Markets live chat transcript for the chat ending at 12:23 on 6 Nov 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH) Sam Jones (SJ) Bryce Elder (BE)
PM:
Welcome
PM:
This is Markets Live
NH:
slit your wrist live is more like it
PM:
NH:
there is some much bearish stuff around this morning
NH:
Jump off the top of a building live
PM:
Have we got some gloomy stuff for you this morning!
PM:
Steady Neil !
NH:
where do we start
PM:
Which car crash?
PM:
You know no one has logged on yet
PM:
We are early — its only 11.02
NH:
yeah, coz the system is working
NH:
where shall we start
NH:
The Fed being broken??
PM:
ive todl Sam he’s got to come on and explain
NH:
The latest missive from Albert Edwards
PM:
NH:
a hecacomb in the mining and oil sectors
NH:
cruncy recession
PM:
not to mention biggest falls in the FTSE ranging from 10-30 per cent
PM:
NH:
the 30% is for Man Group
PM:
Oh — adn we’ve got an interest rate decision at noon
PM:
Place yer bets!
NH:
we could look at the wider market – which is being hammered
NH:
but let’s start with Man Group
PM:
Stand out casualty
PM:
Just been destroyed – what’s the price now??
NH:
off 113p, or 29%, at 278.5p
NH:
Interim figures out this morning generally described as shocking.
PM:
Man has been interesting all the way thru this crisis – for its resilience.
PM:
Everytime we’ve seen a statement it’s been Man Alive! Assets under management still growing.
NH:
And suddenly they are not.
PM:
Tracy did a post on it earlier — probs all over the place
PM:
Analysts?
NH:
Okay – this is from Haley Tam at Citigroup.
NH:
28.8c EPS, down 16% yoy — EPS of 28.8c was 14% below our 33.3c forecast.
The key drivers of this miss were: i) accelerated amortisation of $107m MGS
upfront sales commissions, ii) adverse investment performance and FX moves.
The key drivers of this miss were: i) accelerated amortisation of $107m MGS
upfront sales commissions, ii) adverse investment performance and FX moves.
NH:
Disappointment vs. pre-close guidance — AUM came in at $67.6bn, 4% below
pre-announced $70.3bn. The difference reflected extreme moves in markets
and FX in the last week of September. Management had also guided that H1
Sep 08 EPS would be 5% lower (actually 16%), and that within this underlying
EPS would be 10% higher. Management fee PBT is actually 14% lower.
pre-announced $70.3bn. The difference reflected extreme moves in markets
and FX in the last week of September. Management had also guided that H1
Sep 08 EPS would be 5% lower (actually 16%), and that within this underlying
EPS would be 10% higher. Management fee PBT is actually 14% lower.
NH:
Effective Suspension of MGS — We read management’s decision to accelerate
amortisation of upfront MGS sales commissions as an admission that outflows
from MGS are expected to accelerate. $107m represents just over half
unamortized sales commissions on MGS products. MGS AUM at end Mar08
were $10.5bn and following $2.6bn de-leverage in H1 Sep 09 and planned
$7.5bn further de-leverage in Oct and Nov, will be mostly gone by end 2008.
amortisation of upfront MGS sales commissions as an admission that outflows
from MGS are expected to accelerate. $107m represents just over half
unamortized sales commissions on MGS products. MGS AUM at end Mar08
were $10.5bn and following $2.6bn de-leverage in H1 Sep 09 and planned
$7.5bn further de-leverage in Oct and Nov, will be mostly gone by end 2008.
NH:
Short-term share price weakness — With start of November AUM at $61bn
some 15% below our end December AUM forecast, short-term share price
weakness seems likely. Increased retail outflows are also a worry. We expect
downgrades to consensus forecasts for underlying EPS, and even though AHL’s
strong current performance could lead to consensus upgrades to performance
fee EPS, we don’t think this is enough to stop the shares falling near term.
some 15% below our end December AUM forecast, short-term share price
weakness seems likely. Increased retail outflows are also a worry. We expect
downgrades to consensus forecasts for underlying EPS, and even though AHL’s
strong current performance could lead to consensus upgrades to performance
fee EPS, we don’t think this is enough to stop the shares falling near term.
NH:
and the striking thing here is, that Man’s biggest fund AHL has actually performed quite well
PM:
very well!
NH:
AHL is a managed futures fund that tracks trends
NH:
usually performs well when the $dollar trends
NH:
AHL +17% year to date. Single manager AHL funds price both weekly and
monthly. Focusing on the top five largest AHL single manager funds, it looks as
though the weighted average performance of AHL funds is around +17% year
to date. This includes AHL Diversified Futures up 18% since end December
and Athena Guaranteed Futures up 12%. Both funds are now close to high
water marks (3% to 4% below), and if current performance trends continue,
AHL looks set to start earning significant performance fees soon.
monthly. Focusing on the top five largest AHL single manager funds, it looks as
though the weighted average performance of AHL funds is around +17% year
to date. This includes AHL Diversified Futures up 18% since end December
and Athena Guaranteed Futures up 12%. Both funds are now close to high
water marks (3% to 4% below), and if current performance trends continue,
AHL looks set to start earning significant performance fees soon.
NH:
but the problems lie elsewhere
NH:
in areas such as
NH:
RMF –15% year to date. RMF provides weekly estimate fund NAVs, providing
more timely performance data than is available for Glenwood or MGS. Focusing
on the top 10 largest RMF funds, it looks as though the weighted average
performance of RMF funds is around -15% year to date. This encompasses a
wide range of performance, as the table below shows
more timely performance data than is available for Glenwood or MGS. Focusing
on the top 10 largest RMF funds, it looks as though the weighted average
performance of RMF funds is around -15% year to date. This encompasses a
wide range of performance, as the table below shows
NH:
The two ‘flagship’ funds performed better: RMF Absolute Return Strategies
returned -8.9% to end October and RMF Four Seasons Strategies -11.2%.
Glenwood and MGS. We don’t have October pricing data available yet for these
two managers, but we expect negative investment performance to have
continued. In the nine months to end September 2008, Glenwood (as
represented by Man-Glenwood Multi-Strategy) was down -14% and MGS (Man
Multi-Strategy Guaranteed) down 20%.
returned -8.9% to end October and RMF Four Seasons Strategies -11.2%.
Glenwood and MGS. We don’t have October pricing data available yet for these
two managers, but we expect negative investment performance to have
continued. In the nine months to end September 2008, Glenwood (as
represented by Man-Glenwood Multi-Strategy) was down -14% and MGS (Man
Multi-Strategy Guaranteed) down 20%.
PM:
There’s another point we’d should raise here – its being discussed by various shrewd sales desks this morning.
PM:
Basically the worry is that MAN becaomes the default liquidity provider.
PM:
What I mean there is that because lots of hedge funds have stopped redemptions – or put so called gates up – hedge investors cash in their Man investments simply because they are allowed to.
PM:
There’s a worry that this could start to spiral.
PM:
Should also mention the link put up by XY earlier.
PM:
That’s about GLG – very interesting. Don’t think there is a direct parallel with Man – but it illustrates how nervous everyone is.
PM:
Neil has jsut pulled RAB’s price up
NH:
yup, it’s a penny dreadful
PM:
PM:
PM:
thanks for refs to german manufacturing — quite shocking
NH:
that is
NH:
more doom and gloom
NH:
BERLIN, Nov 6 (Reuters) – German manufacturing orders plunged by 8.0 percent
month-on-month in September, the biggest monthly fall since reunification in
1990, underlining the severity of an economic downturn during the financial
crisis.
month-on-month in September, the biggest monthly fall since reunification in
1990, underlining the severity of an economic downturn during the financial
crisis.
NH:
The preliminary seasonally adjusted figures compared with the Reuters
consensus forecast for a drop of 2.0 percent, and undershot the lowest
prediction for a decline of 5.0 percent.
consensus forecast for a drop of 2.0 percent, and undershot the lowest
prediction for a decline of 5.0 percent.
NH:
The Economy Ministry, which published Thursday’s figures, noted the fall
followed a rise of 3.5 percent in August, but said the outlook for industry
output had “worsened seriously.”
The decline was led by an 11.4 percent drop on the month in foreign
orders, while domestic orders fell by 4.3 percent.
Capital goods orders were down by 11.0 percent, with orders for
intermediate goods falling by 5.4 percent. Orders for consumer goods declined by
1.5 percent, the ministry said.
followed a rise of 3.5 percent in August, but said the outlook for industry
output had “worsened seriously.”
The decline was led by an 11.4 percent drop on the month in foreign
orders, while domestic orders fell by 4.3 percent.
Capital goods orders were down by 11.0 percent, with orders for
intermediate goods falling by 5.4 percent. Orders for consumer goods declined by
1.5 percent, the ministry said.
NH:
Dax off 4.4%
PM:
And what about London?
NH:
well, this is more like it
NH:
dead cat goes splat
NH:
PM:
PM:
we are off 4.33%
NH:
that a fall of almost 200 points, index now at 4,332
NH:
and that’s follows a 2% drop yesterday
PM:
(Thanks for that suggestion Tuna)
NH:
will pass it on to Merkel
PM:
So what do you think is happening out there??
NH:
well, there is some profit taking
NH:
and probably some people taking advantage of the bounce to sell
NH:
remember before yesterday’s fall, the FTSE 100 had gained 20% in six sessions
PM:
that’s one hell of a dead cat
NH:
it is and I am not sure what drove it
NH:
coz all the while the economic news
NH:
got more and more bearish
NH:
and continues to do so
NH:
seen the latest Halifax housing survey?
PM:
yup
PM:
much worse than expected
PM:
2.2% fall
NH:
that’s much, much bigger than the 1.3% fall recorded in September
NH:
and the sharpest drop since May
NH:
conclusion – anyone who thought house price declines were stabilizing are wrong
NH:
in all, house price are down 13.7 year on year in the three months to October
NH:
and year on year in October house prices were down 15%, now this is a sharper drop since the early 1990’s
NH:
In fact it was sharpest drop since the series began in 1983.
PM:
great
NH:
here’s some comment from Howard Archer
NH:
The markedly sharper fall in house prices reported by the Halifax adds late pressure on the Bank of England to deliver a large interest rate cut today.
NH:
The Halifax data follows on from the Nationwide reporting that house prices sank by a further 1.4% month-on-month in October, following a decline of 1.5% in September. Consequently, the year-on-year decline in house prices widened to 14.6% in October from 12.4% in September. This is the largest annual fall in house prices since Nationwide started producing monthly data in January 1991.
NH:
Housing market fundamentals remain overwhelmingly unfavourable, clearly pointing to further marked price falls. Affordability ratios are still relatively stretched, even though they have come down significantly in recent months. On top of this, faster rising unemployment, major concerns over the depth and length of the recession, and widespread expectations that house prices will come down markedly further seem set to depress housing market activity and prices for some considerable time to come. Faster rising unemployment will lead to a marked rise in the number of forced house sales, and it will also hit reduce the number of potential house buyers.
NH:
Meanwhile, credit conditions are still relatively tight; and even if the government measures to tackle the financial crisis work on a sustained basis, it will clearly take time for confidence to improve and mortgage lending to pick up significantly.
NH:
Consequently, even though we expect the Bank of England to cut interest rates aggressively over the coming months and to bring them down to 2.00% in 2009, this is unlikely to lead to any quick pick up in the housing market’s fortunes particularly as many mortgage lenders are not fully passing on the Bank of England’s interest rate cuts in their standard variable rate mortgages. Furthermore, market interest rates seem likely to come down much more slowly so this will limit the pace that fixed mortgage rates fall.
NH:
Consequently, Global Insight forecasts house prices to fall by 16% overall in 2008 and by a further 15% in 2009. As a result, house prices are seen falling 29% in nominal terms from their August 2007 peak of £199,612 on the Halifax measure to stand at £140,774 at the end of 2009. Reduced falls in house prices are expected in the first half of 2010, taking them down to a low of £133,736, which would be 33% below their August 2007 peak. House prices are then seen flattening out in the latter months of 2010.
PM:
PM:
Going to be very interesting onrates at Noon
PM:
not a clear consensus below on what the Cut will be
NH:
but the PR effort is already underway on why the banks will not be passing this reduction on to poor, impoverished, soon to be sacked consumers.
NH:
This is from the BBA couple of hours ago…
PM:
Clearly aimed at the Daily Mail Telegraph.
NH:
Historically, high street lending rates tend to track the official bank rate, but they are usually a little higher, reflecting factors such as:
NH:
(i) the real rate at which the high street banks borrow from each other (this is currently well above the official bank rate)
(ii) how much they can make available for lending and for how long; and critically
(iii) how easy it is for the bank to raise money, whether from customers’ deposits or from other financial institutions (if it is difficult – as it is currently – the bank will have to offer more attractive rates to attract cash from savers).
(ii) how much they can make available for lending and for how long; and critically
(iii) how easy it is for the bank to raise money, whether from customers’ deposits or from other financial institutions (if it is difficult – as it is currently – the bank will have to offer more attractive rates to attract cash from savers).
NH:
Point (iii) shows where the credit crunch has really bitten. According to the Bank of England’s latest Financial Stability review, the gap between what banks want to lend and what they can borrow is £765 billion, but there is only £250 billion available to borrow in the inter-bank market. In the past, some of that difference has been made up by securitising assets such as mortgages – effectively packaging them as debt and selling them on. Securitisation has been helpful in giving customers a better deal, as it made borrowing more efficient and therefore cheaper, helping banks to reduce the interest rate on mortgages. However, there is no longer a market for this securitised debt, putting additional pressure on banks to find new ways to fund their activities.
NH:
There are other important developments affecting the availability of credit. Banks are in the process of “de-leveraging”: because of the funding gap, they are unwinding their (high level of) exposure to the financial system. There is also a widespread appreciation that credit has been mis-priced in recent times. This means that the price of loans, or the rate at which a bank will lend, has historically been cheap relative to the risk that could be attributed to that loan. Loan rates today may seem high because a process of adjustment has taken place to make sure that the price of the loan is much more aligned with the underlying risk.
NH:
Here’s the specific stuff:
NH:
Two key reasons why a base rate cut might not be passed on
1. When it sets the official bank rate, the Bank of England considers the amount at which banks borrow from each other overnight. Central banks do not believe that they can control the level of interest rates for any longer periods. But banks set their interest rates with a view to how the market will look in the longer term, typically in three months’ time. Things might look very different from these two perspectives, particularly in times of uncertainty. Banks will need to factor in the likely level of interest rates in the future and will also be looking at other market indicators to assess what the economy might look like in the coming months. They will also consider the relative risk of lending to a particular customer.
1. When it sets the official bank rate, the Bank of England considers the amount at which banks borrow from each other overnight. Central banks do not believe that they can control the level of interest rates for any longer periods. But banks set their interest rates with a view to how the market will look in the longer term, typically in three months’ time. Things might look very different from these two perspectives, particularly in times of uncertainty. Banks will need to factor in the likely level of interest rates in the future and will also be looking at other market indicators to assess what the economy might look like in the coming months. They will also consider the relative risk of lending to a particular customer.
NH:
2. There is also a general economic downturn. Consumers are reluctant to spend, companies are reluctant to invest and banks are more careful about who they lend to. They have to make informed choices about which companies and customers they believe will survive the downturn. The amount of credit that they have available is also curtailed, because, put simply, they cannot lend money they have not got. This is as true of other markets as it is of the UK: bank lending rates in the US and the eurozone are also still generally at a level well above their central bank rates.
So are rates likely to come down?
2. There is also a general economic downturn. Consumers are reluctant to spend, companies are reluctant to invest and banks are more careful about who they lend to. They have to make informed choices about which companies and customers they believe will survive the downturn. The amount of credit that they have available is also curtailed, because, put simply, they cannot lend money they have not got. This is as true of other markets as it is of the UK: bank lending rates in the US and the eurozone are also still generally at a level well above their central bank rates.
So are rates likely to come down?
NH:
Rates are coming down in the interbank market, but it is taking time for this adjustment to take place. In early October the world’s main central banks (including the Bank of England) injected more money into the interbank market, but it will take time for this money fully to take effect, given the severe dislocation we have been seeing in these markets for more than a year now.
NH:
When can I expect my mortgage rate to come down?
In time, rates will come down. We will reach a balance (based on the funding available to banks) between the demand and supply for mortgages. As house prices and the cost of mortgages come down, there will be more incentives – particularly for first-time buyers – to enter the housing market.
In time, rates will come down. We will reach a balance (based on the funding available to banks) between the demand and supply for mortgages. As house prices and the cost of mortgages come down, there will be more incentives – particularly for first-time buyers – to enter the housing market.
NH:
Can’t blame em really. But they need to employ tighter subeditors – need less words for their target audience.
NH:
and that all deserves a BICKIE
Reminder to readers – if you arrived late and want to stop the dialogue ‘jumping’ as you catch up, hit the ‘pause auto-scrolling’ tab at the bottom right hand corner
NH:
NH:
right question below about the Phantom HBOS counter bid
NH:
prolly fair to say we are not that bullish about another offer
PM:
Now this von Ungern-Sternberg guy
PM:
You know he’s a bit of an expert in epublishing as well as a potential saviour of the scottish banking industry, dont you?
NH:
is he really. that will come in useful.
PM:
CV:
PM:
ALEXANDER VON UNGERN-STERNBERG runs an investment banking boutique, Euro-IB Ltd. based in London, which specializes in cross-boarder transactions involving the UK and Germany. He is also the Finance Director of GuideGuide AG, based near Bonn, which supplies e-publishing and e-learning software in Germany. Alex spent most of his career in banking, as Group Treasurer of Deutsche Bank, Frankfurt, Board Member of Investment Banking in Rabobank International, Utrecht and Barclays Bank, London, as Deputy Chief Executive, Markets Division. He studied Modern History and Economics at St John’s College, Oxford, and qualified as a UK chartered accountant with Price Waterhouse.
PM:
Came up wih a proposal recently to link universities electronically
PM:
I shall focus on the principles of e-learning and, more importantly, the principles of e-publishing, which is an easier phase to introduce and will bring more visible, immediate benefits for a larger community. It is such a huge project that one risks being drowned by its size; some projects work better if you start with small steps and build it up gradually.
I have therefore identified three key questions:
* What is the purpose and future role of European universities?
* Are there any necessary changes for the universities?
* What concrete measures are needed to retain their world-class reputation?
NH:
talented chap clearly. but talented enough to take on HBOS
NH:
not sure
PM:
But let’s answer the question — do we think he will pull off a counterbid for HBOS?
NH:
no
NH:
Lloyds is the only game in town
NH:
it has govt backing
NH:
the only reason this counter bid story has not been shot down by the govt is the small matter of a crucial by-election this evening
NH:
on top of that
NH:
Lloyds can generate massive cost savings from this deal
NH:
no one else can
NH:
HBOS off 6.2p at 107.5p this morning
PM:
More on Lloyds’ takeover — ws being discussed eralier, no?
NH:
it was, because the new FD at Lloyds has been seeing brokers
NH:
talking about the deal and the likelihood of counter bids
NH:
these notes come from a meeting with broker Execution last night
NH:
Tim Tookey is the new FD’s name
NH:
A strong perfromance from the newly appointed Lloyds FD last night. Tim is one of the more competent CFOs in the space and is part of a strong management team. Key messages;
NH:
1) The UK banks are demonstrably over capitalised. This was a deliberate move to restore confidence in the system. The FSA will move to identify a more normalised level fo capitalisation post the crisis.
NH:
2) Lloyds took the Government cash as it provided speed, certainty and a certain price (8.5% discount to the last price for the rights and the 12% coupon for the prefs). The Government presecribed how much capital they had to raise. It was not a negotiation. They believe that if they had gone the Barclays route they would have missed the opportunity to get HBOS. The dividend blocker will be removed next year.
NH:
3) A key theme was that Lloyds took capital so that they were part of the solution. They are keen to identify that they were not part of the problem.
NH:
4) It is clear to Lloyds that investors do not understand how the clawback mechanism works. They will explain this to investors more clearly shortly. The key date to be on the register for what is an ‘in-the-money’ call option is December 12th.
NH:
5) Lloyds see the HBOS deal as a ‘marriage made in heavan’ which would not have been possible without the crisis. The synergies at over £1.5bn are we believe very conservative and will continue to be revised upwards.
NH:
6) Fair value adjustment process is very robust. It is ‘an acceleration of impairments coming through in time’. So having taken these up front they will not come through the P&L in the ordinary course of the recession.
NH:
7) Of these £4bn relate to the afs reserve. The other £6bn relates to the loan book. This is a post tax figure so the actual de-risking relates to £9bn of assets.
NH:
There will be divestures of those businesses which will become non-core to the ongoing business. The integrated finance book would be one example.
There will be divestures of those businesses which will become non-core to the ongoing business. The integrated finance book would be one example. PM:
Very interesting all that — Lloyds on a longer view
NH:
yes
NH:
and I think point 1 is interesting
NH:
UK banks are going to need to be “demonstrably over capitalised”
NH:
given what’s coming
NH:
seen this note from Sandy Chen this morning
NH:
he remains bearish
PM:
No — this is Chen from Panmure
NH:
he reckons there is lots of bearish news in the world of CDS’ that investors are ignoring
NH:
including mounting losses for these credit derivative product company
NH:
now, earlier this week, RBS revealed it had hedge a lot of its toxic credit securities via CDPC’s
NH:
Chen also reflects on the grim figures from Ambac overnight
NH:
and the warning from GMAC that ResCap could fail
NH:
this seems to have been overlooked by a lot of people
PM:
credit derivative product companies — onw-label monolines
NH:
here’s the note
NH:
Common thread
NH:
There has been a slew of CDS-related news recently – little of it positive. We
reiterate our Sells on BARC & RBS, which we see as most exposed to further
losses as credit events gain momentum.
reiterate our Sells on BARC & RBS, which we see as most exposed to further
losses as credit events gain momentum.
NH:
Last night, Moody’s downgraded Ambac’s bond insurer rating four notches to junk
(from A3 to Ba1), following its announcement of US$2.7bn in credit derivatives-related losses; the CDPC (credit derivative product company), Primus, also announced bigger than- expected losses on CDS payouts; and the steady flow of credit event notices and ratings downgrades from synthetic CDOs continues.
(from A3 to Ba1), following its announcement of US$2.7bn in credit derivatives-related losses; the CDPC (credit derivative product company), Primus, also announced bigger than- expected losses on CDS payouts; and the steady flow of credit event notices and ratings downgrades from synthetic CDOs continues.
NH:
The common thread amongst all this is, of course, credit derivatives. The recent slew of credit events – FNM/FRE, LEH, WM and the Icelandics – and their associated payouts have put tremendous strains on counterparties.
NH:
Yesterday’s reported warning from GMAC that ResCap could fail, and the bailout discussions that GM, Ford, and Chrysler are scheduled to hold with US House Speaker Pelosi today, are clear indicators that the credit events are likely to both accelerate and broaden into the wider range of CDS reference entities
NH:
And although the recent DTCC disclosure on CDS is helpful, it is not complete; we
think it details the CDS exposures and netting agreements in the three-fifths of the
market that we aren’t worried about (e.g. banks, dealers) – not the two-fifths of the
market comprised by other counterparties (e.g. some insurers, CDPCs, hedge funds) that have written non-standard swaps (e.g. on CDOs).
think it details the CDS exposures and netting agreements in the three-fifths of the
market that we aren’t worried about (e.g. banks, dealers) – not the two-fifths of the
market comprised by other counterparties (e.g. some insurers, CDPCs, hedge funds) that have written non-standard swaps (e.g. on CDOs).
NH:
Our usual suspects: BARC and RBS, who each have over £20bn in contracts with
monolines; RBS has also disclosed £20bn of contracts with CDPCs. The write-downs
and losses on these exposures explains much of why our forecasts are significantly lower than consensus.
monolines; RBS has also disclosed £20bn of contracts with CDPCs. The write-downs
and losses on these exposures explains much of why our forecasts are significantly lower than consensus.
PM:
good analysis
PM:
and anyone thinking of subscribing for the RBS placing
PM:
might bear in mind that last par
PM:
RBS has also disclosed £20bn of contracts with CDPCs. The write-downs
and losses on these exposures explains much of why our forecasts are significantly lower than consensus
and losses on these exposures explains much of why our forecasts are significantly lower than consensus
PM:
if there are further probs with the monolines and CDPC’s – RBS is not where you want to be
PM:
thanks for that
NH:
nope, you’d want to be a safe distance from its toxic balance sheet
PM:
PM:
Now — did you read Sam’s post on the Fed earlier — out of control?
NH:
I did
NH:
really depressing
NH:
not sure I am qualified to talk about it
NH:
where’s Sam
NH:
perhaps he can explain it for the readers
PM:
here’s the link
PM:
The Bernanke Twist — its been a growing theme for a number of weeks here
PM:
Where is Sam?
PM:
Sam?
SJ:
Hello
PM:
Sam!
PM:
Oh ther you are
NH:
go for it
SJ:
Im here!
PM:
Explain why the Fed broken
NH:
in 200 words pls
PM:
No 100 — we havent got much time
NH:
rate decision in 25mins
SJ:
PM:
SJ:
This is like one of those impossible to answer university entrance questions
SJ:
Um anyway
SJ:
Basically the Fed looks like its acknowledging a liquidity trap scenario
SJ:
in which its traditional array of monetary policy tools are rendered…
SJ:
useless
SJ:
doesnt matter what the fed does, it ceases to become a consequential player…
PM:
NH:
so it just tries support prices
SJ:
it just has a $800bn balance sheet in a $50trn market
SJ:
yes, so Bernanke looks like he’s trying to turn the Fed into a deflation eliminator
SJ:
supporting asset prices where it can
PM:
japan style
SJ:
A Bernanke Twist
NH:
support operation
SJ:
after “Operation Twist” in 1961
SJ:
yeh exactly – Japan style
SJ:
the difference being that in Japan they were conducting quantitative easing and trying to support Tbill rpices
SJ:
whereas here Bernanke is targetting potentially all asset prices
SJ:
the gamble being that this might turn out to be one market bigger than the fed
PM:
Hmm — very interesting
PM:
Do read and digest the whole post
SJ:
Yeh – i recommend reading blogs Brad Setser, Krugman and Brad De Long on it all…
PM:
NH:
time for something lighter?
NH:
some Albert Edwards perhaps
PM:
NH:
lloks like he has got over his honeymoon
PM:
It won’t be over until we slide down the slope of hope
PM:
this is the latest missive
PM:
Extracts
PM:
This time next year, Obama euphoria will be crushed under the weight of the unfolding
economic and market meltdown. Despite frantic efforts to reflate, the highly reliable ECRI lead
indicator demonstrates that we have entering the deepest downturn since the Great
Depression. The crushing weight of the Great Debt Unwind has only just begun (see chart
below). And we have a long way to go just to get back to pre-1929 crash levels! Recent
economic data around the world has slumped and supports our deep recession forecast. One
key lesson from Japan is that buying ahead of a supposed economic bottom is far too
dangerous. Only participate on a purely cynical, tactical basis and wait for the upturn.
economic and market meltdown. Despite frantic efforts to reflate, the highly reliable ECRI lead
indicator demonstrates that we have entering the deepest downturn since the Great
Depression. The crushing weight of the Great Debt Unwind has only just begun (see chart
below). And we have a long way to go just to get back to pre-1929 crash levels! Recent
economic data around the world has slumped and supports our deep recession forecast. One
key lesson from Japan is that buying ahead of a supposed economic bottom is far too
dangerous. Only participate on a purely cynical, tactical basis and wait for the upturn.
PM:
He’s clearly been reading Draaisma…
NH:
who was about a week out with his buy, buy, buy call
NH:
should have been, tora, tora, tora
PM:
The recovery in markets at the end of October has brought renewed hope that we might avoid total meltdown. Reading the press it is clear there has been quite a gaggle of strategists who have turned bullish. Where the difference lies is that the strategic bulls think we have now seen the bottom because the market has (had?) priced in the worst possible outcome (usually a shallow recession) and that you should be buying about six months ahead of the economy bottoming – which will be sometime next year. By contrast we see a bear market rally ultimately petering out under the weight of catastrophically poor economic/earnings news and a US equity market that is still not cheap.
PM:
Oh – very good link in here:
PM:
Dante’s Inferno
PM:
Oh – I just love Edwards!
PM:
Look at this par:
PM:
I no longer think this will be as bad as the deep US recessions of the early 1980s or early
1970s, when full-year GDP declined almost 2% yoy (see chart below – this is consistent with
non-farm payrolls declining 500k per month). It will be worse!
I no longer think this will be as bad as the deep US recessions of the early 1980s or early
1970s, when full-year GDP declined almost 2% yoy (see chart below – this is consistent with
non-farm payrolls declining 500k per month). It will be worse!
PM:
PM:
PM:
LIBOR time
NH:
06/11/2008 11:39:05 DI *DJ 3-Month Euro Libor Fixed At 4.59625%, Vs 4.65625% Wednesday
NH:
*DJ 3-Month Sterling Libor Fixed At 5.56125%, Vs 5.68% Wednesday
NH:
*DJ 3-Month USD Libor Fixed At 2.3875%, Vs 2.50625% Wednesday
NH:
don’t have overnight yet
PM:
ON$ is 0.327 — v 0.322
PM:
$ OIS is 182.75 v 194.5
PM:
Missed em below — sorry!
NH:
PM:
Strawbug
NH:
right back on the bear tack
NH:
here’s some more depressing news
NH:
new car sales in the UK
NH:
or the lack of
NH:
The Society of Motor Manufacturers has said new car registrations plunged by 23.0% year-on-year to 128,352 units in October
NH:
that follows a 21.2% drop in September and 18.6% fall in August
PM:
just shocking
NH:
in total new car registrations have fallen by 21.4% year-on-year over the past three months.
NH:
and did you see the results from Cisco overnight??
PM:
Remind
NH:
Cisco is considered a tech bellweather
NH:
so this matters
NH:
according their usually bullish CEO John Chambers
NH:
The environment has changed dramatically in the last two months”
PM:
“Take a step back!”
PM:
John chambers
NH:
We have to take action early, while not missing sight of our long-term goals
NH:
he was referring to cost cutting there
NH:
but the important stuff is this
NH:
warned of a 5-10 per cent slump in its revenues in the current quarter because of a collapse in IT spending
NH:
it is also planning to slice $1bn from its annual costs by next summer, with a hiring freeze already in place since the middle of last month.
NH:
Chambers is also forecasting forecast Cisco’s first revenue decline in five years
NH:
apparently sales will drop as much as 10 percent in the second quarter to Jan
PM:
er, this is all not very good
PM:
NH:
not at all
NH:
although entirely predictable
NH:
welcome to the White House President Obama
NH:
just another quick thing on Cisco
NH:
one of its biggest resellers is Dimension Data
NH:
mid cap company
NH:
its shares off 11% at 32p on the warning
NH:
and here’s a note from Altium which explains the impact
NH:
Outlook for Cisco deteriorates sharply in October At its Q1 results last night,
networking equipment vendor and technology bellwether Cisco reported that it had
seen a sharp drop-off in demand in October, adding that “the environment has
changed dramatically in the last two months”. Cisco’s Q1 covers the period to 25
October, meaning that the company is the first major technology firm to report results
for October, a month characterised by a sharp increase in macroeconomic uncertainty.
networking equipment vendor and technology bellwether Cisco reported that it had
seen a sharp drop-off in demand in October, adding that “the environment has
changed dramatically in the last two months”. Cisco’s Q1 covers the period to 25
October, meaning that the company is the first major technology firm to report results
for October, a month characterised by a sharp increase in macroeconomic uncertainty.
NH:
In contrast to August, its first month of the quarter, when orders were up 7% YoY, the
company saw a 9% decline in October. Cisco’s normally upbeat CEO John Chambers
cautioned that the weak demand was likely to last until January at least but that it was
“difficult to provide a forecast given the dramatic variability [in demand]”.
company saw a 9% decline in October. Cisco’s normally upbeat CEO John Chambers
cautioned that the weak demand was likely to last until January at least but that it was
“difficult to provide a forecast given the dramatic variability [in demand]”.
NH:
Malaise spreads to emerging markets Even more worryingly for Dimension Data,
Chambers warned that the economic malaise had begun to spread from the US and
Europe to Asia and emerging markets around the world. DiData generates c.40% of
revenues from Asia and Africa but close to two thirds of group profits. This has
enabled the group to weather the economic downturn thus far but arguably means that
once it spreads to emerging markets it will be hit more severely than others.
Chambers warned that the economic malaise had begun to spread from the US and
Europe to Asia and emerging markets around the world. DiData generates c.40% of
revenues from Asia and Africa but close to two thirds of group profits. This has
enabled the group to weather the economic downturn thus far but arguably means that
once it spreads to emerging markets it will be hit more severely than others.
NH:
Prelims due next week Dimension Data reports preliminary results to September
next Wednesday, 12 November. While the reported results may be fine, we would be
surprised if management did not offer a cautious outlook in line with the comments
from Cisco.
next Wednesday, 12 November. While the reported results may be fine, we would be
surprised if management did not offer a cautious outlook in line with the comments
from Cisco.
While it is true that DDT has a higher level of recurring revenue than Cisco
through its services operations, which account for around 40% of group sales, that still leaves 60% which are generated from hardware sales.
NH:
Not only are these vulnerable to short term variability in demand, much of the services revenue follows directly on from equipment orders and is likely to be indirectly affected too. Although DiData’s share price has fallen sharply over the past few months, the company has yet to report any negative impact from the downturn; we continue to believe that once it does, the shares are likely to fall further. DiData’s share price has recovered sharply over the past couple of weeks; we believe that this will quickly reverse and we reiterate our SELL recommendation and 20p price target.
NH:
NH:
has the BoE leaked the rate decision??
PM:
Nope — BoE dont leak things like that
NH:
market just rallied 50 points
NH:
is Pestowire on the case?
Top News from Top Sources. The BBC’s Business Editor, Robert Peston, has played in important role keeping the British public fully informed during these difficult times.
PM:
Ah. let me check
NH:
no it can’t be he’s HM Treasury news service
NH:
not a bank
PM:
nah — not Pesto — done stuff on Obama
NH:
PM:
Qucik question from robert Write — our transport corr
PM:
FT Alphaville colleagues!
Are you hearing anything from your high-quality readers about the potential problems in the forward freight agreements market this week? I know a lot of people are very worried, for reasons with which I won’t bore you at present.
PM:
Sorry — Robert Wright Transport Correspondent,
NH:
I heard something this morning
NH:
big container ship which was being leased out at $250,000 a day
NH:
now going at $5,000
PM:
goodness — might try and get a post out of Robert later
NH:
trying to get hold of a note on this from a private research outfit
PM:
PM:
What else happening out there?
NH:
well everything is going down
NH:
especially miners
NH:
probably down to profit taking
NH:
had a barnstorming run during the dead cat bounce
NH:
and the grim results from ArcelorMittal yesterday
NH:
those gains are being surrendered this morning
NH:
RIO:LSE
RIO TINTO (RIO:LSE): Last: 2,681, down 267 (-9.06%), High: 2,849, Low: 2,585, Volume: 3.36m
NH:
VED:LSE
Vedanta Resources (VED:LSE): Last: 814.00, down 94 (-10.35%), High: 950.50, Low: 795.50, Volume: 1.18m
NH:
BLT:LSE
BHP Billiton (BLT:LSE): Last: 1,034, down 106 (-9.30%), High: 1,099, Low: 1,005, Volume: 7.17m
NH:
ANTO:LSE
Antofagasta (ANTO:LSE): Last: 380.00, down 35 (-8.43%), High: 402.00, Low: 370.25, Volume: 2.96m
NH:
there is also a really, really bearish note on the sector around
NH:
actually it covers all commodes including oil
NH:
came out of UBS yesterday
NH:
and was picked up by one of our grads – Esther Bintliff
NH:
and check this title
NH:
A hecatomb for commodity price forecasts
PM:
PM:
what’s a hecatomb????
NH:
well, I had to look it up too
NH:
but according to
NH:
the Free Dictionary.com
NH:
it is
NH:
1. A large-scale sacrifice or slaughter.
NH:
2. A sacrifice to the ancient Greek and Roman gods consisting originally of 100 oxen or cattle.
PM:
blimey
PM:
a large scale slaughter of???
NH:
commodity investors not cattle or oxen
NH:
and here’s why
NH:
UBS has cut its Global GDP growth cut to just 1.3%
PM:
NH:
as a result
NH:
UBS has slashed commodity forecasts by an average of 37% for 2009
NH:
UBS expects oil to average $60 a barrel next year
NH:
and copper US$1.30/lb.
PM:
NH:
and for iron ore to plunge 40%
PM:
NH:
now, that’s about the most bearish thing I have seen
NH:
on commods
PM:
Er, me too
NH:
will put some up if you can bear it
NH:
In light of the heightened severity of the global financial crisis in recent weeks
we are now forecasting global growth of just 1.3% in 2009E. This has been
downwardly revised from our previous forecast of 2.2% and would mark the
slowest rate of global economic expansion since 1982. Our previous global
forecast already implied the onset of global recession next year. Our new
forecasts imply a much deeper recession and only a sluggish recovery
we are now forecasting global growth of just 1.3% in 2009E. This has been
downwardly revised from our previous forecast of 2.2% and would mark the
slowest rate of global economic expansion since 1982. Our previous global
forecast already implied the onset of global recession next year. Our new
forecasts imply a much deeper recession and only a sluggish recovery
NH:
Having already cut our outlook at the start of October why have we become
even gloomier so soon and even before the month of October has ended? The
answers are straightforward. Firstly the global financial crisis has become even
more pernicious. Secondly the world economy has been slowing even more
rapidly and broadly than we thought it would. Our global growth surprise index,
for example, has slumped over the last few weeks as the flow of global growth
data has consistently disappointed. This development has coincided with the
huge increase in risk aversion in financial markets
even gloomier so soon and even before the month of October has ended? The
answers are straightforward. Firstly the global financial crisis has become even
more pernicious. Secondly the world economy has been slowing even more
rapidly and broadly than we thought it would. Our global growth surprise index,
for example, has slumped over the last few weeks as the flow of global growth
data has consistently disappointed. This development has coincided with the
huge increase in risk aversion in financial markets
NH:
The huge downdraft in global equity markets and the widening of corporate
credit spreads that has unfolded are now likely to take an even bigger toll on
economic activity than we thought possible a few weeks ago. Of more
significance, though as far as our outlook for next year is concerned is the
contagion from the crisis in developed economies into the emerging economy
bloc. Risk premiums on emerging market debt have leapt to levels that are, in
many cases, close to those that were last seen during the Asian financial crisis in
the late 1990s. The downside risks to economic growth in these regions have
accordingly risen to levels that we cannot ignore.
credit spreads that has unfolded are now likely to take an even bigger toll on
economic activity than we thought possible a few weeks ago. Of more
significance, though as far as our outlook for next year is concerned is the
contagion from the crisis in developed economies into the emerging economy
bloc. Risk premiums on emerging market debt have leapt to levels that are, in
many cases, close to those that were last seen during the Asian financial crisis in
the late 1990s. The downside risks to economic growth in these regions have
accordingly risen to levels that we cannot ignore.
NH:
and here’s the subsequent impact on commodes
NH:
and a definition of hecatomb
NH:
A hecatomb is defined as a large scale slaughter (originally meaning a sacrifice
to Greek or Roman gods). Given the rout in commodity markets, a function of
the rapidity and severity of the global slowdown in growth and risk avoidance,
we believe that this word is, unfortunately, appropriate in characterising the
current and likely near-term environment for commodities markets.
On the back of the further downgrade in global growth estimates and our
expectation that the risks for further downgrades over the course of the next
several quarters are quite high; we have cut commodities estimates by on
average 37% (excluding precious metals).
to Greek or Roman gods). Given the rout in commodity markets, a function of
the rapidity and severity of the global slowdown in growth and risk avoidance,
we believe that this word is, unfortunately, appropriate in characterising the
current and likely near-term environment for commodities markets.
On the back of the further downgrade in global growth estimates and our
expectation that the risks for further downgrades over the course of the next
several quarters are quite high; we have cut commodities estimates by on
average 37% (excluding precious metals).
NH:
Our new forecasts for 2009E are, for
the most part, at or below spot prices; in addition they are roughly 40% lower
than consensus on average.
the most part, at or below spot prices; in addition they are roughly 40% lower
than consensus on average.
NH:
NH:
right, we are on BoE watch
NH:
tension is building
NH:
wait for it
NH:
crikey
NH:
wow
NH:
double wow
PM:
150bp
NH:
huge
PM:
1.5 per cent
PM:
PM:
NH:
Merv admits he gets it wrong
NH:
applause in newsroom
PM:
Footsie caps to 4428
PM:
gaps even
NH:
lots of people with tracker mortgages
NH:
including me
NH:
PM:
And me
NH:
no one went for 150bps
PM:
NH:
i don’t think
NH:
BoE admits it got it wrong
PM:
1.58 sterling
NH:
Blanchflower right
PM:
1.5844
NH:
UK Krona holding up
PM:
Krona going now — 1.5822
PM:
FOOTISE is off 96 points now
PM:
Neil — can you get the statement
PM:
We were in shock
NH:
looking on the site
NH:
i think the GBK will be steady on this
NH:
shows the MPC realises how bad things are
PM:
Substantial risk of undershooting inflation — statement
PM:
Satement:
PM:
The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 1.5 percentage points to 3%.
The past two months have seen a substantial downward shift in the prospects for inflation in the United Kingdom. There has been a very marked deterioration in the outlook for economic activity at home and abroad. Moreover, commodity prices have fallen sharply.
Since mid-September, the global banking system has experienced its most serious disruption for almost a century. While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time. As a consequence, money and credit conditions have tightened sharply. Equity prices have fallen substantially in many countries.
In the United Kingdom, output fell sharply in the third quarter. Business surveys and reports by the Bank’s regional Agents point to continued severe contraction in the near term. Consumer spending has faltered in the face of a squeeze on household budgets and tighter credit. Residential investment has fallen sharply and the prospects for business investment have weakened. Economic conditions have also deteriorated in the UK’s main export markets.
CPI inflation rose to 5.2% in September. The substantial rise since the beginning of the year largely reflects the impact of higher energy and food prices. But commodity prices have fallen sharply since mid-summer, with oil prices down by more than a half. Inflation should consequently soon drop back sharply, as the contribution from retail energy and food prices declines, notwithstanding the fall in sterling. Pay growth has remained subdued. And measures of inflation expectations have fallen back.
Since the beginning of the year, the Committee has set Bank Rate to balance two risks to the inflation outlook. The downside risk was that a sharp slowdown in the economy, associated with weak real income growth and the tightening in the supply of credit, pulled inflation materially below the target. The upside risk was that above-target inflation persisted for a sustained period because of elevated inflation expectations. In recent weeks, the risks to inflation have shifted decisively to the downside. As a consequence, the Committee has revised down its projected outlook for inflation which, at prevailing market interest rates, contains a substantial risk of undershooting the inflation target. At its November meeting, the Committee therefore judged that a significant reduction in Bank Rate was necessary now in order to meet the 2% target for CPI inflation in the medium term, and accordingly lowered Bank Rate by 1.5 percentage points to 3.0%.
The Committee’s latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 12 November.
The minutes of the meeting will be published at 9.30am on Wednesday 19 November.
NH:
FTSE 100 down just 90 points now
NH:
and we have the ECB to come
PM:
Good point here:
Posted by Pakora Mix [report]
Posted by Pakora Mix [report]
Any bankers who do not pass this on will be shot
NH:
the hit from the rate cut is starting to wear off
PM:
People jsut thinking -er – -does this mean things are actually even worse than we were thinking
NH:
the junkie will soon need another hit
NH:
FTSE 100 down 118 points at 4,410
PM:
Sterling holding steady at 158
NH:
NH:
away from rates cuts briefly
NH:
I learnt another new phrase this morning
PM:
(XY — yes taht is def biggest single cut)
PM:
What’s your new phrase?
NH:
we have crispy, right
PM:
Crisp — as in crisply ironed trousers
NH:
what about a crunchy recession then
PM:
Ah
PM:
certainly got that
NH:
been dreamt up by Huw van Steenis at Morgan Stanley
NH:
in another weighty tome on the European financials sector
NH:
the conclusion of the note is that
NH:
Deleveraging, funding stresses, weaker macro and re-regulation make us think it’s still too early to buy the banks sector and we are cutting 09 EPS ~30%
NH:
but that’s not the most interesting thing
NH:
the crunchy recession is
NH:
Stress-testing a Crunchy Recession and Whether It’s Already Priced In
NH:
We’ve run a stress test for a weaker recessionary scenario to
determine the levels of capital that each bank might have to
reach (see Exhibit 7) We’ve then tried to assess the capital
shortfall by bank to see who can best weather this storm. This
analysis suggests banks need to raise at least another €83
billion though this includes potential dividend reductions.
determine the levels of capital that each bank might have to
reach (see Exhibit 7) We’ve then tried to assess the capital
shortfall by bank to see who can best weather this storm. This
analysis suggests banks need to raise at least another €83
billion though this includes potential dividend reductions.
NH:
This needs to be put into context of the €117 billion of capital that
has already been raised this year by major European banks. To
be clear, this is a crunchy outcome, but not worst case as we
have not factored in a material reduction in the pre-provision
forecasts. Investor and regulatory pressure mean the bar has
been raised for banks, even if a few seem to still be hoping they
can avoid the regulators’ attention. More importantly, in the last
year the debate for some financials around capital has been
about perceived weakness in capital rather than actual
weakness; as we get deeper into the recession proper, capital
strength will be even more important.
has already been raised this year by major European banks. To
be clear, this is a crunchy outcome, but not worst case as we
have not factored in a material reduction in the pre-provision
forecasts. Investor and regulatory pressure mean the bar has
been raised for banks, even if a few seem to still be hoping they
can avoid the regulators’ attention. More importantly, in the last
year the debate for some financials around capital has been
about perceived weakness in capital rather than actual
weakness; as we get deeper into the recession proper, capital
strength will be even more important.
NH:
Also, these estimates include the assumption that some banks will suspend MTM.
We have much sympathy with marking a banks balance sheet
to credit not price risk, as historically has largely been the case.
But we fear real impairment not price moves, would drive this
capital shortfall. For instance, if market is right that corporate
debt is 60c/$ (which we hope is too harsh an outcome) then we
will see massive write downs over the coming years.
We have much sympathy with marking a banks balance sheet
to credit not price risk, as historically has largely been the case.
But we fear real impairment not price moves, would drive this
capital shortfall. For instance, if market is right that corporate
debt is 60c/$ (which we hope is too harsh an outcome) then we
will see massive write downs over the coming years.
NH:
On top of this, we’ve generated what we believe are the new
European standards for capital ratios. Importantly we have
attempted to adjust the banks target ratios based on the
analysis of their individual funding and asset quality positions,
which we go into more detail in this report.
European standards for capital ratios. Importantly we have
attempted to adjust the banks target ratios based on the
analysis of their individual funding and asset quality positions,
which we go into more detail in this report.
NH:
• core Tier 1 of of 7-8.25 % for retail (depending on the
market);
• 7.75-8.75% for universal;
• 8.5-10% for wholesale with a 3.25% Tier 1 leverage ratio
(on US GAAP basis) as a cross-check;
• for EM we’ve used also used 8.5%-10%, although for
European groups rich in EM we’ve tried to use a blend.
market);
• 7.75-8.75% for universal;
• 8.5-10% for wholesale with a 3.25% Tier 1 leverage ratio
(on US GAAP basis) as a cross-check;
• for EM we’ve used also used 8.5%-10%, although for
European groups rich in EM we’ve tried to use a blend.
NH:
We’ve included some modest local twists (for example, in
Spain the general provisions provide more of a cushion than at
many banks) but we’ve tried not to create too many incremental
twists to keep the figures comparable
Spain the general provisions provide more of a cushion than at
many banks) but we’ve tried not to create too many incremental
twists to keep the figures comparable
NH:
We have taken into account the banks that might be able to
raise sufficient capital by simply cancelling dividends until the
end of 2009 – these may be treated more leniently by investors
and regulators. In Exhibit 7, those highlighted in grey are the
banks where dividend cuts alone would take too long to re-build
capital, in our view and therefore a combination of dividend cut
and capital increase might be required to get to the level our
methodology suggests is appropriate.
raise sufficient capital by simply cancelling dividends until the
end of 2009 – these may be treated more leniently by investors
and regulators. In Exhibit 7, those highlighted in grey are the
banks where dividend cuts alone would take too long to re-build
capital, in our view and therefore a combination of dividend cut
and capital increase might be required to get to the level our
methodology suggests is appropriate.
NH:
Banks that cannot
demonstrate a reasonable plan to reach the new level could be
forced into a capital increase, which as we have seen in the UK,
could result in partial or full state ownership. The best indicator
for this in using our methodology is the amount of capital that
the banks may need to raise as a percentage of market cap.
As a result of our analysis, we are cutting the dividends for any
remaining banks where we had not already done so.
demonstrate a reasonable plan to reach the new level could be
forced into a capital increase, which as we have seen in the UK,
could result in partial or full state ownership. The best indicator
for this in using our methodology is the amount of capital that
the banks may need to raise as a percentage of market cap.
As a result of our analysis, we are cutting the dividends for any
remaining banks where we had not already done so.
NH:
Of the
stocks that we think are perceived to be defensive, we now
forecast a 50% dividend cut at HSBC (in the base case) and a
US$15 billion capital increase (in the bear case).
Compounding credit quality issues for European banks are
€3.6 trillion of undrawn credit lines, which would have been
underwritten at the wrong price and almost certainly on the
wrong terms. Globally the process of deleveraging and
re-balancing funding means that credit quality could be as bad
as we have seen it for a long time.
stocks that we think are perceived to be defensive, we now
forecast a 50% dividend cut at HSBC (in the base case) and a
US$15 billion capital increase (in the bear case).
Compounding credit quality issues for European banks are
€3.6 trillion of undrawn credit lines, which would have been
underwritten at the wrong price and almost certainly on the
wrong terms. Globally the process of deleveraging and
re-balancing funding means that credit quality could be as bad
as we have seen it for a long time.
NH:
NH:
got some reaction to the cut if anyone wants it
NH:
this is Mr Archer
NH:
The Bank of England’s decision to slash interest rates by 150 basis points from 4.50% to 3.00% was a particularly bold step. We had expected a 100 basis point cut to 3.50%, but we believe the even larger cut to 3.00% is fully justified given that the already very weak economy has clearly suffered a serious relapse recently and is now in grave danger of suffering a prolonged, deep recession. Furthermore, mounting evidence that underlying inflationary pressures are now moderating significantly gave the MPC scope for aggressive action.
NH:
The fact that the Bank of England had never previously moved interest rates by more than 50 basis points in any direction since the Monetary Policy Committee was set up in 1997 highlights the very serious situation that the UK economy is in. On top of the very clear evidence that the economic downturn is deepening, credit conditions remain uncomfortably tight.
NH:
Not only did the economy contract by a far sharper than expected 0.5% quarter-on-quarter in the third quarter, but the prospects for the fourth quarter look even more worrying as the heightened financial crisis hits harder. Indeed, latest data and survey evidence relating to service sector activity, manufacturing, the consumer, unemployment, investment intentions and the housing market are overwhelmingly bearish.
NH:
Meanwhile, inflation is poised to drop like a stone over the coming months due to lower oil, commodity and food prices, very favorable base effects and rapidly diminishing underlying inflation pressures. Inflation expectations are retreating, wage moderation is continuing and latest survey evidence shows that companies’ pricing power is increasingly being undermined by markedly weakening demand and intensifying competition. Consequently, even though latest data show that consumer price inflation was still up at 5.2% in September, it could well dip below 1.0% late in 2009, thereby substantially under-shooting the Bank of England’s medium-term target of 2.0%.
NH:
Indeed, the Bank of England’s statement accompanying the interest rate cut acknowledged these factors, noting that ” in recent weeks, the risks to inflation have shifted decisively to the downside” and that “there is a substantial risk of undershooting the inflation target.”
We expect the Bank of England to reduce interest rates by a further 50 basis points to 2.50% in December, and would not rule out a larger cut if the economic downturn continues to deepen. Further out, we expect interest rates to come down to 1.50% by mid-2009, and it is very possible that they could fall even further. This reflects our belief that the economy will contract up to, and including, the third quarter of 2009 before stabilizing. We expect GDP to contract by 1.5% overall in 2009.
NH:
this from Charles Stanley
NH:
It was never a question of whether the Monetary Policy Committee (MPC) would cut interest rates but by how much.
In the event the MPC reduced interest rates by 150 basis points to leave UK base rates at 3%.
It has been noticeable over the past two months that the global economy in general and the UK economy in particular have fallen into an accelerated decline.
NH:
Figures for the UK published yesterday showed the service sector, which accounts for 75% of GDP, declining sharply. The jobs market recorded its weakest level since 1997 whilst factory output contracted at a record pace for the longest period since the 1980 recession.
There is a growing feeling that the MPC has misjudged the severity of the recession and is therefore behind the curve. Taking the view that UK output will not reach the bottom until the second half of 2009, it is now possible to see base rates reaching a level of 2% over the course of the next year.
NH:
Whilst it has been clear that there has been a thaw taking place in the credit markets, banks have been reluctant to lend to their customers, in which case it remains to be seen how much of today’s reduction will be passed on to borrowers.
Bond investors face a difficult choice. UK gilts offer total safety but suffer from problems of over-supply and inadequate real returns. By way of compromise we would recommend the following:
EIB 4.375% 2015 which at 97.03 produces a flat yield of 4.51%.
PM:
thanks for that Neil
NH:
what about something lighter to end on??
PM:
Such as ?
NH:
well, this might cheer you up
NH:
there a deal happening today in Europe
PM:
No way
NH:
yup a lesser spotted deal
NH:
it’s not big
NH:
but it is a deal
NH:
company in question is called
NH:
called Altana – German specially chemicals company
NH:
50% shareholder Susanne Klatten has bids €13 for remainder of company
NH:
stock closed last night at €9.39. Klateen is making a voluntary public offer through a vehicle called SKion
NH:
Skion has raided the market for stock this morning
NH:
and the deal has one quirk – it will only be subject to the Dow Jones Euro Stoxx 50 Index closing above a level of 1,900 on the last day of the offer period
PM:
??
NH:
but that’s not the most interesting thing
NH:
some brokers are being rather naughty and suggesting that
Mrs Klatten may just be trying to deflect attention
Mrs Klatten may just be trying to deflect attention
PM:
From what?
NH:
OK, some background here
NH:
Klatten is the BWM heiress
NH:
worth billions and fairly glamorous
NH:
anyway she is embroiled in a court case
NH:
With a larcenous lothario who blackmailed her for millions – he was not a diplomat on the run from the mafia after all just a chicken fast food salesman
PM:
PM:
that’s all a bit of dirty rotten scoundrels
NH:
er suppose it is
NH:
and the lothario recorded their sex sessions
PM:
Excellent
NH:
here’s a bit more on the case
NH:
Nov. 3 (Bloomberg) — Susanne Klatten, Germany’s wealthiest woman and heiress to the Quandt family that controls BMW AG, was blackmailed for several million euros, according to her spokesman.
NH:
Klatten asked prosecutors in January to investigate a man for fraud and extortion, her spokesman Joerg Appelhans said in an e-mailed statement today that identified the man only as “Mr. S.” Bild Zeitung reported earlier that the man was her former lover and sought 40 million euros ($51 million).
NH:
The 41-year-old Swiss national threatened to publish photos and videos that an Italian accomplice secretly took when the couple met at a Munich hotel, the newspaper said. Both men were arrested in Austria and her former lover has been extradited to Germany where he’s in custody, Bild said.
PM:
NH:
“Klatten learned that the relationship to Mr. S. had an exclusively criminal background; its goal from the beginning was to defraud and blackmail her,” Appelhans said. “She filed her complaint regardless of the distressful consequences in the public.”
NH:
Klatten was blackmailed with pictures of meetings of the former couple. The crimes started a year ago after her former lover requested a loan for several million euros and then tried to blackmail her for “a substantially higher sum,” according to Appelhans.
Klatten has a fortune valued at 7.8 billion euros and is married with three children, Bild reported.
Klatten has a fortune valued at 7.8 billion euros and is married with three children, Bild reported.
NH:
and here’s the other piece
NH:
Germany’s richest woman is alleged victim of sex films sting
PM:
thanks very much for that
PM:
Lunch time for us
PM:
Fun session today — thank you to everyone
PM:
Sterling up now at 1.5913
PM:
Footsie stabilised a bit — down 120 points
NH:
ah, market taking the view that the deep cut might, just might help the UK econonmy and prevent a really deep recession
PM:
Okay — we are off
PM:
back tomorrow at 11am
PM:
Thanks for all the comments — adn also thanks to Sam and Bryce for joining us as well
PM:
seeya