Markets live chat transcript for the chat ending at 15:40 on 21 Nov 2008. Participants in this chat were: Paul Murphy (PM) Stacy-Marie Ishmael (SMI)
PM:
Okay — we promised an afternoon Markets Live chat today
PM:
But I am immediately going to disappoint immediately
PM:
Cos Neil can’t get a proper connection in the cheap joint his staying at in Milan
PM:
he left here with two laptops
PM:
he actually had a radio active glow about him, but that might have had something to do with last nights party
PM:
Anyway — it’s melt up in the US
PM:
126 on the Dow in the opening minutes
PM:
London doesnt know how to read it
PM:
What were were expecting?
PM:
I should calm down tho Dow always takes 20 minutes to show its trend
PM:
WhenIWereYoung — i don’t dance
PM:
Well, she teaches it now
PM:
A dancer, not a “dance”
PM:
praxis22 – i believe (hope) Neil is up for a rather big award
PM:
he can then buy some celebratory drinks
PM:
As for guest people on here…
PM:
Trouble is, colleagues see us doing it the office and think Yikes, I cant deal with that lot
PM:
Stacy is rushing around doing other stuff
PM:
Who’s got a citi price
PM:
i was trying to do a post but ran out of time
PM:
Maybe justified, may not be…
PM:
But strikes me that there’s a wild spamming attack on Pandit
PM:
Things like this going around:
PM:
As Michael Caine likes to say-”Not alot of people know this but” Citi paid $800mln for Bandits old hedge fund.Bandit made $165mln from the trade,the hedge fund was closed last June,which was just 11 months after Bandit became CEO!
Citi has a $2trln balance sheet.Lets be generous as per AIG and Goldie and assume that 20% of that is shit-say $400bln!Citi’s book value is $126bln.
Do you think Bandit can spell I-N-S-O-L-V-E-N-T?
Rubin-former Tsy Sec.-is also on the Citi Board so maybe Paulson will come to the rescue?
Just by the by,the G-20 meeting was a disaster because everyone who is anybody was informed that the US financial situation was far worse than being reported.Paulson/Bernanke et all were throwing in the towel and passing the buck to the Obama Administration as it has suddenly dawned on “The Four Horsemen”that the remaining $350bln is trillions short of whats actually being lost in the blackhole peviously known as the US financial system.
Oh,and finally,186 of the 500 SnP stocks should not be in the Index as they fail to meet the minimum $4bln capitalisation criteria!
PM:
Anyone got Richard X Bove’s note on Citi?
PM:
Apparently he’s saying it’s just fine
PM:
there are others — more conspiratorial
PM:
Sam spent some time earlier seeing whether there was something to the stories — but they didnt stack up at all
PM:
So we might have a little Save Vikram campaign here
SMI:
PM why are you talking to yourself?
SMI:
Well, I suppose you are also talking to our readers
PM:
i tell you what — Stacy is a treasure
PM:
She is in NY and she’s gone and got the Bove note
PM:
Highlights
• I have received numerous calls today asking me if Citigroup is
about to fail. I see no reason why this should happen. The
only reason banks fail is because their cash flows turn negative
and it does not appear that this is likely at this bank. This is
because the bank is able to roll over its liabilities and because
its net interest income is positive.
• The following programs backstop Citigroup’s liabilities: a) its
deposits are FDIC insured; b) the company is working out a
program to insure some of its debt with the FDIC; c) the Federal
Reserve discount window is always open to the company; d) it
can sell commercial paper to the Fed; e) it can use the primary
dealer debt facility; f) its deposits, which equal $780 billion, are
primarily sourced overseas (64%) giving the bank greater
diversity in capturing funds; g) it has access to bank protection
programs in multiple countries around the world; h) it has $393
billion in long-term debt; i) it has net free cash flows; j) it has
paid down $94 billion in long-term debt this year and $42 billion
in short-term debt; and k) it is reducing the size of its balance
sheet faster than any other company in the banking industry
(estimated $300 billion).
• The second way the bank can find its cash flow turning
negative is if its interest income falls short of its interest
expenses and loan losses. This would occur if loan losses
surged to a level that eliminated net interest income. To date
loan losses plus reserve builds are comfortably below net
interest income. Plus, interest rates are low and loans are
being repriced up across all categories.
• Factors that cannot cause cash flow to go negative are noncash
write-downs in security values, increases in loan loss
reserves, and changes in tangible book value.
• The company’s estimated Tier One ratio by year end is 10.45%.
This is very high relative to the past. Its stockholder equity is
estimated to be $150 billion assuming the TARP contribution.
• It would take a Depression every bit as large and long as the
1930s debacle to shake this company’s viability. The current
decline in the stock price is reflecting a series of fears related to
loans and security values that cannot be actualized without a
severe setback in the economy and a very rapid increase in
interest rates.
• I would be a buyer of this stock.
PM:
Ah Stacy — didnt see you
SMI:
No worries. There are mixed views on Bove, as evinced by some of the comments below
PM:
let me just go and get his recommendation record on Citi — wont be a mo
SMI:
I, for the record, disagree with Bove’s assertion that it would take a 1930′s debacle, etc
SMI:
In this market it it all about confidence, and Pandit has not been able to regain investors’ confidence
SMI:
There was also a rather good line in an FT story this morning (and by good I mean worrying)
PM:
Okay, well on 11/11 Bove said buy at 10.8, targeting 17 dolalrs
SMI:
Some asset managers, pension funds and endowments adhere to internal standards that mean they cannot hold stocks with a value of less than $5. With the shares below that mark, some analysts suggested a further bout of selling might take place today.
SMI:
PM what’s your take on the Bove call? and the save Citi campaign?
SMI:
Does it need saving?
PM:
Bove was a buyer in June, buyer in April, Buyer in February, buyer last November
PM:
Buy buy buy — all the way down
PM:
I kinda like Bove cos he makes firm calls
PM:
Shame they tend to be wrong
SMI:
So you think he’s wrong about C?
SMI:
TheHoof – going out on a limb here but I cannot see Citi being allowed to fail
SMI:
Here’s RBS this morning
SMI:
we don’t expect Citi to go the same way as Lehman. Think along the lines of USD350bn unspent in TARP and the volume of rats and mice that have been bailed out so far in the US. There is uncertainty as to exactly how the govt will sort things out this time round (they have used so many variants so far) but Citi will be bailed and senior debt holders at the very least will be OK.
PM:
Hmm — thanks for that
SMI:
praxis – is that a net or gross figure?
SMI:
On Santander – Paul any thoughts?
SMI:
My last take on Citi – not doomed.
PM:
Not immediately — will have a look in a mo
SMI:
Troubled, but not doomed
PM:
First , here’s some positive thinking
PM:
Andrew Garthwaite – from credit Suisse
PM:
Equities: 7 reasons why we should not give up!
PM:
Our thoughts are:
(1) Credit spreads are consistent with a default rate above that seen in the 1930’s. This cannot be right. 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). Credit and equity move together (slides 2 and 3)
(2) Equities offer good value (though not as good value as credit):
The current equity risk premium on trend earnings is 6.3%, compared to the long-term average of 3.5%. Given where credit spreads, VIX and lead indicators are the warranted risk premium is 6.8%. However, we think that credit spreads should narrow and lead indicators pick up a bit over the next six months causing the warranted risk premium to fall to 5%. We continue to target a 5% risk premium which equates to 1,050 on the S&P 500. We note that equities only offer value if credit spreads improve.
P/E ratios on trend earnings: Since 1985 we have experienced four bear markets. During these episodes, the market has bottomed on the following multiples of trend earnings: 13.7x (Dec 87), 14.2x (Oct 90), 25.9x (Oct 98) and 15.7x (Oct 02). Currently, the multiple is 10.1x on trend earnings (10.7x on our 2009 earnings estimate of $70).
On HOLT, global non-financials are discounting a CFROI of 3.6%, compared to a long-run average of 5.7% and a 20-year low of 4.1%. This is below the discount rate of 7.3%.
(3) On Jonathan Wilmot’s data, US real equity returns are now 1.1 std below trend (data goes back to 1850).
(4) The market can trough about 2 quarters (and sometimes up to 5 quarters) before the trough in earnings, we think earnings trough in 2H09. And within 3 months of the trough in earnings MOMENTUM…we are close to that!
(5) Many of the tactical indicators are extremely supportive (equity sentiment and risk appetite are at all-time lows, insider buying surged to all-time highs).
(6) All policy makers realize the extent of problems we are facing and policy response has been on an unprecedented scale (aggressive interest rate cuts, proposed fiscal easing, TARP / capital injection into banks, Fed’s Commercial Paper Funding Facility, deposit guarantees, increased swap lines with central banks, guarantee of money market mutual funds). China also has a lot of fire power!
(7) This is the worst year for equities on record (back to 1825!). On the 8 occasions equities have fallen by more than 20% in one calendar year, 6 of the following years have produced positive returns. For the first time since 1938, equities have fallen more than 50% peak to trough and realized volatility is as high as in 1929 and 1987. We note that bear markets rallies can be as much as 50% (US 1929, Japan 1990s).
We believe the key catalyst are:
- credit spreads improving- which they are not
- signs of liquidity improving (i.e. signs that corporates can access credit markets)
- ultimately, we need some improvement in news on the US housing market.
We believe that credit spreads have been driven wider by the uncertainty surrounding the implementation of TARP, year-end book closings of investment banks and issues surrounding the autos bail out.
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
SMI:
Hah I am going to disagree with his first point on credit spreads
SMI:
It is true that CDS is forcasting armageddon
SMI:
It is true that CDS and equities do sometimes move together
SMI:
But it is also true that CDS and bond yields and similar measures of creditworthiness have been far more right than equity markets
SMI:
There will be a wave of defaults both in investment grade and high yield
SMI:
There will be unprecedented ‘restructuring’ and a serious bout of private equity firms begging to waive covenants
SMI:
Credit spreads might be exaggerating at this point, but I think it would be a mistake to dismiss them out of hand
PM:
Opening pop on the Dow now all but gone
SMI:
Ando – as much as cov-lite and cov-loose were popular, there was very few, if any, ‘cov-zero’ deals
SMI:
I think the bear case is well established
PM:
Dow now up just 3 points
SMI:
Totally agree with Monkey
SMI:
Loose and lite covenants delaying the inevitable
PM:
On the covenants issue — i was of the impression that relatively few deals actually got those terms
PM:
it was a small window at the very height of the PE madness
PM:
You know, when, er Blackstone used the pubilc markets to get a valuation
PM:
Didnt even offer part ownership — just stupid units thtat didnt have any votes
PM:
how much of a warning was that?
PM:
Okay — FXtrader is a buyer of C at 3.93
SMI:
Hindsight is a heckuva thing
SMI:
Here’s BarCap on PIKs
SMI:
The credit market has changed quite significantly since our prior discussions on toggle/cash pay relative value
. With each passing week additional issuers announce
their decision to pay-in-kind (PIK) the interest on toggle notes in an effort to preserve liquidity given the harsh credit environment. These moves are also consistent with the
sizeable increase in revolving credit drawn by companies recently. The economic incentive to PIK has increased and there is little stigma attached to exercising the PIK toggle note option anymore. This is evidenced by the reduced sensitivity of bond prices to the announcements.
PM:
Shovels are what we need right now
SMI:
I’m totally biased, but echoing some of the comments made in recent posts, I think equity market investors need to pay more attention to credit strategists
PM:
Someone asked about Santander earlier — apols but cant find anything immediately
SMI:
Anything else of interest, aside from the end of the world as we know, etc?
SMI:
Ooh I’ve got a note from S&P reiterating the gloom in credit
SMI:
NEW YORK (Standard & Poor’s) Nov. 21, 2008— The S&P speculative-grade composite spread continued its widening trajectory yesterday, setting a new five-year record for the fifth consecutive day, now at 1527 bps. New five-year records were seen at the BB and B levels as well, with reached 1051 bps and 1608 bps, respectively. CCC tightened a bit off its five-year record to 2872 bps.
SMI:
Investment-grade spreads also widened to a new five-year record of 534 bps, echoing its components which all hit new five-year records as well. AA widened to 430 bps, A to 485 bps, and BBB to 633 bps.
SMI:
With speculative-grade defaults on the rise, higher preponderance of credit downgrades, and a general malaise about the future of the economy, we expect spreads to remain at their elevated levels for some time until confidence is restored to the market.
SMI:
phoenix – Goldies forecasts inline with the most recent update from the Fed
SMI:
Which is predicting unemployment at 8 per cent in the US and significantly slower growth – possibly contraction in GDP in 2k9
SMI:
Stepping back for a moment
SMI:
John Authers on sterling – in medium term, prolly going quite a bit lower.
PM:
dollar wise — here’s a few pars from Marc Ostwald at Monument
PM:
One key question that we think will need to be considered more
closely in the not very distant future is when the explosive
growth in the US monetary base starts to impact the USD,
as can be seen on the attached chart.
As yet it is clearly not registering on FX markets, even
though the USD’s recovery since the July trough in the
USD Index does appear to have hit major resistance
around current levels, which also fits with the major
support level established in the early 1990s. That is
without even mentioning the lack of any material form of
corrective activity to the USD since July, which creates
a vulnerability (for the USD) in and of itself.
The simple point to be made is: if money has no
intrinsic value, but rather merely represents value,
then at what point does the world wake up to the fact
that the U.S. has embarked on a colossal degradation
of its own monetary unit, as the explosive growth in
the USD monetary base would appear to be testament to?
PM:
yeah Stacy — rite proper
PM:
This was just being shared by Izabella and Sam
SMI:
According to Markit desktop, Xover is at 912bp
SMI:
According to Yahoo, bras for men are the next big thing
PM:
Stacy — ive now found the CDS indices on reuters here
PM:
Europe off a tad at 179
PM:
Slade’s just been over from the main news desk
PM:
Kiran Stacey has a take on New Star’s cio “leaving”
PM:
Stephen Whittaker has left his job as joint chief investment officer at New Star Asset Management with immediate effect.
John Duffield, New Star’s chairman, asked Mr Whittaker to leave on Friday after what Mr Duffield called “a long period of underperformance”.
SMI:
Kiran’s one of the fresh crop of grad trainees. Been doing very good work.
PM:
here’s the operative par
PM:
Mr Whittaker was partially a victim of his own misjudgement of the UK stock market. He told the FT’s Your Money in January: ”I anticipate the equity market can make progress in 2008 and a closing [FTSE 100] figure of 6,800 by year end would appear feasible. I feel much more comfortable holding depressed cyclical and financial stocks than trying to hide in expensive defensives.”
PM:
6800?
PM:
Might yet be proved right of course
SMI:
PM where are UK markets now?
SMI:
Sadly I do not have a Reuters or a Bloomie on my desk :/
SMI:
Hmm I think Paul is having some IT issues
SMI:
Does anyone have any thoughts or questions? If not we’ll shut up shop till Monday.
SMI:
Although I am afeard this will be another Bazooka Bailout weekend
PM:
nah — Stacy — was just trying to find something to say
PM:
Two mins and we’ve done an hour
PM:
I know you have other work to do
PM:
Might just guide the Dow back into negative territory tho
SMI:
Here’s a challenge for ML readers – an intraday chart of ML vs Dow or FTSE going back 6 months
PM:
Organise a margin call for FXtrader – C at 3.80
SMI:
ctagg – thin, thin trade during thanksgiving week.
SMI:
Actually, good point. Some people might be trying to get out of Citi before Monday
PM:
Neil has just mailed to say that Citi puts at 2.5 currently cost 85c
SMI:
Cause the possibility of some kind of news over the weekend is significant, and even if not, a lot of people will take the week off.
SMI:
Ctagg – it could mean quite significant volatility
SMI:
Neil is a blackberry ninja
SMI:
Right, before we wrap up, here are the latest levels
PM:
And ive just got a Barclays econ note to share
SMI:
Dow up 40.78 points at 7,593.07
SMI:
S&P up 4 points at 756.47
SMI:
Nasdaq up 3.3 points at 1,319.43
This entry was posted by Paul Murphy on Friday, November 21st, 2008 at 14:30 and is filed under Uncategorised.
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