Markets live chat transcript for the chat ending at 12:21 on 13 Oct 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Hellow – welcome to Markets Live
PM:
Meant hello
PM:
Hellow
PM:
Sound Kenneth Williams
PM:
The is FT Alphaville’s daily markets chat
NH:
morning
PM:
Usual stuff this morning.
PM:
Quick look at the muppet sector
NH:
That’s the banks
PM:
Then get into some nitty gritty on second and third line oil stocks – and the odd gaming play.
PM:
Then get into some nitty gritty on second and third line oil stocks – and the odd gaming play.
NH:
Sometimes the market can be a bit brutal for us.
PM:
Maybe our mothers were a bit soft on Neil and I.
PM:
Didn’t kick us out on to the street earlier enough.
NH:
But we will admit to being shocked this morning.
NH:
Shocked at the chanting coming from the City.
NH:
Wafting over the river. We can hear it here at FTAV HQ
NH:
There it is a gain….
NH:
KILL FRED, KILL FRED, KILL FRED
PM:
Nasty, eh.
NH:
KILL FRED, KILL FRED, KILL FRED
PM:
Not content with seeing the proud Scot Sir Fred Goodwin stripped of his job, the market now appears to want to eat his children
NH:
And destroy his bank.
PM:
Just extraordinary. I think RBS, at its height, was the sixth largest bank in the world.
NH:
What’s happened today – the market has said “YOURS!” after looking at the terms of the HM Bailout.
NH:
The stock, in its cum-rights form, has just collapsed. Repeatedly hit 50p earlier.
NH:
That compares with the 65.5p at which the government is underwriting a £15bn cash call.
PM:
Currently trading at 54p, diwb 13.8
NH:
The market has taken one look at this avalanche of 23 billion new shares.
NH:
And that’s compared with the £12bn in new stock we saw in June– at 200p
NH:
so how many shares in issue on Friday?
PM:
16.5bn
PM:
so with roughly 23 billion of new shares being printed
PM:
that’s a ratio of about 1.4 for 1
PM:
at 65.5p
NH:
but with the shares below the offer price
NH:
no one is going to want them
PM:
So, bottom line, the market is saying – RBS is Nationalised.
NH:
The Nationalised Bank of Westminster
PM:
Very good.
PM:
NatWest.
PM:
That’s settled then. Short cut – through the usual AV “former” process…
PM:
Former RBS is now simply NatWest..
NH:
let’s get a auto system message programmed double quick
PM:
Will do — but not now
PM:
You know, I think there’s more to that.
NH:
What do you mean?
PM:
More to it than a simple NatWest gag.
PM:
Remember Stephen Hester’s background.
NH:
Yes, he and Luqman Arnold were actually useless at running Abbey. All their efforts failed – and they ended up having to sell it to Santander.
NH:
turning banking on its head was one idea they had
PM:
Well, yes that’s true – but what Hester was good at – the reason he was put into Abbey – was to detoxify it.
NH:
Hmm – had to unwind £100bn of toxic treasury assets.
PM:
That’s right, in banking terms, he’s a controlled demolition guy – not someone who is going to run the thing long term.
NH:
Well im sure there’s lots of toxicity for him to get his gloved hands on.
PM:
Yes, but I might also mean dismembering the bank.
PM:
You know – sell off ABN.
NH:
who’d want that at the moment
NH:
Sell off the American operations?
PM:
Maybe – Citizens, Charter One.
NH:
Could shrink it all the way back to the old NatWest, with a branch network in Scotland carrying the Royal logo.
PM:
Hmm – one quickish way for the government to get their money back.
NH:
NH:
So Jeff Randall emerges with a victory over RBS
Jeff Randall, the Telegraph’s Editor-at-Large is available for speaking engagements through The Gordon Poole Agency, the UK’s premier talent and speaker bureau. Fee group: £5k – £10k.
PM:
Employed, anyway
PM:
I here from a friend who works in Aidan Barclays’ office that Sir Fred — or someone v v senior from RBS was on the phone last week
PM:
Saying randall was unprofessional and that he got his fact wrong
PM:
In fact the Telegraph rowed back on the story
PM:
PM:
We didnt!
NH:
now and we still have a job
NH:
well done Jeff
PM:
(Sorry, should nick JR’s story)
PM:
NH:
Right we have been focusing on RBS so far
NH:
but HBOs also below its rights price
NH:
of course this is not straight forward
NH:
because they are being taken over at the same time as trying to raise £8.5bn
NH:
via a share placing
NH:
and some prefs on top
NH:
don’t think I have ever seen a cash call and an offer period coincide
NH:
and on top of that, the terms of the offer have been changed
NH:
so the new offer price is 108p
PM:
Currently
NH:
HBOS at 93p
NH:
and raising cash at 113.6p
NH:
got all that
NH:
Offer price is 108p, HBOS trading at 93p and cash call at 113.6p
PM:
So that stock is going to end up with the government as well
NH:
yup and then in a bigger stake in Lloyds
PM:
Lloyds HMT — public/private partnership
PM:
the first PPP bank
NH:
and Hornby does not get a job in the new bank after all
NH:
and Lord Stevenson gone as well
PM:
financing it thru a special purpose issue called gilts
NH:
NH:
right plenty of discussion below about why RBS and HBOs are being smashed
NH:
above the obvious
NH:
income funds are selling
NH:
because there are not going to be any divs for a long, long time
NH:
and then
NH:
there have been another wave of margin calls round the market today
NH:
especially among the spread betters
NH:
as for FTSE
NH:
the rules on weightings
NH:
it will be very interesting to see how they are treated
NH:
we will be looking into this today
NH:
bit early for FTSE 100 to make a decision yet
PM:
PM:
Advisers on all this stuff?
NH:
This is the first decent bit of corporate action for months.
PM:
Who is getting the fees?
NH:
Well UBS are high up the list.
NH:
Merrill Lynch are in there too.
PM:
Okay, just looking – UBS joint adviser, book running on both RBS and Lloyds.
NH:
And Citi is doing some stuff.
PM:
Makes sense – UBS always had good links with the government, goes back to the Warburg days – and the privatisation programme.
NH:
And ML has Matthew Greenberg.
PM:
Yes, top financials adviser.
PM:
But remember Greenberg was one of those guys who was egging the banks into whatever acquisitions he could get them to do.
NH:
Hmm.
PM:
Remember it was Greenberg who tried to get Lloyds to buy Abbey National – before the competition commission stopped em.
PM:
NH:
making money on the way up and down.
NH:
nice
NH:
in spite of the spanking RBS is taking
NH:
Merrill Lynch has turned buyer
NH:
and here’s why
PM:
Pestonian language Neil
PM:
Spanking
NH:
sorry, the guy seems to be everywhere at the moment
NH:
he is my head
NH:
Equity injection of £15bn builds balance sheet
RBS announced this morning that it will raise £15bn of equity in a deal
underwritten by the UK government. The government will also acquire £5bn of
preference shares and no dividend will be paid on ordinary shares until the
preference shares have been repaid. In addition, CEO Sir Fred Goodwin will be
replaced by British Land CEO Stephen Hester.
RBS announced this morning that it will raise £15bn of equity in a deal
underwritten by the UK government. The government will also acquire £5bn of
preference shares and no dividend will be paid on ordinary shares until the
preference shares have been repaid. In addition, CEO Sir Fred Goodwin will be
replaced by British Land CEO Stephen Hester.
NH:
Equity tier 1 ratio of 8%, NAV p/s of 106p
Based on the data available, we see a year end equity tier 1 ratio of 8%, and a
tangible equity / asset ratio of 3.4%, which we think should be robust enough to
satisfy investors. We estimate an 08 NAV per share of 106p. Our estimates
include a £3.9bn credit market writedown in 2H, and we have assumed the sale of
the insurance business is cancelled. RBS indicate that full year results will be
below the expectations of the Board at the time of the interim statement.
Based on the data available, we see a year end equity tier 1 ratio of 8%, and a
tangible equity / asset ratio of 3.4%, which we think should be robust enough to
satisfy investors. We estimate an 08 NAV per share of 106p. Our estimates
include a £3.9bn credit market writedown in 2H, and we have assumed the sale of
the insurance business is cancelled. RBS indicate that full year results will be
below the expectations of the Board at the time of the interim statement.
NH:
Risk / reward now looks more compelling
Our Price Objective of 108p implies that the shares trade close to our new NAV.
We think that there are a number of risks to our recommendation, including higher
structured credit marks and deteriorating asset quality on the loan book.
Nevertheless, we feel that this morning’s actions make the valuation at Friday’s
close of 0.7x NAV look overly cheap. We have also upgraded our
recommendations on a number of other European banks this morning, as we
believe that policy moves on capital and funding are a positive development.
Our Price Objective of 108p implies that the shares trade close to our new NAV.
We think that there are a number of risks to our recommendation, including higher
structured credit marks and deteriorating asset quality on the loan book.
Nevertheless, we feel that this morning’s actions make the valuation at Friday’s
close of 0.7x NAV look overly cheap. We have also upgraded our
recommendations on a number of other European banks this morning, as we
believe that policy moves on capital and funding are a positive development.
NH:
right we have some CDS prices
PM:
From Paul Davies — from the cap markets team — just paid us a visit
NH:
RBS spread has tightened by 23%
PM:
RBS tightened to 143 from 188
PM:
Barclays 136 down to 110p
PM:
And they are no even nationalised yet
PM:
Bank of Scotland — bonds stil trade — come in from 187 to 155
PM:
Continental wise…
PM:
UBS big mover — tightened from 216 to 185 ish
NH:
NH:
right, we need to have a look at Barclays
NH:
they are performing quite well
NH:
up 11p at 218p
NH:
off earlier highs – hit 242p
NH:
and that was on relief they were not tapping the govt for cash
NH:
but going to their wealthy SWF backers
NH:
and shareholders
NH:
now for some reason the SWF’s seem happy to throw good money after bad
NH:
one of them have already pledged £1bn to this latest capital increase
PM:
OK, let’s recap here
PM:
what are the details of the Barclays capital raise?
NH:
well,
NH:
to raise £3bn through a straight forward capital raise
NH:
£3bn in prefs
NH:
balance sheet management and other operational activities to save another £1.5bn
NH:
final dividend in 2008 not to be paid
NH:
but Barc is going to resume payments in the second half of next year
PM:
Hmm
NH:
oh and trading is strong apparently
NH:
Current trading
NH:
We will provide our usual Interim Management Statement on 18 November 2008. When we announced the Lehman Acquisition on 17 September 2008, we commented that Barclays had traded satisfactorily during the months of July and August. In the month of September, profit before tax very significantly exceeded the monthly run rate for the first half of the year, with strong contributions from Global Retail and Commercial Banking and from Investment Banking and Investment Management, and strong inflows of new customers and customer deposits.
PM:
How on earth did they manage that
PM:
September saw dislocation in every single market
PM:
Are they magic??
NH:
magicians you mean
PM:
Yep, that must be it
NH:
anyway, this is a brave call by Barclays
NH:
they are not taking any govt cash
NH:
they are going it alone
NH:
now if they can pull it off
NH:
they are going to be one of the strongest UK banks
NH:
RBS has been humbled
NH:
they will not be doing any mutant finance for a while
NH:
HBOS also humbled
NH:
and of course by not taking govt cash than can continue to pay their executives
NH:
big salaries
NH:
and one other thing
PM:
(praxis22 — you may well be right — was supposed to be a big bet on the libor OIS spread)
NH:
because they are raising their Tier 1 to the new govt gold standard
NH:
they will be able to access the CGS
NH:
and get that guarantee for funding
PM:
a — can you share the leaving note?
NH:
but not have any of the downside
PM:
Below….
PM:
no finger prints carried on AV
NH:
like govt non executives poking around
PM:
Sorry, Neil is that correct?
PM:
Wil they be eligible for the CGS
NH:
well, based on what the govt said last week yes
NH:
and I can find nothing in this morning’s statement which says they can’t
PM:
I imagine there could be a bit of a backlash against this
NH:
hang on, just had a look at the Debt Management Office statement
NH:
and it really does seem as if the Barclays are going to try and have the best of both worlds
PM:
really?
NH:
yup
NH:
In order to be eligible to participate in the Scheme, an institution must have raised, or committed to raise within the required timeframe, Tier 1 capital in the amount and in the form the Government considers appropriate, whether by Government subscription or from other sources. (Please refer to the Rules document for the requirements that need to be met before an application can be made). For a list of current eligible institutions please visit HM Treasury website http://www.hm-treasury.gov.uk/press_100_08.htm, which will be updated as appropriate.
NH:
actually, one could argue that there is no reason why Barc should be hit as hard as the other banks, if they are not in such a mess
NH:
so perhaps it is right they can access the CGS as long as their Teir 1 is up to scratch
PM:
PM:
can we jsut cut to the Fred lettter
PM:
thank you for that to those below
PM:
After nearly nine years as the Group’s Chief Executive I would have been approaching the end of what could be considered an appropriate time in office, regardless of the scenario we faced.
However, the new capital raising and the need for us to maximise shareholder support for it, requires us to articulate a new business case to our investors for the medium term. This leads to the obvious conclusion that I should step aside at this point to enable a new leader to take the Group forward into this next phase of its development.
I leave confident in the knowledge that my successor Stephen Hester has the skill, experience and temperament to bring out the best from the Group he will lead. I also, however, feel sad to be leaving behind so many special people, whom I can only thank for their support and friendship over the years. I won’t forget them.
NH:
so, he was going to go regardless of what happened.
NH:
yet they felt the need to phone the owners of the Daily Tel and complain about something that Fred now admits was going to happen
NH:
very odd
NH:
I could say something else
PM:
I actually think that note is thoroughly insulting to RBS staff
PM:
it jsut so disingenuous
NH:
it is
NH:
Fred not humbled by the fact that he has effectively blown up the bank
NH:
the share price is 90p now
NH:
for god’s sake
PM:
Everyone who works at RBS can now look forward to at last two years of job insecurity
PM:
Nice kiss off from the top man
NH:
and this sums it up
NH:
Never apologise.
Never explain.
Goodbye.
Never explain.
Goodbye.
NH:
Hat Tip to Fred below
PM:
NH:
right back to Barclays
NH:
just looking at the conference call highlights
NH:
Barclays is confident that they are not going to take any really big toxic write downs
NH:
BARCLAYS CEO SAYS UK GOVT DOES NOT EXPECT STRONGER BANK CAPITAL RATIOS
NH:
BARCLAYS CEO VARLEY SAYS UK GOVT WANTS BANKS’ CAPITAL STRUCTURES TO COPE WITH “A VERY SIGNIFICANT DOWNDRAFT” IN ECONOMY
NH:
Barclays:Reviewing Compensation In Line With FSA Letter
NH:
BARCLAYS CAPITAL CEO DIAMOND SAYS “CAUTIOUSLY OPTIMISTIC” OFIMPROVEMENT IN MONEY MARKETS, FINANCIAL MARKET LIQUIDITY
NH:
*BARCLAYS FINANCE DIRECTOR SAYS IF BANK HAD SIGNIFICANT ADDITIONAL WRITEDOWNS IT WOULD BE REQUIRED TO HAVE ANNOUNCED THEM
PM:
bare with us a mo — the Reuters machine has fallen over
NH:
along with our email, which is running nine hours behind
NH:
which is something of a pain
NH:
while Paul reboots the Reuters machine
NH:
I have some snap reaction from the City’s number crunchers
NH:
this is from Merrill again
NH:
£3bn equity, £3bn pref, raised privately
Barclays announced this morning that it will raise an additional £3bn of equity and
£3bn of preference shares. Barclays will attempt to raise the capital without calling
on the government funding available.
Barclays announced this morning that it will raise an additional £3bn of equity and
£3bn of preference shares. Barclays will attempt to raise the capital without calling
on the government funding available.
NH:
Equity tier 1 ratio of 6.3%, NAV p/s of 229p
Based on the data available, we see an equity tier 1 ratio of 6.3% by year end 08E
(proforma for equity raising), a tangible equity/asset ratio of 2.6%, and an NAV per
share of 228p. In addition to the equity and preference share raising, Barclays
says that it will release equity resources of £1.5bn through balance sheet
management. We estimate this would add ~40bps of equity tier 1 ratio. Our
estimates include a £4.7bn credit market writedown in 2H. We note that Barclays
comments that trading in September was strong.
Based on the data available, we see an equity tier 1 ratio of 6.3% by year end 08E
(proforma for equity raising), a tangible equity/asset ratio of 2.6%, and an NAV per
share of 228p. In addition to the equity and preference share raising, Barclays
says that it will release equity resources of £1.5bn through balance sheet
management. We estimate this would add ~40bps of equity tier 1 ratio. Our
estimates include a £4.7bn credit market writedown in 2H. We note that Barclays
comments that trading in September was strong.
NH:
No fortress Balance Sheet, but enough
We do not believe that Barclays capital raising is as aggressive as others
announced in the sector this morning. Moreover, we see risks that Barclays still
has to take more credit market hits. However, with the shares having fallen 68%
over the last 12 months, we feel that now is the time to remove our Underperform
recommendation. Our Price Objective of 235p implies that the shares will trade
close to NAV.
We do not believe that Barclays capital raising is as aggressive as others
announced in the sector this morning. Moreover, we see risks that Barclays still
has to take more credit market hits. However, with the shares having fallen 68%
over the last 12 months, we feel that now is the time to remove our Underperform
recommendation. Our Price Objective of 235p implies that the shares will trade
close to NAV.
NH:
and here is a more general note from Dresdner
NH:
RBS is raising £15bn of equity and £5bn of prefs. Barclays is raising £3bn
of equity next year, releasing £1.5bn from balance sheet management and
won’t pay the final 2008 dividend, saving £2bn; it is also raising £3bn of
prefs. Initial estimates suggest a Barclays tangible NAV of 222p and 114p
at RBS. More capital and liquidity should help the banking system to
recover from the current turmoil.
of equity next year, releasing £1.5bn from balance sheet management and
won’t pay the final 2008 dividend, saving £2bn; it is also raising £3bn of
prefs. Initial estimates suggest a Barclays tangible NAV of 222p and 114p
at RBS. More capital and liquidity should help the banking system to
recover from the current turmoil.
NH:
Our initial estimates suggest that after these measures, RBS will have RoE of
11% versus 13% at BARC. On diluted tangible NAV per share, the P/tNAV looks
to be 0.9x at Barclays and 0.7x at RBS. Our initial estimates suggest that
Barclays’ core tier 1 will be 7.9% after the measures, but the £3bn equity raising
and zero dividend won’t help the ratios until next year. RBS’s core tier 1 is likely
to end this year at about 8.4% (although it sounds like extra writedowns may
bring this down a little).
11% versus 13% at BARC. On diluted tangible NAV per share, the P/tNAV looks
to be 0.9x at Barclays and 0.7x at RBS. Our initial estimates suggest that
Barclays’ core tier 1 will be 7.9% after the measures, but the £3bn equity raising
and zero dividend won’t help the ratios until next year. RBS’s core tier 1 is likely
to end this year at about 8.4% (although it sounds like extra writedowns may
bring this down a little).
NH:
Our initial estimates suggest that after these measures, RBS will have RoE of
11% versus 13% at BARC. On diluted tangible NAV per share, the P/tNAV looks
to be 0.9x at Barclays and 0.7x at RBS. Our initial estimates suggest that
Barclays’ core tier 1 will be 7.9% after the measures, but the £3bn equity raising
and zero dividend won’t help the ratios until next year. RBS’s core tier 1 is likely
to end this year at about 8.4% (although it sounds like extra writedowns may
bring this down a little).
11% versus 13% at BARC. On diluted tangible NAV per share, the P/tNAV looks
to be 0.9x at Barclays and 0.7x at RBS. Our initial estimates suggest that
Barclays’ core tier 1 will be 7.9% after the measures, but the £3bn equity raising
and zero dividend won’t help the ratios until next year. RBS’s core tier 1 is likely
to end this year at about 8.4% (although it sounds like extra writedowns may
bring this down a little).
NH:
bickie
Reminder to readers – if you arrived late and want to stop the dialogue ‘jumping’ as you catch up, hit the ‘pause auto-scrolling’ tab at the bottom right hand corner
NH:
and here’s some stuff on Lloyds and HBOS
NH:
from WestLB
NH:
Lloyds TSB
NH:
Raises £5.5bn new capital. Revises terms of HBOS acquisition
NH:
Following the announcement last week of a package to help stabilise the UK
bank sector, Lloyds TSB announced this morning that it is raising £5.5bn of
new capital. The terms for the acquisition of HBOS have also been revised. We
believe that the measures taken today to raise additional capital represent an
extremely positive move, and should go a long way to restoring confidence in
the UK Banks sector. The proforma tier 1 capital ratio of 8.5% probably
represents a new benchmark which many less well capitalised European banks
may have to take note of. The EPS dilution arising from this capital increase is
necessary pain, and may well be replicated across many other European banks
over the coming months, as individual European governments introduce their
own bank sector support packages.
bank sector, Lloyds TSB announced this morning that it is raising £5.5bn of
new capital. The terms for the acquisition of HBOS have also been revised. We
believe that the measures taken today to raise additional capital represent an
extremely positive move, and should go a long way to restoring confidence in
the UK Banks sector. The proforma tier 1 capital ratio of 8.5% probably
represents a new benchmark which many less well capitalised European banks
may have to take note of. The EPS dilution arising from this capital increase is
necessary pain, and may well be replicated across many other European banks
over the coming months, as individual European governments introduce their
own bank sector support packages.
NH:
The terms for the acquisition of HBOS have been revised. HBOS shareholders
will receive 0.605 Lloyds TSB shares for every HBOS share. The revised terms and
the £8.5bn equity capital raising by HBOS will result the issue by Lloyds TSB of
7.8bn new ordinary shares in respect of the acquisition.
will receive 0.605 Lloyds TSB shares for every HBOS share. The revised terms and
the £8.5bn equity capital raising by HBOS will result the issue by Lloyds TSB of
7.8bn new ordinary shares in respect of the acquisition.
An offer will also be made to HM Treasury to exchange HM Treasury´s
preference shares in HBOS for equivalent shares in Lloyds TSB.
NH:
Furthermore, £17bn of capital will be raised. Of this, £11.5bn will be raised by
HBOS (£8.5bn in ordinary shares, £3bn in preference shares), and £5.5bn will be
raised by Lloyds TSB (£4.5bn in ordinary shares, and £1bn in preference shares)
HBOS (£8.5bn in ordinary shares, £3bn in preference shares), and £5.5bn will be
raised by Lloyds TSB (£4.5bn in ordinary shares, and £1bn in preference shares)
The £4.5bn new equity capital to be raised by Lloyds TSB involves HM
Treasury subscribing for 2.6bn ordinary new shares at 173.3p. This represents
an 8.5% discount to the share price on 10 October. Lloyds TSB shareholders will
be given the opportunity to claw back their proportionate entitlement to these new
shares through an open offer.
NH:
HM Treasury will subscribe for £1.0bn of Lloyds TSB preference shares. The
preference shares will carry an annual coupon of 12% (non tax deductible) and
will be callable after a period of five years.
preference shares will carry an annual coupon of 12% (non tax deductible) and
will be callable after a period of five years.
NH:
The enlarged group (Lloyds TSB, HBOS) will be precluded from paying a cash
dividend on its ordinary shares whilst any of the preference shares remain
outstanding.
dividend on its ordinary shares whilst any of the preference shares remain
outstanding.
NH:
After completion of the HBOS acquisition, the ownership structure will change
significantly. If neither Lloyds TSB nor HBOS shareholders participate in the
clawback, existing Lloyds TSB shareholders will own 36.5%, existing HBOS
shareholders 20.0% and HM Treasury 43.5%.
significantly. If neither Lloyds TSB nor HBOS shareholders participate in the
clawback, existing Lloyds TSB shareholders will own 36.5%, existing HBOS
shareholders 20.0% and HM Treasury 43.5%.
NH:
HM Treasury is expected to act as a value oriented shareholder. Lloyds TSB
continues to forecast cost savings of the enlarged group of £1bn by 2011, and for
completion of the acquisition to be achieved in early 2009.
continues to forecast cost savings of the enlarged group of £1bn by 2011, and for
completion of the acquisition to be achieved in early 2009.
Following the actions announced today, and the inclusion of HBOS on a
proforma basis at 30 June 2008, the enlarged group had a tier 1 ratio in excess
of 8.5%.
NH:
The capital increase comes with some conditions. These include a commitment
to support the SME and mortgage markets (including shared equity schemes for
mortgage holders). Furthermore, to satisfy EU state aid rules, the aggregate
growth in balance sheet of banks accessing government schemes will be limited
to the higher of the annual growth rate of UK nominal GDP in the preceding year,
or the average historical growth of the balance sheets of the UK banking sector
over the period 1997-2007.
to support the SME and mortgage markets (including shared equity schemes for
mortgage holders). Furthermore, to satisfy EU state aid rules, the aggregate
growth in balance sheet of banks accessing government schemes will be limited
to the higher of the annual growth rate of UK nominal GDP in the preceding year,
or the average historical growth of the balance sheets of the UK banking sector
over the period 1997-2007.
NH:
CURRENT TRADING (Q3 2008):
NH:
Retail banking has delivered double digit growth in PBT. The division continues
to capture market share in a number of key areas, whilst improving product
margins.
to capture market share in a number of key areas, whilst improving product
margins.
Insurance and Investment has delivered double digit growth in PBT. This
excludes the impact of insurance volatility, which had a negative £504m impact
due to volatile fixed income markets, and lower equity markets.
NH:
PBT in the Wholesale and International Banking division were lower. This
reflected a £384m impact from market disclocation. Relationship banking
businesses also achieved double digit growth in PBT before the impact of market
dislocation.
reflected a £384m impact from market disclocation. Relationship banking
businesses also achieved double digit growth in PBT before the impact of market
dislocation.
NH:
and finally
NH:
here is some Merrill comment on the moves in Europe this morning
NH:
Remaining Neutral. Upgrading six ratings
We think the Eurozone governments’ decision to follow the blueprint of the UK in
offering banks funding and capital support should go a long way to promoting
improved stability in credit markets. There are many challenges ahead for the
sector, hence we remain Neutral. However, with today’s announcements we now
know that banks can recapitalise and that liquidity issues should ease. Those
reassurances plus a 27% decline in bank share prices last week make us
incrementally more positive. Accordingly we are upgrading three stocks to Buy
(RBS, Commerzbank and DNB NOR) and three stocks to Neutral (Barclays,
Credit Suisse and AIB). Valuation is the key driver of these upgrades.
We think the Eurozone governments’ decision to follow the blueprint of the UK in
offering banks funding and capital support should go a long way to promoting
improved stability in credit markets. There are many challenges ahead for the
sector, hence we remain Neutral. However, with today’s announcements we now
know that banks can recapitalise and that liquidity issues should ease. Those
reassurances plus a 27% decline in bank share prices last week make us
incrementally more positive. Accordingly we are upgrading three stocks to Buy
(RBS, Commerzbank and DNB NOR) and three stocks to Neutral (Barclays,
Credit Suisse and AIB). Valuation is the key driver of these upgrades.
NH:
Governments can help banks de-lever
De-leveraging remains the key theme in the sector. By committing to provide
banks with capital, governments can help with this de-leveraging process. Our
scenario analysis suggests the European banks could require between €132bn
and €292bn of fresh capital. Assuming a leverage ratio of 22x, the €132bn would
eliminate the need for almost half of our estimated €5.5 trillion of required asset
reductions. With the sector trading at 1.0x NAV, capital injections would have to
be conducted at deep discounts in order to erode the optical cheapness of the
sector. At a 10% discount, for example, the sector’s P/NAV would only deteriorate
to 1.05x for a possible 2009E RoNAV of between 9.2% and 11.0%.
De-leveraging remains the key theme in the sector. By committing to provide
banks with capital, governments can help with this de-leveraging process. Our
scenario analysis suggests the European banks could require between €132bn
and €292bn of fresh capital. Assuming a leverage ratio of 22x, the €132bn would
eliminate the need for almost half of our estimated €5.5 trillion of required asset
reductions. With the sector trading at 1.0x NAV, capital injections would have to
be conducted at deep discounts in order to erode the optical cheapness of the
sector. At a 10% discount, for example, the sector’s P/NAV would only deteriorate
to 1.05x for a possible 2009E RoNAV of between 9.2% and 11.0%.
NH:
Ongoing reasons for caution
We think the governments’ statements over the weekend are important because
they offer both crisis containment and resolution in a coordinated manner. But we
admit there are still plenty of reasons to remain cautious on the sector – the deleveraging
process is still likely to be drawn-out and painful, business models will
need to change, regulation will increase and earnings momentum remains poor
driven by a bad debt cycle which has barely started to turn down in Europe.
Moreover, the likely volume of capital raisings will put a brake on banks’ share
price performances, and there is the risk that banks do not even take advantage
of the opportunity to recapitalise. That said, we note that some of the more
apocalyptical downside scenarios for the sector around funding can now be
removed from our thinking.
We think the governments’ statements over the weekend are important because
they offer both crisis containment and resolution in a coordinated manner. But we
admit there are still plenty of reasons to remain cautious on the sector – the deleveraging
process is still likely to be drawn-out and painful, business models will
need to change, regulation will increase and earnings momentum remains poor
driven by a bad debt cycle which has barely started to turn down in Europe.
Moreover, the likely volume of capital raisings will put a brake on banks’ share
price performances, and there is the risk that banks do not even take advantage
of the opportunity to recapitalise. That said, we note that some of the more
apocalyptical downside scenarios for the sector around funding can now be
removed from our thinking.
PM:
Thanks for all that
PM:
We cant get on to our Reuters terminal
PM:
getting a new password
PM:
Writing blind
PM:
Anyone got a Libor fix??
NH:
right, I think I have got it working againi
NH:
we have
NH:
OIS spread has narrowed
NH:
small, but it is a start
PM:
Thank you Q
PM:
We are back up with reuters now
NH:
4 bps to 362
PM:
All of four bips
NH:
yeah, yeah
NH:
but every little helps
NH:
as for the rest
NH:
*THREE-MONTH DOLLAR LIBOR 4.75% VERSUS 4.82%, BBA SAYS
NH:
*THREE-MONTH LIBOR FOR EURO 5.30%, VS 5.37%, BBA SAYS
NH:
*THREE-MONTH STERLING LIBOR 6.27% VS 6.29%, BBA SAYS
NH:
and here are the O/N’s
NH:
OVERNIGHT STERLING LIBOR 5.60% VS 5.81%, BBA SAYS
NH:
OVERNIGHT LIBOR FOR EURO 3.78% VS 3.89%, BBA SAYS
NH:
so on the OIS – all that cash gets pumped into the system and for what?
NH:
4bps
NH:
we are still at Defcon 1
PM:
RBS — Stephen Hester talking — saying “no sacred cows” in review of the group
PM:
We cant see any BATs annoucement btw
PM:
But the stock is off 4.5%
PM:
IN a big UP market
PM:
We havent mentioned yet that the FTSE 100 is up 176 points currently at 4108
NH:
but well, off its earlier highs
NH:
hit 4,202
NH:
just a dead cat bounce if you ask me
NH:
NH:
fell 21% last week remember
NH:
in that context pretty poor really
NH:
and thanks Q
NH:
we were going to come on to Taylor Wimpey in a minute
NH:
I am not really surprised the market has not rallied further
NH:
plenty of bearish comment around this morning
NH:
along the lines of
NH:
none of this will prevent a nasty recession or possibily a global depression
NH:
Citi is really pessimistic
NH:
real tumbleweed stuff
NH:
predicting weakest nominal GDP growth since 1954
NH:
and Sam has done a nice post on this
NH:
but here is the executive summary for those who have not seen it
NH:
Post-World War II highs in corporate credit spreads,
extreme disruptions in money markets, and credit
rationing have broken the bounds of any previous, merely
cyclical event. The negative feedback loop of tightening
financial conditions, weakening economic activity, and
further tightening in credit has not yet been severed.
extreme disruptions in money markets, and credit
rationing have broken the bounds of any previous, merely
cyclical event. The negative feedback loop of tightening
financial conditions, weakening economic activity, and
further tightening in credit has not yet been severed.
NH:
The credit tightening suggests a more severe recession,
while a path to recovery requires functioning credit
intermediation. On the assumption that traction is
eventually regained, we have still cut our full year 2009
US forecast to -0.8% and expect contraction in U.S. GDP
over the four quarters ending in 2Q 2009. We believe
large company profits will now fall 27% peak-to-trough,
and the unemployment rate to peak above 8 1/2%.
while a path to recovery requires functioning credit
intermediation. On the assumption that traction is
eventually regained, we have still cut our full year 2009
US forecast to -0.8% and expect contraction in U.S. GDP
over the four quarters ending in 2Q 2009. We believe
large company profits will now fall 27% peak-to-trough,
and the unemployment rate to peak above 8 1/2%.
NH:
Already pending actions can be helpful. But for
policymakers, it seems time to over-react, not just react,
if current financial events are to avoid lasting and severe
damage. If policymakers are successful, the steps can
be temporary.
policymakers, it seems time to over-react, not just react,
if current financial events are to avoid lasting and severe
damage. If policymakers are successful, the steps can
be temporary.
NH:
In 2009, we expect the weakest nominal GDP growth rate
NH:
since 1954. The inflation that followed the post 2002-
2003 easing steps has likely made some policymakers
reluctant to repeat an inflationary “policy mistake.” But
the latest bout of asset deflation, financial fragility and
contracting demand is a more severe threat. An arguable
mistake of 2003-2004 was a slow tightening process, not
saving the system.
2003 easing steps has likely made some policymakers
reluctant to repeat an inflationary “policy mistake.” But
the latest bout of asset deflation, financial fragility and
contracting demand is a more severe threat. An arguable
mistake of 2003-2004 was a slow tightening process, not
saving the system.
PM:
1954!!!!!!!!!!!!!!!
NH:
this is what Andrew Garthwaite at Credit Suisse makes of it all
NH:
Nothing can be done to stop a global recession, in our view (our research suggests US consumers have about $2.5trn of excess leverage, banks have $5trn of excess assets in Europe and the US, there are 2m excess homes in the US, housing looks overvalued by roughly 20% in parts of Europe, and as of now European monetary policy is still very tight). But a lot can be done to stop a global depression.
NH:
• We are in a period of sharply negative feedback loops (we estimate that each 10% off Wall Street takes ½% off GDP growth;
as credit losses and counterparty risks rise, banks hoard cash and credit markets stop working). Clearly, credit markets have to open up to stop a global depression.
as credit losses and counterparty risks rise, banks hoard cash and credit markets stop working). Clearly, credit markets have to open up to stop a global depression.
NH:
• Credit remains the judge and jury: Equities have never sustainably rallied without credit rallying (the lead time is up to 3
months) and 60% of corporate lending in Europe is LIBOR related and a lot of US sub-prime resets to LIBOR.
months) and 60% of corporate lending in Europe is LIBOR related and a lot of US sub-prime resets to LIBOR.
NH:
• If credit markets do not open up and financial markets cease to operate, the downside is so substantial it is impossible to put
a number on a floor in equity markets. During periods of sustained deflation, the average P/E has been around 10X (in the 1930s P/Es fell to as low as 5X)-on trend earnings alone, this would require around 740 on the S&P 500.
a number on a floor in equity markets. During periods of sustained deflation, the average P/E has been around 10X (in the 1930s P/Es fell to as low as 5X)-on trend earnings alone, this would require around 740 on the S&P 500.
NH:
but here is the good news
NH:
• But it is too early to write off capitalism.
NH:
• The key question is thus what is needed to open up credit markets.
• Ultimately, we think the solution is to recapitalise the banks and have some form of guarantee on unsecured bank funding to ease counterparty risk.
• We estimate that banks need about $400-$600bn of capital (around $600bn on our estimates, $400bn to offset probable losses, $200bn to delever). Ideally the process should be: the government injecting capital via preference shares (and forcing
all banks to be part of the scheme, as was the case in Japan) with the government insuring bank debt.
• Ultimately, we think the solution is to recapitalise the banks and have some form of guarantee on unsecured bank funding to ease counterparty risk.
• We estimate that banks need about $400-$600bn of capital (around $600bn on our estimates, $400bn to offset probable losses, $200bn to delever). Ideally the process should be: the government injecting capital via preference shares (and forcing
all banks to be part of the scheme, as was the case in Japan) with the government insuring bank debt.
NH:
• At the same time, we believe there needs to be a full guarantee on all bank retail deposits (with maybe a form of guarantee on money market funds to stop capital flight from money markets to bank deposits). With the banks running out of eligible
collateral to post against secured funding, we need to see mechanisms to allow the banks to access unsecured funding (which accounts for about 80% of banks’ funding). This could be achieved with the Irish type guarantee or the UK government’s proposal to guarantee interbank lending.
collateral to post against secured funding, we need to see mechanisms to allow the banks to access unsecured funding (which accounts for about 80% of banks’ funding). This could be achieved with the Irish type guarantee or the UK government’s proposal to guarantee interbank lending.
NH:
here’s something a little more bullish
NH:
from Goldman Sachs
NH:
10 reasons the market should bounce
NH:
Rally Driving: 10 reasons why the market should bounce
NH:
Markets are unlikely to see a decisive transition to a new bull market
until mid-2009, in our view. Valuations are attractive, implying a 30%
fall in earnings in 2009, but that alone may not be enough; an
inflection point in economic activity remains too far away. That said,
many indicators point to a strong rally in equities. We give 10 reasons
why we believe the market should now bounce.
until mid-2009, in our view. Valuations are attractive, implying a 30%
fall in earnings in 2009, but that alone may not be enough; an
inflection point in economic activity remains too far away. That said,
many indicators point to a strong rally in equities. We give 10 reasons
why we believe the market should now bounce.
NH:
Bear bounce
Bear markets do not tend to move in a straight line. Indeed, since July
2007, the DJ Stoxx has fallen over 40% but there have been seven rallies of
at least 5%. Two of those rallies saw the market bounce roughly 8% and
another two between 10% and 15%.
Bear markets do not tend to move in a straight line. Indeed, since July
2007, the DJ Stoxx has fallen over 40% but there have been seven rallies of
at least 5%. Two of those rallies saw the market bounce roughly 8% and
another two between 10% and 15%.
NH:
Risk aversion and valuation at extremes
Our risk indicator which is made up of 11 ‘risk factors’ is back to 2002
levels. Valuations have reached levels which imply a 30% fall in profits in
2009, even applying an historically high 4% risk premia assumption. Even
on long-term trend earnings the P/E is approximately 9x. Also, 85% of the
DJ STOXX 600 stocks are within 5% of their 52-week lows, an unusually
high percentage.
Our risk indicator which is made up of 11 ‘risk factors’ is back to 2002
levels. Valuations have reached levels which imply a 30% fall in profits in
2009, even applying an historically high 4% risk premia assumption. Even
on long-term trend earnings the P/E is approximately 9x. Also, 85% of the
DJ STOXX 600 stocks are within 5% of their 52-week lows, an unusually
high percentage.
NH:
Recession obsession
A barrage of recent indicators show that most of the Developed World is
stagnating or in recession. Most of these indicators are at levels that are
normally consistent with a recovery in risky assets relative to bonds. Our
‘Recession Protection Basket’ Bloomberg ticker GSSTRECS has surged in
recent weeks, suggesting that recession is now being priced in.
A barrage of recent indicators show that most of the Developed World is
stagnating or in recession. Most of these indicators are at levels that are
normally consistent with a recovery in risky assets relative to bonds. Our
‘Recession Protection Basket’ Bloomberg ticker GSSTRECS has surged in
recent weeks, suggesting that recession is now being priced in.
NH:
Aggressive interventions
Central banks and governments are getting more aggressive and ever
more proactive in targeting the banks and money markets. Many of the
recent steps taken are, we feel, very constructive and should contribute to
a market rally. We have upgraded the bank sector to a neutral, having
been underweight for over a year.
Central banks and governments are getting more aggressive and ever
more proactive in targeting the banks and money markets. Many of the
recent steps taken are, we feel, very constructive and should contribute to
a market rally. We have upgraded the bank sector to a neutral, having
been underweight for over a year.
NH:
and here are the 10 reasons
NH:
To bounce, or not to bounce 2
10 reasons why a rally may drive the next phase of the market 2
1) Bear market rallies happen 2
2) Risk appetite is at a low 3
3) Macro data now consistent with recession 5
4) Equity and bond correlations and prices are consistent with recession 6
5) Valuations have not been this low since 1982 8
6) Our Recession long-short basket has risen to levels suggesting that recession is now priced as the ‘core’ scenario9
7) Depression hits the papers 9
Banks are now being supported by Government action 10
9) Basic resources: Discounting EM recession 11
10) Central Banks and Policy action become aggressive
10 reasons why a rally may drive the next phase of the market 2
1) Bear market rallies happen 2
2) Risk appetite is at a low 3
3) Macro data now consistent with recession 5
4) Equity and bond correlations and prices are consistent with recession 6
5) Valuations have not been this low since 1982 8
6) Our Recession long-short basket has risen to levels suggesting that recession is now priced as the ‘core’ scenario9
7) Depression hits the papers 9
Banks are now being supported by Government action 109) Basic resources: Discounting EM recession 11
10) Central Banks and Policy action become aggressive
NH:
We continue to believe that profits will weaken dramatically over the course of the next
year relative to forecasts and that we are many months away from a recovery in economic
activity. These factors suggest that, despite attractive valuations, a decisive transition into
a sustainable bull market for equities is still someway off. We have argued that this is
unlikely before the middle of next year. But, markets do not tend to fall in a straight line.
Many indicators are suggesting that we have entered a period of capitulation in the
markets, suggesting a similar reasonably sharp rally may be close at hand.
year relative to forecasts and that we are many months away from a recovery in economic
activity. These factors suggest that, despite attractive valuations, a decisive transition into
a sustainable bull market for equities is still someway off. We have argued that this is
unlikely before the middle of next year. But, markets do not tend to fall in a straight line.
Many indicators are suggesting that we have entered a period of capitulation in the
markets, suggesting a similar reasonably sharp rally may be close at hand.
PM:
Thanks for all that!
PM:
have we used the bickie yet?
PM:
Yes
NH:
NH:
On to Taylor Wipeout
NH:
it seems Toscafund has slashed its holding in the struggling housebuilder
PM:
Oooh
PM:
And this wehn they are still struggling to get a refinancing in place
NH:
below 5% according to this morning’s statement
PM:
And Tosca of course is trying to do a good fund, bad fund — hold and hope arrangement
PM:
(Posters below — i know feelings are runing high, but please watch your language)
PM:
(Neil is a sensitive sort)
NH:
just checking what Tosca’s interest was before
NH:
wires are saying 27%
NH:
a little difficult to tell if he has sold
NH:
or moved the position to another account/broker
NH:
stock is down however, off 2.75p at 18.25p
NH:
a drop of 12%
NH:
and aside from what Tosca may or may not be doing Wipeout is struggling to put together a refinancing package
NH:
and this is because its Eurobond holders have got involved
PM:
PM:
Anything to finishon?
NH:
Tui Travel is flying
NH:
no pun intended
NH:
up 32.75p at 224p
NH:
that’s a rise of 17%
PM:
so with the banks rescued
NH:
well, maybe
PM:
we can all go on hols is that it?
NH:
this reason for this move can be found in Germany
NH:
and the events at TUI
NH:
the biggest shareholder in TT
PM:
Go on
NH:
well, this morning, Tui has finally sold its stake in shipping company Hapag-Lloyd for EUR 4.45bn, including debt
NH:
now, this is quite some achievement in the current market
NH:
even if they had to take a stake in the bidding vehicle
PM:
so what’s the read across to
NH:
well, the idea seems to be that
NH:
that Tui Germany
NH:
might make an offer for the 49% of TT it does not already own
NH:
and if they increase their holding above 55% from the current 51% they will be forced to make a mandatory offer
PM:
thanks for that
NH:
and this is
NH:
RBS finance director says they are going to test the market for a government-guaranteed debt issue this week
NH:
Barclays also suggests they will start issuing government-guaranteed debt almost immediately.
PM:
Hmmm
PM:
there’s going to be quite a lot of debt around — Uk gov issuing £37bn of gilts to start with
NH:
oh, seen Woolies – up 21.7% at 4.94p. market seems all excited at the prospect of P Greeen taking on the Baugur stake
PM:
No — go on
NH:
P Green and SurAlun on the same share register
PM:
how exciting
PM:
not
PM:
Right we are off
PM:
Sorry for those wanting stuff on second and third tier oil stocks — and gaming issues
PM:
that was a joke at the outset
NH:
and one more things – the rally is fading
NH:
now up just 150 points at 4085
PM:
Dow forecast to open about 200 plus points higher
PM:
Not much of a dead cat
NH:
and Wall Street is open today
NH:
unless the debt markets
NH:
usually Columbus Day is a waste of time, but I have a feeling nervous brokers might be coming in today
NH:
and thanks to Bryce we have a new Draaisma. He is saying it is time to buy a bit more.
NH:
I will paste it
NH:
Time to buy a little bit more in our tactical asset allocation. Last week we wrote Capital Preservation Rules (6 October 2008). While that was decent enough
advice, we wish we had written Worst Week Ever For Equities Ahead. Now, we are not necessarily calling for the trough in equity markets, as the near-term is
fraught with risk because of redemption, deleveraging and question marks over the policy response. But, after our premature tactical move into equities in July
(Dipping A Toe Back In, 21 July 2008), today we are moving a further 2% from cash into equities in our tactical asset allocation, leaving us +5% OW equities,
Neutral cash, and -5% UW bonds, versus our 50 / 10 / 40 benchmark. Our maximum ever OW equities was 15%, in March of 2003, so we still have a lot of dry
powder. But we believe when there is panic, drastic policy action and attractive valuations, you should buy a bit more.
advice, we wish we had written Worst Week Ever For Equities Ahead. Now, we are not necessarily calling for the trough in equity markets, as the near-term is
fraught with risk because of redemption, deleveraging and question marks over the policy response. But, after our premature tactical move into equities in July
(Dipping A Toe Back In, 21 July 2008), today we are moving a further 2% from cash into equities in our tactical asset allocation, leaving us +5% OW equities,
Neutral cash, and -5% UW bonds, versus our 50 / 10 / 40 benchmark. Our maximum ever OW equities was 15%, in March of 2003, so we still have a lot of dry
powder. But we believe when there is panic, drastic policy action and attractive valuations, you should buy a bit more.
NH:
No change to our fundamental bearish view. We continue to believe we are in a big earnings recession, during which investors should be OW defensives and
UW cyclicals. Risks are high and capital preservation is key. And the next bull market will only start at the earliest in the summer of 2009, one or two quarters
before fundamentals may trough. The three fundamentals that we focus on are earnings, US house prices and banks’ balance sheets, and we expect these to
improve only late 2009/early 2010, with risks on the downside.
UW cyclicals. Risks are high and capital preservation is key. And the next bull market will only start at the earliest in the summer of 2009, one or two quarters
before fundamentals may trough. The three fundamentals that we focus on are earnings, US house prices and banks’ balance sheets, and we expect these to
improve only late 2009/early 2010, with risks on the downside.
NH:
A prudent investor focuses on market-neutral trades. For the duration of this bear market, even through bear market rallies, we continue to advocate our
market-neutral trades such as the Joel Greenblatt-inspired long-short value strategy, the Piotroski-based long-short financial health strategy, and long Defensives
over Cyclicals, while cash offers great risk-reward for an investor focused purely on capital preservation.
market-neutral trades such as the Joel Greenblatt-inspired long-short value strategy, the Piotroski-based long-short financial health strategy, and long Defensives
over Cyclicals, while cash offers great risk-reward for an investor focused purely on capital preservation.
NH:
However, we do not expect a 1930s-style decade as we expect authorities to eventually extend sufficient guarantees. Our tactical indicators are suggesting
very high probability of a bear market rally, already. Sure, without stabilising money and credit markets this bear market rally will not materialise. But we interpret
the authorities’ actions of the last few weeks as a signal that they will do anything to avoid the worst, and they may be close to having done enough. It may take a
little while, and the market may push governments to guarantee larger and larger parts of the financial system, but we believe authorities will succeed, eventually.
As ever we look at valuations, sentiment and fundamentals in deciding whether to buy or sell in our tactical asset allocation.
very high probability of a bear market rally, already. Sure, without stabilising money and credit markets this bear market rally will not materialise. But we interpret
the authorities’ actions of the last few weeks as a signal that they will do anything to avoid the worst, and they may be close to having done enough. It may take a
little while, and the market may push governments to guarantee larger and larger parts of the financial system, but we believe authorities will succeed, eventually.
As ever we look at valuations, sentiment and fundamentals in deciding whether to buy or sell in our tactical asset allocation.
NH:
1) Extreme valuations. Valuations are pricing in a very severe earnings recession. First, the trailing PE for Europe is 7.9x. At the end of the last two earnings
recessions, the market was willing to pay a 20-22x PE multiple on trough earnings. If one wishes to be conservative maybe we should expect only a historical
average 14.5x PE multiple on trough earnings. Therefore, based on a PE on trough earnings of 14.5-20x, a 45-60% earnings recession is in the price, which would
be consistent with single-digit trough ROE, as is usual in earnings recessions, and is much more than our current 30% earnings recession expectation. Second, the
DY (5.9%) over government bond yield (4.2%) ratio is at an all-time high bar 1938-40. If one assumes a 70% fall in Financials dividend, the DY still exceeds the BY
for the first time in 50 years
recessions, the market was willing to pay a 20-22x PE multiple on trough earnings. If one wishes to be conservative maybe we should expect only a historical
average 14.5x PE multiple on trough earnings. Therefore, based on a PE on trough earnings of 14.5-20x, a 45-60% earnings recession is in the price, which would
be consistent with single-digit trough ROE, as is usual in earnings recessions, and is much more than our current 30% earnings recession expectation. Second, the
DY (5.9%) over government bond yield (4.2%) ratio is at an all-time high bar 1938-40. If one assumes a 70% fall in Financials dividend, the DY still exceeds the BY
for the first time in 50 years
NH:
Bearish sentiment. The AAII survey has been below -20 for several weeks (latest -29), indicating 90% historical odds of up markets in the next 6 months.
Mutual fund outflows have accelerated too in the last month, with an all-time high outflow of $72 billion in September in the US, according to Trimtabs. Our
capitulation indicator at -3.2 (and our combined market timing indicator) has only been exceeded on 8 October 98 at -3.4
Mutual fund outflows have accelerated too in the last month, with an all-time high outflow of $72 billion in September in the US, according to Trimtabs. Our
capitulation indicator at -3.2 (and our combined market timing indicator) has only been exceeded on 8 October 98 at -3.4
NH:
3) Bad fundamentals, but there is hope as authorities get ever more active. While money markets are clearly not healing yet, we like last week’s policy
initiatives. In addition to the weekend’s European initiatives, there have been coordinated rate cuts, TARP, the UK bailout, the Fed’s initiative regarding
Commercial Paper and possibly unsecured lending, and GSEs buying $40 billion of troubled assets a month. These were all signs of a much better and
encouraging response to the trouble. It will take time for these initiatives to start working, but already there are some signs of hope in money and credit markets,
which include forward LIBOR suggesting things may improve soon (3-month LIBOR from mid-December is priced to set a full 200bp lower than today), ABX holding
up well and not going to new lows, and European iTraxx subordinated financials spreads coming in 30+bps. We are very aware of the severity of the fundamental
problems, but it is now clear to us that authorities are, too, and we are encouraged by their increased initiatives.
initiatives. In addition to the weekend’s European initiatives, there have been coordinated rate cuts, TARP, the UK bailout, the Fed’s initiative regarding
Commercial Paper and possibly unsecured lending, and GSEs buying $40 billion of troubled assets a month. These were all signs of a much better and
encouraging response to the trouble. It will take time for these initiatives to start working, but already there are some signs of hope in money and credit markets,
which include forward LIBOR suggesting things may improve soon (3-month LIBOR from mid-December is priced to set a full 200bp lower than today), ABX holding
up well and not going to new lows, and European iTraxx subordinated financials spreads coming in 30+bps. We are very aware of the severity of the fundamental
problems, but it is now clear to us that authorities are, too, and we are encouraged by their increased initiatives.
PM:
Thanks for that Neil
PM:
And thanks Bryce
NH:
HBOS down 25%, Lloyds of 8%, but RBS has bounced back to the rights price – 65p
PM:
right — we are off
PM:
Thanks for joining us today
PM:
Neil and I will be back tomorrow at 11am sharp
PM:
Well 11.02
NH:
unless the market melts down this afternoon
PM:
Seeya