed yesterday that there is another way
NH:
IE – the state effectively re-capitalisation the banking sector
NH:
and sharing in the upside through warrants
NH:
on top of all that, it is a pretty quiet out there this morning
NH:
traders and investors are just shell shocked
NH:
just sitting there unsure what to do next
NH:
of course, after yesterday’s panic there was always going to be something of a plain old bounce
NH:
and compared to yesterday we have only seen one nationalisation this morning – Dexia
NH:
and only two governments – Ireland and Korea – have moved to help the banking system
NH:
obviously, if there is any more bad news from the banking sector or the Tarp gets into trouble
NH:
then all bets will be off
NH:
and the selling will continue
NH:
but for now, things are calm
PM:
right thanks for that
PM:
Not very calm typing !
PM:
hey, you lot below, can we calm down a bit
PM:
And stop the abuse please
PM:
Jokes are good. But abuse is just abuse
PM:
We’re not experts on the Irish economy/financial sector
PM:
Showed that yesterday by confusing Anglo Irish bank with AIB
PM:
Being Allied Irish Banks
PM:
But on a similar theme …..
PM:
As in little country with BIG ambitions….
NH:
ah, yes, here is some research on Glitnir
NH:
Glitner Goes to the Government
Implications for Icelandic and Nordic Banking
NH:
Icelandic State Bail-Out ― On 29 September, the Icelandic State announced it
is injecting €600 million into Glitnir for new shares equivalent to 75% of the
group. Glitnir’s home markets are Iceland and Norway and it has expanded
internationally based on industry niches, such as seafood. The three largest
banks of Icelandic origin, ranked by size of total assets, are Kaupthing (€53
billion, end 1H08), Landsbanki (€32 billion) and Glitnir (€31 billion). We have
a Sell/High Risk rating on Kaupthing (target price ISK 610, current price ISK
723). We do not cover either Glitnir or Landsbanki.
NH:
What Went Wrong? ― On the 29 September conference call, Glitnir’s
management said that it had been a casualty of the freeze in short-term
funding markets in the past few weeks since the collapse of Lehman Brothers.
In the past week, Glitnir has faced increased margin calls (haircuts) on its
short-term repo funding. We believe that the bank’s counterparties, some of
whom may have had their own balance sheet problems, reduced their lines. In
terms of balance sheet structure, Glitnir was an outlier in terms of its loan-todeposit
ratio: 359% at end 1H08 versus 226% for Kaupthing and 159% for
Landsbanki.
NH:
What We Learnt ― The collapse of Glitnir as a private-sector bank was
effectively due to a wholesale run on the bank. At end 1H08, Glitnir noted that
it had “immediate liquidity to cover all maturing debts within 6 months” and
“immediate liquidity and other liquid assets to cover all debt maturing within
12 months” (repeated in a Glitnir “Funding Presentation” dated September
2008). On 29 September, the Governor of Iceland’s Central Bank, said:
“without this intervention, Glitnir would have ceased to exist within the next few
weeks”.
NH:
Asset Sales Likely ― We would note that the three largest Icelandic origin
banks had a combined balance sheet of €116 billion at end 1H08, or about
12x the size of the Icelandic economy. We do not see how the State can
indefinitely support the balance sheets of these banks – the Icelandic
sovereign CDS spread doubled yesterday in response. While Glitnir
management said its new majority shareholder has not asked for a change of
strategy, divestments may be highly likely. We think acquisitions in recent
years such as BNbank (Norway, 2005), Fischer Partners (Sweden, 2006), FIM
(Finland, 2007) could be sold off.
PM:
Note that — 12x the Icelandic economy
PM:
Of course Glitner ws controlled by the baugur guy
PM:
Whose name name i cant spell
NH:
through a 30% stake in a veichle called Stodir
NH:
which is now in administration
NH:
and Stodir were set to take a stake in Baugur today
NH:
that shareholder vote has been scrapped
NH:
and it could have impliactions for the UK high street
NH:
and a number of listed stocks
Debenhams (DEB:LSE): Last: 51.00, up 2.5 (+5.15%), High: 52.50, Low: 46.75, Volume: 3.73m
Woolworths Group (WLW:LSE): Last: 4.06, down 0.17 (-4.02%), High: 4.09, Low: 3.47, Volume: 7.36m
Moss Brothers Group (MOSB:LSE): Last: 20.00, down 2.5 (-11.11%), High: 22.00, Low: 20.00, Volume: 92.70k
French Connection Group (FCCN:LSE): Last: 65.00, down 0.5 (-0.76%), High: 65.00, Low: 63.50, Volume: 39.52k
NH:
actuallyy, taken a few calls on Debs this morning
NH:
traders puzzled by the move and say there is a big buyer than keeps hovering up stock
NH:
one theory is that it could be a russian buyer
NH:
although if they want more stock they only have to call Baugur
NH:
Am sure they would sell
NH:
still, the Debs share price movement is odd
NH:
looks like something is going on to me
PM:
Lemmy — Stacy is not in the office this morning so i cant get Icelandic CDS price
PM:
Thing Im wondering is if the icelandic banks are really in trouble — does the Bank of England end up bailing them out
PM:
Cos of the fact that rate-chasing british depositors have thrown money at them
NH:
don’t think it is going to make it to the takeover
NH:
HBOS will be back at 88p soon
PM:
The deal was struck at almost twice this price — 10 days ago
NH:
don’t think this is about a lack of arb activity
NH:
this looks more fundamental
NH:
HBOS - 394,000 offered at 110p at the moment
NH:
201,000 offered at market
NH:
Pestowire must have something
NH:
clearly someone knows something
NH:
rumours that new terms will be 0.6 vs 0.833
NH:
HBOS in auction period
NH:
115p indicative price
PM:
Where’’s Robert when we really need him?
NH:
we need pestowire to guide us in these dark hours
NH:
RBS not looking to healthy either
Royal Bank of Scotland Group (RBS:LSE): Last: 171.10, down 9.9 (-5.47%), High: 177.10, Low: 157.50, Volume: 46.53m
PM:
That’s delayed — live price is down 9%
NH:
and that’s in spite of a statement from the company, which said the sale of Fortis interests in RFS Holdings (that’s ABN Amro) would not impact its integration plans
NH:
however, the fact that RBS has felt the need to make this statement, only goes to show how nervous they are
NH:
and in these markets that can be lethal
NH:
perhaps they would have been better off saying nothing
PM:
Let’s go to Europe — for a rest
NH:
a rest, it is one of the main theatres of operation
NH:
a bloody war is being fought
NH:
even though the short sellers have been defeated
NH:
investors are looking around and trying to figure out who might be next
NH:
well, quite a few people think Commerzbank could be vulnerable
NH:
and also Natixis, which is basically a niche investment bank
NH:
not something you want to be at the moment
PM:
no, an endangered species
NH:
here’s a good note from Cazenove on Commerzbank
NH:
Implications for Commerzbank / Aareal
NH:
CBK fell 24% yesterday and Aareal 42%. The reaction appears logical in the sense that both share HRX’s gearing to wholesale funding markets (outstanding wholesale debt securities equivalent to 27x CBK’s market cap, ARL 24x vs European average 7x) and HRX’s commercial real estate bias.
Against this, on the crucial question of funding maturities, their positions look less somewhat less vulnerable and both banks made positive statements regarding their positions yesterday.
NH:
Commerzbank: the concerns focus on Eurohypo, which appears to account for the bulk of the group’s €25bn funding requirement to end-2009. However, CBK has said it has no funding needs for at least the next 6 months and its participation in the HRX bailout looks like a sign of strength. EHY has a lower reliance on the 2 funding sources that appear vulnerable for HRX, unsecured money market and repo (accounting for 45% of HRX’s total funding vs 24% for EHY). In addition, its balance sheet maturity mismatch appears smaller with an excess of 3-month maturing liabilities vs assets equivalent to only 16% of the balance sheet compared to 28% in the case of HRX (end-2007).
Aareal: disclosure on balance sheet maturities is less comprehensive but from the information given on liabilities, ARL appears to be longer-dated than either EHY or HRX. Liabilities with maturities of less than 1yr account for 31% of total funding vs EHY 42%, CBK 54%. In principle, without the low margin public sector finance exposure of EHY or HRX, Aareal has less incentive to chase margin via maturity-mismatching and the company stated yesterday that it has “a solid funding position” and is “healthy to the core”.
NH:
Conclusions
The state of the interbank markets puts many banks in a potentially perilous position. The German banks reliance on wholesale funding makes them obvious targets for concern, although both CBK and ARL look to be in a more robust position than HRX. P/NAV’s are at historic lows (CBK 0.5x, ARL 0.2x, HRX 0.1x) but seem likely remain overshadowed by perceived liquidity risks.
NH:
and this came out of Citi today
NH:
they have cut Naxtisis to a sell
NH:
Natixis (CNAT.PA)
Tough Times
NH:
Standalone Investment Bank Model Challenged — Following the change of
ownership of several independent US brokers, this business model now looks
to be increasingly challenged. During the current credit turbulence, universal
banks, with access to retail deposits appear more resilient than pure
investment banks. Natixis’ core business is a standalone CIB franchise with
other product businesses. We believe the current environment is not optimal
for Natixis, which was created at a high point of the investment banking cycle
NH:
CDS Spreads Widening — Natixis is mainly wholesale funded, as it has no
access to retail deposits and we believe higher funding costs will impact its
profitability. Natixis 5Y senior CDS spreads widened by 70bps to 300-350bps,
compared to a FY07 average of only 42bps. As a comparison, BNP Paribas’ 5Y
CDS spreads trade at 85-99bps. Natixis disclosed its funding needs of
c€225bn, of which c25% is medium term and c75% is short term. The bank’s
1H08 loans totaled €113bn, with corporate deposits of €57bn.
NH:
Parents Supportive — Natixis’ parents can provide support to Natixis, and to
some extent increase their shareholding in the open market. While their current
capital position may be adequate, with Caisses d’Epargne and Banques
Populaires having a Tier 1 ratio of 8.3% and 9.6% (respectively) this does not
include unrealized losses on their stake in Natixis.
Parents’ Stake at IPO Price — The parents still carry Natixis on their books at
the Dec 2006 IPO price of €19.55 per share. The rationale is that Natixis is
fully consolidated, and its business plan has not changed materially since the
IPO. We remain uncertain whether or not the parents of Natixis will have to
recognise an impairment on their stake. We think that if this were the case, it
would reduce their ability to support Natixis.
NH:
Downgrading Recommendation, Reducing Target Price — We reduce our EPS
estimates by 12% in 2008 and 10% in 2009 to take into account a more
difficult CIB environment. We increase our cost of equity to 14.8% from 13.8%
to take into account higher CDS spreads, which leads to us reducing our target
price to €1.5 from €3. We downgrade our rating on Natixis to Sell/High from
Hold/High Risk.
PM: thanks for that
PM:
Natixis off2.8% currently
PM:
any more comment on the banks?
NH:
yes a bit more from Cazenove
NH:
UK Banks - House rejects TARP bill
The bill has failed to pass the House vote. It had survived largely intact from the original proposal by the US Treasury secretary. The degree of success if the bill is enacted is unclear; there is speculation that the House will vote on (amended) bill on Friday. Banks need to deleverage and recapitalise. TARP will help with the former and to the extent that it cleanses balance sheets will allow further capital raising. Indeed one positive aspect of recent days is that banks have raised over $30bn of equity (of which UK c.$3bn). Most simply TARP would provide a rare piece of welcome news.
NH:
The failure to pass the Act keeps pressure on the money markets (UK 3m LIBOR is +126bp, US 3m +176bp, EU 3m +97bp). There is little activity beyond overnight as banks hoard liquidity, partly due to higher counterparty risk but also higher probability that credit lines are called given the drying up in the commercial paper market.
In reaction share prices of US banks fell in the range of 10-20% (with the exception of Wachovia, -82%), compared to the c.10% falls by UK banks yesterday (from HSBC -2% to HBOS -18%).
NH:
Valuations are largely ignored but for the record the four domestic banks trade on 7.5x 2008E or 3.4x historic earnings, with a range of price/book (tangible) 1.1x for RBS to 1.45x for Barclays (Lloyds at 1.4x has fallen below Barclays). HSBC and Standard Chartered trade on 2.1x and 2.3x respectively with 08E PER of 13.4x and 9.4x.
Macro news will continue to dominate with no company announcements expected until next month.
Our preference remains for HSBC (HSBA.L HSBA LN OUTPERFORM/NEUTRAL 865p), with the premium justified by its relative safety.
Attached is a summary of the bill, which may prove relevant if it is brought back to the House at the end of this week.
NH:
Seperately, Royal Bank of Scotland (RBS.L RBS LN UNDERPERFORM 181p) has issued a statement confirming our comments from yesterday.
The sale of Fortis interests in ABN would not affect RBS.
Fortis has paid in full for its shares in RFS Holdings and should it sell the stake the financial consequences reside with Fortis.
No comment is made on its possible interest in acquiring the Fortis shareholding in RFS but we continue to believe that it is highly unlikely.
NH:
oh and there is a bit on the housebuilders from Caz as well
NH:
UK Housing Market Briefing: Volume not price becomes volume through price, Sector Neutral
Any company that sees volumes across its industry fall by a half in a year is going to be in distress. If it enters that period financially geared, the combination of financial and operational leverage can be lethal.
In this note we attempt to explore the mechanics of cash flow generation within the UK housing industry. The conclusions are not encouraging. The housebuilders need volume and the only way that sufficient volume will be generated is through either a material easing of the mortgage market, or massive government intervention or cutting prices.
NH:
It would appear that a price war is likely as housebuilders’ mantra moves on from ‘volume not price’ to ‘volume through price’.
The current banking crisis appears to be making the issue of mortgage availability somewhat of a sideshow; with offered maximum loan to values (LTV) in decline and mortgage rates increasing once more, volumes are inevitably in retreat. The only lever to pull is price and this has to be pulled downwards. Not surprisingly, therefore, our cash flow scenario analysis favours the lowly geared or cash rich (Berkeley and Bellway), while those most reliant on volume appear to us most at risk (Barratt and Taylor Wimpey).
NH:
It is our view that one cannot currently estimate the downside risk in the UK housing market with any certainty. Until consumer confidence returns and the mortgage market re-opens we see little upside. Both, in our view, are unlikely before a significant correction in UK house prices.
We would not be surprised to see another relief rally once the US Treasury has agreed the ‘bail out’ plan, but, in our view, with the UK economy in decline this will do little to the fundamentals of the UK housing market. We believe that the prices of the shares in the sector will recover in advance of and at a faster rate than the actual physical recovery of the UK housing sector, but not yet. In the mean time the (relatively) safest havens are those with the least debt and those most likely to generate cash.
PM:
Eye catching note out of Arden this morning. Headline:
PM:
If market falls to 4400, NSAM may breach banking covenants
NH:
This is New Star Asset Management – and the analyst making this bold claim is Sarah Spikes, a former colleague.
NH:
used to be M&A reporter
NH:
When we were looking at a footsie fig of 4600 earlier, this research had real resounance – less so at 4800. But what is Spiko saying?
PM:
• NSAM, which has £220m in debt and a market cap of £180m, could breach its banking covenants if the FTSE 100 falls to 4400, according to our April meeting with the company.
• If it were to breach its banking covenants, NSAM could have to pay 1.5% more for its loans, substantially raising costs, such that it could become loss making.
• At 4000, NSAM would likely be in rights issue territory.
• While their debt is not due until 2012, with other companies renegotiating ahead of time to guard against having to refinance during even worse debt market conditions, we believe that NSAM may consider an early refinancing.
PM:
• We do not see this as being a problem for the sector more widely, as NSAM has more debt than other asset managers following the £365m return of cash to shareholders in June 2007.
• NSAM trades on a PE of 4.14X December 2008.
NH:
Goodness me. Stock reaction?
PM:
Just down 1p at 69p. but remember this has already fallen a long long way. Stock was above 100p last month.
NH:
But is this 4400 Footsie figure direct cliff risk.
PM:
Not sure it’s quite as simple as that.
PM:
There is certainly an retail assets under management covenant at NSAM, according to the people ive been talking to.
PM:
They say it is around £8bn.
NH:
So how much have the got under management – should be in the last figs.
PM:
It is — £19bn – but that includes institutional and other stuff. They don’t split it out.
PM:
Clearly, as the Footsie shrinks, so too dos NSAM’s AUM – but you also have to take into account property and fixed income holdings.
NH:
So Spiko is on to something here – but it’s a bit more complicated.
PM:
Yes, in fact I think we can add to a bit.
PM:
Understand that NSAM is already in talks with its bankers – HBOS – about renegotiating the covenants. The argument being that these are such extraordinary times…
NH:
And if it has to pay more for its debt does it fall into the red?
PM:
No. I’m pretty sure that is not the case. Can quite easily wear higher payments – remains intrinsically profitable.
NH:
But Arden are right to highlight this. People saying NSAM are already cutting costs – fast.
NH:
of course New Star leveraged up a while ago. took on loads of money to return to shareholders
NH:
that has left them in a tight spot
NH:
and the CEO recently £2m worth of stock
NH:
Thanks for the new Howard Jpeg
NH:
don’t think that will get on the site
NH:
or the 10.00 o’clock news
NH:
have you seen this note from Dresdner note on the housebuilding sector
NH:
(Bohemia - they have insurance ops. NSAM does not)
NH:
he’s been on a tour of property markets in the Midlands and the North of England
NH:
well they are pretty bleak
NH:
carnage beyond even our most bearish expectations
NH:
and there are plenty more juicy sound bites from the note
NH:
In Leeds, the city displayed a range from high spec, well located developments to what our source summarised in a pithy but unprintable one syllable adjective
NH:
you wonder why the housebuilders are not getting kicked this morning
NH:
We have just returned from a tour of property markets in the Midlands and
North of England and our impression - especially of newbuild apartments -
is of carnage beyond even our most bearish expectations. Prices of urban
apartments appear to have fallen in many cases by 40 - 50%, volumes have
dried up to virtually zero, many developers have gone bust and land in
many cases appears to be worthless.
NH:
Our visits to agents and consultants in Birmingham, Manchester, Leeds and
Sheffield revealed a near-apocalyptic landscape which we believe to be far
worse than even the most candid builders have revealed in presentations. We
believe quoted housebuilders could be forced to issue early profit warnings and
are in danger of widespread breaches of banking covenants. The turmoil in the
banking sector looks almost certain to take lending to a new low and deter
would-be buyers indefinitely, in our view.
PM:
near-apocalyptic landscape????
NH:
One stark view was that the six leading property agents in Leeds have sold -
between them - only six new apartments in two months. We were also given
documentation sent by Barratt to property professionals throughout the group’s
Yorkshire East division offering up to 43% off its properties on bulk deals of at
least 5 units. An attached price list of 161 homes showed average reductions of
26% (effectively 29% with agents’ fees) - and 33% (effectively 36%) off
apartments (see below).
NH:
Barratt this month described 25% falls in price, and 40% in volume, as the
“Armageddon” scenario in its stress testing of its new banking covenants. In the
letter, dated 24 September headlined “Six Million Pound Yorkshire Property Sale
- Better Than Auction Prices!”, the divisional head states “As a result of current
market conditions we have committed to sell up to 70 properties throughout our
region, equating to a value of approximately £6 million, to assist with our
operational targets
PM:
This stuff on Barrett is v interesting
NH:
Homes on 20 developments “have been significantly discounted to very realistic,
below valuation prices, subject to a bulk acquisition by a single purchaser of no
fewer than five units.” The catalogue in fact lists 161 with “before and after”
prices downgraded from a total of £27.2m to £20.1m, ranging from 1 bed flats to
5-bed detached homes. The minimum discount is 18.2% for a 3-bed terraced
house in Bridlington. The maximum is a 5-bed detached in Doncaster. Agents
are promised fees of 2 - 3%.
NH:
Elsewhere on our tour there was a similarly bleak picture. In all four cities agents described: massive over-supply of apartments; developers selling at virtually any price to shift stock of flats; virtually all forthcoming new
NH:
developments mothballed; according to those we talked to, signs of the biggest listed housebuilders descending
into severe financial difficulties; residential sales staff numbers being cut by around two-thirds and a complete
NH:
do you want some more
Reminder to readers - if you arrived late and want to stop the dialogue ‘jumping’ as you catch up, hit the ‘pause auto-scrolling’ tab at the bottom right hand corner
NH:
freezing up of the land market. Generally lenders were insisting on deposits of at least 25% for flats, with very vigorous valuation criteria.
NH:
The two signs of light - and which all our contacts agreed on - was the emergence of “vulture funds” and greatly increased rental demand and signs that rents had risen in low to mid single digit amounts.
NH:
There were, however, concerns that in most cases these cities had very large developments that were still underway and these could
disrupt the revival of rent levels.
NH:
In Birmingham, prices of apartments had fallen from their peak of around £300 per sq foot to £185 - roughly their level in 1998 when the city’s boom in urban living got under way. Houses were estimated to be down by a lesser
20%. One agent told us volumes of flats through the city’s office had declined by over 80% since the peak. The decline had been relatively steady over the past three years.
NH:
Large housebuilders were attempting to stall on major land deals or were being forced to sell options. Any bulk buyers were looking for at least 8% net yields (at
least 12% gross, we estimate). In Manchester the decline had been more recent but much more precipitous, according to our meetings. Many
private developers had failed or were teetering, we were told by all. Effective net yields after discounts were around 10%. We were highly impressed by the quality and prospects of the forthcoming Media City (one of only two schemes where new phases are coming out of the ground) but believe that developers will be impacted by
the failure of City Lofts on the same site.
NH:
In Leeds, the city displayed a range from high spec, well located developments to what our source summarised in a pithy but unprintable one syllable adjective. There was a high level of new stock coming onstream and much of the recently developed stock largely held by what we would describe as the victims of so-called “investor clubs”.
Vulture funds were circling, we were told, but there appeared to be a tendency for bulk buyers to drop the price at the last moment. Residual land values on some sites zoned for apartments are likely to be seriously negative, we
were advised.
NH:
Final stop was Sheffield. Our contacts estimated that around 85% of all the new stock that has come into the city centre market was buy to let. Prices of flats had fallen 25% since the peak, with more on repossessions.
A worrying new trend, we were told, is that Alliance & Leicester had now started requiring two valuations on
purchases of flats: one a standard valuation, and the second a 90-day “Projected Market Valuation”, ie what it would sell for in three months. Surveyors were under pressure to drive down valuations, we were told by one who
had seen his volumes plunge by over 90%.
NH:
We stress that urban (”city centre” is a misconception in many cases) apartments are not everything that housebuilders undertake. But they are around half of the UK output of Barratt and Taylor Wimpey. The Barratt
price list below indicates that houses are not immune and houses are more dependent on chains and less attractive to vulture funds in our view. Our own belief is that the smart vultures will choose to stay hungry for quite a long time to come.
Barratt Developments (BDEV:LSE): Last: 106.50, up 4.5 (+4.41%), High: 110.75, Low: 80.25, Volume: 4.27m
Taylor Wimpey (TW:LSE): Last: 36.25, up 1.5 (+4.32%), High: 38.00, Low: 27.50, Volume: 6.13m
Persimmon (PSN:LSE): Last: 407.00, up 34.75 (+9.34%), High: 414.25, Low: 336.00, Volume: 2.23m
Redrow (RDW:LSE): Last: 180.00, up 18.25 (+11.28%), High: 183.50, Low: 146.25, Volume: 664.54k
PM:
eh? Why are all these things up????????????????
Bovis Homes Group (BVS:LSE): Last: 380.00, up 10.75 (+2.91%), High: 383.00, Low: 341.00, Volume: 451.50k
NH:
Barratt looks to be conducting a fire sale
NH:
*OVERNIGHT DOLLAR LIBOR 6.88% VERSUS 2.57%, BBA SAYS
PM:
ONE MONTH STERLING LIBOR 6.08% VS 6.01%, BBA SAYS
*OVERNIGHT DOLLAR LIBOR 6.88% VERSUS 2.57%, BBA SAYS
EURO 3-MO LIBOR/OIS SPREAD WIDENS TO 125.02BPS VS 111.55 MON
*OVERNIGHT LIBOR FOR EURO 4.84% VS 4.72%, BBA SAYS
*OVERNIGHT STERLING LIBOR 6.78% VS 5.26%, BBA SAYS
**DOLLAR 3-MO LIBOR/OIS SPREAD WIDER AT 246.25BPS VS 218.1 MON
*THREE-MONTH STERLING LIBOR 6.30% VS 6.26%, BBA SAYS
PM:
CHECK OVERNIGHT DOLLAR
NH:
and HBOS has rallied. strange
NH:
Dollar Libor-OIS is 274bps vs 219
NH:
(Hector that is the full note)
PM:
For those watching Ireland — bank of Ireland CDS zoomed to 230bp
NH:
OIS spread does not come down
NH:
got some technical research
NH:
from Richard Crossley at Merchant Securities
PM:
has he gone back into the financials yet??
NH:
Tuesday 30 September 2008
NH:
The final day of an extraordinary month, culminating in the
barely credible events of yesterday.
Yesterday’s note referred to a number of themes and
in the following order.
NH:
1). There is no American Banks sector as such -
the strong get even stronger, the weak collapse.
Hence, in a sector falling 17% on the day,
one bank, amazingly, rose in price terms:
Unionbancal - up on the day The Mercantalyst
Technical Strategy Wachovia - extinguished
NH:
2) Investor focus on the American
financial crisis, entirely understandable in the circumstances,
had tended to distract attention from what was yesterday described here as the
“even worse deterioration in the European - centred Financials,
much of this occurring very recently.”
The European Banks fell 10% in price terms yesterday,
the sector’s chart shown below:
Mercantalyst
NH:
Yesterday’s comment on the European Banks concluded
on the basis that, throughout this period of Financial weakness,
the technical importance of the mid-July lows had
been emphasised here - that the breach of those lows would be serious
and that those lows, at the time of writing yesterday, had in the main been broken.
We would, therefore, continue to look for further weakness in this area.
NH:
3) Reassertion of American $ strength:
Yesterday’s performance adds weight to the bullish view.
NH:
3) Reassertion of American $ strength:
Yesterday’s performance adds weight to the bullish view.
4) Further marked weakness in the Mines.
The updates of yesterday’s charts are shown below.
Price
NH:
Mercantalyst
Technical Strategy 5) Reassertion of the downward trends in the crude price.
Yesterday’s performance shows this clearly happening:
Yesterday’s note commented on weakness in prospect
in the American Oil - Services sector,
Halliburton was shown as an example of this, its chart shown below.
In yesterday’s weak session, the American Oil - Services
sector underperformed markedly.
Mercantalyst
Technical Strategy 6) The final point made in yesterday’s note was that the
theme of weakness in prospect in the consumer
confidence - relateds continues in full force.
There is no reason to change this view.
Finally, the stock below came into focus around Christmas last,
and has proven a good friend:
There seems no reason why the friendship should end.
The stock of course is Wal - Mart.
Mercantalyst
Technical Strategy The only major sector to make a new high
yesterday was Beverages.
The ultra - defensive themes continue very strong.
PM:
(Blackrain — yes denials of repricing running on the regular wires — but not pestowire)
NH:
before we go, some interesting news out on BSkyB this morning
PM:
Ah yes — OfCom have ruled that Sky must offer the footie to other broadcasters — and at a regulated rate
PM:
Cant think of what would be worse news for Sky
PM:
They are going tto get price regulated like a regular utility
PM:
Bizarrely, the stock is up a tad this morning
PM:
But then the whole equity market is bizarre today
NH:
it is and I wonder how much end of quarter book squaring there is today
NH:
and yesterday in fact
NH:
also hedgies selling to meet redemptions
PM:
Or simply closing short positions
NH:
of course the really big redemptions will be in December
NH:
Right that is it for today
PM:
Jump is dollar ON libor rate is the biggest on record, according to Reuters
NH:
Sam has got hold of a very interesting note on US banks from Bank of America. He will post later but well worth coming back and logging on for.
NH:
FTSE now down - off 15 points at 4,803
NH:
Libor rate has not gone down well
PM:
We will come back later if conditions dictate
PM:
But we are exhausted for now
NH:
yup, need some food. but if the Street tanks we will be back
PM:
But for now we are off
NH:
just came over the internal message system
NH:
and ECB is lending overnight dollars at 11 per cent….
PM:
Albert Edwards of SocGen is getting married this weekend
PM:
He’s promised an update on his Ice Age thesis before he goes on honey moon
NH:
so just as he gets married and heads off on honeymoon, the Ice Age begins. typical
PM:
Thanks for joining us — adn thanks for the hundreds of comments
PM:
Well msot of them
