Markets live chat transcript for the chat ending at 12:13 on 27 Oct 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Hello – welcome to Markets Live
PM:
The is FT Alphaville’s daily markets chat
PM:
he’s talking about how difficult it must be for people to survive all this
PM:
Yeah, yeah Asia looking a bit dicky.
PM:
And part of the land mass between Europe and the East has disappeared.
PM:
But look on the bright side – the fall in London, equity wise, has been restricted to 4.7 per cent.
PM:
That’s not even half a crash.
PM:
And I must note a post put up by one of our new Long Room-ers – MK
PM:
Saying that it’s all very well everyone – like us – saying “Told you so!”
PM:
Will quote MK briefly:
PM:
You can and must do better. Same holds for the rest of us: point to solutions, not problems.
PM:
So Neil! Point to solutions.
NH:
there is one bit of good news
NH:
today could be the day of capitulation
PM:
marvelous — how do you know that??
NH:
Panic lows have historically occurred on day 27/28 of the 7th lunar cycle which are this Sunday and Monday
NH:
The panics of 1857/1907/1929/19
87/1997 all marked their lows on these days in October.
NH:
so today could be the day
PM:
Where did you get that — been to Brighton pier or something at the weekend?
NH:
I consulted Mystic Meg
NH:
these are desparate times
PM:
So Neil is a buyer
NH:
better than pinning ones hopes on another Fed rate cut
NH:
I’m going with the Lunar cycle
PM:
Mystic mog — the
indicator
PM:
Bring us up to date Neil
PM:
Black forces have jsut struck us here in the office
PM:
Neil’s PC jsut closed down on him — in front of our eyes
PM:
No blue screen of death
PM:
This was obviously set in advance — close down at 11.08
PM:
While he is doing that i will do a quick recap
PM:
FTSE 100 id currently down 155 pionts — off its low on this lunar calander stuff
PM:
That followed some frightening falls in the far east overnight
PM:
Nikkie off 6.4% to a 26-year low
PM:
Hang Seng plunged 12.7%
PM:
Hang Seng plunged 12.7%
Philippines off 12%
PM:
once more there was massive de-leveraging
NH:
let’s hope the sucker doesn’t go down again
PM:
yen carry trade being unwound
PM:
that prompted the G7 to issue a statement warning against yen’s volatility and its possible adverse implications for economic and financial stability
PM:
needless to say it did not have too much impact
NH:
(Word I use a ZX81)
PM:
compounding the misery were economic slowdown fears
PM:
and then reports that the Japan’s government may buy shares held by the nation’s banks to help stabilize financial markets,
PM:
Neil is almost sorted — except now his Lotus notes is performing a consistency check
PM:
Consistent with what? exactly
NH:
Lotus Notes running on Dell and Windows. A match made in the depths of hell.
PM:
here’s a it of japanese wire stuff
PM:
apparently Japanese lawmakers may next week consider reviving laws used to prop up bank capital and purchase almost 2 trillion yen ($21 billion) of shares from lenders between 2002 and 2006, Nikkei reported today, without saying where it obtained the information.
PM:
The government earlier this month said it would stop selling those shares as part of a package of market-support measures. The nation’s largest banks will be eligible for public funds once the government revives a bailout law authorizing injections of public funds into banks that need additional capital, Economic and Fiscal Policy Minister Kaoru Yosano said on Oct. 21.
PM:
and of course over the weekend we the IMF poised to give a
Ukraine $16.5bn loan and providing Hungary with “a substantial financing package”
NH:
so we have an a global currency crisis on our hands
NH:
actually, very good note out of Deutsche Bank this morning
NH:
looks at how much more money came still come out of EM assets
NH:
and whether the authorities have enough money to avoid default and/or stabilise their currencies?
NH:
the broad conclusion is worryingly “a lot” and “probably not”.
NH:
De-leveraging is clearly continuing with a vengeance (see our notes
“Assessing the Impact of Global Deleveraging on EM” and “CEE Banking
Systems – Risks of a Systemic Crisis”) and the latest data indicate that local
currency bond funds, for instance, lost 20% of AUM since the last week of
August. The redemptions, in turn, have clearly set in train a vicious cycle with EM
equities down nearly 50% since early August, EMFX between 10% (Asia) and
25% (EMEA) and the EMBI Global 28%, with so far little respite in sight. This
raises the risk that money will continue to flow out of EM—even with substantial
commitments of official IMF and bilateral official support.
NH:
This note sets out what we believe is the right way to think about the
potential financing needs and presents country-by-country external gap
estimates. The bottom line: if there is no deposit flight, it would take nearly
USD28bn in international financial support for Hungary to cover outflows under a
70% credit roll-over scenario (0% rollover of bonds and some further liquidation of
non-resident equity and bond positions) and restore FX reserves to reasonable
levels. In Ukraine it would take “only” about USD15bn (though closer to 20bn with
deposit flight). The largest projected financing gaps are, however, in countries that
have not formally requested IMF programs: Turkey, South Africa and Romania. All
risk depleting their reserves, even under relatively benign assumptions.
NH:
Based on these estimates, the largest financing gaps appear to be in South Africa,
Turkey, Romania, Poland and Hungary. For instance, it would take USD27bn to cover all the potential outflows in Hungary under the relatively benign Gap 1 scenario.
NH:
However, this would involve the complete depletion of FX reserves (to minus USD3½bn—as shown in the “Gap A” column), and to restore these to full coverage of the existing short-term debt stock (i.e. implicitly assuming that eventually that stock will be rebuilt) would require USD36bn in
NH:
official financing support (see the 3rd column from the right). If we were to assume that no domestic capital flight takes place at all, the financing need would drop to USD28bn and one could argue it could be lower if Hungary were to live with lower FX reserves levels for the next few years.
NH:
But the bottom line for us, is that to adequately finance Hungary over the
next 18-24 months requires more than the “average” exceptional access program from the IMF, which would be in the order of USD10-13bn (See our note “Reference
Points for the Potential Size of IMF Support”, October 20).
NH:
Ukraine would appear to require about USD22bn in total financing and USD15bn if we assume away domestic capital flight. However, in the event of a run on the banks, the financing gap would quickly balloon to something closer to USD55bn, underscoring the critical importance of stabilizing the deposit base. In reality, it is highly likely that deposit
restrictions would be imposed well before FX reserves are depleted. In
NH:
In South Africa, existing legislation already limits deposits transfers abroad to Rand2mn over the course of one’s lifetime, likely leading to an overestimation of the financing gaps for SA under both our gap scenarios (though even without domestic capital flight South Africa needs around USD20bn).
NH:
In Romania, the financing pressure appears to be greatest relative to the size of the
economy—nearly 20% of GDP, or UD40bn, as shown in the last column. If the deposit base becomes unstable, however, it could be nearly twice that amount. The table also helps illustrate how the just announced IMF program for Iceland is wholly inadequate, but effectively the banking system has already defaulted and there seems no intention to intervene away the scarce resources to help pay off any private liabilities.
NH:
Depending on the degree to which deposit restrictions are maintained, the IMF financing should suffice to cover
the sovereign’s needs.
NH:
Finally, the largest financing gap of all, in nominal terms, is in Turkey, where the current account has been financed by continuous net increases in exposure to the corporate sector.
NH:
A sub-100% rollover rate would leave the country with a financing gap of USD90bn, though perhaps half that if CBT were willing to run down its reserves by half. Turkey’s banking sector is, in our view, a lot stronger (and less leveraged) than most of the rest of CEE, however, which should help avert systemic banking stress
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:
Thank you Michael below
NH:
while we are on the EM theme
NH:
got a really interesting email on Friday about China
NH:
it was from one of the big banks
NH:
but we can print the note
NH:
they just dispatched team to China
NH:
to try and assess the severity of the slowdown
NH:
they say it is much, much worse than the market thinks
NH:
a significant number of factories are shitting down because of slowing demand from overseas consumers
NH:
trade is locking up - letters of credit and 90-day commercial paper are no longer being accepted or transacted
NH:
All copper smelters are losing money at current prices but demand from power companies remains stable for now
NH:
Property prices are down at least 20% in the past few weeks, with 30-40% falls in some areas
PM:
Before you do — we are all conjuring up images of shitting factories in china
NH:
sums things up quite nicely
PM:
Enough — no profanities please. That was a typo!
NH:
Our resources analysts have recently been touring China and have been talking to a wide range of companies, consultants, users etc. They have returned with a very bleak picture of the Chinese economy, even gloomier than the bearish picture being painted at the moment in the market. The picture can be extended to other sectors of the Chinese economy and will have a regional impact, especially on Australia resource companies.
NH:
1. There is a very surprising negative rate of change in the economy being openly vocalised by corporates and other market participants. A significant number of factories are shutting down. These are shutting down due to a collapse in overseas demand as global consumers scale back spending.
NH:
2. Trade flow is locking up rapidly - letters of credit and 90-day commercial paper are no longer being accepted or transacted. Companies are resorting to 30 and 60 day paper putting further pressure on working capital. Letters of credit not being honoured beyond 3m will be a key hurdle for foreign traders who have 1-year contracts. Liquidity pressures are being seen in 60-day paper and this is expected to seize up soon.
NH:
3. There is a significant collapse in demand with end products not being able to be sold - domestic coastal coal shipments for example have declined by 30% in the past 3 months.
NH:
4. All copper smelters are losing money at current prices but demand from power companies remains stable for now. Further closures are expected at zinc smelters, with 85% of smelters thinking prices will continue to fall. A senior advisor to CISA has just said that the steel industry faces a “costs crisis” as material costs exceed falling prices.
NH:
5. The property market has significantly slowed, and companies are now pinning hopes on infrastructure projects. Property prices are down at least 20% in the past few weeks, with 30-40% falls in some areas. Demand for cement, aluminuim, copper, zinc, steel, iron ore and coal have already weakened.
NH:
6. For some companies, preservation of capital will be key. Our analysts believe that there are significant risks of survival in the commodities sector.
NH:
7. Consensus amongst Chinese corporates is that they are banking on a recovery in 2H09, but in the meantime they expect a significant contraction for the remainder of this year and the first half of next year. The single biggest risk they see is an extended OECD recession post 1H09 and incremental changes to China policies.
NH:
There are great hopes being pinned on the Chinese Government to help the economy. Preservation of capital is likely to be crucial over the next
18-24 months - we expect significantly more difficult conditions ahead.
NH:
Things are bad and rapidly getting worse - there is no sign that this market is about to form a base any time soon.
NH:
notes that like that are doing some real damage to the mining sector
NH:
been taken apart again this morning
NH:
if this carries on there won’t be anything left soon
Anglo American (AAL:LSE): Last: 1,121, down 126 (-10.10%), High: 1,175, Low: 1,082, Volume: 3.45m
RIO TINTO (RIO:LSE): Last: 2,045, down 232 (-10.19%), High: 2,164, Low: 2,014, Volume: 1.73m
Xstrata (XTA:LSE): Last: 712.00, down 65.5 (-8.42%), High: 731.00, Low: 696.50, Volume: 3.34m
Lonmin (LMI:LSE): Last: 1,072, down 102 (-8.69%), High: 1,132, Low: 1,056, Volume: 306.19k
Kazakhmys (KAZ:LSE): Last: 220.00, down 19.5 (-8.14%), High: 231.00, Low: 212.00, Volume: 1.36m
BHP Billiton (BLT:LSE): Last: 805.50, down 63 (-7.25%), High: 817.00, Low: 780.50, Volume: 7.88m
PM:
We were laughing at the Xtrata chart earlier — basically it is a triangle - with a vertical right side
NH:
and I dare say there are few others like it in the sector
NH:
actually Citi, which were pretty bullish on the miners
NH:
they have cut forecasts this morning
NH:
Lowering Commodity Prices — We are reducing our commodity price forecasts for the second time in a month. Our revised base metal prices are now in line with trough levels, although we continue to run bulk commodity prices above their
trough levels. Spot commodity prices are pointing to further risk to earnings
downgrades in the short term. The uncertainty in the macro environment, falling
commodity demand and earnings uncertainty are likely to continue to weigh on
the sector.
NH:
Bulks to Fall, but Not to Trough — We now forecast bulk commodities to fall in
JFY2009. We see downward pressure on iron ore pricing over the forecast time
horizon. We forecast prices settle down 20% in JFY2009 (previously +10%). We
now forecast coal prices to fall in the region of 20-25% in JFY2009.
NH:
Impact on Earnings — Our commodity price revisions have resulted in earnings
downgrades to the sector mostly in the order of 40-60% with larger downgrades to
the more leveraged single commodity companies. To reflect these changes, we
have lowered our target prices by 30-60% (see Figure 6 for details).
NH:
Changes to Recommendations — We have made three rating and/or risk code
changes for the UK metals and mining sector. We have moved both Kazakhmys
and Vedanta from High Risk to Medium Risk, to reflect their changing earnings
mixes. We maintain Buy recommendations on both. In addition, we have reduced
our recommendation on Norsk Hydro from Buy to Hold to reflect greater
uncertainty over earnings.
NH:
A Divergence of Returns — Returns in the sector are likely to become polarised,
with those companies with higher sustainable margins, strong free cash flows and
balance sheets delivering significant outperformance. On this basis, we favour
New World Resources (1M, TP £4.60), Kazakhmys (1M, TP £4.75), Kumba (1M,
TP R254), Antofagasta (1M, TP £4.05), Xstrata (1M, TP £15.00), First Quantum
(1M, TP £15.00) and Anglo American (1M, TP £20.00).
NH:
Sumpump - Aviva have results tomorrow. Market worried about capital and its mortgage business
NH:
also we are picking up concerns that the divi might have to but cut
RAW is market chatter - information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
PM:
In the last five weeks or so it has come down from 565p
NH:
divi costs around £1bn I think
PM:
Well the price is certainly signalling something
NH:
biggest faller in the FTSE 100 at the moment
NH:
Right, let’s move on to the one stock in Europe this morning that is really moving
PM:
The GTi of the German bourse – Volkswagen.
NH:
(Zoomy you owe us. We saved from total wipeout.)
PM:
Ah, but he might have booked good profits on Friday
PM:
in fact, I dont think Zoomy is with us
PM:
Yeah, but i think he got a short term job
NH:
anyway back to VW, which must be the 10 biggest company in the world again this morning
PM:
Well Im going to put the whole Porsche press release up here:
PM:
Interest in Volkswagen increased to 42.6 percent
Porsche heads for domination agreement
Stuttgart.
PM:
Due to the dramatic distortions on the financial markets Porsche Automobil Holding SE, Stuttgart, has decided over the weekend to disclose its holdings in shares and hedging positions related to the takeover of Volkswagen AG, Wolfsburg. At the end of last week Porsche SE held 42.6 percent of the Volkswagen ordinary shares and in addition 31.5 percent in so called cash settled options relating to Volkswagen ordinary shares to hedge against price risks, representing a total of 74.1 percent. Upon settlement of these options Porsche will receive in cash the difference between the then actual Volkswagen share price and the underlying strike price in cash. The Volkswagen shares will be bought in each case at market price.
Assuming the economic framework conditions are suitable, the aim is to increase to 75 percent in 2009, paving the way to a domination agreement. The intention to increase the Volkswagen stake to above 50 percent in November/December 2008 remains unchanged.
PM:
Porsche has decided to make this announcement after it became clear that there are by far more short positions in the market than expected. The disclosure should give so called short sellers – meaning financial institutions which have betted or are still betting on a falling share price in Volkswagen – the opportunity to settle their relevant positions without rush and without facing major risks.
In addition, the EU commission will - according to media reports over the weekend - sometime soon qualify the new draft of the VW Act tabled by the Federal Government as not complying with EU law. It is therefore to be expected that a new lawsuit will be filed with the European Court of Justice.
PM:
Also as a reason for today’s step served the fact, that the families Porsche and Piëch, who own all Porsche ordinary shares, have expressed their unconditioned and undivided backing of the steps taken by the members of Porsche SE’s board of management Dr. Wendelin Wiedeking and Holger Härter. As reported, both families clearly expressed last week their support for a domination of the Volkswagen group by Porsche.
GO
NH:
Right, what does “go” mean?
PM:
I don’t know, its just stuck there at the end of the release.
NH:
Maybe it is an instruction to go burn the bears – cos that’s what has happened.
PM:
In simple terms here, what seems to have happened is that people have sold VW short because the price had parted company with reality – on a loony multiple when lots of other car makers are flirting with bankruptcy.
PM:
Now it turns out that all the stock is controlled by Porsche – who may well have been oiling the shorts by lending stock.
PM:
Now they have disclosed that rather than the public 30 per cent holding they actually have effective control of almost three quarters of the company.
NH:
And another 20 per cent is under local state control. So no free float.
NH:
Result – all those betting that the price was too high cannot close their positions.
PM:
Well, in trying to close the VW price has set off for the moon.
PM:
The price was at 400 euros jsut a bit earlier – its all but doubled – but we cant see properly on this screen whether any real volume is changing hands.
NH:
It’s not a car maker – it’s a rocket, and we really don’t know how far it could go if this ludicrous state of affairs is allowed to continue.
NH:
Basically, under the nose of the BaFin, Porsche has made a comedy of the German stock market.
NH:
and the press release is just staggering
NH:
the reason for the disortion is pretty clear
NH:
and it is pretty clear who did it
PM:
Cos Porsche distorted it
NH:
not even the FSA would let this happen
NH:
I thought MIFID was supposed to help make things more transparent
NH:
Lemmy fair points, but we never knew the exact size of the CFD position until this morning
NH:
I can only guess that this is going to end in a lot of litigation.
PM:
Interesting point below on whether — once this short closing debacle is out of the way — VW finally does represent a great shorting opportunity
NH:
At this point we should take out hat off to Max Warburton of Sanford Bernstein.
NH:
He’s only just joined the research shop there – and it was between jobs, while he was cycling round france or somewhere, that he worked out what seemed to be going on.
NH:
Porsche making billions by quietly controlling the market.
NH:
Put a note out week before last, which we previewed on Alphaville.
NH:
Porsche said it was a fairy tale or something. Then they come out with this
PM:
Got his latest research?
NH:
Well we put the summary up earlier – here:
NH:
But I am minded to share some more.
NH:
What does it mean for the VW Ordinary Shares (not rated)?
NH:
What happens to VW Ordinary shares on the back of this announcement? We do not rate VW rds but we express a view as we believe it is important for our rating on Porsche. We can only assume we are going to see the mother of all short squeezes in VW Ords – although this is an almost unique situation. With massive short interest (we understand that total shorts amount to over 15% of VW’s Ordinary share count), but with no real free float, how do hedge funds react?
NH:
To have shorted the stock, hedge funds must have inadvertently borrowed stock from Porsche. Porsche is on record in the press as saying “we do not lend out shares” (e.g. Financial Times, Thursday October 23rd), but since they now admit to controlling 74.1% of the shares, either they or their banks must surely have been lending (maybe their statement last week was semantics – with the banks that wrote the call options lending out stock). The only other explanation is that the State of Lower Saxony has been lending, but this seems unlikely to us.
NH:
Hedge funds who shorted the stock believed that there was a free float and that when Porsche said they planned to go “over 50%” in VW, they literally meant 50.1%. Hedge funds hoped that after this was confirmed, the remaining free float (e.g. 30%) would trade on fundamentals. We have long questioned this view and questioned it again in our recent research. Now the hedge funds know that there is no free float, we assume they will scramble to close their shorts.
NH:
There’s no free float to buy from! To whom did the hedge funds sell stock to when they previously borrowed VW shares and sold them? These are all mysteries – but we argued in our recent Fruit Machine report that since the VW share price went UP (rather than DOWN) when hedge funds sold shares, Porsche might have been buying shares that it already owned (or its banks already owned). Who else could have driven the share price so high in September and early October?
NH:
Hedge funds are going to need to buy VW shares back and Porsche, its banks, or whatever other funds bought stock from hedge funds selling short can now name their price. Look at it this way: if you had bought VW shares recently – and if you knew that the hedge funds HAVE to buy back stock to return it to Porsche/ the banks – at what price would you offer it?
NH:
If independent funds own the shares, they can name their price. If Porsche or the banks own the shares (e.g. own shares twice over), they can also name their price (i.e. one last jackpot from the Fruit Machine?). Alternatively, if Porsche or the banks own the shares but choose to “be nice” (either voluntarily or under the advice of the regulator), maybe they will be willing to sell shares at a lower price, so as not to kill the hedge funds. Perhaps Porsche will “put something back on the table” for hedge funds, to defuse the situation.
NH:
Porsche says in its press release that “the disclosure should give so called short sellers – meaning financial institutions which have betted or are still betting on a falling share price in Volkswagen – the opportunity to settle their relevant positions without rush and without facing major risks”. Hedge funds may have some time to close shorts but we’d assume the VW Ord price goes much higher during this process.
NH:
What happens after the short squeeze? With Porsche seeking a “domination agreement” (a legal process that forces other shareholders – i.e. Lower Saxony and the other 5% of freefloat – to surrender control of VW and its cashflows to Porsche), we’d guess that Porsche will be required to offer remaining shareholders – including Lower Saxony – a price close to the highest price paid. But with only 5.9% left, VW Ords are effectively “off exchange” from now on.
NH:
actually this whole VW things reminds of Roomservice
PM:
Claimed a couple of scalps
NH:
yeah, a few years back some traders at Evoltuion ended up shorting 5 times the shares in issue
NH:
needless to say it created a settlement problem
NH:
THREE-MONTH EURO LIBOR/OIS SPREAD 185 BPS VS 183.8 BPS, STERLING
NH:
*OVERNIGHT EURO LIBOR FIXED AT 3.56250 PCT VS 3.54875 PCT ON FRIDAY
NH:
THREE-MONTH DOLLAR LIBOR/OIS SPREAD 264.3 BPS VS 262.1 BPS ON FR
NH:
*SIX-MONTH DOLLAR LIBOR FIXED AT 3.51250 PCT VS 3.52750 PCT ON FRIDAY
NH:
*THREE-MONTH STERLING LIBOR FIXED AT 5.95375 PCT VS 5.98000 PCT ON
NH:
*OVERNIGHT EURO LIBOR FIXED AT 3.56250 PCT VS 3.54875 PCT ON FRIDAY
NH:
*SIX-MONTH DOLLAR LIBOR FIXED AT 3.51250 PCT VS 3.52750 PCT ON FRIDAY
NH:
THREE-MONTH STERLING LIBOR FIXED AT 5.95375 PCT VS 5
NH:
*OVERNIGHT DOLLAR LIBOR FIXED AT 1.26875 PERCENT VS 1.28125PCT ON FRIDAY
NH:
OVERNIGHT EURO LIBOR FIXED AT 3.56250 PCT VS 3.54875
PM:
Generally and relatively quiet in the governmental interbank market
NH:
*THREE-MONTH STERLING LIBOR FIXED AT 5.95375 PCT VS 5.98000 PCT ON
NH:
sorry, having more IT problems. that’s the right Three month sterling flash
PM:
Anyway — what else have you been looking at
NH:
or HSBC as it has been renamed
NH:
stock has fallen 25% in the past two sessions
NH:
and this is Britain’s second biggest company
PM:
(Stacy — check out the Gordon ramsey for lunch)
NH:
actually it has rallied a bit mow
NH:
was off 11% earlier this morning
NH:
now down just 52.5p at 643p
NH:
obviously, this morning’s weakness is down to the dismal performance of Hong Kong
NH:
which is one of its biggest markets
NH:
that said, I was re-reading Morgan Stanley’s note on HSBC over the weekend
PM:
The World’s Biggest Emerging Markets Bank
NH:
and a few things really stood out
NH:
before Friday’s sell off
NH:
HSBC was down just 5% YTD
NH:
and trading on a price/earnings ratio of over 11
NH:
Morgan Stanley made the not unfair point
NH:
that Smug Bank was well, er a bank
NH:
and three of its biggest markets are UK, US and Hong Kong
NH:
none of which are in fantastic shape
NH:
and then they did some really interesting work on HSBC’s currency exposure
NH:
especially to emerging markets
NH:
and the impact that this could have on earnings and the balance sheet
NH:
In Exhibit 7 we show the FX benefits that HSBC has enjoyed
over the last three years reflecting the depreciation of the US
dollar and their policy of hedging FX risks only in limited
circumstances. Over the period earnings have benefited by
US$1.5bn and shareholders funds have increased by
US$13.5bn.
NH:
here’s some of HBSC’s currency exposure
NH:
these figures are net and in dollars
NH:
and come from Morgan Stanley
NH:
China $10,892bn
Mexican 5,247bn -
Hong Kong 4,635bn
Brazilian 4,007bn
Indian 2,699bn%
UAE 2,182bn
Turkish lira 1,796bn
Korea 1,282bn
Malaysian 1,044bn
NH:
Since 1H08 we have seen a huge shift in most major and
emerging market currencies relative to the US dollar. In Exhibit
8 we show our estimate of HSBC’s exposure to the
strengthening US dollar. It is based on their disclosure of net
currency exposure at the end of 2007. While net positions may
have changed we believe that they would still be representative
of today’s exposures.
NH:
In Exhibit 9 we show the potential impact on earnings if today’s
rates continued into 2009. We calculate earnings would have
been ~14% lower if today’s rate had been the average over the
period.
This is key as HSBC’s share price has been holding up in GBP,
due to the strength of the US dollar relative to sterling. While
this makes sense if it’s only the cable rate that is shifting, when
we see such a global shift in currencies and therefore a fall in
HSBC’s earnings such arbitrage looks like a mistake, in our
view.
NH:
they also made some other interesting points
NH:
HSBC has €779bn of loans to developed markets,
$162bn in Asia, $25bn in the Middle East and $54bn
in Latam
NH:
HSBC CDS is trading inside the UK and well inside
emerging sovereigns
NH:
oh, forgot to mention the stuff on rising impairment charges in the UK, US and Hong Kong
NH:
In Europe we are now mapping a similar bad debt profile in
the UK as for the other UK banks. In our base case we are
working to peak 2010 mortgages losses of 30bp, 650bp in
unsecured and 150bp in corporate. The mortgage charge
compares with ~50-80bp for the other UK banks. This is
still well below peak losses from the early 1990s when
corporate losses reached 250-300bp. Nevertheless, this
increases our bad debt forecasts notably in 2010, where
we had previously had much more modest assumptions.
NH:
In HK and Asia Pacific we have factored in a slowdown in
revenue trends, notably in HK but also a rise in bad debts
to reflect the deteriorating macro economic picture and
falling asset prices
NH:
In the US we have pushed back our expectation of a bad
debt recovery to 2011 from 2010. This results in a
US$4.4bn swing in the US profit in 2010. This is consistent
with our US banks team who now expect the current cycle
to reach historical peak losses across the board, with well
above peak losses in mortgages. While we have not
focused on it in this report we believe that HSBC’s
unsecured subprime, card and auto exposure will start to
cause more problems as unemployment increases.
NH:
In Latam we are also forecasting a slower revenue picture
and a rise in bad debts. We note HSBC’s very strong asset
growth and push into the unbanked consumer segments,
notably in Mexico, as a strategy. If we combine the
portfolio risks at HSBC, with the deteriorating macro and
FX swings we believe risks to our forecasts lie to the
downside.
PM:
While we are looking at HSBC, how abotu Standard chartered??
NH:
pretty much halved in two weeks
PM:
apart from the obvious – massive emerging markets exposure
PM:
any other reason for the weakness?
NH:
the banks team at Citi
NH:
they reckon Stan Chart needs to raise $5bn of capital
PM:
I thought Stan Chart didn’t need the govt bailout shilling
NH:
that’s what they said
NH:
but they wouldn’t be the first bank to get things wrong
NH:
and their point is that given the slow down in emerging markets
NH:
it is going to need stronger capital ratios
NH:
Tier One is around 6.1% at the moment
NH:
Now Smug Bank is on 7.6%
PM:
former smug bank, pse
NH:
and to get it there would require $5bn of capital
PM:
changed its name to HSBC
NH:
of which $3bn needs to be equity
NH:
Shares have fallen c50% from recent peak — Given the speed of this reversal,
we review the reasons behind our Sell rating and stress test our estimates for a
1999 post-Asian crisis impairment experience. With the global economic
outlook deteriorating we continue to view the group’s capital position as too
weak and earnings estimates as vulnerable to further downgrades.
NH:
We estimate Standard Chartered needs to raise c$5bn of capital — We believe
that the group needs to raise $5bn of capital, of which at least $3bn is likely to
be equity. This would take the core Tier 1 ratio from 6.1% at 1H08 to 7.6% on
a proforma basis, in line with HSBC but still below the Asian bank average of
10.5%. Stronger capital ratios are likely to be necessary given slowing Asian
economies and the recent rapid growth of the Wholesale loan book.
NH:
Earnings at risk of significant downgrades — Despite being 12% and 19%
below consensus for 2009E and 2010E respectively, we believe there is risk of
further significant EPS downgrades on the back of higher impairments and
from dilutive equity issuance. Recapitalisation could result in EPS dilution of
between 15% - 33%. Additionally, stress-testing impairments to a post Asian
crisis level, using 1999 as a proxy, would reduce EPS by a total of 74%.
NH:
here’s some stuff on the impact of a recapitalistion
NH:
Figure 9 shows our estimate of the capital position after these two scenarios,
and a third scenario where Standard Chartered issues $3bn of equity and $2bn
of preference share capital. We assume that equity is issued at 590p (955c)
equivalent to 1.0x tangible book value at 1H08 and a 35% discount to
NH:
Figure 10 shows that the 2009E EPS dilution would be in the range of 15% -
33% with a small dilution to 2009E tNAV per share.
NH:
and before we sign off from the banks
NH:
Santander coming under a bit of fire this morning
NH:
they have exposure to emerging markets
NH:
and two wobbly developed world economies – UK and Spain
NH:
adn the US increasinly
NH:
Cazenove have taken the red pen to forecasts this morning
NH:
cut 2009 and 2010 forecasts by 11% and 17%
NH:
and that’s mainly reflecting the expectation of lowerlending volumes at Santander’s Continental Europe, Latin America and UK divisions
NH:
Santander – Estimates reduction and change of recommendation – [SAN.MC, €7.15, Stock: IN-LINE from Outperform] Sector: Neutral
We resume coverage with an IN-LINE recommendation (previously Outperform). We cut our 2008E EPS by 5%, our 2009E EPS by 11% and our 2010E EPS by 17%.
NH:
The catalysts behind our earnings revisions mainly relate to the reduction in lending volumes at Santander’s Continental Europe, Latin America and UK divisions. In addition and as a reflection of the increase in the cost of credit Santander faced during the early 1990’s recession (the cost of credit increased by an average 113bps – see figure 9), we forecast a further deterioration in impairment charges for the period 2008E-2010E, to 109bps.
NH:
Our estimates now factor in the recent Alliance & Leicester, B&B and Sovereign Bank transactions (Source: based on Santander projections). In addition, we factor in the default risk of the Argentina banking division (We estimate a negative impact in the range of €207m per year, with a negative impact in terms of allocated capital of €740m).
Santander has outperformed the DJ Europe Stoxx Banks Index by more than 8% YTD; in absolute terms, the stock is down 48% YTD, yet we believe that the stock could fall further, especially when one considers the historical correlation between PNAV stated and the cost of risk. In the late 1980s, PBVs fell to below 0.5x, while the cost of risk increased to in excess of 150bp.
PM:
Thanks for all that — i will read it thru properly
NH:
right, we have Draaisma through
NH:
he is a bit all over the place
NH:
turned more negative but still bullish
PM:
Well — he’s a structural bear, betting tactically on a bear market rally — or has been
PM:
Teun has been knocked about like everyone else
PM:
Even edwards has his honeymoon brought to a juddering halt
NH:
We are lowering our EPS number and index target again today
NH:
We now expect a 43% EPS recession (-14% in 2008, -33% in 2009). Our end of 2009 earnings estimate is now 45% below IBES consensus. Our new 12 month target for MSCI Europe implies 28% potential upside and a P/E multiple of 16 on trough earnings. This is in line with the 16-17x trailing multiple of trough earnings in the last 4 earnings recessions. The next bull market, and a rotation into Cyclicals, could start in mid-2009, 1-2 quarters before EPS trough.
NH:
Recommended trades: defensive and relative value
NH:
) Sectors: long Defensives (Telcos, Healthcare) short Cyclicals (Industrials)
*) Relative value trades: invest in market-neutral trades such as our value based long/short strategy inspired by Joel Greenblatt (see Valuation Factors Are Working Again, October 20, 2008) or the balance sheet strength long/short strategy inspired by Piotroski (see Piotroski Revisited: A Guide to Corporate Financial Health, October 6, 2008)
NH:
Market direction: there is value but no hurry. We believe investors with a longer-time horizon should slowly average in at these types of valuations (see Time To Buy A Little Bit More, October 13, 2008). However, we are not pounding the table regarding the short-term market direction.
NH:
what’s that you are looking at??
PM:
latest hedge fund performance tables from HSBC
NH:
interesting. updated for last week
PM:
yep - but probably not the last sell off
NH:
and, anything stand out??
PM:
Well, a lot to go thru — but just looking at dear Tosca
PM:
Main fund seems to be down almost 12 per cent months to date
PM:
62% for the year to date
PM:
20% down month to date
NH:
and RAB UK down 12.6% MTD
NH:
Lansdowne hanging in there
NH:
UK fund - off 2.4% MTD
NH:
Greenlight - David Enihorn
PM:
Even the bears are taking a pasting
NH:
yeah, but remember Enihorn owns some mutant finance
NH:
he is long of Punch Taverns
NH:
Punch shares now just above 100p
NH:
so its third Pub shares for one pint
NH:
we will have to keep a watch on that ratio
PM:
Actually — Sam has just sent over some stuff on pub sales
NH:
For the three months to the end of September sales volumes in pubs declined by 8.1%, according to figures published today by the British Beer & Pub Association
NH:
everybody is staying at home
NH:
http://www.beerandpub.com/newsList_detail.aspx?newsId=260
NH:
a fall of 1.8m pints a day
PM:
Well, im not — ive got a lunch to go to
NH:
come on then where is it today?
NH:
which of Mayfair’s finest??
PM:
No no — City lunch today
PM:
Upstairs of course
PM:
Nice place — sister restaurant to the Bleeder
NH:
Starters
Soupe de Poisson Marseillaise with Croutons, Rouille and Gruyère Cheese £6.45
Beignet of Organic Staffordshire Goats Cheese with Roasted Red Pepper Compote £7.50
Salt Cod Brandade on a Shetland Salmon Tartare with a Spiced Tomato Coulis £7.95
Pheasant, Woodpigeon and Duck Terrine with Orange and Quince Relish £8.50
Seared Peppered Loin of Tuna with Marinated Carrot Orientale £8.95
Portland Crab, Beetroot and Chicory Gateau with Salsa Verde £9.95
Foie Gras Crème Brulée, Sorrel and Pain de Campagne £10.25
Scottish Scallops en Coquille with Lime and Vanilla Beurre Blanc £10.50
NH:
Main Courses
Potato, Spinach and Pine Nut Gnocchi with Gorgonzola Sauce £12.95
Supreme of Free Range Guinea Fowl with Roast Cauliflower Sauce Mornay £16.95
Roast Pavé of Cod Lyonnaise with Meaux Mustard Sauce and Pommes Salardaise £17.50
Seared Sea Bass on Watercress and Crayfish Risotto £17.95
Saddle of Rabbit with Wild Mushrooms, Bacon and Green Lentils £18.50
Roast Suckling Pig on a White Bean Purée with Apple and Sage Sauce £18.95
Roulade of Red Mullet with a Scallop Mousse on a Leek and Ginger Fondue £19.50
Roast Rack of Lamb and Slow Cooked Lamb Breast with a Roasted Aubergine Mousse £19.95
Roasted Loin of New Zealand Venison with a Fig and Walnut Tatin and Juniper Jus £21.95
Grilled Fillet of Scottish Beef, Sauce Béarnaise, French Fries and Salad £23.95
Grilled Fillet of Scottish Beef “Rossini” with Foie Gras, Pommes Darphin and Spinach £26.50
NH:
Desserts
Dark and White Chocolate Mousse “Can-Can” with Pistachio Biscuit £5.95
Baked Raspberry Soufflé with a Fresh Raspberry Coulis £5.95
Iced Jasmine Tea and Lime Parfait with a Citrus Syrup £5.95
Warm Crisp Apple and Pear Strudel with Cinnamon Ice Cream £5.95
Summer Berry Tiramisu with an Almond Biscotti £5.95
Plum Tatin with a Prune and Armagnac Ice Cream £5.95
Cheese
Cheese Board £7.50
Gratin of Saint Marcellin with Salad Leaves and Toasted Potato Bread £7.75
NH:
no wine list on line sadly
PM:
Wouldnt usually go for fish on a Monday, cos Billingsgate shut
PM:
But ive really got to watch things on the weight front
NH:
but here’s some history
NH:
The spirit of The Don has been an integral part of 20 St. Swithins Lane since 1798 when the young Perthshire Scot George Sandeman took over the site as the cellar for his port sherry and wine company. The black-caped figure of The Don with his flat black sombrero has long been a symbol of excellence in the world of ports and sherries.
Those ports and sherries were shipped to London from Oporto and Jerez on the Iberian Peninsula in their handsome wooden casks, which were lowered down into the basement bottling cellars by the handturned Capital Patent Crane. The Crane, which was at that time considered a remarkable feat of engineering still stands in the shed that is today the entrance to the Don Restaurant and Bistro.
NH:
The tradition of generous hospitality and fine restauration has always run deep at 20 St. Swithins Lane. One of the younger Sandeman lads wrote thus of a dinner here in 1814.
“I dined at my uncle’s in St. Swithins Lane at six o’clock. Such late hours I dislike - otherwise things were most agreeable. The party consisted of six French gentlemen connected with the wine trade. We had variety of fine wines, clarets, ports and other kinds whose names were quite new to me. I was tempted to take five or six glasses of Madeira, besides some others. Not being accustomed to such liquors, I felt some degree of fever through the night but my head was not affected at all”
NH:
Ports, sherries, and those Madeiras continued to be bottled here until 1969 when the now world-famous ‘Sign of The Don’ was lowered from its site high above Number 20 St. Swithins Lane and shipped to Oporto where it has been hanging in the Sandeman Museum.
George Sandeman, the present chairman, thought it appropriate that the sign should be returned from Oporto to its orginal home at 20 St. Swithins Lane, trusting that the spirit of The Don would inspire a new generation of enthusiastic connoisseurs.
PM:
back tomorrow at 11am -
PM:
Thanks for all the comments
NH:
i hope this doesn’t happen to you
NH:
Not being accustomed to such liquors, I felt some degree of fever through the night but my head was not affected at all”
PM:
kingie has got a start date at the Times
PM:
Sun City editor becomes Times biz deputy
NH:
market update - FTSE 100 down 132 points at 3,751
PM:
Right — off — cheers — seeya
