Markets live chat transcript for the chat ending at 11:59 on 21 Nov 2008. Participants in this chat were: Paul Murphy (PM) Sam Jones (SJ) Neil Hume (NH)
PM:
Welcome to Markets Live – FT Alphaville’s regular stock chat that fills some time up before lunch.
PM:
It’s Friday
PM:
First up, must thank Monkey for organising a very very good bash yesterday evening.
PM:
At El Ryans
PM:
Great to meet people.
PM:
And we should salute Zoomy for turning up in a sombrero and shorts.
PM:
We should have another one soon. — as soon as i get the marketing department to put up some cash
PM:
Anyway the immediate news is….
PM:
We’ve lost Neil.
PM:
PM:
Well actually , he’ swanned off to Milan for a day or so.
PM:
Why Milan? You ask.
PM:
Well, im not a liberty to say – other than that there is a big mid/small cap M&A conference
PM:
This lot:
PM:
And they have these:
PM:
But readers – don’t fret! We’ve got Sam here instead.
SJ:
Hi there.
SJ:
I’ve got the red wine stains off my mouth. For anyone who saw me last night and didn’t talk to me: it wasn’t lipstick.
PM:
PM:
What you been looking at this morning Sam?
SJ:
Well, i’ve been looking at Neil’s hotel. I thought we were supposed to be saving money???
SJ:
It’s owned by the Dorchester
SJ:
SJ:
SJ:
It’s a tad too flowery for my tastes, but I do note that it’s posh enough not to have a rate card on its website.
PM:
Oh dear me. Neil’s taste is very odd
SJ:
idiotbox: dont know what you’re suggesting
SJ:
PM:
Now should quickly say that Sam and I are just going to do a short session right now.
SJ:
Basically that’s because we haven’t got as much to say as Neil.
PM:
But Neil will be online this afternoon – so we are planning to do a second ML session at circa 2.30 LIVE from Milan.
PM:
In fact LIVE from Hotel Principedi Savoia.
PM:
So do come back if you can this afternnon.
PM:
PM:
In the meantime, what’s the state of play Sam?
SJ:
Er… stocks are up.
PM:
No they are not. The Dow fell 5.5 per cent – S&P was off almost 7 per cent
PM:
I know you’re a youngster Sam – but understand this: when the S&P falls 7 per cent stocks in London don’t go up.
PM:
They go down because investors over here respond to panic selling in the US buy selling shares – and that sends the price lower.
PM:
SJ:
Well on my screen they’re up – you know, in a coloured blue sort of way – and there’s a plus sign next to the index.
SJ:
3917 +42
PM:
Hmmm. Okay
PM:
Basically no one knows how to value stocks any more. It’s as tho market moves have become completely random. What insight are we supposed to add?
SJ:
Good question. Can I go now?
PM:
Hang on in there a mo.
SJ:
Ok fine – i’ve got this little snip…
SJ:
from Paul Kedrosky… super-star US blogger
SJ:
I want to warn people about another derivatives sub-market, one that gets far less attention than the purportedly $36-trillion market (or whatever the current claimed number is) for credit default swaps. It is something called “shares”.
SJ:
You may not have heard of them, so here is a description:
SJ:
A share is itself a derivative, composed of several underylings: capital value changes, dividends, an option that it might be taken over upping the price, and a set of entertaining variable tax consequences, since dividends and capital growth/lose are taxes quite differently from each other and for different classes of investor.
SJ:
Quite a good insight anyway, I thought
PM:
Very good
PM:
PM:
All the miners are up – strongly – gains of 8/9/10 % Why’s that.?
SJ:
Er, because the oil price has fallen below$50?
PM:
Not sure about that.
SJ:
Okay – how about “The miners are up cos they fell a lot yesterday”
PM:
Now you’re on it!
SJ:
Actually I have some stuff on volatility
SJ:
Credit Suisse out with a note this morning
SJ:
Shallow liquidity caused by fewer arbitrageurs
SJ:
(title)
SJ:
From August to October, equity markets risk has notably shifted: implied and realized volatility reaching levels unseen since 1987.
Turnover and Bid-Ask spreads increased across the entire market cap range. Turnover increased by 43% and B/A spreads by 32%. Large and mid caps are now trading as mid and small caps used to.
Intraday volatility soared in the last 2 months – more than doubling. Large cap stocks were most impacted (+148%) ahead of mid cap and small cap respectively.
Average orderbook density decreased by 16%, further demonstrating a fall in liquidity.
The financial sectors credit situation has directly affected their trading characteristics, but this has also spread to other sectors.
Financial institutions have had difficulties funding their arbitrage activities such as index and risk arbitrage and stub strategies – which are traditional providers of liquidity. That disaffection rendered order books shallow which may have caused wider bid-ask spreads (see report The Bitter end)
Turnover and Bid-Ask spreads increased across the entire market cap range. Turnover increased by 43% and B/A spreads by 32%. Large and mid caps are now trading as mid and small caps used to.
Intraday volatility soared in the last 2 months – more than doubling. Large cap stocks were most impacted (+148%) ahead of mid cap and small cap respectively.
Average orderbook density decreased by 16%, further demonstrating a fall in liquidity.
The financial sectors credit situation has directly affected their trading characteristics, but this has also spread to other sectors.
Financial institutions have had difficulties funding their arbitrage activities such as index and risk arbitrage and stub strategies – which are traditional providers of liquidity. That disaffection rendered order books shallow which may have caused wider bid-ask spreads (see report The Bitter end)
PM:
So basically we are saying the stock market is broken.
SJ:
Credit is too
SJ:
Here’s some more from that note
SJ:
Since the bankruptcy of Lehman Brothers and the implementation of short selling ban, the daily volatility exploded. We currently have sustained levels of 70% realized and implied volatility. At the same time, the intraday volatility more than doubled on average from 0.22% to 0.49%.
All market caps have seen their intraday volatility massively increase. Also it is interesting to note that it is the Large Cap volatility that increased the most with a148% increase between the two periods. This should partly explain the fact that Large Cap has seen its B/A spread increasing by 45% ahead of Mid Cap and Small Cap with 36% and 33% respectively.
PM:
The markets broken. How unfortunate is that?
SJ:
There is a view that credit is more broken than equities.
PM:
Yes, have heard that view.
PM:
Look at this from Credit Suisse – different note.
PM:
We believe credit offers exceptional value: the implied default rate over a 5-year period is 61% (assuming an average recovery rate and an average risk premium), considerably higher than the 46% peak default rate in 1935. Even if we assume trough recovery rates of 20%, the implied default rate would be 51%. Empirically, credit spreads imply that 12-month speculative grade default rates will rise from 4% to 21%; above the peak of 15% in 1933. However, we do not think there will be a repeat of the 1930s when nominal GDP halved and there were numerous policy errors (tax and rate hikes, import tariffs).
PM:
so credit prices are suggesting we will see more businesses go bust than during the Great Depression. That’s silly.
SJ:
Yep. Problem is no one seems to have the cash to fix prices.
PM:
PM:
BREADKING NEWS
PM:
Bank of Ireland approaches from unnamed parties
PM:
i don’t have live prices for Irish stocks
PM:
Investment in the bank — not bid
PM:
Just to clarify
SJ:
RNS Number : 6678I
Bank of Ireland(Governor&Co)
21 November 2008
Bank of Ireland(Governor&Co)
21 November 2008
Bank of Ireland
In response to media speculation, Bank of Ireland states that it has received unsolicited approaches from a number of parties wishing to make an investment in the Group. No decision on these approaches has been made. Bank of Ireland will keep its stockholders informed as appropriate.
PM:
thanks for that
SJ:
No probs
SJ:
SJ:
Anyway – very briefly i promise – quick observation on yest. credit markets
SJ:
which were insane
SJ:
lots of stuff out there
SJ:
but two things head and shoulders above the rest in terms of significance…
SJ:
The yield on 3month t bills fell to 2bps….
SJ:
Just 2!
SJ:
And the yield on 30 year treasury bonds fell 45 bps over the day
SJ:
which is madness
SJ:
there was a good dresdner note on this out yest
SJ:
which tracy wrote about
SJ:
on the flattening of the yield curve
SJ:
anyway – we’ve stuck another post up on the site about it all
SJ:
so you can get more info there
SJ:
ok im done on that… you can come back now Paul
SJ:
PM:
thanks for that Sam!
PM:
ive got something i need to get out of the way also
PM:
Gonna be brave now.
PM:
Going to hand out some direct advice on Mecom.
PM:
We said we believed Axel Springer have been looking at buying Mecom – we had heard they were going to take a substantial stake that would probably lead to a bid for the whole company
PM:
Then sources speaking to other people played that down – yet Mecom’s price continued to climb.
PM:
Albeit from just about nothing.
PM:
I noticed this morning that the stock spiked up to 3p and then came back to around 2.2p – about level.
PM:
Now you should know that Axel Springer ceo wsa quoted by reuters this morning out of Barcelona saying….
PM:
He is interested in Mecom’s polish assets, but not the whole company.
NH:
London. Can you hear me London
PM:
So we are not going to argue with that – he’s gone on the public record.
NH:
hello from milan
PM:
Hi Neil — hang on a mo
PM:
We still believe they looked at a full bid – but that is now besides the point.
PM:
Advice: take your profits or cut your losses in Mecom.
PM:
Price now 2.2p. – the spread is not too painful for a penny dreadful.
PM:
But get out.
PM:
We can’t hope to value the company.
PM:
But we do not want to spend the next how ever many months with people coming on here saying: “Got any update on Mecom.”
PM:
So sell.
PM:
I hate writing about penny dreadfuls. They are a quick way to loose all your money.
PM:
Mecom will not appear amid these pixels for the foreseeable.
PM:
Done
PM:
SJ:
Anyway – hi Neil
SJ:
Have spotted any oligarchs?
SJ:
Your hotel has a special russian language site for its Russian friends!
SJ:
Наталья Лазукина, наш русскоговорящий менеджер по бронированию, рада помочь Вам с понедельника по пятницу.
SJ:
That says:
PM:
(Praxis — good point — the auto-generator seems broke at the moment — bu t…. READER BEWARE on Mecom)
PM:
PM:
Translate please!
SJ:
Nathalie Lazukina, our Russian speaking reservations manager is waiting for your call
PM:
PM:
Neil =– have you disappeared?
SJ:
RBradley: yes, special vin de antifreeze lipstick came off ok – see earlier in chat
PM:
PM:
While on the subject of stuff previously published here.
PM:
We had this earlier in the week:
PM:
and for a real scary headling check this
NH:
John Lewis’ reporting of a 14% year-on-year plunge in retail sales in the week to 15 Novembe
NH:
John Lewis’ reporting of a 14% year-on-year plunge in retail sales in the week to 15 Novembe
PM:
That caused a flurry of emails and comments later in the day – I think on Tuesday.
PM:
We were worried that we had got it wrong.
PM:
But its been confirmed today – dept store sales at John Lewis down 14 % in week to Nov 15
PM:
Food off 4.6% — making total at 9.1%
SJ:
Quite terrifying
SJ:
Here’s a quick take from Symour Pierce
SJ:
*Seymour
SJ:
John Lewis Partnership
Week ending 15 November: -9.1%
Sales in the John Lewis department stores declined by 14%. Although these figures were well flagged they were nevertheless very poor. As we noted last week, it appears the grim financial news is now beginning to markedly impact the consumer environment with a vengeance. Electricals outperformed fashion in value terms for the first time in a number of months. Electrical sales were reported to have declined by 12.0%, fashion by 11.9% and home was down by 18.7%.
Again, sales in the Southern based stores were notably weak – in particular the London based outlets – Oxford Street -11.9% was the weakest in value terms probably affected by the opening of the Westfield store, Peter Jones -18.6% and High Wycombe -21.5%. Even the internet site had a poor week with its sales reported to be down by 8.8%.
Waitrose sales were again poor, down by 4.6%, which represent a weakening of the recent trend.
In the apparel category, we have Sell recommendations on M&S and Debenhams and a Hold recommendation on Next.
Week ending 15 November: -9.1%
Sales in the John Lewis department stores declined by 14%. Although these figures were well flagged they were nevertheless very poor. As we noted last week, it appears the grim financial news is now beginning to markedly impact the consumer environment with a vengeance. Electricals outperformed fashion in value terms for the first time in a number of months. Electrical sales were reported to have declined by 12.0%, fashion by 11.9% and home was down by 18.7%.
Again, sales in the Southern based stores were notably weak – in particular the London based outlets – Oxford Street -11.9% was the weakest in value terms probably affected by the opening of the Westfield store, Peter Jones -18.6% and High Wycombe -21.5%. Even the internet site had a poor week with its sales reported to be down by 8.8%.
Waitrose sales were again poor, down by 4.6%, which represent a weakening of the recent trend.
In the apparel category, we have Sell recommendations on M&S and Debenhams and a Hold recommendation on Next.
PM:
So how is Next doing on the back of that? John Lewis figs
SJ:
Up 27p at 997.
PM:
???????????????????
SJ:
Marks & Spencer also higher at 209p – up 3p
SJ:
(all those shoppers in yest)
PM:
Not Debenhams, surely.
SJ:
Up 0.5p at 25.75.
PM:
I give up.
PM:
Actually – I’m not giving up.
PM:
CS cut their target price on M&S from 175p to 160p. haven’t got the research tho
NH:
sorry have a few tech probs
PM:
PM:
hi Neil
SJ:
Ciao
NH:
can’t run reuters and ml on same laptop
PM:
You in the hotel?
NH:
paul i need your password
PM:
For reuters?
PM:
PM:
Nothing from Italy — let’s go to spain
PM:
Spanish banks — anything going on there?
SJ:
Sorry , haven’t looked.
PM:
Quite aggressive ntoe out from JPMorgan this morning
SJ:
Actually I’ve got that
SJ:
A sharp derating looks inevitable, capital looks safe -
Stay UW in Spanish retail banks – downgrading
Banesto from N to UW
Stay UW in Spanish retail banks – downgrading
Banesto from N to UW
SJ:
Capital-led recent outperformance not sustainable — We understand investors “hiding” in banks still delivering earnings growth, insulated from subprime markdowns, with sound underlying solvency (boosted by generic provisioning buffers of c.20% of core capital figures), and still showing 30- 50% payout ratio. That said, we remain firmly convinced about the accelerated macro/asset quality deterioration and less benign external conditions (rates, funding costs) taking a large toll on the sector’s underlying profitability, which we do not see as discounted in current share prices.
SJ:
Sharp fall in earnings power as generic provisions vanish, we assume little or no reported profits by 10E — We have cut our reported EPS forecasts by 23-91% for 09/11E to reflect (i) no volume growth, (ii) moderate margin declines, (iii) no support from non interest income, (iv) cost
containment policies, and (v) especially, a “crisis” scenario in asset quality terms, with NPL ratio hovering around 7-8% by 11E (vs. current c.2%) led by developers and SMEs to a lesser extent, and specific provisions rising to c.150-200bps vs. current 40-60bps. Timing wise, the hit to reported earnings is likely to concentrate in H209/10E when generic provision buffers are fully
utilized and loan losses prolong their upward trend.
containment policies, and (v) especially, a “crisis” scenario in asset quality terms, with NPL ratio hovering around 7-8% by 11E (vs. current c.2%) led by developers and SMEs to a lesser extent, and specific provisions rising to c.150-200bps vs. current 40-60bps. Timing wise, the hit to reported earnings is likely to concentrate in H209/10E when generic provision buffers are fully
utilized and loan losses prolong their upward trend.
SJ:
Sound regulatory capital, rights issues should not be imminent — Including generic provisions, Q308 core Tier 1 would stand c.8%. This regulatory buffer is ever more important as we expect a steady deterioration of core equity ratios once the generic buffer is exhausted next year in most cases (5.6-6.5% (BKT/SAB) to 7.3-4% (PAS/POP) by 11E), assuming no cash
dividends from 09 and 5-6% annual RWA growth. If Spanish banks are “forced” by the market to raise cash, we assume manageable rights issues of 8- 25% of existing market values and avg. 4% decline of NAV/share figures.
dividends from 09 and 5-6% annual RWA growth. If Spanish banks are “forced” by the market to raise cash, we assume manageable rights issues of 8- 25% of existing market values and avg. 4% decline of NAV/share figures.
SJ:
Remain bearish, de-rating necessary, BTO downgraded to UW — We rate all retail banks UW and believe current prices offer low risk entry point for the short call to be successful. With NAV c.20% below stated BV by 09/10E and single-digit RONAV at best, we believe sector’s PNAV multiple should converge to at least 1.0x, still 25-40% below current levels. Our 12/09 SOP PTs are consistent with that view. On a relative basis, we still prefer Banesto.
PM:
Cheers for that
SJ:
Well I can even tell you Banesto is up a fraction on that at 8.35 euros
PM:
Brilliant
PM:
SJ:
Actually while we are in Europe – see this CS note on UBS?
PM:
No – do share.
SJ:
There’s saying UBS is clear of toxicity – raging buy.
SJ:
Trading Alert: Buy on overreaction to sector
SJ:
Action: With the wholesale banks sector in rout, it is worth remembering that UBS has agreed to transfer its US commercial real estate exposure to the Swiss National Bank. The remaining leveraged portfolio could contribute writedowns to the Q4 P&L, but apart from that UBS is relatively free of ‘toxic’ risk and proprietary trading exposure. Although we are cautious about long term
prospects, the stock is more than 75% below our fair value target.
prospects, the stock is more than 75% below our fair value target.
Valuation: Stated tangible NAV is SFr10.4 and “adjusted” (for gains on own debt) TNAV is SFr8.6. At less than 1.5x TNAV, UBS ought to be considered cheaper than other wholesale banks at NAV, because of the presence of the wealth management businesses, which require little capital. These businesses plus the domestic bank contribute SFr 1.6/share, or 18.5% return on group TNAV, which would more than justify the current rating.
Newsflow potentially better?: Although we are cautious about UBS’ private bank, Q4 net flows could surprise. Given turmoil in emerging markets and worries about capital controls, there could be a “flight to safety” in Q4. Rationale: UBS at current prices appears to be implying a negative value for the investment bank, suggesting that the market is assuming further capital destruction. This is actually quite difficult to achieve given that the SNB deal will have closed by quarter-end, taking the majority of the toxic assets off the balance sheet. We would be short term buyers at this price.
PM:
UBS price?
SJ:
Well they are up rather nicely – up 6.3% at 12 euros
PM:
PM:
ALERT
PM:
Can i just stop people from posting photos of th TARPy
PM:
Nothing to do with me being a short arse
PM:
its about identity
PM:
People need to retain privacy and anonymity
PM:
V V important
NH:
right thanks for the password paul, am in.
PM:
Well done Neil
PM:
NH:
cant get the streaming to work
PM:
No libor yet
PM:
Neil — do you know why the miners are racing???
NH:
er, dead cat bounce
PM:
Marvelous
PM:
Bank of Ireland up 25% now
PM:
Madness. in my view
PM:
here’s lehman on UK banks
PM:
Sorry, Nomura
PM:
We view banks as highly cyclical and believe that bank shares are likely to follow this cycle. Essentially, banks are leveraged to the real value of debt and are one of the most leveraged industries of all. In our view, the real value of debt in the UK needs to fall, taking the relative value of bank shares down with it. We would only be positive towards bank shares, when investors wish to discount the end of the deleveraging process and look forward to a resumption of re-leveraging, economic recovery and a bottoming of asset values.
PM:
· We believe credit cycle losses are likely to be 8-10% of domestic bank loan portfolios. This is equivalent to 1.5x recapitalised book value and 4-5x pre provision profits. At best, banks are likely to break even for several years, while there are real risks of yet further recapitalisations.
· Economic and housing market deterioration in the UK appears to be occurring faster than in the 1990s’ cycle. Financial investments also present asset quality risk. Basel II is pro cyclical and will absorb significant amounts of equity raised. In our view, capital strengthening has only reversed excess leverage, not generated excess capital.
· Funding pressures have been eased after intervention from the authorities along with capital injections. However, the support from authorities is aimed at the liability holders, while solvency risk remains with the equity holder.
· Our relative preferences are driven by exposure to deleveraging. We are negative towards Lloyds TSB/HBoS, Standard Chartered and Barclays. We are positive towards HSBC and our recovery recommendation is RBS.
PM:
Thats Robert Law at Nomura
PM:
he doesnt like UK banks
PM:
Thanks for LIBOR strawbug
PM:
*LIBOR-OIS SPREAD LITTLE CHANGED AT 171 BASIS POINTS
*ONE-MONTH DOLLAR LIBOR 1.40% VERSUS 1.47%, BBA SAYS
*ONE-WEEK DOLLAR LIBOR 0.96% VERSUS 0.92%, BBA SAYS
*THREE-MONTH LIBOR FOR EURO 4.06% VS 4.11%, BBA SAYS
*OVERNIGHT STERLING LIBOR UNCHANGED AT 3.00%, BBA SAYS
*THREE-MONTH DOLLAR LIBOR 2.15% VERSUS 2.17%, BBA SAYS
*ONE MONTH STERLING LIBOR 3.47% VS 3.51%, BBA SAYS
*OVERNIGHT LIBOR FOR EURO 2.90% VS 2.93%, BBA SAYS
*THREE-MONTH STERLING LIBOR 4.07% VS 4.10%, BBA SAYS
*ONE-MONTH DOLLAR LIBOR 1.40% VERSUS 1.47%, BBA SAYS
*ONE-WEEK DOLLAR LIBOR 0.96% VERSUS 0.92%, BBA SAYS
*THREE-MONTH LIBOR FOR EURO 4.06% VS 4.11%, BBA SAYS
*OVERNIGHT STERLING LIBOR UNCHANGED AT 3.00%, BBA SAYS
*THREE-MONTH DOLLAR LIBOR 2.15% VERSUS 2.17%, BBA SAYS
*ONE MONTH STERLING LIBOR 3.47% VS 3.51%, BBA SAYS
*OVERNIGHT LIBOR FOR EURO 2.90% VS 2.93%, BBA SAYS
*THREE-MONTH STERLING LIBOR 4.07% VS 4.10%, BBA SAYS
PM:
You know the BBA charges for live LIBOR figs
SJ:
PM:
But we’ve got Strawbug and Nelly!
SJ:
They haven’t cottoned on
NH:
trying again
SJ:
erm
SJ:
those Libors
PM:
Those are WRONG libor figs
PM:
Sorry!!!!!!!!!!
PM:
oops
SJ:
PM:
SJ:
Thats why you should always pay!
PM:
diotBox is right
SJ:
We;ve been spreading false Libors!
SJ:
We’ve been liboring… etc etc
PM:
PM:
Right — before we go
PM:
Here’s some shopping stuff
PM:
just in from Investec
PM:
Retailers’ ability to control costs and margins will determine the winners and
losers in the sector over the next 12 months. Given the debate about sourcing
cost pressures and the volatile currency picture in the year to date, we look at
pricing trends across the clothing majors and the outlook for pricing and
margins in 2009. Next is our top pick of the three examined here, given its
ability to manage margin combined with robust cashflows.
losers in the sector over the next 12 months. Given the debate about sourcing
cost pressures and the volatile currency picture in the year to date, we look at
pricing trends across the clothing majors and the outlook for pricing and
margins in 2009. Next is our top pick of the three examined here, given its
ability to manage margin combined with robust cashflows.
PM: