Markets live chat transcript for the chat ending at 13:11 on 17 Oct 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH) Robert Wright (RW) Stacy-Marie Ishmael (SMI) Alida Smith (AA)
PM:
Hello and welcome.
PM:
This is Markets Live, FT Alphaville’s daily market chat.
PM:
Slightly different arrangement this morning.
PM:
Neil Hume is not with me in person – but he is doing the chat.
PM:
He’s LIVE BLOGGING FROM HERTFORDSHIRE
PM:
We are so webbed-up us two.
PM:
Actually Neil’s looking after one of his nippers
PM:
think he#s with me anyway
NH:
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NH:
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NH:
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NH:
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PM:
Neil
NH:
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PM:
Neil!
PM:
Neil! – I think you’re kid is on the keyboard!
NH:
Oh yeah, sorry
NH:
Hang on.
PM:
NH:
so, I see the market has come right back
NH:
only up 20 points now
NH:
at 3,884.4.
PM:
Went as high as 4052 earlier
PM:
And we have been as low as 3861
NH:
no one really trusts the late rally from Wall Street
NH:
did u see the Dow iin the last hour?
NH:
soared nearly 480 points.
NH:
Dow Jones swung in an 816-point range Thursday from low to high and finished 401.35 points higher, up 4.7%, at 8979.26,
PM:
Incredible move
PM:
i know i am a bore on the subject….
PM:
But you only get a proper view of the Dow’s overall trend during hte last half hour of business
PM:
Seen the flag waving by Buffett in the US?
NH:
Yes, in the New York Times – saying buy American stocks – like he is.
NH:
Saint Warren of Omaha
PM:
Just a shame he’s called Warren really.
PM:
Anyway, what have we got that can balance out the inevitable Buffett love in?
NH:
Well there’s some stuff from Tony Maude
PM:
Dresdner guy?
NH:
Yep. Sent over by Grim earlier
PM:
A very useful source in these trying times
NH:
As you know, I have recently wavered from my long held view that it all
ends in economic collapse and full scale depression. I wavered as a
result of Government bail outs which came in sheer biblical proportions.
I’ve now had time to have a very good think, do some reading, talk to
investors, talk to people outside our industry and get a feel for the
psychology that will drive the markets from here. It’s not good news.
The wavering is over.
ends in economic collapse and full scale depression. I wavered as a
result of Government bail outs which came in sheer biblical proportions.
I’ve now had time to have a very good think, do some reading, talk to
investors, talk to people outside our industry and get a feel for the
psychology that will drive the markets from here. It’s not good news.
The wavering is over.
PM:
EXCELLENT!
NH:
It’s going to be very very very bad indeed.
Between now and March 2009 I think we will see true chaos, markets
gripped with total fear and panic again. We could see the Dow at 4000!
Why not…it’s not about PE ratios, it’s about divesting risky assets.
Governments will look on helpless as the ground gives way. I think
they’re even more scared now.
Between now and March 2009 I think we will see true chaos, markets
gripped with total fear and panic again. We could see the Dow at 4000!
Why not…it’s not about PE ratios, it’s about divesting risky assets.
Governments will look on helpless as the ground gives way. I think
they’re even more scared now.
NH:
Just a couple of weeks ago, America’s House and Senate rejected the
$700bn bail out plan. Representatives and senators were receiving calls
from the people. They were 50:50 against the bill, 50% No, 50% Hell no.
Congress was then completely brow beaten into passing the bill.
Representative Brad Sherman tells how in private conversations they were
told that if they didn’t pass the bill the dow would fall 2-3000 the
first day and another 2-3000 the next. Some were even told that tanks
would be deployed in major cities under marshal law!
That could still happen.
$700bn bail out plan. Representatives and senators were receiving calls
from the people. They were 50:50 against the bill, 50% No, 50% Hell no.
Congress was then completely brow beaten into passing the bill.
Representative Brad Sherman tells how in private conversations they were
told that if they didn’t pass the bill the dow would fall 2-3000 the
first day and another 2-3000 the next. Some were even told that tanks
would be deployed in major cities under marshal law!
That could still happen.
PM:
Hey! Yeah! Smoke that Buffett!
NH:
Here are some frightening numbers. According to the quarterly review of
the BIS, in September, the total notional amount of outstanding
derivatives in all categories rose 15% to a mindboggling $596 Trillion
as of December 2007.
the BIS, in September, the total notional amount of outstanding
derivatives in all categories rose 15% to a mindboggling $596 Trillion
as of December 2007.
NH:
That splits out $393 Trillion in interest rate derivatives, $58 Trillion
in credit default swaps, $56 Trillion in currency derivatives, oh and
$71 Trillion of unallocated derivatives.
Derivatives are, in my book, leveraged exposures. This is another
accident just waiting to happen.
in credit default swaps, $56 Trillion in currency derivatives, oh and
$71 Trillion of unallocated derivatives.
Derivatives are, in my book, leveraged exposures. This is another
accident just waiting to happen.
NH:
In a perfect world, long and short derivatives should net each other out
leaving only a fraction of risk. As we know this world is far from
perfect.
The BIS tries to assess this net risk and have come up with two figures.
$14.5 Trillion in gross market value and $3.256 Trillion in gross credit
exposure.
leaving only a fraction of risk. As we know this world is far from
perfect.
The BIS tries to assess this net risk and have come up with two figures.
$14.5 Trillion in gross market value and $3.256 Trillion in gross credit
exposure.
NH:
We are talking Trillions here.
A net risk of $14 Trillion compares with the annual GDP of the USA.
Consider a disorderly unwinding of this market that is roughly 12 times
the size of the global economy.
This pool of silent derivatives can suddenly come to life any day with
the failure of a multinational financial firm.
No wonder it was so important to get that bill through!!!
A net risk of $14 Trillion compares with the annual GDP of the USA.
Consider a disorderly unwinding of this market that is roughly 12 times
the size of the global economy.
This pool of silent derivatives can suddenly come to life any day with
the failure of a multinational financial firm.
No wonder it was so important to get that bill through!!!
So, in coming Wibbles, why USA and Great Britain are going bust and both
the US dollar and sterling will collapse.
The Uber-Bear is back.
Really really hope I’m wrong, but it’s good to consider the worst case
scenario.
PM:
thank you very much for that – UK, US going bust
PM:
Adds a bit of balance to the debate
NH:
PM:
You seen Volkswagen???
NH:
Down 10 per cent last time I looked. But I cant get live European prices in herfordshire.
NH:
Gap in satellite coverage.
PM:
But 10 per cent move in VW is nothing extraordinary – and this is the usual stuff we have come to expect.
PM:
Market up, VW, down
PM:
Market down, VW up.
NH:
Hmm – there has been loads and loads of speculation about the extraordinary rise in VW over the last couple of months.
NH:
While extremely volatile, the general VW trend has been thru the roof.
NH:
Ahead of today’s fall the price had just about doubled in the space of eight weeks.
NH:
Like this is a car maker – heading into a global recession – doubling in price just as all its rivals head for the scrap yard? What’s going on?
PM:
Did a load of stuff on this early – on the blog.
PM:
Max Warburton at Bernstein has produced a very brave piece of research suggesting Porsche – which is in this slowmotion takeover of VW – is controlling the market in very strange and very profitable ways.
PM:
The general view is that someone – a hedgie – is stuck in a short position and is having the proverbials squeezed off them.
PM:
The assumption is that it has something to do with the Lehman situation – cos its since Leh went bust that the price has zoomed.
PM:
But the Bernstein research goes rather further. I’ll put some more up on that – but cant reproduce the flow chart here.
PM:
You’ll have to go to the AV home page for that.
PM:
btw — ht to reader JC for this.
NH:
JC? Readership from on high, eh?
PM:
No, don’t go there.
PM:
Anyway, here’s some more stuff from Bernstein. Hope they don’t mind 
PM:
First the “facts” and then Warburton’s “suggestions”
PM:
Facts
We highlight the following important factors which have either been stated by Porsche in press releases,
stated by Porsche management in analyst meetings and other public forums, stated in Porsche’s Annual
Report or are visible to market participants.
(1) Porsche has announced that it now owns 35.14% of VW’s Ordinary shares and has stated that its
goal is to “increase our stake in VW to more than 50%” (press release, September 16, 2008).
(2) Porsche management have stated in analysts’ meetings (e.g. Frankfurt Auto show, September 2007)
that the company is using cash settled options to build its position in VW but that they expect to be
able to take delivery in physical stock upon exercise.
(3) Porsche’s annual report (2006/2007) shows both huge in the money positions and huge out of the
money positions on what Porsche calls “stock options”.
(4) Porsche’s annual report has CEO Wiedeking stating that earnings were enhanced by “special effects
in connection with our commitment to Volkswagen. Indeed, earnings from stock option
transactions are more than Euro 3.5 billion”.
(5) Porsche has drawn down a €10bn credit line. Porsche stated at the time that “the amount borrowed
will be invested free of risk at favorable interest rates and will bring in additional profit for
Porsche” (Feb 20, 2008).
(6) We still see a large daily trading volume in VW Ordinary shares – suggesting a large free float.
(7) There has been an unusually high level of puts being written on VW in the last 12 months – with
supply above normal for a DAX stock.
(8) VW is one of the most heavily shorted stocks in Europe, and the level of short interest continues to
rise, according to www.dataexplorers.com
(9) Bloomberg and other sources cannot identify any large shareholders other than Porsche, Lower
Saxony and UBS; we can’t find more than a few investors in the market who claim to own the stock and VW investor relations do not put forward any suggestions for who might own their stock. Does
anyone know a VW shareholder?
We highlight the following important factors which have either been stated by Porsche in press releases,
stated by Porsche management in analyst meetings and other public forums, stated in Porsche’s Annual
Report or are visible to market participants.
(1) Porsche has announced that it now owns 35.14% of VW’s Ordinary shares and has stated that its
goal is to “increase our stake in VW to more than 50%” (press release, September 16, 2008).
(2) Porsche management have stated in analysts’ meetings (e.g. Frankfurt Auto show, September 2007)
that the company is using cash settled options to build its position in VW but that they expect to be
able to take delivery in physical stock upon exercise.
(3) Porsche’s annual report (2006/2007) shows both huge in the money positions and huge out of the
money positions on what Porsche calls “stock options”.
(4) Porsche’s annual report has CEO Wiedeking stating that earnings were enhanced by “special effects
in connection with our commitment to Volkswagen. Indeed, earnings from stock option
transactions are more than Euro 3.5 billion”.
(5) Porsche has drawn down a €10bn credit line. Porsche stated at the time that “the amount borrowed
will be invested free of risk at favorable interest rates and will bring in additional profit for
Porsche” (Feb 20, 2008).
(6) We still see a large daily trading volume in VW Ordinary shares – suggesting a large free float.
(7) There has been an unusually high level of puts being written on VW in the last 12 months – with
supply above normal for a DAX stock.
(8) VW is one of the most heavily shorted stocks in Europe, and the level of short interest continues to
rise, according to www.dataexplorers.com
(9) Bloomberg and other sources cannot identify any large shareholders other than Porsche, Lower
Saxony and UBS; we can’t find more than a few investors in the market who claim to own the stock and VW investor relations do not put forward any suggestions for who might own their stock. Does
anyone know a VW shareholder?
PM:
Our questions – and suggestions
We put forward the following questions. They pull together the facts listed above and assemble what we
believe is a possible explanation of Porsche’s behaviour – and a possible explanation for the rise and rise of
VW.
(1) Might Porsche have bought call options over the vast majority of the VW free float – perhaps
taking their eventual stake from the current 35% up towards 70% (leaving c.10% free float for
index tracker funds etc), with the banks that have written these calls having to buy VW Ords to
hedge their position? It is impossible to know what price Porsche paid – we believe the “strike” on
the options that will take Porsche from 35% to over 50% are below €70 (based on accounting
disclosures) but beyond that we can’t quantify it. But if Porsche has been buying options constantly,
it may only be paying near current prices for a tiny number of shares.
(2) Might Porsche be willing to lend out the shares it owns, or might the banks that own shares to
hedge the VW cash settled options be lending out shares? Might Porsche profit from stock lending?
(3) Might the daily trading volumes we see simply be large numbers of hedge funds borrowing VW
shares and selling them in the market – and might Porsche and/or banks that have held VW shares
to hedge the call options bought by Porsche – be the buyer on the other side?
(4) If Porsche or its counterparties buy all the shares that are being sold in an effort to short the stock –
and maybe buy some extra shares in addition – might that support the stock, or even drive the VW
stock higher – despite such short interest?
(5) If hedge funds give up on the short when it fails to work, and have to buy back stock in the market,
might Porsche or the banks be the only substantial owners of the stock – and therefore the only
substantial supply of stock? Might Porsche or the banks be able to sell VW shares back to the hedge
funds at ever higher prices – creating a huge short squeeze?
(6) Might Porsche or the banks make large amounts of money from this set of transactions – buying
stock from the hedge funds, then selling it back at a higher price?
(7) Might Porsche also be writing puts – the balance sheet disclosures suggest some sort of similar
activity – receiving premiums for this, but confident that since it already controls most of the free
float, it is unlikely VW’s share price falls back to the level of the puts?
(8) How is Porsche funding all of the activity above? We’d highlight that Porsche has not disclosed
how it has invested the €10bn credit line. Might it use the money to fund The Fruit Machine –
which so far, for Porsche, does look pretty “risk free”?
We put forward the following questions. They pull together the facts listed above and assemble what we
believe is a possible explanation of Porsche’s behaviour – and a possible explanation for the rise and rise of
VW.
(1) Might Porsche have bought call options over the vast majority of the VW free float – perhaps
taking their eventual stake from the current 35% up towards 70% (leaving c.10% free float for
index tracker funds etc), with the banks that have written these calls having to buy VW Ords to
hedge their position? It is impossible to know what price Porsche paid – we believe the “strike” on
the options that will take Porsche from 35% to over 50% are below €70 (based on accounting
disclosures) but beyond that we can’t quantify it. But if Porsche has been buying options constantly,
it may only be paying near current prices for a tiny number of shares.
(2) Might Porsche be willing to lend out the shares it owns, or might the banks that own shares to
hedge the VW cash settled options be lending out shares? Might Porsche profit from stock lending?
(3) Might the daily trading volumes we see simply be large numbers of hedge funds borrowing VW
shares and selling them in the market – and might Porsche and/or banks that have held VW shares
to hedge the call options bought by Porsche – be the buyer on the other side?
(4) If Porsche or its counterparties buy all the shares that are being sold in an effort to short the stock –
and maybe buy some extra shares in addition – might that support the stock, or even drive the VW
stock higher – despite such short interest?
(5) If hedge funds give up on the short when it fails to work, and have to buy back stock in the market,
might Porsche or the banks be the only substantial owners of the stock – and therefore the only
substantial supply of stock? Might Porsche or the banks be able to sell VW shares back to the hedge
funds at ever higher prices – creating a huge short squeeze?
(6) Might Porsche or the banks make large amounts of money from this set of transactions – buying
stock from the hedge funds, then selling it back at a higher price?
(7) Might Porsche also be writing puts – the balance sheet disclosures suggest some sort of similar
activity – receiving premiums for this, but confident that since it already controls most of the free
float, it is unlikely VW’s share price falls back to the level of the puts?
(8) How is Porsche funding all of the activity above? We’d highlight that Porsche has not disclosed
how it has invested the €10bn credit line. Might it use the money to fund The Fruit Machine –
which so far, for Porsche, does look pretty “risk free”?
PM:
Quick bickie here, even tho it’s early.
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
PM:
Pretty hard-hitting stuff, eh?
NH:
Hmm. Don’t think he’ll be getting an invite to the Porsche track day any time soon
PM:
And neither will we.
NH:
I never get freebies like that
PM:
Nor do i
PM:
I went go-karting once about 10 years ago. Not with Porsche, but was good fun.
PM:
Actually, I got an invite to the grand prix – from a certain bank, earlier this year. But I felt I had to decline it.
NH:
Journalistic ethics, eh? Very important.
PM:
No, it clashed with a J Sheekey lunch I already had in the diary.
PM:
PM:
Right — Roberrt Wright has just appeared here at AV HQ
PM:
Robert is our transport correspondent
PM:
Expert in many things, including the Baltic Dry index
PM:
So if anyone has any specific questions relating to shipping etc — post em now
RW:
Hello everyone. Thanks for having me – this is very exciting for me.
PM:
hi Robert
RW:
You’ll have seen I posted a piece on the fall in the Baltic Dry Index this morning – and, from the comments, people seem to think I was a bit too positive.
PM:
PM:
Nah — good to have the piece — puts things in perspective
RW:
It’s probably because I’m a naturally sunny person – and quite possibly also because I’m wrong. But I do think there are reasons to think things won’t stay this bad forever.
PM:
Tell us why? We like the positive view – -but explain
PM:
Please
RW:
There’s always the risk I’ve spoken to too many Greek shipowners, but commenters are saying the only way for newbuilding contracts to get cancelled is for owners to pull out of them. I’m not quite sure that’s true. A lot of the shipyards that have orders at the moment are going to go out of existence – or never come into it. The really frothy orders were often placed with “greenfield” yards that haven’t been built yet. No-one thinks those yards are going to get built now.
PM:
okay
RW:
I also tend to think the stuff about a world recession might overstate the impact on dry bulk shipping. A huge amount of the growth in recent years has come from China and India, particularly China.
RW:
TB – which countries are going to get worst hit? Well, it depends what you mean by worst hit but the biggest shipowner is Greece – and it owns a very high proportion of dry bulk ships. It’s a problem for them, I think.
NH:
(Xstrata down 10%. wow. now trading at 817p)
RW:
WV – on Frontline, I don’t have a view on their dividend process. But tanker rates are holding up pretty well. The trade depends less on letters of credit and is less overbuilt, for sure.
RW:
Also, John Fredriksen, the biggest shareholder, is as smart a shipowner as I’ve met – or anyone’s met.
RW:
When I were young – there seems to be confusion about this. But the phase-out of single-hull tankers in most markets still seems to be on. That’s positive for tanker operators.
PM:
Okay — cheers for that
RW:
FKA – if you look back to a piece I wrote earlier this year, you’ll see Mr Fredriksen’s explanation of the unfortunate held in custody incident.
PM:
Okay — cheers Robert — come back in when you like a bit later
PM:
PM:
PM:
NH:
PM:
PM:
NH:
just looking at the miners
NH:
no respite
NH:
being crushed again
NH:
check Xstrata
PM:
Just seen the price — down 10%
PM:
trading 94p lower at 819
NH:
and look at these
Kazakhmys (KAZ:LSE): Last: 267.00, down 22.25 (-7.69%), High: 311.00, Low: 258.00, Volume: 3.73m
Vedanta Resources (VED:LSE): Last: 594.00, down 38.5 (-6.09%), High: 689.00, Low: 573.50, Volume: 2.07m
Antofagasta (ANTO:LSE): Last: 269.25, down 18.25 (-6.35%), High: 307.75, Low: 265.75, Volume: 3.56m
NH:
Stacy just sent an interesting email on this
NH:
its from UBS
PM:
Do share
NH:
Not a personal plea, but rather a description of what is going on in
many markets at the moment: investors are liquidating positions
regardless of fundamentals or even volition. This is deleverage at its
most vicious and it is distorting relationships of and between assets
and implying weird inputs to valuation models according to my equity
colleagues. “Is the equity market really telling us that investors
believe that commodity prices will fall XX% from here”, someone asked.
In commodity strategy we are believe that equity markets are telling us
nothing about underlying growth, price, volumes and currency
assumptions.
many markets at the moment: investors are liquidating positions
regardless of fundamentals or even volition. This is deleverage at its
most vicious and it is distorting relationships of and between assets
and implying weird inputs to valuation models according to my equity
colleagues. “Is the equity market really telling us that investors
believe that commodity prices will fall XX% from here”, someone asked.
In commodity strategy we are believe that equity markets are telling us
nothing about underlying growth, price, volumes and currency
assumptions.
NH:
Instead, we believe that many assets are undergoing
distress liquidation, as investors rush for the door. One example of
this is the recent underperformance of gold equities against gold.
Another is the selling of gold itself, or at least so we believe. Safe
haven buying of gold continues with our own sales desks reporting buy /
sell ratios of about 85 / 15 yesterday. Yet gold was sold aggressively
on the electronic futures markets, with two clips of about 6000 lots
swept lower. Gold sold off down from about $835 to $820 and then took
another leg lower as the second load was dumped.
distress liquidation, as investors rush for the door. One example of
this is the recent underperformance of gold equities against gold.
Another is the selling of gold itself, or at least so we believe. Safe
haven buying of gold continues with our own sales desks reporting buy /
sell ratios of about 85 / 15 yesterday. Yet gold was sold aggressively
on the electronic futures markets, with two clips of about 6000 lots
swept lower. Gold sold off down from about $835 to $820 and then took
another leg lower as the second load was dumped.
NH:
With jewellery demand still light (in sharp contrast to the last time
gold traded below $800/oz in August and September), there was less
support for the metal, which traded to a low of 786/oz before recovering
some ground into the close. Gold continues to hover just above $800/oz
at the time of writing. As the story from FT Alphaville details below,
this deleveraging has become self re-enforcing and has the potential to
push individual commodity prices to silly levels – just look at
platinum, now trading only 10% above gold on a spot basis and at a
discount a few years forward. Deleveraging could continue for a long
time to come: it has taken years to build up these positions so it seems
highly unlikely that can be eliminated in a few months.
gold traded below $800/oz in August and September), there was less
support for the metal, which traded to a low of 786/oz before recovering
some ground into the close. Gold continues to hover just above $800/oz
at the time of writing. As the story from FT Alphaville details below,
this deleveraging has become self re-enforcing and has the potential to
push individual commodity prices to silly levels – just look at
platinum, now trading only 10% above gold on a spot basis and at a
discount a few years forward. Deleveraging could continue for a long
time to come: it has taken years to build up these positions so it seems
highly unlikely that can be eliminated in a few months.
NH:
For gold, Comex
open interest has fallen a lot, as the accompanying chart shows, but
only compared to levels seen in the past couple of years. Open interest
could fall back a lot further and, in many cases, with leveraged
positions held via the OTC market, less quantifiable selling is also
probably taking place. Deleveraging may present some fantastic
opportunities for long term value investors that can live with negative
short term marks on their portfolio, but as asset prices are showing,
there is a mismatch between the strength of long term buyers and
distressed deleveragers. The lack of jewellery demand and ongoing
deleveraging is likely to keep gold and other precious metals under
pressure in the near term and we will review our short term gold and
precious metals forecasts on Monday, once we have seen the COTR data
released tonight.
open interest has fallen a lot, as the accompanying chart shows, but
only compared to levels seen in the past couple of years. Open interest
could fall back a lot further and, in many cases, with leveraged
positions held via the OTC market, less quantifiable selling is also
probably taking place. Deleveraging may present some fantastic
opportunities for long term value investors that can live with negative
short term marks on their portfolio, but as asset prices are showing,
there is a mismatch between the strength of long term buyers and
distressed deleveragers. The lack of jewellery demand and ongoing
deleveraging is likely to keep gold and other precious metals under
pressure in the near term and we will review our short term gold and
precious metals forecasts on Monday, once we have seen the COTR data
released tonight.
PM:
ta for that
PM:
i was jsut looking at Xstrata’s price
PM:
This stock has fallen 81% !!!
PM:
And its not even a bank
NH:
but it is a deal machine
NH:
not sure how leveraged it is
PM:
true
PM:
PM:
Neil — before LIBOR arrives I am jsut going to let Robert back in here
PM:
think he’s got the ML bug and wants to type away
PM:
Robert?
RW:
A lot of you are asking about port congestion. I think this is a huge issue and I should probably have mentioned it in my post this morning.
RW:
Congestion seems really to have fallen away at places like Newcastle, NSW and that makes a big difference to the net supply of tonnage. When 80 ships are waiting off Newcastle or some Brazilian port, it means they can’t be doing anything else. When that queue disappears, it’s as if 80 new ships had just been delivered. If demand gets going again and the queue reappears, tonnage automatically tightens.
PM:
hmm
RW:
As for the question about letters of credit, I wrote a lot of stuff in Monday’s paper on this. I don’t know about Canada specifically, but the shortage of letters of credit is really messing up the dry bulk trade at present.
NH:
(taxloss – stop it)
)RW:
The letters of credit thing is one of the reasons I’m positive. That’s not going to go on forever and a lot of traffic must be getting held up. You have to think quite a lot of that is going to start moving – possibly all of a sudden – once the problems get resolved.
RW:
Finally, When I Were Young – you could look at the website of the International Maritime Organisation. But I don’t know any really reliable source of information on this, I’m afraid.
PM:
Thanks for all that Robert
RW:
It was great – you’re becoming the FT’s Test Match Special. Am I right in thinking a reader even sent you a birthday cake yesterday? I think I had some last night long after you went home.
PM:
thanks for joining — now on to LIBOR
PM:
PM:
PM:
Neil — you got the figs in sunny hertfordshire?
NH:
3-Month USD Libor Fixed At 4.41875% Vs 4.5025%
OVERNIGHT DOLLAR RATES FIX AT 1.66875 PCT VS 1.93750 PCT – BBA
NH:
DJ 3-Month Sterling Libor Fixed At 6.16% Vs 6.1825% Thurs
NH:
DJ 3-Month Euro Libor Fixed At 5.02% Vs 5.08125% Thursday
PM:
ON rates still coming in fast — 3M not
NH:
OIS? anyone have it
PM:
Cant see it yet
NH:
it was mentioned below. was that accurate?
PM:
330 we believe
PM:
331.93 v 341.75
PM:
£3m/OIS
PM:
NH:
just going back to VW for a moment
NH:
Morgan Stanley have downgraded
NH:
moved to underweight with a target of EUR69
PM:
eh– got the note?
PM:
target price of 69 when the marekt price is at 360????
PM:
do share
NH:
only a summary at the moment
NH:
will try and get hold of the VW specific stuff
NH:
but it just shows that VW should be trading anywhere near this level
NH:
Our latest round of estimate cuts for the European autos brings profitability close to breakeven for 2009 and 2010 (EPS forecasts cut by an average of 70% in 2009-10). Our revised estimates reflect a global recession with a shrinking of financial sub portfolios.
We now assume no dividend payments at PSA, Renault and Fiat for 2009 and 2010 and have cut others by >50% as we think
companies will struggle to justify significant payouts at a time when cash burn is high and funding sources scarce. With consensus facing near 100% downside, there’s no need to rush in.
NH:
From an historical perspective, this is a buyer’s market for long-term investors who can look past poor news flow, profit warnings and missed targets. We highlight BMW and PSA as quality Overweights among the premium and volume players. Fiat offers the greatest diversification with the least financial services risk. Daimler, Michelin and Renault look cheap, but we expect the pace of consensus declines will surprise investors over time.
PM:
thanks for that
PM:
Feel like a bit and growing issue this
PM:
NH:
market update – FTSE 100 up 60 points now
PM:
Notice gold off 2 per cent at 788
PM:
I know what i meant to ask yo uabout
PM:
The insurers
PM:
After the moves yesterday
NH:
well, the Pru are weak again
NH:
which I am surprised by
NH:
they were pretty categoric in shooting down the rights issue rumour
NH:
and Cazenove now saying the company might pull forward its trading statement
NH:
to allays fears about a rights issue and cash call
NH:
and its corporate bond portfolio
NH:
Volatility hit the insurance sector hard on Thursday, particularly the Pru (-20%) and Old Mutual (-22%), with the rest being hit by “only” 10% or so. We believe that the market has become increasingly concerned by press reports of FSA concern over life company solvency, as well as a note by one of the Pru’s corporate brokers which highlighted the Pru in its stress tests.
NH:
Under the circumstances we would not be surprised if the Pru brought forward its sales figures (officially due on Tuesday 21st October), and we also expect it to provide data on its current solvency position.
NH:
In the table below we forecast the Pru’s EUIGD solvency surplus to have fallen by 20% to £1,117m compared to June, driven by lower bond yields (which are negative for the Pru due to Asian guarantees), due to realised losses and hard defaults on US corporate bonds, and due to equity losses.
NH:
We estimate that the company will confirm 17% 9M global sales growth, helped by the £110m APE Cable and Wireless bulk annuity announced during the quarter. This will have driven UK sales growth of an estimated 40%, although the growth rate for UK retail business (ie excluding bulk annuities) is lower (but still impressive) at +15%. We expect to see no growth in the US , where higher hedging costs and equity market taint will have made it increasingly hard to sell VA’s profitably. Asian sales growth of 15% leaves them just about on track to achieve their target this year. We expect there to be much more interest in the outlook, particularly in Asia , where the growth bull case looks increasingly shaky.
NH:
Saturday’s FT reports that the FSA is getting increasingly concerned over solvency at UK life companies, and is looking particularly closely at corporate bond portfolios. The FSA returns completed by the companies historically contain limited information on UK life companies’ debt portfolios and it looks as though the FSA is trying to find out exactly what is held. Both credit risk and concentration risk are reportedly being looked at in more detail.
NH:
As the table shows, if the industry incurred defaults at 50% of the 2002 level by each credit rating band (which seems an increasingly generous assumption) then the impact on EV would be limited on average to 2.2% on average for the sector. However, hard defaults drop straight down to solvency and cannot be passed on to policyholders. The impact on solvency is more significant therefore, at 8.1% on average. Although the FSA focus is naturally on the UK , the worst affected names are the three with US subsidiaries, with credit losses at this level erasing 16% of Aviva’s solvency, 11% of OM ‘s, and 25% of the Pru’s. Of the domestic names the most exposed to credit risk is L&G but the 4% hit to solvency is very manageable.
NH:
Old Mutual, another stock which got hammered yesterday, have rallied small
Old Mutual (OML:LSE): Last: 50.40, up 0.8 (+1.61%), High: 56.50, Low: 48.80, Volume: 13.59m
PM:
Thanks for that
PM:
PM:
Can I offer apols on City Index price box to the right. There seems to be a big problem where a number of contracts have disappeared. We will get it looked in to.
PM:
But Neil — tell me about Premier Foods — whats going on there??????
NH:
price got drilled earlier
NH:
traded as low as 16.25p
NH:
recovered a bit now
PM:
(taxloss — please 
)
)NH:
off just 11.2p at 23.75p
NH:
that’s a drop of 32%
NH:
now, the company have come out and said rumours that it is in breach of its banking covenants just aren’t true
NH:
but the market seems in no mood to listen
NH:
and that’s not surprising
NH:
this company is another one created in the corporate finance lab
PM:
Mutant finance rather than Frankenstein food
NH:
and the spawn of private equity
NH:
it was then genetically modified
NH:
in the corporate finance lab
NH:
after which it went on a huge spending spree
NH:
snapped up loads of company and wracked up a mountain of debt
NH:
it’s now toxic
NH:
and no one wants to touch it
NH:
so if covenants have not been breached
NH:
there can only be two other explanations for the weakness
NH:
1) – shareholders are dumping stock
NH:
or a rumoured private equity cash injection has been pulled
NH:
that said this deal has the potential to be pretty dilutive for equity shareholders
NH:
in fact
NH:
here’s a story we wrote on this subject Monday
NH:
Premier Foods, which owns Hovis bread, Branston pickle and Quorn, is in talks with private equity groups over a cash injection in the latest move to shore up its balance sheet.
The group, whose debt reached £1.8bn at the end of June, is likely to make an announcement today confirming the discussions, although it is expected to stress that no deal was imminent. Prospective investors include CCMP, the former private equity arm of JPMorgan.
While it is too early to say how an investment would be structured, a deal, potentially worth several hundred millions of pounds, could take the form of preference shares or a convertible debt instrument.
Premier’s share price has fallen sharply amid concerns about the level of debt after recent mergers with RHM and Campbell’s Soup.
NH:
The impact of higher commodity prices on working capital and lower values from some property assets have also affected debt.
However, the company, which renegotiated banking terms early this year, said it had been within covenants at the end of June and it expected to continue to operate within its limits.
Premier’s board believes a reduction in its debt would allow the City to rerate the shares at a time when defensive stocks such as food companies could find more favour among investors.
With debt market frozen, the group has already cut its dividend, saving about £55m-£60m annually, held back on £20m of capital expenditure not related to restructuring and eased back on marketing spending.
Aside from a cash injection from private equity investors, another option being considered by Premier is asset sales.
The shares have fallen more than 75 per cent over the past 12 months. Its market capitalisation now stands at £483.5m, or about a quarter of its net debt.
NH:
In August the group reported adjusted interim profits of £60m, up from £57.8m. Turnover rose 44 per cent to £1.29bn thanks to the acquisition of RHM and Campbell’s Soup. However, after exceptionals pre-tax profits were £3.6m (£5.1m).
PM:
So current market cap of 194m
PM:
And debts of £1.8bn
PM:
no sure an injection of £100m from a PE fund is going to do much good
NH:
fair point
PM:
Got 1.35bn of shareholder equity of course
PM:
But the market just doesnt trust its balance sheet
NH:
not surprised by that
PM:
PM:
Moving on
PM:
Time is pressing
NH:
one thing we have not had time to go into this morning is the number of profits warnings that are coming out
NH:
Savills and Inchcape
NH:
and that seems to be affecting anything consumer related
NH:
DSGI look horrible at the moment
NH:
and talking of bombed out retailers
NH:
Seen Woolworths?
PM:
no
PM:
shares aren’t doing much
PM:
Price up a fraction at 4.2p
NH:
OK
NH:
it seems SurAllun has not got his stock
NH:
he bought around 4% last week
NH:
or thought he had
NH:
this came out a little earlier
NH:
TR-1: Notifications of Major Interests in Shares
NH:
. Identity of the issuer or the underlying issuer of WOOLWORTHS GROUP PLC
existing shares to which voting rights are attached:
existing shares to which voting rights are attached:
2. Reason for notification (yes/no)
An acquisition or disposal of voting rights
An acquisition or disposal of financial instruments which may result in
the acquisition of shares already issued to which voting rights are
attached
An event changing the breakdown of voting rights
X
Other (please specify):Rectification
3. Full name of person(s) AMSPROP LONDON
subject to notification LIMITED
obligation:
4. Full name of shareholder(s)
(if different from 3):
NONE
5. Date of transaction (and
date on which the threshold is
crossed or reached if
different):
16 OCTOBER 2008
6. Date on which issuer
notified:
BELOW 3%. SHARES
7. Threshold(s) that is/are NOTIFIED ON 9
crossed or reached: OCTOBER AS ACQUIRED
WERE NOT ACQUIRED:
SELLING PARTY WAS
UNABLE TO DELIVER
THE SHARES.
8: Notified Details
A: Voting rights attached to shares
Class/type of shares Situation previous to the triggering Resulting situation after the triggering transaction
If possible use ISIN transaction
code
Number of shares Number of voting Number of shares Number of voting Percentage of voting
rights rights rights
Direct Indirect Direct Indirect
BELOW 3%
12.5P ORD.
B: Financial Instruments
Resulting situation after the triggering transaction
Type of financial instrument Expiration date Exercise/ conversion No. of voting rights Percentage of voting
period/date that may be acquired rights
(if the instrument
exercised/converted)
Total (A+B)
Number of voting rights Percentage of voting rights
BELOW 3%
PM:
Oh dear
PM:
7. Threshold(s) that is/are NOTIFIED ON 9
crossed or reached: OCTOBER AS ACQUIRED
WERE NOT ACQUIRED:
SELLING PARTY WAS
UNABLE TO DELIVER
THE SHARES.
crossed or reached: OCTOBER AS ACQUIRED
WERE NOT ACQUIRED:
SELLING PARTY WAS
UNABLE TO DELIVER
THE SHARES.
PM:
So SurAllun’s holding is below 3% because the people he acquired the stock off can’t deliver
NH:
yup
NH:
and remember Baugur have, or had, who knows, a 10% stake in Woolies
NH:
so putting two together and coming up with five
NH:
it looks like SirAllun might have got caught up in the great Icelandic unwind
PM:
presumably the Buagur stock was held at Kaupthing
NH:
I guess so
NH:
interesting though
PM:
v interesting
PM:
Wonder if the Telegraph will be sellers of equities after that
NH:
and just going back to an earlier question on PWC and the RIo stake owned by Chinalco
NH:
we have no fresh news
PM:
Stacy did a post on it earlier:
http://ftalphaville.ft.com/blog/2008/10/17/17174/chinalco-pulls-bond-sale-as-rumours-swirl-about-rio-stake/
NH:
but we do have the rather ominous statement the Chinese released late last night
PM:
i think it is in that post
PM:
NH:
(Grizzley – we have long thought Liverpool FC is one of the Premier League clubs in most danger of being crunched. They need to sell to DIFC and quick)
PM:
Okay — we are done
NH:
FTSE 100 bouncing all over the place like the Dow
NH:
just traded 100 points better
NH:
now up 94 points
PM:
yep
PM:
We are off now. Neil has to do some parenting
PM:
But we will be back on Monday for the next scheduled session of Markets live
PM:
Thanks for joining us — adn thanks for most of the comments
PM:
Seeya
PM:
NH:
see u on Monday
PM:
(Q — v funny)
PM:
Right — for those who have not logged off yet I have a little extra.
PM:
Here’s a link to a beta version of our new site.
PM:
Yp — a lockin
PM:
Yep, even
PM:
We will be running this in the background for a week
PM:
you can try it out and give us feedback
PM:
Not publicising it widely yet
PM:
You can click on the Long Room table — fill out a quick form — and then we will make you “members”
PM:
Well, most of you
SMI:
Jumping in for some tech support
PM:
The Long Room is a mini-blogging platform
PM:
you can host your own tables — post your own articles
SMI:
First, any of who having crashing problems please email me alphavilleATftDOTcom with details of what browser you’re using
AA:
test site comments not live yet
PM:
Comment on the work of others, etc
SMI:
Including the version of your browser; also, what operating system are you (Mac/Linux/Windows etc)
PM:
Also — remember that this is on a test server. There might be load problems.
PM:
The content is scrapped from the old AV site every hour or so
PM:
We will go live with this in a week’s time
SMI:
So do email me with any errors
PM:
There is a new version of Markets Live with the new site also
PM:
BIG IMPROVEMENT: the comment box comes up to the top
AA:
@TheWord -
ah but if you select full screen then you can have two pages open at the same time…
ah but if you select full screen then you can have two pages open at the same time…
SMI:
OK. Thanks for the feedback. Note on the size – we’re not huge fans of it either.
AA:
please feel free to add comments to the new site
PM:
Note point about people not being able to email us. Regulatory environment etc
PM:
So please leave comments, error messages here
PM:
yes — Monkey — that is main reason for the delay.
PM:
Can get the current owners to let us use it
PM:
It clsoed at Xmas — M&B handed back the lease
AA:
Sorry, PM means on the new site…
AA:
i.e. leave comments errors etc on the new site.
SMI:
We will make sure your initial comments here get taken on
AA:
when I were young – what do you mean no one there?
AA:
thanks Bryce… they won’t be around for long
AA:
no I am not a web developer
AA:
and it’s Alida, thanks
AA:
I am not a large opera character
AA:
praxis22 – sorry, I know what you mean.
AA:
That site is being monitored, but as we are having this conversation on THIS site we are not over there “live”
AA:
so we can’t see your comments on here…
AA:
no don’t worry, will pick them up from there… Thanks!
AA:
No idea to be honest… I have a broken thumb and can’t spell at the best of times… so that could be a clue.
AA:
Hi guys… re the wait for approval I have asked PM to hold for 5 minutes. He will resume shortly…
PM:
Okay — closing this chat now. Cheers!