Markets live chat transcript for the chat ending at 12:06 on 20 Nov 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Welcome to Markets Live
PM:
This is FT Alphaville’s daily market chat
PM:
it is THE party tonight
PM:
Monkey’s gig — at Ryans
NH:
EL Ryans
PM:
Be there — i fyou possibly can. We certainly will
PM:
Aside from excitement over the party
PM:
We have been somewhat distracted this morning
NH:
A certain magazine is doing a special on the FT.
NH:
flash blubs going off
PM:
And to illustrate it they will be running a snap of our own dear Sam Jones – along with some other FT hacks.
NH:
a little styling
NH:
product being applied
NH:
Snap? I think its more than a snap – they’ve got seven people on the job!
PM:
What Neil is referring to is that this a serious magazine shoot.
PM:
Obviously in the media there’s always cameras around and stuff, but these lot have taken it too a new level
NH:
I think the equipment lorry turned up at about 8am – several crates had to be unloaded. Then they have to crash those around for half an hour or so. Then the location woman…
PM:
Steady. 
PM:
Sam will be getting “done” after lunch. They’re going to style him.
NH:
Style him as what?
PM:
Well, currently he’s just a self-styled Sam Jones.
NH:
They even brought a wardrobe in and will decide whether to put him in on eof their suits. I quote from one of Sam’s emails
NH:
I’ll be in touch again soon about timings – in the mean time could you ping over your shoe and shirt size if you’re happy to? Obviously these will go to the grave with me.
NH:
size 9 shoes
15″ collar
15″ collar
PM:
Someone asked whether shirts are coming off. Bit of toning moisturiser. Just a little blusher.
NH:
Darling
PM:
Don’t want to lose the fresh, young feel to the skin.
PM:
We think you look gorgeous Sam!
PM:
Tilt to the right a little…
NH:
A bit more…
NH:
Loose the smile, give us smirk. That’s right. Cheeky!
PM:
It’s like Blow Up here, except with the genders reversed.
PM:
PM:
Anyway — we’ve got a broken market to talk about
NH:
Financials were slammed on Wall Street once again overnight
NH:
(the shoot is titled Faces of the Credit Crunch)
NH:
(Paul and I only have faces for radio)
NH:
right where were we
PM:
(The stylist is with Sam now)
NH:
broken market
NH:
Dow off 5%.
PM:
(They want some shot of him outside as well as in here)
NH:
S&P off 6%.
NH:
Considering that, London relatively unscathed.
PM:
(A lot of sniggering going on here)
NH:
Footsie currently down
PM:
Anyway
NH:
come on concentrate
PM:
Will do
NH:
FTSE 100 down 90 points at 3,915.9
PM:
NH:
that leaves us around 60 points above the October low
NH:
that was a five and half year low
NH:
which we could test today
NH:
especially if there is another sell off on Wall Street
NH:
of course, Wall Street did test its October lows overnight
NH:
and broke through them
NH:
in heavy volume this time
NH:
there was real selling
NH:
and panic buying
PM:
of what?
NH:
T-bills – buying sent 30-year yield to historic low of 3.94 per
cent – lowest since inception of this duration in 1977.
cent – lowest since inception of this duration in 1977.
NH:
Wall Street totally spooked out by the fall in Citigroup
NH:
and the financials generally
PM:
Certainly was
NH:
The Financial Select Sector SPDR fund, which tracks the S&P’s financial stocks, fell 11.15% on the day
NH:
and the financials which accounted for 20% of the S&P 13 months ago
NH:
has now fallen to 12%
PM:
Citigruop — incredible fall — down 25%
NH:
yup
NH:
stock closed at just $6.40 – lowest level since May 2 1995
NH:
and trading volume in the Big C was twice the daily average
NH:
that took losses this year to 78%
NH:
company now valued at $34bn
NH:
and its CDS’s well….
NH:
it now costs $360,000 to protect $10 million in bonds against default, compared with $240,000 on Tuesday.
NH:
and there are a couple of views on what the fall is telling us
NH:
) the market has no confidence in Pandit
NH:
: and he will have to go
NH:
or
NH:
and this is much more concerning
NH:
that Citi might need
NH:
well might
NH:
might need another capital injection
NH:
and that’s because of its holding of risky assets
NH:
particularly commercial backed mortgage securities
NH:
where Citi is apparently the biggest player
PM:
there was also the SIV news
PM:
that impacted Citi too
PM:
it bought its remaining $17.4 billion SIV assets
PM:
Just llooking for some analyst comment
PM:
a note floating around from Fox Pitt yesterday
PM:
big earnings downgrades
PM:
Highlights from mgmt’s presentation at Monday’s employee town hall
meeting include: (a) consumer NCOs in 1Q09/2Q09 will each be $1-$2 bil.
higher than 3Q08, using 7%-9% unemployment scenarios; (b) significant
credit reserve builds will end in a few quarters assuming unemployment
peaks towards YE09; (c) $80 bil. in problem assets will be transferred from
mark-to-mkt to HTM, HFI or AFS in 4Q08; (d) $50-$52 bil. of 2009
expense target; and (e) 52K headcount reduction from 3Q08 levels, half of
which would be from divestitures, implying more may be announced.
meeting include: (a) consumer NCOs in 1Q09/2Q09 will each be $1-$2 bil.
higher than 3Q08, using 7%-9% unemployment scenarios; (b) significant
credit reserve builds will end in a few quarters assuming unemployment
peaks towards YE09; (c) $80 bil. in problem assets will be transferred from
mark-to-mkt to HTM, HFI or AFS in 4Q08; (d) $50-$52 bil. of 2009
expense target; and (e) 52K headcount reduction from 3Q08 levels, half of
which would be from divestitures, implying more may be announced.
PM:
Mgmt. reiterated that the majority of $667 bil. in securitized mortgage
loans will not come on to balance sheet. However, we are somewhat
concerned that securities investors may demand originators to buy-back
some of these loans for: (a) ‘breach of warranty’ in underwriting; or (b)
modifying the loans under loan modification program. Moreover, even at a
20% rate, problem assets would double from current levels.
loans will not come on to balance sheet. However, we are somewhat
concerned that securities investors may demand originators to buy-back
some of these loans for: (a) ‘breach of warranty’ in underwriting; or (b)
modifying the loans under loan modification program. Moreover, even at a
20% rate, problem assets would double from current levels.
PM:
We now expect 4Q08/2009 NCOs to be $5.9 bil./$31.5 bil. vs. our prior
est. of $5.4 bil./$23.2 bil., while the reserve build will be $2.9 bil./$1.9 bil.
vs. our earlier est. of $1.0 bil./$3.8 bil. Thus, total credit costs will be $8.7
bil./$33.4 bil. vs. our prior $6.4 bil./$27.0 bil.
• By transferring $80 bil. in problem assets to HTM, HFI or AFS, Citi will
avoid quarterly mark-to-mkt charges after 4Q08. However, the transfer will
be at mkt. prices, thus we expect $3 bil. in 4Q08 net write-downs as
follows: (a) subprime=$490 mil.; (b) lvgd. Loans=$1.1 bil.; (c) Alt-A=$544
mil.; (d) CRE=$338 mil.; and (e) liability mark-ups, i.e. losses =$500 mil.,
as Citi’s credit spreads have narrowed QTD.
est. of $5.4 bil./$23.2 bil., while the reserve build will be $2.9 bil./$1.9 bil.
vs. our earlier est. of $1.0 bil./$3.8 bil. Thus, total credit costs will be $8.7
bil./$33.4 bil. vs. our prior $6.4 bil./$27.0 bil.
• By transferring $80 bil. in problem assets to HTM, HFI or AFS, Citi will
avoid quarterly mark-to-mkt charges after 4Q08. However, the transfer will
be at mkt. prices, thus we expect $3 bil. in 4Q08 net write-downs as
follows: (a) subprime=$490 mil.; (b) lvgd. Loans=$1.1 bil.; (c) Alt-A=$544
mil.; (d) CRE=$338 mil.; and (e) liability mark-ups, i.e. losses =$500 mil.,
as Citi’s credit spreads have narrowed QTD.
PM:
We are cutting our 4Q08 est. from -$0.08 to -$0.79 reflecting higher credit
costs (-$0.31) and net write-downs (-$0.40). Also, our 2009 est. drops
from $0.69 to $0.28 due to higher credit costs (-$0.71) mitigated by lower
costs (+0.30), as our expense est. falls from $57.4 bil. to $54.9 bil. in ‘09.
Lastly, we are cutting our price target from $20 to $16, 1.7x tangible BV.
• Cit trades below tangible book, although we believe this is at risk given
still-large problem asset exposures. The key question is whether mgmt will
be able to continue to find buyers for business units, which is necessary to
fortify the capital base against further credit losses and write-downs. In
the meantime, the specter of Citi’s problem asset levels—whether in HTM,
HFI, or AFS—could continue to hinder investor confidence in the story.
costs (-$0.31) and net write-downs (-$0.40). Also, our 2009 est. drops
from $0.69 to $0.28 due to higher credit costs (-$0.71) mitigated by lower
costs (+0.30), as our expense est. falls from $57.4 bil. to $54.9 bil. in ‘09.
Lastly, we are cutting our price target from $20 to $16, 1.7x tangible BV.
• Cit trades below tangible book, although we believe this is at risk given
still-large problem asset exposures. The key question is whether mgmt will
be able to continue to find buyers for business units, which is necessary to
fortify the capital base against further credit losses and write-downs. In
the meantime, the specter of Citi’s problem asset levels—whether in HTM,
HFI, or AFS—could continue to hinder investor confidence in the story.
NH:
for me the key thing in the note is assets
NH:
Citi wants to shift $80bn of assets
NH:
this was mentioned in the Town Hall presentation
NH:
a bit was included about these assets sales
NH:
apparently they are no longer attempting to sell them
NH:
they are going to be reclassified
PM:
really?
NH:
not sure if this was in the original presentation
PM:
is that true?
NH:
but in the updated version is says that
NH:
has taken $80bn of assets
NH:
and parked them somewhere else
NH:
in the held to maturity portfolio for example
NH:
here’s the key pars
NH:
Second, the quality of many of these assets remains strong. In fact, we are moving or plan
to move in the fourth quarter of 2008, approximately $80 billion of these legacy assets into a
held for investment, held to maturity or available for sale category. This accomplishes two
things:
to move in the fourth quarter of 2008, approximately $80 billion of these legacy assets into a
held for investment, held to maturity or available for sale category. This accomplishes two
things:
NH:
It allows us to benefit from the inherent upside from these marked down assets as it
is our belief that the loss adjusted yield is high enough to earn an attractive return on
equity on these assets.
is our belief that the loss adjusted yield is high enough to earn an attractive return on
equity on these assets.
NH:
It reduces the earnings volatility that these assets could pose.
PM:
thank s for that
PM:
NH:
hang on Bryce has just sent another Citigroup note
NH:
on its on the SIV’s it brought back on its balance sheet
NH:
Event
Citi (Aa3wn/AA-wn/AA-wn) announced that it will acquire the remaining assets of its
structured investment vehicles (SIVs) at their current fair value, estimated to be USD
17.4 bn, net of cash.
Citi (Aa3wn/AA-wn/AA-wn) announced that it will acquire the remaining assets of its
structured investment vehicles (SIVs) at their current fair value, estimated to be USD
17.4 bn, net of cash.
NH:
On September 30, 2008, they had a value of USD 21.5 bn: the decline
since then reflected asset sales and maturities of USD 3.0 bn as well as a decline in market
value of USD 1.1 bn. As a result, Citi’s GAAP assets will be reduced by approximately USD 6
bn and risk-weighted assets will be increased by approximately USD 2 bn: on September 30,
total assets were USD 2,051 bn. Citi’s SIVs had a value of USD 87 bn at the end of July 2007.
since then reflected asset sales and maturities of USD 3.0 bn as well as a decline in market
value of USD 1.1 bn. As a result, Citi’s GAAP assets will be reduced by approximately USD 6
bn and risk-weighted assets will be increased by approximately USD 2 bn: on September 30,
total assets were USD 2,051 bn. Citi’s SIVs had a value of USD 87 bn at the end of July 2007.
NH:
Impact
Citi’s latest measure, which the bank described as a “nearly cashless transaction”, can
be viewed positively. It may signal the end of month-long troubles at Citi’s off-balance
sheet vehicles. Despite the market reaction, we continue to be positive about Citi’s
future. Our trade idea is to buy Citi 6.4% 03/13 at ASW 248 bp. We have a marketweight
recommendation on the name.
Andrea Crepaz (HVB)
Citi’s latest measure, which the bank described as a “nearly cashless transaction”, can
be viewed positively. It may signal the end of month-long troubles at Citi’s off-balance
sheet vehicles. Despite the market reaction, we continue to be positive about Citi’s
future. Our trade idea is to buy Citi 6.4% 03/13 at ASW 248 bp. We have a marketweight
recommendation on the name.
Andrea Crepaz (HVB)
PM:
right
PM:
PM:
See this FBR ntoe?
NH:
I saw the headline. very scary
PM:
Tracy did a post – employing all the zeros.
NH:
how many where there?
PM:
U.S. Financial System Still Needs at Least $1.0 Trillion to $1.2 Trillion
PM:
Will put the summary up here
PM:
The U.S. financial system needs at least $1.0 trillion to $1.2 trillion of tangible common equity to restore confidence and improve liquidity in the credit markets. The private sector lacks the necessary confidence and financial flexibility to meet the capital shortfall. Investors have been unable to price risk in equity markets due to high-profile banking failures, coupled with difficulties quantifying opaque credit default swap (CDS) market exposure. The U.S. government must supply the interim funding to weather the crises; later, once the system is running smoothly and private capital begins to return, we can debate the best way for the government to extract itself. Ultimately, once appropriate capital levels are established and asset pricing is rationalized, private market participants will reenter the
financial system.
financial system.
NH:
Oh, give us more on that. The financial system is broken!
PM:
State of the financial system today. Currently, the U.S. financial system has $37 trillion of debt outstanding. While we consider the bulk of this amount adequately capitalized, we identify eight large financial institutions that we consider in greatest need of capital as they have relied heavily on non-deposit funding. Combined, these eight financial companies have roughly $12.2 trillion of assets and only $406 billion of tangible common capital, or just 3.4%. Given their dependence on short-term funding and the illiquid nature of their asset bases, our analysis indicates that these institutions need somewhere between $1.0 trillion and $1.2 trillion of capital to put their balance sheets back on solid ground and begin to extend credit again.
• How did we get here? Simply, as a society, we did not demand enough capital in the financial system given the risk on the balance sheets. Recent practices have only exacerbated the problem. In the credit crisis of the 1930s, regulated depositories held most financial debt (63% in 1945, our earliest data point), and their liability structure was 98% deposits. Over time, advances in technology and regulatory disintermediation pushed financial assets outside the regulated banking system, resulting in higher leverage and greater reliance on short-term debt instruments. By 2008, only $11 trillion of assets (30% of total) were loosely regulated in the banking system, while more than $26 trillion were outside the banking system, some in other regulated industries, but some with very little regulatory oversight with respect to both capital and underwriting standards. Financial innovation just got too far ahead of itself. Today, the government is pulling these financial assets under regulatory watch through the issuance of commercial banking charters (i.e., GS, MS, AXP, CIT, etc.). This will help going forward, but it does not solve the immediate capital shortfall problems.
PM:
• Debt or TARP capital is not true capital. Long-term debt financing is not the solution. Only injections of true tangible common equity will solve the current crisis. Tangible common equity is the first loss position and will absorb the majority of balance sheet deficiencies. If losses are large enough to affect book value and stock price significantly, a company’s probability of failure increases, regardless of the level of preferred or regulatory capital
.
• The government will have to lead the recapitalization. Initially, the bulk of $1.0 trillion to $1.2 trillion of capital will have to come from the government. The sheer size of the capital deficiency, coupled with the opaque nature of credit risk, will keep private capital sidelined. Eventually, capital levels will be strengthened by both private capital raises and internal capital generation, but the federal government will have to be the primary first responder to the crisis. If the government would convert TARP capital issuances into pure, tangible common capital (akin to the $23 billion C class investment in AIG), it would go a long way toward encouraging subsequent private investment. A bank holiday on dividend payments is another appropriate step toward preserving capital. Political will is building for these types of solutions. The quicker the government acts, the sooner the financial system can work through its current problems and begin to supply credit again to the economy.
.
• The government will have to lead the recapitalization. Initially, the bulk of $1.0 trillion to $1.2 trillion of capital will have to come from the government. The sheer size of the capital deficiency, coupled with the opaque nature of credit risk, will keep private capital sidelined. Eventually, capital levels will be strengthened by both private capital raises and internal capital generation, but the federal government will have to be the primary first responder to the crisis. If the government would convert TARP capital issuances into pure, tangible common capital (akin to the $23 billion C class investment in AIG), it would go a long way toward encouraging subsequent private investment. A bank holiday on dividend payments is another appropriate step toward preserving capital. Political will is building for these types of solutions. The quicker the government acts, the sooner the financial system can work through its current problems and begin to supply credit again to the economy.
PM:
bickie required for that
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:
Tracy has done a post on this
NH:
but do you think analysts are now becoming too bearish
NH:
there is a race for the bottom?
PM:
Possibly — but we really do feel like we are in a final capitulation in the financials
PM:
Except RBS of course!
NH:
yes, they are flying
NH:
wow, almost back a 50p
NH:
up 4.6p at 46.9p
PM:
It’s the shareholder meeting today
PM:
Promised an apology from Sir Tom.
NH:
Will Sir Fred be on the platform?
PM:
Dunno
PM:
Can you imagine how he’ll feel.
PM:
We went on a reckless race to became a world class bank – and then blew up.
NH:
NH:
penny dreadful time
PM:
NH:
Mecom
NH:
all of 2p now
PM:
A tuppeny stock
NH:
any update for the readers??
PM:
Well…
NH:
up 41% at 2.14p at the moment
PM:
I am told that Axel Springer are quietly guiding people away from the story — playing it down
PM:
I dont know whether Mecom are saying anything
PM:
But look, its only a £18m company
NH:
with debts of £550m
PM:
PM:
We understand that AS is definitely looking at some sort of staged takeover
PM:
Will begin with a major stake
NH:
so, the people briefing are not quite in the loop then?
PM:
Would appear not
PM:
Btw — i have NO idea about price
NH:
of course some people think that AS is just interested in the Polish operations of Mecom
PM:
Could be at a ha’penny as far as i know
PM:
READER BEWARE
NH:
actually I just got an email from the editor of Danish paper
NH:
asking about yesterday’s chat and story
PM:
oh yea
PM:
Saying?
NH:
quite sweet really
NH:
would like us to elaborate on the rumour
NH:
so, we are standing by this story
PM:
PM:
But we do not suggest people chase this stock
PM:
It remains a penny dreadful — past investors in Mecom have lost substantially all their money
PM:
NH:
right, we must move on to another penny dreadful
PM:
NH:
Taylor Wipeout
NH:
no longer as housebuilder
NH:
not just a house seller
NH:
a forced house seller
NH:
and Fitch have cut its rating on Wipeout’s debt to CCC
NH:
which is one notch above default
PM:
TW, the forced house seller…
PM:
That’s good. And will stick
NH:
Fitch Ratings has today downgraded Taylor Wimpey plc’s
(TW) Long-term Issuer Default rating (IDR) and senior unsecured ratings to ‘CCC’ from ‘B’ and
Short-term IDR to ‘C’ from ‘B’. All ratings are being maintained on Rating Watch Negative
(RWN). Fitch has simultaneously affirmed the ‘RR4′ Recovery Rating (RR) on TW’s senior
unsecured debt instruments.
(TW) Long-term Issuer Default rating (IDR) and senior unsecured ratings to ‘CCC’ from ‘B’ and
Short-term IDR to ‘C’ from ‘B’. All ratings are being maintained on Rating Watch Negative
(RWN). Fitch has simultaneously affirmed the ‘RR4′ Recovery Rating (RR) on TW’s senior
unsecured debt instruments.
NH:
The rating downgrades reflect the heightened default risk facing TW as its next covenant
testing date approaches (now understood to be 1 January 2009, rather than mid-February 2009).
Due to the ongoing weakness in the UK housing market, TW is likely to breach interest coverage
covenants when next tested. Although the company continues to talk to its creditors in an
effort to renegotiate its covenant package, it has publicly stated that an agreement is
unlikely before the January test date.
testing date approaches (now understood to be 1 January 2009, rather than mid-February 2009).
Due to the ongoing weakness in the UK housing market, TW is likely to breach interest coverage
covenants when next tested. Although the company continues to talk to its creditors in an
effort to renegotiate its covenant package, it has publicly stated that an agreement is
unlikely before the January test date.
NH:
Fitch understands that TW’s creditors may choose to suspend testing while negotiations
continue into Q109, although the creditors may also retain the ability to request testing at
any point after 1 January. This seems likely to leave TW highly dependent on the actions of
its creditors, as a test request could lead to an event of default soon after (following any
applicable grace period).
continue into Q109, although the creditors may also retain the ability to request testing at
any point after 1 January. This seems likely to leave TW highly dependent on the actions of
its creditors, as a test request could lead to an event of default soon after (following any
applicable grace period).
NH:
Fitch now believes that default at TW is a real possibility, with a distressed debt exchange
(which qualifies as a default under Fitch’s definition), such as a debt-for-equity swap,
looking increasingly likely.
(which qualifies as a default under Fitch’s definition), such as a debt-for-equity swap,
looking increasingly likely.
PM:
debt for equity swap on its way
PM:
There are going to be plenty of thse over the coming months
NH:
yup the end is nigh for this house-seller
NH:
and uber bear of the house-selling sector Alastair Stewart at Dresdner is telling clients to sell Wipeout
NH:
Fitch Ratings yesterday after close downgraded TW’s Long-term Issuer
Default rating and senior unsecured ratings to ‘CCC’ from ‘B’ and
Short-term IDR to ‘C’ from ‘B’. All ratings are being maintained on Rating
Watch Negative. The content of the statement was extremely concerning
and highlighted the possibilities of covenant breach, distressed debt for
equity swaps and even forced liquidation
Default rating and senior unsecured ratings to ‘CCC’ from ‘B’ and
Short-term IDR to ‘C’ from ‘B’. All ratings are being maintained on Rating
Watch Negative. The content of the statement was extremely concerning
and highlighted the possibilities of covenant breach, distressed debt for
equity swaps and even forced liquidation
NH:
Against the background of a rapidly collapsing UK housing market and
yesterday’s 12% fall to a nine year low in homebuilding stocks in the US (where
TW is heavily exposed), we believe the text of the Fitch statement will increase
the perception that equity could be worthless. Our wide range of industry
contacts are almost unanimous in telling us that TW is among – if not the – most
aggressive in discounting sales to generate cas
yesterday’s 12% fall to a nine year low in homebuilding stocks in the US (where
TW is heavily exposed), we believe the text of the Fitch statement will increase
the perception that equity could be worthless. Our wide range of industry
contacts are almost unanimous in telling us that TW is among – if not the – most
aggressive in discounting sales to generate cas
NH:
We do not have a price target due to the risk of highly dilutive restructuring, but
had had a Hold recommendation due to the volatility of the stock. We now
believe a Sell with no price target is more appropriate until any further
transparency on debt negotiations emerges.
had had a Hold recommendation due to the volatility of the stock. We now
believe a Sell with no price target is more appropriate until any further
transparency on debt negotiations emerges.
Taylor Wimpey (TW:LSE): Last: 8.95, down 0.34 (-3.66%), High: 9.74, Low: 8.88, Volume: 5.93m
NH:
NH:
right I am sick of all this doom and gloom
PM:
oh ok
NH:
what about some good news
NH:
look at the retailers
NH:
some are up this morning
Next (NXT:LSE): Last: 957.00, up 27 (+2.90%), High: 976.50, Low: 903.50, Volume: 1.75m
Marks and Spencer Group (MKS:LSE): Last: 202.50, up 2.5 (+1.25%), High: 209.00, Low: 194.30, Volume: 7.87m
Kingfisher (KGF:LSE): Last: 102.90, up 3.3 (+3.31%), High: 105.00, Low: 96.40, Volume: 10.65m
NH:
and that’s because of these AMAZING retail sales figs
PM:
Unbelievable, you mean
NH:
down just 0.1% last month
NH:
here’s a quick take on the figs from Howard Archer at Global Insight HIS
NH:
Retail sales only edged down in October according to the ONS – a performance that once again appears to markedly understate the downturn in consumer spending given the dire survey evidence from the British Retail Consortium, the CBI, the Bank of England’s regional agents and reports from most retailers.
NH:
According to the ONS, retail sales only dipped by 0.1% month-on-month in October, although this did mark a second successive decline following a drop of 0.5% in September. Furthermore, retail sales were only flat on a three-month./three-month basis in October. Sales of household goods were particularly weak as they were hit by the sharp downturn in the housing market.
NH:
Meanwhile, a marked retreat in the retail sales price deflator for October indicates that retailers are increasingly having to engage in discounting and special promotions to get reluctant consumers to spend. Indeed, the year-on-year rise in the retail sales price deflator fell back to 0.6% in October from 1.0% in September and a peak of 1.7% in July (which had been the largest increase since January 1999). This adds to the rapidly mounting evidence that inflationary pressures are now declining sharply.
NH:
We suspect that the modest fall in retail sales in October will not deter the Bank of England from delivering another sizeable interest rate cut in December, as the central bank clearly believes that consumer spending is significantly weaker than the picture being portrayed by the ONS. Significantly, the Bank of England’s regional agents reported taht the value of retail sales was broadly unchanged year-on-year in October, while demand for consumer services shrank.
PM:
ONS always adding things up wrongly
PM:
I just dont believe that retail sales fell 0.1%
NH:
nor do i
NH:
0.1 per cent, really
NH:
we were hearing yesterday that DSG could have been down by as much as 30% this month
NH:
actually I have some more positive stuff
NH:
from a broker/contact
NH:
REASONS TO BE BULLISH ~ see attached Put/Call Ratio vs SPX…
- So here we are, testing the 3 point lows of October, but see
the attached chart and how the put/call extreme vs the SPX
entirely indicated when the oversold/bounce was about to
happen…We are right there, right now…
- So here we are, testing the 3 point lows of October, but see
the attached chart and how the put/call extreme vs the SPX
entirely indicated when the oversold/bounce was about to
happen…We are right there, right now…
NH:
So to summarize what to buy, No Financials, No Insurance,
But the rally will be this afternoon in the retailers, (see
NXT, MKS) despite the retails sales figs in 15 mins, pharma
(despite AZN), apparel and SXTP – basically, consumer
interest rate cuts stocks & Telco…
- You might disagree on the sectors, but the overall mkt when
related to the attached is indisputable..
But the rally will be this afternoon in the retailers, (see
NXT, MKS) despite the retails sales figs in 15 mins, pharma
(despite AZN), apparel and SXTP – basically, consumer
interest rate cuts stocks & Telco…
- You might disagree on the sectors, but the overall mkt when
related to the attached is indisputable..
PM:
Hmm
PM:
so what else is moving this morning
NH:
well the insurers are getting a battering
NH:
and this is just following on from what went on in the US overnight
NH:
here was the tale of woe
NH:
AIG -20% ALLSTATE -20% HARTFORD FINL -29% LINCOLN NATL -40%
PM:
Wot has actually caused that??
NH:
a general feeling that many insurance companies are going to require capital injections
NH:
because their liabilities are rising
NH:
I guess this was caused by the movements in the CMBS market
NH:
anyway, the result has been knock on selling in London
NH:
heavy selling
NH:
check these prices
Aviva (AV:LSE): Last: 300.00, down 51.75 (-14.71%), High: 341.50, Low: 297.25, Volume: 4.87m
Prudential (PRU:LSE): Last: 267.50, down 26.5 (-9.01%), High: 279.75, Low: 264.00, Volume: 3.87m
PM:
dear me
NH:
don’t forgot the Pru has a large US operation
NH:
and while I am not sure what its CMBS exposure is
NH:
Jackson National Life holds lots of corporate bonds
NH:
and the average yield on junk bonds in the US is now over 20%
NH:
as per out story this morning
NH:
PM:
which brings us to a note published by Deutsche’s Jim Reid this morning
PM:
worth reading
PM:
This morning we’ve published a “Chart of the Week” entitled “A Once in a Century Yield Crossover”.
PM:
This looks at yesterday’s momentous day for those of us who are keen
historians of asset price performance through history. The note and chart highlights
that the dividend yield on the S&P 500 closed above 10-year Treasuries for the first
time since 1958 overnight. We discussed in yesterday’s EMR that they were then on a
par but with the S&P 500 closing -6.12%, and below its 27/10 lows, it now has a
dividend yield of 3.74%. 10-year Treasuries rallied 21bps to close at 3.32%.
historians of asset price performance through history. The note and chart highlights
that the dividend yield on the S&P 500 closed above 10-year Treasuries for the first
time since 1958 overnight. We discussed in yesterday’s EMR that they were then on a
par but with the S&P 500 closing -6.12%, and below its 27/10 lows, it now has a
dividend yield of 3.74%. 10-year Treasuries rallied 21bps to close at 3.32%.
PM:
So the market is fleeing from risk once again and one wonders how much of it has
been a realisation that the economy is going to be worse than people imagined or
whether much of it can be linked to recent uncertainty regarding the TARP program.
While one has to feel sorry for Mr Paulson, we wonder what history will make of his
various policy moves and inconsistencies over the last year. After Bear Stearns was
saved one can have sympathy for those thinking that a similar outcome would have
been reached at Lehman Bros ($0.04).. Wrong.
been a realisation that the economy is going to be worse than people imagined or
whether much of it can be linked to recent uncertainty regarding the TARP program.
While one has to feel sorry for Mr Paulson, we wonder what history will make of his
various policy moves and inconsistencies over the last year. After Bear Stearns was
saved one can have sympathy for those thinking that a similar outcome would have
been reached at Lehman Bros ($0.04).. Wrong.
PM:
Also after the TARP plan was
developed it became clear that stressed credit assets would be supported and that
mortgage backed securities may start to find a bottom, albeit due to artificial state
support. Wrong again! The changes in the TARP proposals continue to have an
opposite and equal reaction, especially in the mortgage space. Markets like certainty
and policy makers are running the risk of destabilising a market they are trying to help
developed it became clear that stressed credit assets would be supported and that
mortgage backed securities may start to find a bottom, albeit due to artificial state
support. Wrong again! The changes in the TARP proposals continue to have an
opposite and equal reaction, especially in the mortgage space. Markets like certainty
and policy makers are running the risk of destabilising a market they are trying to help
PM:
Overnight CMBS again saw significant weakness with the CMBX.5 AAA tranche
another 185bp wider at +750bp on the bid. A reminder that this index traded at around
+200bp a few weeks back and inside +400bp at the start of this week. With this in
mind we’d like to highlight a conference call today hosted by our CMBS analysts at
9.45am Eastern US time concerning Commercial Real Estate and the recent turmoil.
Please let us know if you want the dial-in details.
another 185bp wider at +750bp on the bid. A reminder that this index traded at around
+200bp a few weeks back and inside +400bp at the start of this week. With this in
mind we’d like to highlight a conference call today hosted by our CMBS analysts at
9.45am Eastern US time concerning Commercial Real Estate and the recent turmoil.
Please let us know if you want the dial-in details.
As Credit Strategists we certainly care as to what’s happening to these stressed ABS
assets as they are in many ways a ceiling for credit spreads across all assets classes.
HY and IG would perform better if these stressed assets could find a price floor.
Indeed HY indices have climbed to a yield of above 20% over the past 48 hours for the first time since the late 1980s.
PM:
So Mr Paulson’s plan to switch attention to consumer related ABS may yet prove to be a masterstroke but there is definitely a negative short term
impact for those assets previous thought to have been about to catch
Governmental support.
impact for those assets previous thought to have been about to catch
Governmental support.
The knock-on impact on the financial sector (that still own
chunks of these bonds and associated securities) has been fairly severe with the S&P
Financials index down 22.04% since last Wednesday’s change in TARP emphasis. If
one is looking for better news we can move from Henry to John Paulson. The latter,
who has been a trailblazer for us housing bears, has been reportedly (in the FT earlier
in the week) buying MBS for the first time in this crisis.
NH:
while we are talking about credit
NH:
did u see the Itraxx Xover this morning
NH:
reached 926 this morning at around 9am GMT. Previous intra-day high was 925.
NH:
Europe index at 183.5
NH:
to Markit confirm this is widest ever
PM:
Hmm — serious credit stress
NH:
interesting because LIBOR which were watching as a guide to this sort of stress
NH:
is providing no guide anyone
PM:
Krona’s looking stressed also
PM:
GBK at 1.4827
PM:
no libor figs as yet
PM:
NH:
Results out from financial spread betting company IG
PM:
ah!
PM:
that will be worth looking at
PM:
rumours have been swirling for weeks about bad debts in the spread betting world
PM:
some of it’s to with that Scottish wealth management company that went under
NH:
Echeleon Wealth Management you mean
PM:
yep
NH:
hmm, I think that is a very interesting story
NH:
might even be worth a visit to Glasgow to investigate
NH:
I hear the police are involved
NH:
anyway
NH:
back to IG
NH:
released trading update ahead of half year figures this morning
NH:
and in line with just about everyone else in the industry
NH:
: they are enjoying strong top line growth
NH:
lots of people opening new accounts
NH:
in the second quarter of its current fiscal year, IG reckons it will open 22,000 vs new accounts against 10,000 in the same period last year
PM:
goodness me
NH:
although 4,000 will come from that Japanese internet fo-rex broker they acquired
NH:
personally I am not sure how much longer this can keep up
PM:
not at that pace — unless they break into china of course
NH:
I get the fact that volatility is good for financial betting
NH:
but with things getting tighter out there
NH:
do people really have spare cash to punt on massively volatile markets?
PM:
I think people are actually tempted by the volatility
PM:
But they are likely to lose their shirts very quickly indeed
NH:
so, all the top line stuff is good
NH:
but there has been a marked increase in bad debts
PM:
NH:
they increased to £15m, with 80% of this occurring in October
PM:
So a lot of margin calls were not met
NH:
would seem so
NH:
and IG are saying that clients lost money in RBS
NH:
and trading indices
PM:
right
NH:
net, net
NH:
: the £15m bad debt charge is equivalent to 12% of revenues
NH:
and the higher charge means that PBT is likely to come in.£3m below City forecasts
PM:
right
PM:
analyst comment?
NH:
OK
NH:
here you go
NH:
this is from Numis
NH:
In summary the top line was very strong as new account
openings, client activity and volatility were at record level but we believe the market
is likely to have concerns over the increase in bad debts. We leave our forecasts
unchanged at this point for the full year but suspect the composition will change
with higher revenues offset by the increase in bad debts and betting duties in the
first half, although directionally we would expect greater downside risk to our
numbers. Target price and recommendation are under review.
openings, client activity and volatility were at record level but we believe the market
is likely to have concerns over the increase in bad debts. We leave our forecasts
unchanged at this point for the full year but suspect the composition will change
with higher revenues offset by the increase in bad debts and betting duties in the
first half, although directionally we would expect greater downside risk to our
numbers. Target price and recommendation are under review.
NH:
Bad debts rise will be the major concern: In our view, the market will focus on the
significant increase in bad debts, which increased to £15m with 80% of this occuring in October. We understand that the Group’s provisioning approach is to provide 25% for debts over 30 days and 100% for debts over 100days. Clearly our numbers will have to factor in the increase we have seen in H1.
significant increase in bad debts, which increased to £15m with 80% of this occuring in October. We understand that the Group’s provisioning approach is to provide 25% for debts over 30 days and 100% for debts over 100days. Clearly our numbers will have to factor in the increase we have seen in H1.
NH:
Top line continues to prove resilient: The Company experienced record levels of
account openings and client activity which resulted in revenues of £125m (+45% yoy)
c9% ahead of our numbers and PBT £58m (+21% yoy) although in line with consensus this is around 8% below our numbers. The variance due to higher bad debts.
account openings and client activity which resulted in revenues of £125m (+45% yoy)
c9% ahead of our numbers and PBT £58m (+21% yoy) although in line with consensus this is around 8% below our numbers. The variance due to higher bad debts.
New account openings strong: The company indicated that new financial account
openings in Q2 stood at 22,000 vs 10,000 in the prior year, with this being a lead
indicator for revenues this should help support revenue growth in the second half.
NH:
International business performaning very well: The expansion outside the UK is
going very well, with revenue growth of +85% qoq and represented c15% of total
revenues. The acq of JapanOnline is progressing ahaed of expectations with 4000 new
customers in first 2 months and synergies already being achieved.
going very well, with revenue growth of +85% qoq and represented c15% of total
revenues. The acq of JapanOnline is progressing ahaed of expectations with 4000 new
customers in first 2 months and synergies already being achieved.
Composition of forecasts will change: We believe our bottiom line forecasts will be
trimmed modestly at this stage but the composition will change more dramatically as
higher revenue growth is offset by higher bad debts and betting duties. We will confirm post the analyst call at 8.30am today. Consequently we put our target price under review.
NH:
and here’s Investec
NH:
H1 trading update; benefits and costs of volatility
Strong client growth and volatile markets resulted in strong revenue growth of
45% in H1 to £125m vs. our expectation of £115.4m. However, volatility has
also resulted in significant bad debt incidence in October, resulting in bad
debts as a % of revenues increasing to 12% in H1 versus c.3% in H2’08. As a
consequence of higher bad debts, PBT is likely to come in £3m lower than our
forecast at £58m. Higher client growth means we retain our FY forecasts.
Strong client growth and volatile markets resulted in strong revenue growth of
45% in H1 to £125m vs. our expectation of £115.4m. However, volatility has
also resulted in significant bad debt incidence in October, resulting in bad
debts as a % of revenues increasing to 12% in H1 versus c.3% in H2’08. As a
consequence of higher bad debts, PBT is likely to come in £3m lower than our
forecast at £58m. Higher client growth means we retain our FY forecasts.
NH:
Strong revenues but high bad debts – Volatile markets resulted in heightened
levels of client recruitment and trade activity levels, and are expected to push
revenues ahead by 45% to £125m versus our forecast of £115.4m. Excluding
the impact of the Japanese acquisition, revenue growth should be an impressive
c.35%. However, bad debts are expected to be £15m in the period, equivalent to
12% of revenues, around three times higher than our expectation. Higher bad
debts mean that PBT is likely to come in c.£3m below our expectation at £58m.
levels of client recruitment and trade activity levels, and are expected to push
revenues ahead by 45% to £125m versus our forecast of £115.4m. Excluding
the impact of the Japanese acquisition, revenue growth should be an impressive
c.35%. However, bad debts are expected to be £15m in the period, equivalent to
12% of revenues, around three times higher than our expectation. Higher bad
debts mean that PBT is likely to come in c.£3m below our expectation at £58m.
NH:
October hits bad debt provision – The high levels of volatility seen in October
adversely impacted bad debts, with the company expecting to make a provision
of £15m for the period, equivalent to 12% of revenues. We had expected bad
debts as a proportion of revenues to remain at similar levels to H2’08 (c.3%).
Management indicates that the bad debts relate to a relatively small proportion
of its client base by both number and revenues, with the largest debts relating to
positions in RBS and the main indices.
adversely impacted bad debts, with the company expecting to make a provision
of £15m for the period, equivalent to 12% of revenues. We had expected bad
debts as a proportion of revenues to remain at similar levels to H2’08 (c.3%).
Management indicates that the bad debts relate to a relatively small proportion
of its client base by both number and revenues, with the largest debts relating to
positions in RBS and the main indices.
NH:
Higher betting duty indicates a difficult period for its clients – It was not
only bad debts that are likely to come in ahead of our expectation, as betting
duties are expected to be c.£7m versus our forecast of £5.2m. Higher betting
duties indicate higher levels of client loss, potentially impacting clients’
propensity to continue using IG’s service.
only bad debts that are likely to come in ahead of our expectation, as betting
duties are expected to be c.£7m versus our forecast of £5.2m. Higher betting
duties indicate higher levels of client loss, potentially impacting clients’
propensity to continue using IG’s service.
NH:
Strong client growth bodes well for the future – The company attracted 22k
clients in Q2, more than double the number attracted in Q2’08. IG’s new
clients in Q2, more than double the number attracted in Q2’08. IG’s new
European operations have had a particularly strong period, with management
changes in Germany seemingly having an immediate impact on this business’s
ability to recruit new clients.
NH:
No changes to our full year forecasts – Despite H1 profits coming in lower
than we forecast, we do not expect to amend our full year forecasts. Higher
levels of client growth will support the business in H2 to a greater extent than we
have in our current forecasts, thus offsetting the bad debt impact in the first half.
than we forecast, we do not expect to amend our full year forecasts. Higher
levels of client growth will support the business in H2 to a greater extent than we
have in our current forecasts, thus offsetting the bad debt impact in the first half.
Summary and recommendation – Bad debts are worrying, but should be
exceptional in nature and are offset to some extent by the volatility benefits to
revenues. While the significant increase in bad debts should prove a one-off, the
benefits of higher client growth should prove lasting and support the longer-term
growth prospects of the business. We retain our Buy recommendation, but will
revise our price target to better reflect the risks of bad debts.
PM:
thanks for all that
PM:
And thanks to Baz below for pasting LIBOR
NH:
and I almost forgot
NH:
the IG share price
NH:
down 54.5p at 174p
NH:
that’s almost a quarter of its market cap removed this morning
NH:
and means anyone who bought into IG’s recent fund raising is sitting on a huge loss
PM:
Placing — wot placing??
NH:
raised £85m to pay for the Japanese carry trade broker they acquired
NH:
shareholders stuffed at
NH:
wait for it
NH:
295p a share
PM:
OUCH
PM:
neil and I had lunch yesterday with the head of one of the smaller spread betters
NH:
amazing lunch
NH:
I left stunned
PM:
We were talking about FX trading and asked how much leverage they offered
PM:
He ssaid:
NH:
300 times
PM:
Before adding:
NH:
and your point is
PM:
We, said — “Er..”
PM:
“Do you not fear regulation”
NH:
No
NH:
he also came up with an amazing stat
NH:
that clients never make money in financial spread betting
PM:
Yes, repeated told us that the clients were always wrong
PM:
And he said it with a smile on his face
NH:
and to protect themselves from bad debts they have an aggressive stop loss system that just takes you out if there is a spike
PM:
For those who dont know , let me just run thru quickly how spread betting FX will lose you lots of money
PM:
You put up a few grands — and then feel smart punting 1m
PM:
You think sterling will go to — say — 125, and bet that way
PM:
It might go to 125, but not in a straight line — and if you are levered 300 times with automatic stop loss, you will be wiped out with the first bit of volatility
NH:
i was just stunned by the contempt in which they held their customers
NH:
sheep just waiting to be fleeced
NH:
anyway the conservation eventually moved on to that very annoying CMC advert featuring the actor James Nisbit
PM:
PM:
Anyway — got to go — i have to do a talk on AV
PM:
PM:
And we need to get ready for the PARTY
PM:
Ryans — heroically organised by Monkey
PM:
Do come along!
PM:
Otherwise back tomorrow at 11am
NH:
FTSE now off 60 points at 3,947