Markets live chat transcript for the chat ending at 12:11 on 29 Oct 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Welcome to Markets Live
PM:
This is FT Alphaville’s daily markets chat
PM:
Now, came to work with every intention of taking the dust sheet off the Rally Monkey
PM:
But then it kind of looked like the batteries were going flat – so we held off.
NH:
had got some Duracell’s in it?
PM:
nope
PM:
Cheapos
PM:
And you know what? I’m glad we held off. .
PM:
Because this dead cat of an equity market rally does not have a lot of bounce in it that I can see.
PM:
What do you reckon Neil?
PM:
And, I should say – thanks must go to you and Stacy for manning the ML controls last night.
PM:
Answering all those critics who say we only do ad hoc emergency sessions when stocks plunge.
PM:
As tho we prefer crashs! 
PM:
What a cheek.
PM:
Big rally last night – saw the Dow up almost 11 per cent. Neil and Stacy were quickly on the case.
PM:
I was Stuck in an ice and snow storm.
NH:
BEIJING, Oct 29 (Reuters) – China’s central bank cut banks’
benchmark lending and deposit rates by 0.27 percentage point on
Wednesday, the third cut in six weeks.
benchmark lending and deposit rates by 0.27 percentage point on
Wednesday, the third cut in six weeks.
NH:
The cost of one-year bank loans will fall to 6.66 percent
from 6.93 percent, while the benchmark one-year deposit rate
falls to 3.60 from 3.87 percent, the People’s Bank of China
(PBOC) said.
from 6.93 percent, while the benchmark one-year deposit rate
falls to 3.60 from 3.87 percent, the People’s Bank of China
(PBOC) said.
NH:
The cut in interest rates takes effect on Thursday, the
central bank said on its website (www. pbc.gov.cn).
central bank said on its website (www. pbc.gov.cn).
PM:
Hmmm
NH:
we had snow too in Hertfordshire
PM:
Notice that Shanghai was off another 3 per cent overnight
NH:
Shanghai onbviously not correlated to dow
PM:
Index there at just above 1700
PM:
Oh, does my short at 6k look good now
NH:
it was actually at 4,000 – don’t exaggerate
NH:
So, why weren’t you on line last night??
PM:
I had gone for a drink with Ians King and Cowie, and also Simon English from the Standard.
PM:
Oh, and Simon Goodley.
NH:
Gossip?
PM:
Not a lot, well
PM:
Not stuff I can repeat here.
NH:
Late one?
PM:
It was – 9pm by the time I got out.
NH:
wow that is late
NH:
right, Paul has some connection problems
NH:
while he reboots we will have a look at the wider market
NH:
FTSE 100 now up over 200 points
NH:
204.3 points higher at 4,130
PM:
(Watch it reggie)
NH:
that’s pretty much the high for the day
NH:
still think this is a dead cat
NH:
the rally on Wall Street followed tick for tick the Yen
NH:
as it sold off on news of rate cut
NH:
with the Fed likley to cut as well today
NH:
the carry trade will be back on
PM:
So central banks trying to reflate the carry trade?
NH:
and stop the run on EM currencies
NH:
that, as far as I can see, explains why we are up
NH:
that said, there was some good news from the Fed’s CP programme
PM:
We should have a quick look at the yen – tho ive got to say I am pretty clueless on currencies
PM:
Peter Granham — forex man at FT — says big level to look at is 90 for the yen$
NH:
we are we now?
PM:
Good way off that — yen $ at 96.78 right now
NH:
OK
NH:
of course there is one market in Europe that is lagging behind
NH:
ze German’s
PM:
Comicstocks
NH:
and that’s because its biggest company is under a wee bit of pressure this morning
NH:
down 7 points on the day
NH:
and VW?
PM:
Oh, that’s off just 36% at the moment
PM:
At 507
PM:
traded betwen 607 and 491 this morning
NH:
actually there are a couple of another interesting angles on VW
NH:
apart from Porsche offering to sell 5%
PM:
Go on
NH:
well, we have an index event on Friday
NH:
Dax has announced that VOW ords will be capped at 10% weighting.
NH:
Dow Jones has said it Eurostoxx50 index will also be changing its freefloat consideration too.
NH:
now this should help put the brakes on VW
NH:
according to one broker who has done some back of the envelope calculations
NH:
by cutting the weighting to 10% from 27% at the moment this could bring some 1.4x’s daily average volume on to the market
NH:
have a couple of notes on this
NH:
DAX:
Deutsche Börse has decided to adjust the weightings of the DAX constituents with
an extraordinary rebalance whereby the 10 percent capping rule applied on a
regular basis at the chaining dates will be exceptionally brought forward for
Volkswagen shares as per the close of Friday 31 October.
Deutsche Börse has decided to adjust the weightings of the DAX constituents with
an extraordinary rebalance whereby the 10 percent capping rule applied on a
regular basis at the chaining dates will be exceptionally brought forward for
Volkswagen shares as per the close of Friday 31 October.
NH:
The weighting of Volkswagen shares will hence be reduced to 10 Percent, if the
weighting is above this threshold at the end of trading on Friday
weighting is above this threshold at the end of trading on Friday
NH:
This announcement also means that as per their index methodology they do not
consider the cash-settled options as part of the non-free float of VOW, so currently
the free float of VOW stays at 44.78% within the DAX index.
consider the cash-settled options as part of the non-free float of VOW, so currently
the free float of VOW stays at 44.78% within the DAX index.
PM:
That’s from Morgan Stanley
NH:
Morgan Stanley
NH:
DJ EuroSTOXX50:
NH:
has announced that the free float factor of Volkswagen will only be
decreased from 49.63% to 37.32% to reflect the recent changes in the shareholder
structure of Volkswagen. They will therefore not consider the cash-settled options
as part of the non-free float of VOW. The timing of this free float factor change is an
extraordinary exception to their existing rule and will be implemented as of the
close of Thursday 30 October. Note that there are currently no capping factors
applied on the DJ EuroSTOXX50 constituents.
decreased from 49.63% to 37.32% to reflect the recent changes in the shareholder
structure of Volkswagen. They will therefore not consider the cash-settled options
as part of the non-free float of VOW. The timing of this free float factor change is an
extraordinary exception to their existing rule and will be implemented as of the
close of Thursday 30 October. Note that there are currently no capping factors
applied on the DJ EuroSTOXX50 constituents.
NH:
and this is from BNP
NH:
On 26 October Porsche disclosed its stake in Volkswagen’s ordinary
shares
After adding Porsche’s direct (42.6%) and indirect (31.5% through options) holdings in
Volkswagen’s ordinary shares to the Land of Lower Saxony s
shares
After adding Porsche’s direct (42.6%) and indirect (31.5% through options) holdings in
Volkswagen’s ordinary shares to the Land of Lower Saxony s
NH:
Volkswagen’s market capitalization on loan exceeds 10%
There are more shares on loan than free floated shares. It is technically impossible to
unwind all the short positions on Volkswagen.
There are more shares on loan than free floated shares. It is technically impossible to
unwind all the short positions on Volkswagen.
NH:
Index funds are facing an unprecedented situation
With around 5% of Volkswagen’s outstanding ordinary shares, index funds control
most of the remaining free float.
With around 5% of Volkswagen’s outstanding ordinary shares, index funds control
most of the remaining free float.
NH:
MSCI Barra has made an exception by deciding that Porsche’s options on
Volkswagen can be considered as non free float. They have already announced that
they will reduce Volkswagen’s ordinary shares free float factor on 26 November. The
effective date is not completely certain yet, and the adjustment could happen earlier.
Volkswagen can be considered as non free float. They have already announced that
they will reduce Volkswagen’s ordinary shares free float factor on 26 November. The
effective date is not completely certain yet, and the adjustment could happen earlier.
NH:
The DAX committee views the situation as exceptional, and announced, on 28
October after close, that Volkswagen’s free float weight will be capped at 10% as of
31 October at close. All the other Dax constituents will benefit from the reallocation.
October after close, that Volkswagen’s free float weight will be capped at 10% as of
31 October at close. All the other Dax constituents will benefit from the reallocation.
NH:
STOXX announced on 28 October after close that Volkswagen’s free float factor will
be reduced to 38% as of 30 October at close.
This will generate some selling pressure on Volkswagen.
be reduced to 38% as of 30 October at close.
This will generate some selling pressure on Volkswagen.
NH:
Consequences of Volkswagen free float reduction in the
indices
indices
NH:
On Volkswagen
Index fund managers will have to sell their shares. They will probably recall the shares
that they lent to other investors, forcing them to close their positions (i.e. buy shares on
the market). This could create buying pressure. Then they will have to sell their shares
on the market, creating a selling pressure at the adjustment dates.
Index fund managers will have to sell their shares. They will probably recall the shares
that they lent to other investors, forcing them to close their positions (i.e. buy shares on
the market). This could create buying pressure. Then they will have to sell their shares
on the market, creating a selling pressure at the adjustment dates.
NH:
The index adjustments could be a good opportunity for the remaining short sellers to
buy back some of their short positions, if they do not all decide to close their positions
at the same time. In that case, as the open short interests exceed the changes under
passive index management, the original selling pressure could be overpowered by the
short-covering buying pressure.
On other index components
Volkswagen being among the highest free float-adjusted market capitalizations, a
significant reduction of its weight in an index, or its deletion, would create some buying
pressure on the other index components and on any potential addition.
buy back some of their short positions, if they do not all decide to close their positions
at the same time. In that case, as the open short interests exceed the changes under
passive index management, the original selling pressure could be overpowered by the
short-covering buying pressure.
On other index components
Volkswagen being among the highest free float-adjusted market capitalizations, a
significant reduction of its weight in an index, or its deletion, would create some buying
pressure on the other index components and on any potential addition.
PM:
it’s such a jolly mess
PM:
Thanks for all that
NH:
another consequence of Porsche’s activities
NH:
is that it may be forced to make an offer for Swedish truck maker Scania
PM:
really?
NH:
yes
NH:
Sweden’s Financial Supervisory Authority said yesterday that once Porsche’s
interest in Volkswagen exceeded 50%, this would likely be considered a change in ownership of Scania, which would trigger a mandatory bid for Scania from Porsche.
interest in Volkswagen exceeded 50%, this would likely be considered a change in ownership of Scania, which would trigger a mandatory bid for Scania from Porsche.
NH:
in effect, Volkswagen’s 68.6 percent voting stake in Scania would be treated as if owned by Porsche but would not be subject to the exemption from making a mandatory bid granted to Volkswagen.
PM:
I see
NH:
and under Swedish takeover rules the bid could not be lower than the average Scania share price in the 20 days prior to Porsche acquiring more than 50% of Volkswagen.
NH:
here’s a quick bit of comment from MF Global
NH:
Our BUY recommendations on both MAN and Scania were predicated on anything from co-operation agreements between Volkswagen’s heavy truck business, MAN and Scania to a full blown merger of MAN, Scania and Volkswagen’s heavy truck business.
NH:
There still remain a few permutations for the three
businesses but the requirement that Porsche make a mandatory bid for Scania next year, if it increases its stake in Volkswagen to above 50% will precipitate a decision on the future of the three heavy truck businesses.
businesses but the requirement that Porsche make a mandatory bid for Scania next year, if it increases its stake in Volkswagen to above 50% will precipitate a decision on the future of the three heavy truck businesses.
NH:
The rationale behind any agreement between the three companies was to extract synergies in purchasing, manufacturing, R&D and service provision. To this end, we believe MAN must be part of any decisions made by Porsche and Volkswagen. The MAN share price has fallen over 70% since its peak but should now pick up as some form of agreement looks more imminent.
NH:
We think a renewed hostile bid from MAN is unlikely, as Volkswagen is unlikely to accept an offer without a substantial premium to thecurrent price, given that they paid SEK 200 per A share just 6 months ago for a share that is now trading
at just SEK 60.
at just SEK 60.
NH:
We do not believe Porsche will be granted an exemption from making a full bid for Scania as Volkswagen decision to use the exemption granted by the Financial Supervisory Authority’s was not well received by
the Swedish investment community.
the Swedish investment community.
NH:
We re-iterate our BUY recommendations on both MAN and Scania as we believe an announcement on
any proposed combination is now likely to happen in 2009
any proposed combination is now likely to happen in 2009
NH:
PM:
So waht is leading this dead cat this morning??
NH:
insurers
NH:
and anything else with a higer beta
NH:
just look at
Old Mutual (OML:LSE): Last: 49.50, up 10.5 (+26.92%), High: 49.50, Low: 44.60, Volume: 11.19m
Aviva (AV:LSE): Last: 312.50, up 53.5 (+20.66%), High: 313.00, Low: 286.00, Volume: 5.40m
PM:
Old Mut dead cat
NH:
and the miners, they are going too
PM:
Insurers — JPM had some stuff out earlier on Aviva
PM:
Think people thought there was going to be a string of cash calls across the sector
PM:
hey are saying “no”
PM:
In the case of Aviva
PM:
Aviva’s Q3 revealed why we believe Aviva is highly unlikely to conduct
a rights issue, indeed it may even maintain the dividend, giving a yield of
12% on the current market price. Our price target remains 440p end ’08 and
we expect the ’08 dividend to be flat on ’07 giving a 12% yield.
Aviva has options, which we believe have been missed by the market, to
boost capital if needed. A quota share reinsurance deal is similar to that
done by Swiss Re, Admiral and RSA (prior to 2005). Every 10% quota
share would release £400m of capital. We highlighted this as a possibility to
raise capital back in Oct. ’07. We believe this would involve giving up a
return on capital to the reinsurer, and therefore not the first choice of Aviva.
This is a back up plan which should avoid any additional shareholder
capital required by releasing up to £2bn of capital.
£14bn UK Commercial Property loans. The interest on the portfolio is
covered by rental income 1.27x times, which suggests that Aviva’s portfolio
can have more than 15% of properties empty without falling below the
interest on the loans. 24% of the portfolio is with either doctors or local
authorities. The 80% non-doctor surgeries have an average loan to value of
87%. No loss expected on the £642m Dawnay Day portfolio is also positive.
We see maintaining the year end dividend as a possible positive catalyst.
Our view is that, given the growth in EPS expected by management (double
the value – ’07 to ’12 EPS) and additional capital flexibility, management
will pay a high year end dividend. The driver for dividends is net operating
profits (less impacted by market conditions) 1.5-2x covered.
The IGD solvency surplus has fallen from the £1.9bn end of September to
£1.3bn as at 24th October. A further 20% fall in share prices would reduce
this solvency buffer down to £0.9bn. The IGD surplus is in line with our
year end estimate of £1.48bn published on Monday.
We expect the share price to re-rate upwards, as investors adopt the
view that Aviva is unlikely to need additional shareholder capital.
a rights issue, indeed it may even maintain the dividend, giving a yield of
12% on the current market price. Our price target remains 440p end ’08 and
we expect the ’08 dividend to be flat on ’07 giving a 12% yield.
Aviva has options, which we believe have been missed by the market, to
boost capital if needed. A quota share reinsurance deal is similar to that
done by Swiss Re, Admiral and RSA (prior to 2005). Every 10% quota
share would release £400m of capital. We highlighted this as a possibility to
raise capital back in Oct. ’07. We believe this would involve giving up a
return on capital to the reinsurer, and therefore not the first choice of Aviva.
This is a back up plan which should avoid any additional shareholder
capital required by releasing up to £2bn of capital.
£14bn UK Commercial Property loans. The interest on the portfolio is
covered by rental income 1.27x times, which suggests that Aviva’s portfolio
can have more than 15% of properties empty without falling below the
interest on the loans. 24% of the portfolio is with either doctors or local
authorities. The 80% non-doctor surgeries have an average loan to value of
87%. No loss expected on the £642m Dawnay Day portfolio is also positive.
We see maintaining the year end dividend as a possible positive catalyst.
Our view is that, given the growth in EPS expected by management (double
the value – ’07 to ’12 EPS) and additional capital flexibility, management
will pay a high year end dividend. The driver for dividends is net operating
profits (less impacted by market conditions) 1.5-2x covered.
The IGD solvency surplus has fallen from the £1.9bn end of September to
£1.3bn as at 24th October. A further 20% fall in share prices would reduce
this solvency buffer down to £0.9bn. The IGD surplus is in line with our
year end estimate of £1.48bn published on Monday.
We expect the share price to re-rate upwards, as investors adopt the
view that Aviva is unlikely to need additional shareholder capital.
PM:
NH:
Gen – FP. was a bungled auction last night. stock uncrossed at 782,000 at 65p. stock was trading pre-auction at 52.6p
PM:
This is in friends provident
NH:
we are seeing more and more of these weird uncrossings. looks like hedgies and prop desks being forced to dump or buy buy stock at the end of day
NH:
FP off 5p at 60p currently
PM:
PM:
And what about the banks?
NH:
yup, the are up too
NH:
HBOS up 12.7p to 81.4p
PM:
NH:
Standard Chartered up 133p to 833.5p
PM:
NH:
and RBS 7.2p better at 64p
NH:
and that’s in spite of a pretty bearish note from Caz on RBS
NH:
by Simon Pilkington
NH:
He reckons RBS need to recognised greater loan impairment
PM:
Really
NH:
yup
NH:
that’s in addition to £3bn of credit market write-downs, already recognised
NH:
Mr Pilkington’s beet is that the level of non-performing loans at RBS is low both
NH:
he reckons an incremental charge of £3bn-£5bn is possible
NH:
which could very possibly leave the govt with a huge stake in RBS
NH:
in fact there could be some more detail on this and trading when RBS issues its placing prospectus on Friday
NH:
here’s some more from the note
NH:
a very good read IMO
NH:
A peculiar feature of the first half results was the small rise in non