Markets live chat transcript for the chat ending at 12:14 on 12 Nov 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH) Bryce Elder (BE)
PM:
Okay welcome to Markets Live – FT Alphaville’s daily stock knock about.
PM:
But not just stocks!
PM:
Krona too!
NH:
The Great British Krona – henceforth known as GBK
PM:
Cant believe Reuters havent updated that ticker yet
PM:
What is sterling currently?
NH:
not too healthy after the inflation report
NH:
currently $1.5246
NH:
down from $1.5479
PM:
PM:
Taxloss reckons is an ex-currrnency
PM:
the former pound
NH:
actually Merv is just talking about sterling at the press conference
NH:
if sterling falls enough that will be a concern as will have impact on inflation
NH:
we are seeing a rebalancing of the world economy
NH:
no wish to see it fall particularly sharply
PM:
(Taxloss — i think Stacy the shrewdie is fixedi in a 200)
NH:
but inevitable that it will fall further than it was in 2007
PM:
Fine if it falls — jsut not too fast please
PM:
Inflation report
PM:
You can find it here I think:
NH:
that will save people about 10 minutes rooting around the Bank website.
NH:
Some key pars:
PM:
Some key pars:
NH:
Costs and prices
CPI inflation rose to 5.2% in September, much higher than at the beginning of the year. But the near-term outlook for inflation improved substantially in the wake of sharp falls in commodity prices. These falls, if sustained, will cause the contribution from energy and food prices to decline rapidly. However, the speed with which overall inflation moderates will depend, in part, on the extent to which the lower level of sterling is passed through into higher import prices
CPI inflation rose to 5.2% in September, much higher than at the beginning of the year. But the near-term outlook for inflation improved substantially in the wake of sharp falls in commodity prices. These falls, if sustained, will cause the contribution from energy and food prices to decline rapidly. However, the speed with which overall inflation moderates will depend, in part, on the extent to which the lower level of sterling is passed through into higher import prices
PM:
We think alike Neil
NH:
The weaker demand environment should also act to moderate increases in prices and wages. Companies may be forced to absorb a greater proportion of their costs in temporarily lower margins, while the loosening in the labour market is likely to erode the bargaining position of employees. But the impact of the current slowdown on prices and wages will be dampened by weaker growth in the supply potential of the economy. The supply capacity of companies is likely to be hindered by reduced availability of bank finance and trade credit, as well as by the redeployment of capital and labour away from sectors most affected by the downturn. Moreover, as employment prospects deteriorate, some people may be temporarily discouraged from searching for work.
NH:
A key risk highlighted in recent Reports has been that the sharp increase in CPI inflation over the past year might cause companies and households to revise up their expectations of future inflation. Most measures of inflation expectations have fallen back in recent months. Given the lower near-term outlook for inflation, the MPC judges that the risk of inflation expectations remaining elevated has diminished
NH:
And on the direct outlook for inflation:
NH:
The outlook for inflation
Chart 2 shows the Committee’s best collective judgement of the outlook for CPI inflation, assuming that Bank Rate follows a path implied by market yields prevailing prior to the Committee’s November decision. In the central projection, inflation falls sharply in the near term, as the contributions from energy and food prices decline. Further out, inflation falls well below the 2% target, reflecting a larger margin of spare capacity and the waning impact on import prices from the lower level of sterling. The central projection is significantly lower than in the August Report.
Chart 2 shows the Committee’s best collective judgement of the outlook for CPI inflation, assuming that Bank Rate follows a path implied by market yields prevailing prior to the Committee’s November decision. In the central projection, inflation falls sharply in the near term, as the contributions from energy and food prices decline. Further out, inflation falls well below the 2% target, reflecting a larger margin of spare capacity and the waning impact on import prices from the lower level of sterling. The central projection is significantly lower than in the August Report.
NH:
The prospects for economic growth and inflation are judged to be unusually uncertain, reflecting the exceptional economic and financial factors affecting the outlook. The biggest risks to inflation stem from the uncertain depth and persistence of the slowdown in demand. There are also marked uncertainties over: the extent to which the slowdown in demand results in spare capacity despite slowing supply growth, and the degree to which it feeds through into easing price pressures; the prospects for world commodity prices; and the likely scale and pace of pass-through of a lower exchange rate. The risks around the central projections for both GDP growth and inflation shown in Charts 1 and 2 are broadly balanced. But the heightened level of uncertainty means that the Committee has more confidence in the broad shapes of the fan charts than in the precise calibrations. There is a range of views among the Committee on both the central projection and the balance of risks.
PM:
Now Izabella was doing this chart of the Bank’s expectations:
PM:
The basic message here is that the Bank doesn’t know
PM:
The fan chart depicts the probability of various outcomes for CPI inflation in the future. If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s best collective judgement is that inflation over the subsequent three years would lie within the darkest central band on only 10 of those occasions. The fan chart is constructed so that outturns of inflation are also expected to lie within each pair of the lighter red areas on 10 occasions. Consequently, inflation is expected to lie somewhere within the entire fan chart on 90 out of 100 occasions. The bands widen as the time horizon is extended, indicating the increasing uncertainty about outcomes. See the box on pages 48-49 of the May 2002 Inflation Report for a fuller description of the fan chart and what it represents. The dashed line is drawn at the two-year point.
NH:
Well can you go to page 48 then?
PM:
Okay okay
PM:
Oh yes – there’s loads there on proability distribution – and a three dimensional fan
PM:
PM:
Marvellous – I will get no work done whatsoever now.
PM:
NH:
D – Paul is not the only person working here. Didn’t see me on CNBC yesterday afternoon. I am a real person.
PM:
i didn’t — you always keep it secret when you are going on
PM:
Good idea tho
PM:
Anyway –we also had unemployment figs out earlier
PM:
You ever been on the dole Neil?
NH:
Er, no.
PM:
Hmm, I have – but not for a few years. Miserable experience. Eating sardines on toast and sitting in the dole office for like 10 hours to pick up a cheque for a few quid.
PM:
(er, Taxloss 
)
)PM:
Anyway – according to the ONS those without a job rose to 1.825 million in the three months to September.
NH:
sorry Taxloss you have distracted us
PM:
Highest fig in a decade.
PM:
Jobless measure at 5.8 per cent.
PM:
Also had average earnings figs out this morning – they ve come down – to 3.3 per cent.
NH:
(Politik – there is no Alpha link on the homepage)
)PM:
Grim grim grim
PM:
Those figures are as expected of course
PM:
140k joined the dole queue – but you know in reality that’s a big underestimate of how many jobs have been destroyed.
NH:
Explain.
PM:
Well, if you are a Polish plumber and you loose your job you tend to go back to Poland rather than signing on.
PM:
And if you are an investment banker you simply live off your savings, or go round the world or something.
NH:
Hmm –do you think we should have an Alphaville guide on how to live on the dole?
NH:
You could give readers first hand experience.
PM:
Be a slim volume.
PM:
Chapter One – how to vegetate
NH:
Anyway, miserable thing to joke about. Let’s move on.
PM:
PM:
Look
PM:
For feedback on the new FT.com there is a feedback button on the homepage near the top right
PM:
Also, you can leave comments on this blog post….
NH:
hang on Paul is trying to find the linnk
PM:
Sorry cant find it yet
NH:
it’s the editors blog apparently
NH:
right, let’s move on
PM:
PM:
How’s Barc doing this morning
PM:
Barclays
NH:
er it is up, surprisingly
NH:
5.7p higher at 184.3p
PM:
I think this cash call story is now getting very interesting.
PM:
You’ve got a concerted move by the institutions to strong arm Barclays into tweaking the terms and providing more pre-emption rights.
NH:
Legal & general gone very public.
PM:
Here’s Kate Burgess’ take:
NH:
Some of Barclays’ biggest shareholders have threatened to vote against the bank’s planned £7bn capital raising unless it improves the terms of the deal that would leave it almost a third owned by Middle Eastern investors
NH:
Those voicing dissent include Legal & General Investment Management, which owns more than 5 per cent of the bank, and Aviva Investors in the UK, with 1 per cent. They are pushing Barclays to come up with better terms for the bank’s long-term investors or face a revolt at the extraordinary meeting on November 24 to approve the deal.
NH:
The dispute will come to a head on Friday, when members of the Association of British Insurers, which represents a fifth of all UK investors, meets senior Barclays executives, including Marcus Agius, the bank’s chairman.
NH:
Faced with the revolt, Barclays has signalled it is willing to explore amending the terms of the deal with the Qatar Investment Authority and Sheikh Mansour Bin Zayed Al Nahyan, a member of Abu Dhabi’s royal family.
PM:
So Barclays is ready to bend.
NH:
Bendy Bob Diamond
PM:
Bendy Bob!
PM:
Will Bob bend?
NH:
Seems so.
PM:
PM:
Views still very divided on whether it was smart or dangerous for Barclays to seek state support from the middle east, rather than the UK.
PM:
Barclays, the partially state-controlled bank, yesterday…
NH:
actually I have been just sent an interesting link
NH:
corporate video for Barclays EGM on November 24th
NH:
http://www.youtube.com/watch?v=Lfqraa2hUlg
NH:
Arab Money
PM:
That is very funny indeed
NH:
perhaps they could play that an shareholders enter the meeting
NH:
where is the meeting??
PM:
Dunno
NH:
a touch of Busta should go down well
NH:
sure Aguis is a big fan
PM:
PM:
(very funny Lemmy)
PM:
On whether barclays can still go back to the government…
PM:
!. they would have to pay a double penalty rate — the bank has been told that
PM:
2. The boardroom would suddenly be rather lighter
PM:
Tomansoc — this service — two years
NH:
almost to the day
NH:
I remember the first session
NH:
total shambles. we had no idea what we were doing
PM:
NH:
and two years on…..
PM:
PM:
Should do wider market
PM:
All over shop, no?
NH:
yup, bit of a rollercoaster ride this morning
NH:
somewhat surprisingly we had a really, really, bright opening
NH:
FTSE 100 traded as high as 4,333
NH:
but it quickly came crashing back to earth
NH:
hit 4,225
NH:
following another wave of depressing corporate news
NH:
FTSE now finds itself up 60 points 4,307
PM:
A lot of that gain has come while we’ve been on air
PM:
Strangely
NH:
and I am struggling to see why
NH:
the inflation report might pave the way for further interest rates cuts
NH:
but what do they achieve
NH:
nothing, absolutely nothing
NH:
say again
PM:
think that’s the point — people buying on rate cut hopes
NH:
and there is a real pessimism out there
NH:
everyone I talk to thinks the markets here and in the US are going to re-test their lows
PM:
Really?
NH:
yup
NH:
and when you look at the newsflow it is not difficult to see why
NH:
in particular order
NH:
Swiss Life has warned on profits and cut its dividend
NH:
oh, it has also halted its share buyback
NH:
ING has posted its first quarterly loss
NH:
Building materials groups Holcim and Weinberger have both missed forecasts
NH:
and issued really gloomy outlook statements
PM:
i see
NH:
Swiss Life are blaming the “pronounced intensification of the financial crisis since the end of November” for its woes
NH:
Natixis has suffered a massive blow
NH:
it’s investment banking division has somehow managed to blow EUR1bn in trading activities during October
PM:
whoa
NH:
actually the Natixis story warrants further investigation
NH:
because the company are denying they loss that much
NH:
but admit October was a orrible month
NH:
and the investment banking division has negative revenues of EUR250m in October
PM:
Er, right
NH:
it all looks very fishy
NH:
here’s a quick wire snap
NH:
French bank Natixis denied a newspaper report on Wednesday that it lost 975 million euros ($1.2 billion) in trading operations in October but said its core investment banking unit had a torrid time last month.
NH:
“Following information given in La Tribune newspaper today, Natixis denies the existence of a loss of 1 billion euros, as the article suggested, on its market activities during October,” Natixis said in a statement.
NH:
France’s fourth-biggest listed bank added, however, that the market turmoil of October would have “a negative impact of 250 million euros on revenues” at its investment banking arm.
Analysts and fund managers said they interpreted the term “negative impact on revenues” to mean that despite the bank’s denial of the Tribune report it would book a loss on its trading activities.
NH:
“It is unacceptable,” said Michael Sellam, who heads French fund management firm Iris Finance. Sellam has sold off most of his company’s bank shares but still owns around 10,000 Natixis shares.
PM:
that’s not very satisfactory is it?
NH:
nope
NH:
but the market has extracted a small measure of revenge
NH:
Natixis off 12% at the moment
NH:
and Swiss Life down 11.5%
PM:
right thanks for all of that
NH:
hang on
NH:
I have some more doom and gloom
NH:
US doom and gloom
PM:
You are the new Grim Reaper
PM:
actually what’s happened to the old Grim Reaper???
NH:
Oh, he was on this morning
NH:
he heard Philip Green had picked up the Baugur Holding in Moss Bros
PM:
And?
NH:
it was confirmed a couple of hours later
NH:
Green bought 28% of the top hat hire group for 25p a share
NH:
here’s the statement
NH:
Warbeck confirms it has acquired 26,896,932 shares in Moss Bros Group Plc (‘Moss Bros’) at a price of 24.95 pence per share. This stake represents approximately 28% of the issued share capital of Moss Bros.
NH:
Warbeck is considering its alternatives in relation to Moss Bros, which include making an offer for the remaining shares it does not already own, however there can be no guarantee that any offer will be made.
NH:
Warbeck is a Green family investment company.
PM:
And what have the shares done on that?
NH:
er, they are up 52%
NH:
8.25p at 24p
PM:
And wot happens next?
NH:
well I suppose Green might take it private
NH:
after all he never tires of telling people that he never buys shares in public companies
NH:
and for an operation like Moss what is the point of being listed
NH:
it costs around £1.5m a year for what??
NH:
not as if the company could raise money in the market
NH:
unless this is just a value investment
NH:
one prob with taking the company private is that there are a lot of family interests still in Moss
NH:
and they might not be willing to sell
NH:
and all of this puts a rather different light on the rumours that Green was looking to purchase a stake in Sainsbury
NH:
which I reckon might have been true
NH:
as it is, that stock remains lost in the system somewhere
PM:
while we are talking about Sainsbury
PM:
figures out this morning
PM:
seem to be slightly better than expected
NH:
they do
NH:
stock up 13.25p at 285.5p
NH:
to be honest there is not a lost of interest in the figures
NH:
as there is no update on current trading
NH:
in fact Sainsbury’s share price is prolly benefiting from the TNS data that came out last night as much as anything else
NH:
this showed Tesco continuing to suffer
NH:
oh and one more thing on Bagur liquidations
NH:
Kaupthing Luxemborg have sold a 3% holding in French Connection this morning
NH:
i assume this was a hedge for Baugur position
NH:
I wonder how long before the Debs stake is offered around the market
French Connection Group (FCCN:LSE): Last: 46.50, down 0.5 (-1.06%), High: 49.00, Low: 44.50, Volume: 42.77k
Debenhams (DEB:LSE): Last: 33.25, up 0.75 (+2.31%), High: 34.00, Low: 32.50, Volume: 517.66k
PM:
On mention of Green family investment co below…
PM:
Believe most of PG’s assets actually belong to Tina, his billionaire wife in Monaco
PM:
PG manages to be UK resident for tax purposes
PM:
I believe
PM:
NH:
on the inflation report – lots of bank revising down forecasts
NH:
Revision to UK rate calls: Hearing both JPM and BNP now call for 100bps rate cut at the December BOE MonPol meeting and taking rates to 2%. RBS f’cast 50bps cut with a risk of a larger 75bps cut ……
NH:
BNP see a trough in UK base rates below 1%
NH:
that’s all raw from the market floor
PM:
An Xmas cut?? Sounds a tad hopeful to me
PM:
On RBS briefly,w e remain v v cautious on the bank’s medium term prospects
NH:
i think the balance sheet is shot to pieces. much worse than Lehman
NH:
also think Hester is in denial if he thinks the govt wont interfer
PM:
I think Hester will shrink the bank quickly and aggressively
NH:
he will but it will be a painful process
PM:
he is not going to be running it for more than three eyars
PM:
he is a highly technical banker
NH:
the best outcome as with Abbey is that he shrinks and then slots it to someone overseas
NH:
RBS shares up 0.6p at 58.1p
NH:
i would not want to own a bank with its balance sheet and the govt as a majority shareholder
NH:
the placing price is 65.5p
PM:
SO we are talking RFLOP here
PM:
A Royal Flop
NH:
as for HBOS
NH:
this has just pinged into my inbox
NH:
Nov. 12 (Bloomberg) — Bank of China Ltd., China’s fourth-
largest lender by assets, has abandoned a possible bid for HBOS
Plc, Scotland’s second-largest bank, the Scotsman reported.
largest lender by assets, has abandoned a possible bid for HBOS
Plc, Scotland’s second-largest bank, the Scotsman reported.
NH:
what are HBOS shares doing on that??
NH:
they are up – 3p stronger at 102.2p
NH:
back to RBS for a second
NH:
they have been on a roadshow
NH:
they popped into SG yesterday
NH:
and this is how the meeting went
NH:
RBS CEO Stephen Hester and CFO Guy Whittaker hosted an analyst meeting
yesterday as the bank begins its 3yr transformation process. The discussion topics most
interesting to us were
yesterday as the bank begins its 3yr transformation process. The discussion topics most
interesting to us were
NH:
1) Balance sheet management There has been a £65bn
reduction from end of Sept. Further reduction in 2008 will be focused on housekeeping
rather than strategic moves. Asset disposals will be driven by: a) relatively easy asset
sales (e.g. non-strategic equity stakes); b) assets at risk of further deterioration beyond
todays prices; and c) winding down risk concentrations
reduction from end of Sept. Further reduction in 2008 will be focused on housekeeping
rather than strategic moves. Asset disposals will be driven by: a) relatively easy asset
sales (e.g. non-strategic equity stakes); b) assets at risk of further deterioration beyond
todays prices; and c) winding down risk concentrations
NH:
2) Liquidity RBS will need to
strengthen its liquidity management and reduce its wholesale funding going forward to
better manage a) future regulatory scrutiny, and b) difficult situations such as the post-
Lehman fallout.
strengthen its liquidity management and reduce its wholesale funding going forward to
better manage a) future regulatory scrutiny, and b) difficult situations such as the post-
Lehman fallout.
NH:
3) Capital RBS believes it has enough capital to see it through difficult
times ahead. The CFO suggested that the government-mandated £15bn recapitalisation
was based on maintaining a stressed core Tier I ratio of at least 4% and the
acceptable through-the-cycle min. for UK banks is now 6% (Tier I min. is 8%).
times ahead. The CFO suggested that the government-mandated £15bn recapitalisation
was based on maintaining a stressed core Tier I ratio of at least 4% and the
acceptable through-the-cycle min. for UK banks is now 6% (Tier I min. is 8%).
NH:
Impact Estimates unchanged following this update. We continue to believe the lack of
visibility on the new RBS, asset quality concerns and non-payment of a cash dividend
through 2010 leaves limited room for upside in the near term. The potential 58%
ownership by the HM Treasury and restructuring of the business will limit future
underlying returns.
visibility on the new RBS, asset quality concerns and non-payment of a cash dividend
through 2010 leaves limited room for upside in the near term. The potential 58%
ownership by the HM Treasury and restructuring of the business will limit future
underlying returns.
NH:
Given this, and the continued deterioration in the groups operating
environment, we expect the bank to deliver high single-digit ROEs; materially below the
groups cost of capital. Additionally, our research indicates that state-owned banks tend
to trade at a 40-90% discount to their non state-owned counterparts on a P/BV basis.
This, coupled with our relatively low ROE expectations, underpins our belief that RBS
will continue to trade at a material discount to its TBV going forward.
environment, we expect the bank to deliver high single-digit ROEs; materially below the
groups cost of capital. Additionally, our research indicates that state-owned banks tend
to trade at a 40-90% discount to their non state-owned counterparts on a P/BV basis.
This, coupled with our relatively low ROE expectations, underpins our belief that RBS
will continue to trade at a material discount to its TBV going forward.
NH:
Target price & rating We reiterate our Hold rating and 2009 SOTP based 61p TP.