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Markets live transcript 7 Nov 2008

Markets live chat transcript for the chat ending at 12:26 on 7 Nov 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)

PM:
Okay welcome to Markets Live – FT Alphaville’s daily stock knock about.
PM:
Bit pushed this morning. Half my colleagues are either ill or swanned off on long weekends. Izabella and Alida here, phew…
PM:
And so thank goodness is Neil.
PM:
We’ve been sitting around scratching our chins this morning — looking at soaraway stocks in London
NH:
morning all – Taxloss we have no visibility on that at the moment
PM:
Soon
PM:
Neil — how about the wider market to kick things off this morning
NH:
well, ahead of the jobs reports in the US
NH:
not much going on
NH:
but the market is up, not entirely sure why other than a mini dead cat
NH:
NH:
we have had two days of large losses
NH:
so the market bounced first thing
NH:
handed back some of those gains
NH:
but has recovered
NH:
now up 85 points at 4,358
PM:
Hmm – quite a move
PM:
the employment report
NH:
it is
PM:
obviously this is only going be key
PM:
so what’s consensus??
NH:
well, around 200,000
PM:
jobs lost in October
NH:
yup
NH:
but some houses are more pessimistic
NH:
including Goldman which did its big this week
NH:
by axing 10% of its staff
NH:
Izy did a post on this yesterday
NH:
: but it is probably worth putting up the note again
NH:
if the number does come in at 300,000 it could be another rocky session for the market
NH:
Employment Report Looks Likely to B e One of Weakest in Last 20 Years
NH:
We have deepened our forecast of the change in payroll employment for October to -300,000 from -250,000. Our forecast of
the unemployment rate remains at 6.4%, an increase of 0.3 percentage points from September.
NH:
The downward revision is based on a string of very weak data releases since we cut our forecast that point toward more severe job losses in October than we originally thought. Specifically, perceptions of job availability, the employment
NH:
Sub-indexes of both the nonmanufacturing and manufacturing ISM surveys and the ADP employment report all came in well below our expectations.
NH:
If realized, our forecast would be the fourth worst decline in initially reported payrolls over the last 20 years. It is steeper than any initially reported decline in the early 90s recession; the 2001 recession and its aftermath had three steeper months,
though two of them were only slightly steeper
PM:
Apols if stuff coming thru a bit slow this morning. We may have a network prob
PM:
Thanks for that Neil
PM:
One to watch for after lunch
PM:
PM:
Note the demise of Spode mentioned below
PM:
V famous name from Stoke
PM:
I used to get seconds from the factory shop at Spode
NH:
don’t mention Stoke on this site ever again
PM:
it will brilliant — but you could also see why it might go out of business — the rush hour (home time) was 4pm
PM:
Why not mention Stoke?
NH:
because the have an extremely violent football team
NH:
who employ underhand tactics
NH:
against superior teams
PM:
Oh
PM:
NH:
Right, we’ve got the latest Hedge Weekly numbers from HSBC
PM:
And are they pretty?
NH:
No
PM:
Watch jumps out?
NH:
The usual dogs are barking – 788 china, MC Russian, Hermatige
PM:
PM:
788 China
NH:
not sure how 788 china are still alive
NH:
off 94% year to date
NH:
other than that Tosca have had another grim month
NH:
Tosca Class A down 20% last month
PM:
(d — it’s too big to put up on the regular V1 AV site)
NH:
Paulson going ok
NH:
his two credit funds still up for the year
NH:
lthough they took a bit of a hit last month
NH:
by that a mean they were down small
NH:
actually this week’s update is just more of the same – misery
NH:
and the figs from RAB look orrible
PM:
yes, poor RAB
PM:
How’s Man this morning – big bounce?
NH:
down again
NH:
no dead cat for Man
NH:
off 1.75p at 268.25p
NH:
hit 257p a little earlier
PM:
After yesterday’s 31% fall — dear me
NH:
PM:
So what is really moving out there this morning?
NH:
British Airways is top of the FTSE 100 leaderboard
NH:
climbed 19.5p to 150p on the back of better than expected half year results
NH:
that’s a rise of almost 15%
PM:
???????????????
NH:
here’s why the market like it
NH:
although the load factor was down slightly, passenger yield – what they charge passengers – went up
NH:
by 10.5% and that was down to price increase and a stronger dollar
NH:
now that has allowed management to reiterate guidance issued in September
NH:
but with a slightly more positive spin
PM:
go on
NH:
well
NH:
Management is now targeting a small operating profit for the full year.
NH:
Revenues are now expected to grow by 4% (previous guidance 3%) and non fuel costs are expected to grow by 5% (previous guidance 3%.
NH:
Guidance on the fuel bill remains unchanged at £3bn.
PM:
Hmm — Tracy did a note from home on this earlier
PM:
Her point — which struck me ars rather important — is this
NH:
go on
PM:
The airline changed the depreciation period for their RB211 engines, generating a £32.5m decrease in annual depreciation charges, et voila, CEO Willie Walsh gets his 10 per cent margin despite the fiasco that was Terminal 5’s opening and rising fuel costs.
NH:
so what’s the depreciation period now??
NH:
presumably BA would argue that these engines are now more efficient
NH:
and last longer
PM:
Dunno — but it looks rather timely
NH:
ELS – very funny
PM:
any analyst comment?
NH:
yup
NH:
this is from Cazenove
NH:
The group’s net debt position has not changed from the year end; it is £1.4bn and gross cash on the balance sheet remains at £1.8bn. Capital expenditure plans have been cut from £650m this year to £550m
NH:
Overall therefore these results are better than expected and should spark a rally in the share price after such a precipitous fall yesterday. Longer term we believe that notwithstanding the cyclical risks British Airways valuation is compelling at 2.2x peak earnings and funds should consider building weightings in anticipation of the cyclical rally when it comes.
NH:
and this is from Collins Stewart
NH:
H1 results beat due to stronger unit revenues
British Airways reported H1 EBIT of £140m (vs £567m last year), compared to our £87m forecast. The surprise was the strength in unit revenues, with yields up 10.5% in H1. Pre-tax profit for the first half was £52m. For the year, management raised revenue guidance to +4% (from 3%). It maintained its forecast of ‘a small operating profit for the year’.

NH:
Traffic deteriorating but yields being managed up
BA’s strategy has been to raise fares to offset cost inflation (principally fuel) pressures; this is diametrically opposed to the low cost carriers’ strategy and reflects in BA’s poor traffic data vs easyJet and Ryanair. H1 yields rose 10.5%; an acceleration on Q1’s 6.9% increase (currency is likely to be a major factor). October traffic highlighted further demand weakness, with traffic overall down 4.4%, including a 9.2% decrease in premium.
NH:
Costs rose sharply due to fuel and currency. Balance sheet inline
H1 costs rose 18.2%. The largest single increase was fuel (up 52% or £511m). A £40m severance provision was included in staff costs. Landing charges rose 13.4% largely due to T5. Operating cashflow broadly followed profits (the H1 working capital outflow was smaller than last year). BA ended the period with £1.8bn of cash liquidity; net debt was £1.4bn. Due to IBA tax adjustments, fx and derivative accounting; NAV fell from 268p to 238p. The pension deficit increased by £201m.
NH:
Outlook risky but shares trading at an unprecedented discount
The trading outlook for airlines is deteriorating; we have only seen two months of long haul premium traffic weakness. However, BA’s strategy appears to be working as it manages yields up to a level that is sustainable against higher long-term oil prices. Given all the uncertainties, BA shares have traded down to an unprecedented discount to NAV; currently a 45% discount. We expect this gap to narrow. Meanwhile management is working on other self-help measures, including the Iberia merger and the AA tie-up. Medium term, Quest™ value is 347p.
PM:
NH:
actually while we are talking about Rolls Royce someone has just sent a me a note on the company
NH:
a secret investors conference no less
PM:
Ah
PM:
do share
NH:
Rolls-Royce held an Investor Seminar today in London
NH:
Management
maintained 2008 guidance, but declined to comment beyond that, and
regrettably few new figures were given to quantify aspects of the
businesses
NH:
A new focus was on nuclear, which appears strategically sound
but may take many years to build an earnings stream. Management was
customarily upbeat in tone and body language in general, while
acknowledging near-term uncertainty; the President of Civil Aerospace
conceded that the present situation was “Pretty severe”.
PM:
— so it was its annual investor day — not secret!
NH:
Andrew Shilston, FD, gave a brief presentation. We believe that
pension-related swaps exposure to Lehman Brothers has been replaced at
immaterial cost, and that limited equities exposure (~20% of assets) should
restrict asset downside.
PM:
oh dear
PM:
NH:
RR has been very active in the sterling/dollar
hedging market, with ~$8-9bn of hedges being entered into during the last
few weeks, although this is unlikely, in our view, to provide material FX
tailwind until FY 2010/11.
NH:
European Export Credit Agencies recognise that they
will have to step up financing over the next 19 months, and RR will take
customer financing requests on a case-by-case basis after discussion with the
airframe OEM (though RR is generally contractually bound to a 15-25%
share of the total financing).
NH:
Civil Aerospace (1). Mark King, President of Civil Aerospace, gave a broad
presentation. While he conceded that the downturn would have impacts on
RR and that the downturn was “Pretty severe”, he declined to give any views
or projections over the next 2 years, although he pointed to diversity of
backlog and strength of services revenues. Of aircraft retirements announced
so far, ~150 have RR engines, and of these, ~100 are lower-ticket Embraer
145 family.
NH:
Civil Aerospace (2). RR gave some new numbers on Civil Aerospace
segment revenues: 71% of services revenues (and 61% of total revenues)
derive from the Trent and RB211 families, 12% (14% of total) from the
V2500 engine and 17% (25% of total) from other, smaller engines. Services
revenues are well-diversified, with 35% from North America, 35% from
Asian & Middle East, 25% from Europe and 5% from RoW.
NH:
that was from JP Morgan
PM:
Actually – noticed ive also got a note on this from Goldman
PM:
jsut short really
PM:
What’s changed
At its annual investor day, Rolls-Royce was much more bearish on the
outlook for civil aerospace than we had expected. Offsetting this, the
company has moved aggressively to lock in the much better $/£ rate.
Given that these two issues broadly offset each other, we maintain our
Neutral rating. Colour on these and other takeaways are summarised in
this note. We also believe there is negative read across to EADS.
Implications
The company plans to give updated earnings guidance in February. We
believe this could reflect many moving parts including (but not confined
to) lower than previously guided volume, reductions in discretionary R&D
and capex, and a better FX situation. We are slightly changing our
2008/2009/2010 EPS estimates to reflect minor housekeeping.
Valuation
Our 12-month price target of 298p (from 291.9p) is derived through a
scenario analysis, using multiples-based valuations. On our published
estimates (our base-case scenario) our price target implies a 2010E clean
P/E of 9.3x and 2010E EV/EBITA of 7.4x.
NH:
Rolls up 6p at 307p
PM:
PM:
How about some RAW to spice up this friday…
PM:
Reader beware
NH:
OK. this is not a big company
NH:
anymore
NH:
but I have got a number of emails on it this morning
NH:
JJB Sports
PM:
NH:
shares up 4.25p at 39.5p
NH:
12% move
NH:
on rumours that the company could be close to selling its fashion division
NH:
and don’t laugh at that
NH:
they really do have a fashion arm
NH:
it sells the sort of appareal that kids who hang outside shopping centres at night wear
NH:
anyway, talk is JD Sports are about to buy the business
NH:
and the proceeds will be used to pay off./deal with the £20m loan they took off Kaupthing
NH:
also hearing there is one interested bidder for its health club business
PM:
How much confidence do we have in this story?????
NH:
well, the fashion business is up for sale – they confirmed any earlier story we put up here
NH:
JD would be a logical buyer and they tried to buy a lump of the company recently
NH:
which promoted Mike Ashley who owns Sports Direct to build upa secret stake
NH:
he didn’t want a good management team getting their hands on JJB
PM:
right…
NH:
so I’d say this is very possible. less sure on health clubs
NH:
sale proceeds will be key
PM:
lets move on
NH:
Pakora that’s a great name for a hedge fund and a great investment tatic
NH:
do the opposite of Ashley and make millions
PM:
PM:
let’s have a quick look at the banking sector in the wake of yesterday’s panic rate cut
NH:
not much movement to be honest
Lloyds TSB Group (LLOY:LSE): Last: 194.00, up 6.4 (+3.41%), High: 196.90, Low: 187.00, Volume: 5.36m
Barclays (BARC:LSE): Last: 189.40, up 5.7 (+3.10%), High: 191.80, Low: 185.10, Volume: 17.68m
HBOS (HBOS:LSE): Last: 107.10, up 3.6 (+3.48%), High: 109.70, Low: 102.60, Volume: 2.98m
Royal Bank of Scotland Group (RBS:LSE): Last: 67.20, up 3.3 (+5.16%), High: 67.50, Low: 63.20, Volume: 36.05m
NH:
actually on RBS few people buying the stock this morning
PM:
Why
NH:
well, the shares trade ex-entitlement to the open offer to tonight
NH:
terms of which are 13-18 at 65.5p I think
PM:
so if you are on the register tonight you get the option to clawback
NH:
yes
NH:
now some dealers think you can buy the stock tonight, get the entitlement and then sell the shares on Monday
NH:
and then decide over the next two weeks whether to take up the stock
PM:
free option then
NH:
providing Wall Street and Asian markets don’t take after we close this evening
NH:
but I am not clear who they will trade once ex and how the dilution wil be factored in
NH:
but I thought it an interesting idea
PM:
yes, is interesting
NH:
and I wonder whether you could sell RBS knowing you would pick the stock up in the placing
NH:
is that outlawed
PM:
probably
NH:
if anyone has been looking at this trade could they let us know
NH:
back to interest rates
PM:
NH:
MG Global have penned a note
NH:
they reckon banks don’t like big swinging cuts, but small, regular ones
NH:
and they make the point that the relative performance of the UK banking sector has since 1980 correlated with the three month Libor
NH:
conclusion
NH:
Libor will have to fall for banks to pass on the cut to customers
NH:
that does not tell us anything new
NH:
but worth noting
NH:
UK banks, rate cuts and vast supplies of equity
Banks like small, frequent interest rate moves, not big swinging cuts
The govt. is breathing down the banks’ neck to pass the cut to customers, but
- current account funding, especially small business accounts cannot be cut 1.5%
- wholesale funding costs may not adjust quickly or completely
NH:
UK banks’ relative performance correlates with three month Libor since the early 1980s (see attached), not with the base rate. Libor remains the rate to watch, but will have to fall substantially for the banks to
avoid a marked margin squeeze after yesterday’s move
NH:
As a reminder, this week we have also learned:
- The FSA insists that LLOY would have to raise GBP7bn as a standalone entity
This is more than the GBP5.5bn being raised as a condition of the HBOS deal
- Integration costs at LLOY have doubled to GBP2.1bn
- The “extra” GBP500m of synergy with the deal has not changed forecast
accretion i.e. weaker HBOS profit forecasts offset higher cost savings
NH:
LLOY needs the deal to avoid going cap in hand, presumably to the Middle East
NH:
RBS: there is an almost limitless supply of RBS shares available at 65.5p
the deal goes ex on Monday removing this supply, thus
this could be the bank to benefit most if Libor falls sharply next week
NH:
LLOY: there is substantial stock available at 173.3p going ex 12 December
investors can also buy via HBOS at 9% discount to the value of the offer
thus we see no reason for the stock to trade above its rights price
with LLOY at 173p there would be no reason for HBOS to trade above 105p

NH:
BARC: unencumbered by the supply of new equity
but trading at 0.75x tangible book versus 0.65x for RBS
NH:
NH:
Libor watch
NH:
*DJ 3-Month Euro Libor Fixed At 4.4725%, Vs 4.59625% Thursday
NH:
*DJ 3-Month Sterling Libor Fixed At 4.49625%, Vs 5.56125% Thurs
NH:
*DJ 3-Month USD Libor Fixed At 2.29%, Vs 2.3875% Thursday
NH:
what’s the OIS. that will tell us whether risk appetite has returned
NH:
we have dollar
NH:
3-month dollar OIS is 175 vs 183
NH:
but what about the UK???
NH:
anything
PM:
ON $ 0.33 v 0.32
NH:
yes Taxloss, looks like 1% has been passed on
NH:
but aren’t mortgages prices off the five year swap rate
NH:
do we have that figure
NH:
apparently the chancellor has summed the banks chiefs to see him today
NH:
here’s some more bank stuff while we wait for the rest of Libor
NH:
from UBS
NH:
Rate cut moves monetary policy back into non-hostile territory
The 150bp rate cut on 6 November was proportionately the largest since 6 August
1914. We believe that, if followed rapidly by the 100bp in further cuts priced in by
the market, UK monetary policy will belatedly have moved back into non-hostile
territory for the economy.
NH:
2009 already a write-off; some hope for 2010
Lags in monetary transmission are always 6-9 months and may be longer under
current circumstances. 2009 is already a write-off for GDP, but monetary policy is
no longer driving the same conclusion for 2010. However, we believe that the
authorities still have one major outstanding on the ‘to do’ list: mortgage finance.
NH:
Awaiting the Crosby Report
FSA vice chairman and ex HBOS CEO James Crosby’s report on mortgage finance
is now somewhat overdue. We believe it could hold the key to re-opening the
mortgage market sufficiently for mortgage balances to grow once more. In the
absence of a recommendation for ongoing support from the authorities, we believe
the UK’s £700 billion loan overhang is likely to preclude such a recovery
NH:
With the disappearance of many historical buyers for mortgage-backed
securities and the nervousness of many of the survivors around credit quality,
liquidity and price volatility, it seems clear to us that some form of government
involvement will likely be necessary. This could take the form of wrapping
credit risks on prime, lower LTV mortgages, in the way Fannie and Freddie do
(not, of course, then going on to allow the wrapping companies to wander off
into buying subprime exposures as happened in the US). It could also take the
form of a permanent SLS, available for mortgages originated post 2007 as well
as the pre-end 2007 vintages currently eligible.
NH:
However, we believe the UK remains dependent on some kind of extended
support for mortgage financing, or the withdrawal of mortgage credit
highlighted in chart 3, already guaranteed to worsen for the next several months,
will extend far enough into the future as to preclude any meaningful UK GDP
recovery post 2009.
PM:
We still havent got overnight sterling
NH:
and to finish on the banks
NH:
HSBC
NH:
stock off a touch, down 7p at 743.5p
NH:
Now Alex Potter at Collins Stewart has had a few interesting things to say this morning
NH:
forget Smug Bank’s emerging markets exposure
NH:
he is worried about the US
NH:
and Household, the sub prime bank business it bought a few years back
NH:
HSBC US is due to publish results on Monday
NH:
and Mr Potter says investors should be on guard for a big rise in delinqencies
PM:
(sorry daddy, missed that)
NH:
in total he thinks impairments at Household could total $16bn
NH:
and given the group is only going to make $22bn
NH:
here’s the report
NH:
but note Mr Potter remains a buy
NH:
because he says only the big banks are only going to get bigger and stronger
NH:
NH: Group IMS and 3Q08 results from US businesses – Mon 10 Dec
HSBC is scheduled to publish a group update and the usual US GAAP results from HSBC Finance and HSBC USA next Monday, 10 December.
NH:
US delinquencies to be key feature and key group swing factor
NH:
Our forecast for HFC impairments is $16bn for the FY08, implying the rate of impairment rises from 8.5% in the first half to 13% in the second. To put $16bn in context, we only see group PBT being c.$22bn. Loan impairments and net charge-offs have increased amongst the main US peers though we HSBC Finance has better balance-sheet provision coverage than these peers. That said, it is clear that the US consumer finance market will worsen before improving and therefore expect another weak quarter.
NH:
Asian slowdown and HK property outlook
NH:
As we wrote about in our StanChart report (28th Oct), we can see both consumer revenues becoming ex-growth for the coming two years as well as loan impairments rising to late-90s levels. Further, corporate revenues in aggregate in Asia are likely to slow though HSBC (and StanChart) should be net share winners. In total, revenue growth in Asia (which was only c.5% in 1H08) is likely to slow but we believe the profit pool in the region will remain more robust than in Europe and HSBC is a relative winner amongst peers.
NH:
European earnings hit by FX
Since HSBC reports in USD, earnings from Europe (mostly UK) are likely to be downgraded on FX. HSBC has traditionally been at the more conservative end of the lending spectrum such that we see relative outperformance against local peers on revenues and profits. We anticipate strong deposit flows here also.
NH:
Remains favourite stock as the strong get stronger
Our core thesis is that well-funded, well-capitalised banks with conservative risk parameters will both post stronger equity returns in the near-term as well as being market share gainers across the medium term. In short, the strong get stronger. HSBC is at the forefront of this trend and, even with high-end
PM:
(ta for that ON 3.2125)
PM:
NH:
did you read Roger Blitz’s interview with Amanda Staveley this morning?
PM:
yep
NH:
certainly were
PM:
some very funny lines in there
NH:
some of them made me laugh out loud
PM:
Staveley is the fixer or go-between who helped broker the deal between Abu Dhabi and Barclays
PM:
and former girlfriend of Prince Andrew
NH:
she took £40m commision fee on the deal
NH:
for her company
NH:
which is called PCP
NH:
now I thought that was some sort of horse tranquiliser
NH:
actually PCP could be angel dust, the stuff James Brown used to snort
PM:
Phencyclidine (a complex clip of the chemical name phenylcyclohexylpiperidine, commonly initialised as PCP), is a dissociative drug formerly used as an anesthetic agent, exhibiting hallucinogenic and neurotoxic effects.[1] It was first patented in 1952 by the Parke-Davis pharmaceutical company and marketed under the brand name Sernyl. PCP is listed as a Schedule II drug in the United States under the Convention on Psychotropic Substances.[2]

In chemical structure, PCP is an arylcyclohexylamine derivative, and, in pharmacology, it is a member of the family of dissociative anesthetics. PCP works primarily as an NMDA receptor antagonist, which blocks the activity of the NMDA Receptor.[3] Other NMDA receptor antagonists include ketamine, tiletamine, and dextromethorphan. Although the primary psychoactive effects of the drug last only hours, total elimination from the body is prolonged, typically extending over weeks.

NH:
and then get in his car
PM:
From wikipedia
NH:
anyway, she didn’t deal with Barc for the money
NH:
that’s not important apparently
PM:
really?
NH:
yes
NH:
Ms Staveley, always immaculately dressed, with a home in Dubai and now a second on London’s Park Lane, insists she has no interest in personal wealth. But she is certainly hungry to close more deals.
NH:
She is incapable of taking a holiday, saying any break would be work-related. Her entire perspective comes from the Middle East. “It just excites me. There is something in the growth of this young economy that I saw in myself.”

PM:
NH:
got all that
NH:
can’t take a holiday
NH:
and she sees something of the middle east in herself
PM:
NH:
The Barclays deal will at least dispel the impression that football was becoming her metier – though there will be more Middle East-funded deals for leading clubs, she says.
NH:
“It is a business that can only be served by extraordinarily wealthy people. Football is strategically important to the Gulf. A lot of people watch football and the interest in football in the Gulf states is immeasurable.”
NH:
and that’s coz football is “the key provider of digital content on media platforms worldwide
NH:
apparently
NH:
all of which brings us to the note put out by Stephen Jen at Morgan Stanley this morning
NH:
unlike Ms Staveley who thinks middle eastern countries are set to pour billions of dollars into investments in European companies
NH:
because investment opportunities were now emerging for the Middle East to become “a much more integral part of the global financial community”.
PM:
STOP
NH:
Mr Jen is more sanguine and thinks that some of the SWF’s might be about to draw their horns having sustained some nasty losses
NH:
he also makes the point that with oil at $60bn cash may have to be kept at home
PM:
It’s one thing having a chuck — but please NO profane absue please
PM:
When the new site comes in you will moderated – instantly — adn that may include a commenting ban
PM:
Sorry — but,,,
NH:
back to this MS note – think Izy has done a post
NH:
and here is the note
NH:
Bottom line.
NH:
Back in May 2007, we projected that total
AUM of SWFs may grow to US$12 trillion by 2015. We
now believe that US$10 trillion could be a more
reasonable target, in light of (i) the paper losses that
SWFs may have suffered this year; (ii) lower oil prices
and a possible compression in the US C/A deficit; (iii) the
need to replenish official reserves; and (iv) meaningful
risks of SWFs being called upon to finance extraordinary
fiscal operations. We still maintain the thesis that SWFs
will be a source of support for risky assets. However, we
need to acknowledge that SWFs’ firepower may have
been constrained somewhat.
NH:
Paper losses.
NH:
Our guess is that some SWFs may have
seen between 18% and 25% of paper losses so far this
year, implying that total AUM by SWFs may have
declined from US$3.0 trillion to US$2.5 trillion or even
US$2.3 trillion. We stress that this is a guess, not based
on actual data.
NH:
Slower incremental growth of SWFs. Lower oil prices,
more modest export growth, the need to replenish
official reserves and higher risks of being called upon to
finance fiscal operations may lead to a more tempered
growth trajectory for SWFs.
NH:
Revised SWF projections. Updating our calculations,
we now see the AUM of SWFs reaching US$10 trillion
by 2015, compared to the previous projection of US$12
trillion. The expected cross-over between official
reserves and SWFs is now 2014, compared to 2011.
SWFs still a major source of support for risky
assets. We maintain our thesis that SWFs will continue
to be major buyers of risky assets, because that is the
reason why they were set up in the first place.
New questions have arisen. However, we are now
taking seriously the possibility that some SWFs may be
forced to sharply slow down their pace of purchases of
risky assets or, in extreme cases, liquidate parts of their
portfolios in the coming year or so.
NH:
there’s more on the site
NH:
NH:
we had few questions about the miners this morning
PM:
hang on Neil
PM:
E J Leoni-Smith — we value your comments on AV — genuinely do
PM:
But we have to maintain a bit of decorum
PM:
Please
NH:
not heard anything more on the Rio/BHP deal
NH:
but I did pick up an interesting article from the AFR
NH:
Australian Financial Review
NH:
on the bulk shipping market
PM:
(IdiotBox – dont go there either!)
NH:
seems there are 10 ships off RIO’s port at
Dampier in Western Australia
NH:
that don’t have letters of credit and therefore can’t buy the iron ore
PM:
Goodness me
NH:
so there could be a huge slowdown in iron ore sales from the Pilbara region
NH:
Rio Tinto and BHP Billiton are becoming increasingly isolated with their
full-steam-ahead approach to iron ore production. Taking into account
the situation in the global steel industry, it seems certain something
has to give.
NH:
Neither group has said publicly that it is cutting production but Street
Talk’s sources are reporting that not everything is going smoothly
inside RIO.

NH:
Every Australian iron ore producer is coming under increasing pressure
and the rumours are flying.
NH:
Here’s a good one. About ten ships are said to be off RIO’s port at
Dampier in Western Australia – and the story goes that most do not have
letters of credit to buy the ore. Other sources have said that some
customers are being forced tp pay cash as banks tighten credit.
NH:
Fortescue Metals Group has had only one customer unable to obtain a
letter of credit, so if the RIO rumour is true, it would suggest a
drastic deterioration that no one in the Pilbara region will be able to
aboid. What gives the rumour some weight is that RIO is understood to be
cutting the number of train loads running down its main railway track
for the next three days.
NH:
The company has said minor maintenance work is under way but that the
trains will continue to run. In addition RIO has frozen hiring of
workers for projects beyond the planned expansion to 320m tonnes a year
by 2012 and is reducing maintenance staff. Many emploiyees working on
projects beyond 2012 have been transferred to more immediate operations
as work on future expansion slows.
NH:
Publicly, RIO has conceded that it is reviewing the speed of its
expansion plans because of the reduced demand from the world’ steel
makers, but says it has no plans to reduce output.
NH:
Brazilian iron-ore leader Vale plans to cut output by 10% or about 30m
tonnes as it tries to maintain margins rather than volume. This means
that BHP’s position thatnothing ha changed in the Pilbara in terms of
output and aggressive expansion is looking more and more ridiculous.
Some have even called on the ASIC to look at it.
NH:
Of course BHP cannot afford to change its plans because Europes
competition regulators are looking closely at its proposed takeover of
RIO, with iron-ore looking as a major proble,.

BHP’s argument that the deal will bring more product to the market more
quickly will be undermined by any production cuts but RIO is not bound
by the same sensitivities. In fact, if RIO cut output in response to
softening iron ore demand – which analysts predict will result in a 15%
to 20% fall next year – it may help its struggling defence as it
undermines BHP. But any production cut is unlikely to go down well will
all of RIO’s shareholders, manyof whom are frutrated by the lack of
engagement with BHP.

NH:
It could be seen to be trying to turn the EU’s ire against BHP and its
$170bn takeover proposal. A production cut would also derail RIO’s
argument that it is worth more to BHP because it has more near-term
growth options and the infrastructure to underpin them.

But Rio could argue that production cuts are business as usual, given
Vale’s move.

Another question is, does RIO need to bother cutting production and
rocking the baot? Surely Vale has sent the message to the EU loud and
clear that the big three can control prices by reining in production.

NH:
NH:
market seems to have turned lower on the figures from Ford
NH:
GM to follow later. could be grim
PM:
Market extraordinarily challenging
NH:
and with the jobs numbers to come, hold on to your tin hats
NH:
I have the news release
NH:
Net loss of $129 million, or $0.06 a share, for the third quarter of 2008
NH:
Pre-tax loss of $2.7 billion from continuing operations, excluding special items ++
NH:
Favorable curtailment gain in excess of $2 billion related to approval of retiree health care agreement
NH:
Company remains on track to achieve $5 billion in cost reductions in North America by the end of 2008 compared with 2005 (at constant volume, mix and exchange; excluding special items)
NH:
Automotive gross cash (including cash and cash equivalents, net marketable securities and loaned securities) on Sept. 30, 2008 totals $18.9 billion +++
NH:
vailable credit lines total $10.7 billion; overall liquidity totals $29.6 billion
NH:
Company planning further cost and cash improvements to continue implementing Ford’s product-led transformation plan and offset continued weakness in the global automotive industry
NH:
that was at the top of the press release
NH:
so that’s the positive stuff
NH:
digging a bit deeper
NH:
brings this
NH:
To support new product investments and offset continued industry weakness, Ford is implementing actions to improve Automotive cash by a total of $14 billion to $17 billion through 2010.
NH:
Reducing North American salaried personnel-related costs by an additional 10 percent by the end of January 2009, through personnel reductions, attrition and other actions. The reductions are in addition to personnel-related cost actions already taken in Ford North America and under way in Ford of Europe, Ford Asia Pacific and Africa, and Volvo.
NH:
Further reduction of U.S. hourly employees by approximately 2,600 as a result of the most recent round of targeted buyouts – bringing Ford’s total U.S. hourly reductions through buyouts in 2008 to approximately 7,000.
NH:
Eliminating merit pay increases for North America salaried employees in 2009.
NH:
Eliminating performance bonuses for global salaried employees, including the Annual Incentive Compensation Plan for the 2008 performance year.
NH:
Suspending matching funds for U.S. salaried employees participating in Ford’s Savings and Stock Investment Plan, effective Jan. 1, 2009.
PM:
Not a merry xmas if you are at ford
PM:
I was gonig to share details of my lunch venue — but im not now
NH:
Continuing to develop incremental sources of Automotive funding, including divesting of non-core
operations and assets, and implementing equity-for-debt swaps.
NH:
go on
NH:
let’s here today’s venue
PM:
La Petite Maison at 54 Brook’s Mews,
PM:
here’s a line from a view in the Observer — Jay Rayner
PM:
Certainly it is not priced according to the neighbourhood. While it is hardly a bargain, I think it represents value for money,
PM:
NH:
talking of cars, Porsche has results out later today
NH:
should be interesting to see what they have made from non-car making activities
NH:
nothing out yet though
PM:
Certainly
PM:
Ive got to go — leaveing you with Neil for a mo
PM:
Please behave!
NH:
Right, something light hearted to end on
NH:
Winterfloods
NH:
biggest small cap market maker in London
NH:
offices just across the river from FT Towers
NH:
in the former Liffe building
NH:
and they would seem to share that building with some odd tenants
NH:
I got sent this earlier
NH:
deeply strange
NH:
Good morning to you all,
NH:
I have had various requests over the last few weeks with regards to employees bringing firearms onsite for use on external events after working hours.

NH:
I can now confirm that under no circumstances are firearms to be brought onsite, regardless of whether a license is held, the firearm is in pieces, stored in a secure place, no ammo is held etc.
NH:
Please ensure that this message is sent to all employees as any future requests to bring items of this nature will be refused access.
NH:
I thank you in advance for your support on this matter.
NH:
Many thanks

Building Manager
CB Richard Ellis | Management Services Ltd

NH:
slightly worrying
NH:
hope there is not a sniper on the roof
NH:
they would have a clear shot at us
NH:
disgruntled ML reader
NH:
could be one of those stock market bulls
NH:
desperate folk at the moment
NH:
and here’s AA Gill’s review of Paul’s luncheon venue
NH:

http://www.timesonline.co.uk/tol/life_and_style/food_and_drink/eating_out/a_a_gill/article2130325.ece

NH:
La Petite Maison at 54 Brook’s Mews,

It is the London outpost of a decades-old restaurant in Nice, famously overseen by a grumpy French gal called Nicole Ruby who likes to bark at the customers, but who will not be here barking at anyone. La Petite Maison has been brought to London by the team behind the modern Japanese restaurants Roka and Zuma, though there is, thank God, no attempt to bring the flavours of Japan to the culinary traditions of Provence. This…

NH:
SFB – would the Times really give a rival publication any credit?
NH:
especially when it is owned by Murdoch, who owns the WSJ
NH:
we don’t tend to take these things seriously
NH:
right that is it for this week
NH:
look out for the jobs numbers at 1.30pm
NH:
and the numbers from Porsche which could be fund and should be out soon
NH:
cya and thanks for all the comments this weekk and today
NH:
FKA – Robert Wright is chasing this story very hard
NH:
he reckons there will have been big losses
NH:
so far he hasn’t come up with any names
NH:
oh and one thing before we go
NH:
should have mentioned it earlier
NH:
but in the past couple of days there have been some big downgrade on Goldman and MS
NH:
JP Morgan has joined in today
NH:
saying
NH:
The quarter is setting up to be the worst for GS since going public due to marks on its PE portfolio
NH:
U.S. Investment Banks
GS, GS US
Overweight
$80.72
Lowering Broker F4Q08 Ests: Private Equity Losses
Hurt GS; MS Benefits from DVA Gains
NH:
We lower F4Q08 and F2009 estimates for GS and MS due to especially difficult
markets. The quarter is setting up to be the worst for GS since going public due to
marks on its PE portfolio. We think MS will navigate the quarter somewhat better
given its smaller exposure to PE and a DVA benefit of ~$1.5B. Although we
remain Overweight on GS due to business mix and culture, MS could be a better
stock near term due to valuation and possibly better performance in F4Q08.
NH:
GS sensitive to global equity, especially in private equity. We believe GS’s
PE portfolio will generate $2.3B of losses due to the 30% decline in world
indices F4QTD. We estimate EPS sensitivity of $0.40 or ($0.40) for a 10%
incremental increase or decrease in equity markets during F4Q08.
NH:
Write-downs bigger in F4Q but manageable. GS and MS might experience
greater write-downs in F4Q08 at ~$2B and ~$3B (gross), respectively, given the
further deterioration in resi, commercial, and leveraged loan related indices
(~5%, ~10%, ~10%, respectively). We don’t believe hedges are performing
particularly well, with synthetic indexes used to hedge moving less than cash
markets. We expect MS will benefit by app. $1.5B due to spread widening on its
own debt, more than the $0.5B bene
NH:
Strong equity commissions but not enough to save F4Q. We expect strong
equity trading volumes as the cash equity trading has been up ~30% QTD.
• Equity and debt underwriting plummet—M&A holds up better. ECM
NH:
DCM revenues are likely to plummet ~50% q-o-q, testing 2003 lows. However,
M&A is holding-up better, down ~20% q-o-q for GS and up ~15% for MS.
NH:
GS well positioned to benefit from the distressed assets. We see the market
environment as “Goldman’s” with numerous attractive investment opportunities
incl. various distressed and underpriced assets. However, this is contingent upon
GS being willing and able to invest excess capital, if there is such a thing in this
type of market. GS will benefit from the improved trading activity as it has the
capital and the risk mgmt culture to invest in new trading opportunities.
NH:
Solvency risk largely off the table, focus reverts to fundamentals. Even
though the macro environment will likely be incredibly difficult, we think GS
and MS should maintain leading positions in investment banking and trading.
Recent concerns around solvency likely have led to lost business, but
government rescue programs should be a big relief for nervous customers.
NH:
Lowering estimates. We lower our ’09 GS estimate to $12.47 and our MS est.
to $2.99. With its excess capital and ability to raise funds (with gov’t support if
needed), we see GS as a primary beneficiary of a credit market that seems closer
to the bottom than to the top. While we are encouraged by the strength in MS’s
GWM and trading businesses, we remain cautious due to slower client activity,
credit headwinds, and historically erratic risk management. We continue to
suggest investors with time pay up for GS exposure, though MS could be a
better-performing stock near term due to valuation.
NH:
right, must go
NH:
things to do
NH:
no, vending machine for me but a quick wander across the river to Pret
NH:
and on GS
NH:
this from the WSJ today
NH:
Goldman Sachs Group Inc. may post a loss for its fourth quarter, a growing number of stock analysts believe, because of its exposure to the deteriorating equities market.
Goldman Sachs hasn’t reported a loss in any quarter since going public almost 10 years ago. The average of estimates among 11 analysts for its fourth quarter, as compiled by Thomson Reuters, is for earnings of $1.62 a share.
NH:
But several analysts, concerned about Goldman’s positions in private equity and principal investments in stocks, have begun projecting a loss for the quarter.
NH:
A spokesman for Goldman declined to comment about those projections.
While Goldman steered clear of many of the disasters that battered rivals, “every firm has its Achilles’ heel,” said Roger Freeman, analyst at Barclays Capital.
Mr. Freeman had projected in late September that Goldman would earn $2.71 a share in the quarter.
But with the market declining sharply since then, it is reasonably likely that Goldman will report a loss for its fiscal fourth quarter, Mr. Freeman said.
NH:
In recent days, Morgan Stanley analyst Patrick Pinschmidt forecast a loss of $1.09 a share for Goldman, the steepest decline projected by an analyst.
UBS analyst Glenn Schorr changed Goldman’s estimate to a loss of 40 cents a share from a gain of $1.40 a share.
Merrill Lynch analyst Guy Moszkowski expects Goldman to post a fourth-quarter loss of 49 cents a share.
About a week ago, Mr. Freeman met with Goldman’s president and co-chief operating officer, Gary Cohn, and its chief financial officer, David Viniar.
NH:
In a research note, Mr. Freeman wrote that “management suggested that GS has fairly successfully navigated most of the mortgage and credit cycle. However, it believes it is more exposed than most to the equity market declines” particularly because of its large private-equity and principal investments.
Mr. Pinschmidt projects Goldman will take a $2.6 billion loss in its principal investment portfolio.
If equity markets rebound by 10%, the company’s principal investment loss would narrow to $1.6 billion, cutting its loss to 29 cents a share, the Morgan Stanley analyst calculated.
In New York Stock Exchange composite trading Thursday at 4 p.m., Goldman fell 7.7%, or $6.71, to $80.72.
The stock is down 35% in the past month and 62% so far this year.
NH:
Ok, gotta go
NH:
see u all next week
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