Markets live chat transcript for the chat ending at 12:15 on 10 Dec 2008. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder, FT (BE)
NH:
Good morning and welcome to Markets Live
NH:
which is running slightly late this morning
NH:
apologies for that
NH:
anyway
NH:
welcome Alphaville’s daily stock market round up
NH:
which according to one Long Room applicant
NH:
makes him thirsty because he has to take so many pinches of salt when he reads it
NH:
we have such lovely readers
NH:
anyway, we are Murphyless again
NH:
Still ill with food poisoning
NH:
but I am pleased to say attempting to take on food
NH:
so, for those of you who thought it was in some way connected to the fact that Monday’s Xmas lunch extended into the evening
NH:
you were all too cynical
NH:
our glorious leader really is ill
NH:
but hopefully he will be better tomorrow
NH:
anyway, the show must go on
NH:
and joining me this morning is
NH:
Bryce
BE:
Hello
BE:
Took a good 15 mins to log in
BE:
Loads to talk about this morning
BE:
in fact I am not sure where we start
NH:
what about the market
NH:
but before we get on to that
NH:
Throg has been freed
NH:
he is free to comment again, providing he does not say something of a sexual nature
11:11AM
NH:
The rally/dead cat bounce continued yesterday
NH:
but the FTSE 100 is down this morning
NH:
not by much
NH:
off 19.5 points at 4,360
BE:
profit taking?
NH:
yeah, some of that
NH:
mind you I am surprised how well the equity market is taking things in the bond world
NH:
such as
NH:
the implied yield for Three Month T—Bills trading negative for the first time since 1940
NH:
investors actually paying the US govt for the privilege of owning US debt
BE:
and then there was that auction of 4 week bills
BE:
0%
BE:
$30bn at 0%
BE:
and demand for it was huge
NH:
for anyone who wants to know more about this
NH:
check Sam’s post on the site earlier
NH:
anyway, very few people in the equity market seem to have woken up to all this
NH:
and the fact that the bond market is doing a much better job of highlighting the risks out there at the moment
NH:
and that seems to be a mad dash to park cash in ultra safe assets
NH:
although a lot of this seems to be coming from money market managers trying to send out a reassuring message to their investors at the year end
NH:
apparently $100bn of cash has flowed into institutional money market funds in the past month
BE:
Sure – but with yields down there can’t you make an argument that equities are beginning to look decent value?
NH:
i suppose it does
NH:
but then again, what are T-Bills are 0% telling us about the outlook for growth, inflation
BE:
Got a bit of comment on this bond stuff?
NH:
Paste away
BE:
It’s interesting to note that when we first published our “100 years of corporate bond returns” note back in 2005 we made the frivolous point that for Treasury yields to produce returns in the next 5-10 years anything like those seen over the previous 25
years then yields would have to fall into negative territory.
years then yields would have to fall into negative territory.
However overpriced risk assets were relative to their long-term averages at the time, we couldn’t have imagined that 3 years later we would be reporting on actual negative Treasury yields.
BE:
That’s Deutsche Bank
BE:
Well this is what happened overnight as 3-month Treasury bills traded with a negative
yield yesterday for the first time. This follows Monday’s auction where 3-month bills
were sold at a discount rate of just 0.005%, the lowest level since the Treasury started
auctioning them in 1929. In addition yesterday also saw 4-week Treasury bills
auctioned with a 0% discount and given that these securities have only been
auctioned since 2001 it is no surprise that this represents the lowest level they have
been sold at.
yield yesterday for the first time. This follows Monday’s auction where 3-month bills
were sold at a discount rate of just 0.005%, the lowest level since the Treasury started
auctioning them in 1929. In addition yesterday also saw 4-week Treasury bills
auctioned with a 0% discount and given that these securities have only been
auctioned since 2001 it is no surprise that this represents the lowest level they have
been sold at.
BE:
Looking further out the curve both 2yr and 10yr US yields were around 10bps lower
although they still remain above last Thursday’s historic lows. It certainly seems clear
that the flight to quality trade still has some legs as investors still appear happy to park
their funds in safe havens as we close in on the end of the year despite the fact that
we’ve recently seen a healthy equity market rebound and that they provide little in the
way of value.
although they still remain above last Thursday’s historic lows. It certainly seems clear
that the flight to quality trade still has some legs as investors still appear happy to park
their funds in safe havens as we close in on the end of the year despite the fact that
we’ve recently seen a healthy equity market rebound and that they provide little in the
way of value.
At the risk of sounding like somewhat of a broken record we again
highlight from our more recent version of “100 years of corporate bond returns” that
the last time Treasury yields were at or close to current levels (1940s and 1950s) we
saw four successive decades of negative real returns for Treasuries.
NH:
that’s an interesting stat
BE:
Given the continued flight to quality it was not entirely surprising to see US equities end the day in negative territory especially given the recent spate of profit warnings.
NH:
actually I have some more comment
NH:
and this one might need a bickie
Reminder to readers – you can scroll up to read earlier parts of the chat and the window will stop scrolling automatically. When you’re ready to continue, scroll back down to the bottom or click resume.
NH:
from Momument Securities
NH:
but it is well worth reading
NH:
While once again attention will revert to market volatility, the sharp
disinflationary trend in China, the NIESR’s suggestion that UK Q4 GDP will
contract by more than 1.0% q/q and the fact that 3-month US T-Bill rates
traded at zero, even negative yields gives plenty for idle market minds to
contemplate, and highlights the level of apoplectic fear that is gripping
some investors. In that view we would be keen to re-emphasize the following
points on the current government bond rally.
disinflationary trend in China, the NIESR’s suggestion that UK Q4 GDP will
contract by more than 1.0% q/q and the fact that 3-month US T-Bill rates
traded at zero, even negative yields gives plenty for idle market minds to
contemplate, and highlights the level of apoplectic fear that is gripping
some investors. In that view we would be keen to re-emphasize the following
points on the current government bond rally.
NH:
1) It is simple enough to rationalize away the colossal rallies that we have
seen in government bonds via way of the deluge of totally dire economic data
from around the globe, which in turn is driving expectations of rates being
slashed to near zero in many G7 countries. Throw in a hefty measure of
associated concerns about deflation, and government bonds are in the middle
of “a perfect storm”.
seen in government bonds via way of the deluge of totally dire economic data
from around the globe, which in turn is driving expectations of rates being
slashed to near zero in many G7 countries. Throw in a hefty measure of
associated concerns about deflation, and government bonds are in the middle
of “a perfect storm”.
NH:
2) That is however rather too simplistic, even if it is valid. There are
other critical factors:
other critical factors:
NH:
a) The decision by the Fed/Treasury to start buying up GSE debt prompted a
sharp flattening of the US Treasury curve, as short position hedges against
Agency/MBS holdings were unwound.
sharp flattening of the US Treasury curve, as short position hedges against
Agency/MBS holdings were unwound.
NH:
b) The deluge of government / FDIC guaranteed short dated paper has seen
hefty switching out of normal governments into these quasi govt bonds
hefty switching out of normal governments into these quasi govt bonds
NH:
c) We are already well into quantitative easing in the UK and US, even
though no officials have really bothered to term it as such, but if one
argues that quantitative easing (be it implicit, e.g. current US policy, or
explicit, e.g. Japan in the early part of the decade) as being measures that
involve the outright purchase of assets shares, bonds, etc. as opposed to
repo-ing of assets, then it is difficult to deny that quantitative easing is
in process.
though no officials have really bothered to term it as such, but if one
argues that quantitative easing (be it implicit, e.g. current US policy, or
explicit, e.g. Japan in the early part of the decade) as being measures that
involve the outright purchase of assets shares, bonds, etc. as opposed to
repo-ing of assets, then it is difficult to deny that quantitative easing is
in process.
NH:
d) Despite all the liquidity measures and the boost to bank capital, as
well as all the rate cutting, credit availability does not appear to have
improved, and it does appear that we are entering or more likely are already
in a liquidity trap (i.e. banks are unwilling to lend, so the central bank’s
newly-created liquidity is “trapped” behind unwilling lenders).
well as all the rate cutting, credit availability does not appear to have
improved, and it does appear that we are entering or more likely are already
in a liquidity trap (i.e. banks are unwilling to lend, so the central bank’s
newly-created liquidity is “trapped” behind unwilling lenders).
NH:
e) Last but not least position unwinding and ongoing deleveraging is
creating colossal anomalies, e.g. the collapse last week in EUR 50 yr swap
rates, attributed variously to the fear that a 2y/30y EUR Swap spread at
flat could trigger another round of swap receiving, whilst one has to give
much credence to the idea that gamma hedging from exotic desks drove the
move as well, e.g. CMS structures and receiver swaptions due for expiry soon
forcing the writers of these structures / swaptions to buy long-dated
Treasuries.
creating colossal anomalies, e.g. the collapse last week in EUR 50 yr swap
rates, attributed variously to the fear that a 2y/30y EUR Swap spread at
flat could trigger another round of swap receiving, whilst one has to give
much credence to the idea that gamma hedging from exotic desks drove the
move as well, e.g. CMS structures and receiver swaptions due for expiry soon
forcing the writers of these structures / swaptions to buy long-dated
Treasuries.
NH:
3) Be that as it may, there are increasing risks for conventional government
bonds, and these offer some strong suggestions that parking money in T-Bills
for no yield is not a ‘mattress money’ strategy, but one that is fraught
with a number of risks.
bonds, and these offer some strong suggestions that parking money in T-Bills
for no yield is not a ‘mattress money’ strategy, but one that is fraught
with a number of risks.
NH:
a) The world may well be facing an economic slump, but once rates in
the G7 countries have got close to zero, there will be few if any incentives
to chase microscopic yields, even if risk appetite and bank balance sheets
remain impaired.
the G7 countries have got close to zero, there will be few if any incentives
to chase microscopic yields, even if risk appetite and bank balance sheets
remain impaired.
NH:
b) Ratings downgrade risk: this applies most obviously to the very
over-borrowed UK and US governments, with what would be some nasty potential
knock-on effects on to government guaranteed bank debt.
b) Ratings downgrade risk: this applies most obviously to the very
over-borrowed UK and US governments, with what would be some nasty potential
knock-on effects on to government guaranteed bank debt.
NH:
c) The haphazard and hurried approach to most of the government
stimulus packages around the globe exponentially raises the risk of policy
errors, with one error compounded by the next, and the possibility that any
short-term disinflation will be followed a protracted period of inflation.
stimulus packages around the globe exponentially raises the risk of policy
errors, with one error compounded by the next, and the possibility that any
short-term disinflation will be followed a protracted period of inflation.
NH:
d) As Mr Lewis highlighted last week in his piece on “A Treasuries
Bubble”:
Bubble”:
“Would it matter if an asset price bubble developed in the Treasuries
market? When the Fed stoked the equity market in the wake of LTCM, the
result was a serious misallocation of capital, with funds flowing
indiscriminately into commercially unsound ‘dotcom’ ventures. The distress
and economic dislocation that followed the bursting of the housing bubble
are plainly evident. By contrast, a Treasuries bubble might, at first
glance, seem wholly benign. It simply reduces the cost to the taxpayer of
the borrowing the US Treasury is undertaking in order to pay for relief
measures in the financial sector and for fiscal stimuli to the economy. It
would not necessarily distort the allocation of capital.
NH:
sorry that is a bit long and complicated
BE:
Looks like you played the bickie too early
NH:
but interesting
NH:
and deserves a bickie I think
NH:
BICKIE
11:19AM
BE:
Right, after that macro magnum opus, can we move on to some stock specific stuff?
NH:
we can
NH:
what about Rio Tinto
BE:
biggest riser in the FTSE 100 at the moment
BE:
Up 155p at 1413p
BE:
the big cost cutting plan seems to have gone done well
NH:
it does
NH:
and for those of you who might have missed the details
NH:
Rio has finally woken up from its post BHP bid paralysis
NH:
and decided it needed to communicate with the market about its huge debt position
NH:
and make no mistake it is huge
NH:
and what it plans to do it about
NH:
and the upshot is this
NH:
Rio is pledging to cut net debt by $10bn by the end of 2010
NH:
and it plans to do this by
NH:
cutting cap ex next year from $9bn to $4bn
NH:
and in 2010 cap ex to move to maintenance levels
NH:
unless there has been an improvement in the outlook for metals prices
NH:
going to cut $2.5bn of operating costs
NH:
primarily by axing 13% of its workforce
NH:
that’s 14,000 jobs – 8,500 contractors and 5,500 employees
BE:
nice
NH:
oh
NH:
and the dividend is going to be held at 2007 level of 136 cents
NH:
and Rio is going to consider selling more assets
NH:
in addition to the ones already on the block
BE:
good summary
BE:
and the analysts love this
BE:
lots of upgrades etc
NH:
hmmm
NH:
that’s funny because most of the broker I have talked to
NH:
said the conference call was a disaster
NH:
the CEO Albanese really struggled
NH:
neither he or RIO could offer any detail on its plans
NH:
the feeling is that this announcement was cobbled together to stop the rot in the share price
NH:
and it has been quite some rot
NH:
look
NH:
NH: here’s
NH:
We have just heard that unlike Christmas past, it is definitely the ghost of Christmas present at this morning’s meeting…
- Vague answers on Rights Issue, but said ‘for now, they are capital adequate.
- No answers on disposals, and little guidance for any optimism. – Management response and confidence were poor to say the least. – Immediately, the large houses are glossing over and said it went okay, but they just want the corporate fees, the Australian press tomorow will destroy them….BEWARE.
- Vague answers on Rights Issue, but said ‘for now, they are capital adequate.
- No answers on disposals, and little guidance for any optimism. – Management response and confidence were poor to say the least. – Immediately, the large houses are glossing over and said it went okay, but they just want the corporate fees, the Australian press tomorow will destroy them….BEWARE.
BE:
NH:
and this
NH:
I listened to the RIO Aussie press call – I thought it went very badly
to be honest. Albanese refused to answer most questions:
to be honest. Albanese refused to answer most questions:
NH:
Q. Have you held discussions on asset sales/what stage are you at?
A. We can’t be specific but we take what we wrote in the statement very
seriously.
A. We can’t be specific but we take what we wrote in the statement very
seriously.
Q. Well have you had talks?
A. Yes preliminary ones.
Q. Can you meet debt targets without asset sales?
A. We are comfortable with our financial position
Q. How deep is the pool of buyers for assets?
A. There is a pool of those who are attracted to high quality assets.
Not spoken to BHP about buying assets.
Q. Can you give us geographical break down of job cuts?
A. No
Q. Rights issue plans?
A. Lots of talking but key sentences were “circumstances within our
control” and “no current plans”.
Q. Do you have support of the board
A. Yes
NH:
Albanese said “the world has changed” a lot during the call especially
when asked how investors can trust these figures.
when asked how investors can trust these figures.
BE:
Wow. All very amusing.
BE:
but as I said earlier
BE:
the big house love this morning’s statement
BE:
although, given the pounding the Rio price has had
BE:
I reckon they would have been looking for a bigger pop in the share price this morning
BE:
14% seems pretty feeble when they have halved in the space of three weeks
NH:
it does
BE:
anyway here’s the analyst comment
BE:
starting with Merrill, who have upgraded to buy
BE:
Rio Tinto has announced a commitment to reduce net debt by US$10 billion by
end 2009. In their first detailed communication to the market since the
termination of the BHP Billiton bid, Rio Tinto have announced plans to reduce
their net debt by US$10 billion by end 2009 from current levels (end October) of
US$38.9 billion. In terms of net debt reduction per share this is almost £5/share,
i.e. about 40% of the current share price. We believe that the market will perceive
the announced plan as credible.
end 2009. In their first detailed communication to the market since the
termination of the BHP Billiton bid, Rio Tinto have announced plans to reduce
their net debt by US$10 billion by end 2009 from current levels (end October) of
US$38.9 billion. In terms of net debt reduction per share this is almost £5/share,
i.e. about 40% of the current share price. We believe that the market will perceive
the announced plan as credible.
Debt reduction plan in brief
The debt reduction is to be achieved through means we have previously
discussed: Reducing capex from US$9 billion to US$4 billion; Reduce
controllable operating costs by at least US$2.5 billion per year in 2010. Reduction
in global headcount of 14,000 roles (8500 contractor, 5500 employee). Dividends
to be held at 2007 levels of USc136 – no 20 percent uplift in 2008 and 2009.
Expanded scope of assets targeted for divestment including significant assets not
previously highlighted for sale. We believe this is likely to be either Coal and
Allied (Australian coal) or ERA (Uranium) but don’t rule out a potential sale of the
Grasberg stake to the Chinese or an equity investment into Iron Ore.
BE:
Rio Tinto has underperformed its main peer
Since BHP’s offer for Rio Tinto was withdrawn, BHP is up 18%, Rio Tinto is down
49% i.e. 57% relative underperformance. We still don’t rule out an eventual rights
issue but believe that investors should / would be happy to subscribe to deeply
undervalued equity in what in the end, we see as largely a quality set of assets
Since BHP’s offer for Rio Tinto was withdrawn, BHP is up 18%, Rio Tinto is down
49% i.e. 57% relative underperformance. We still don’t rule out an eventual rights
issue but believe that investors should / would be happy to subscribe to deeply
undervalued equity in what in the end, we see as largely a quality set of assets
BE:
And this is from Liberum
BE:
Rio Tinto have today unveiled their post BHPB deal break debt reduction plan.
The announcement is more comprehensive than the capex plan expected by
the market, detailing $5bn of capex cuts in 09 as well as cost cutting ($2.5bn
from 2010) and some production guidance. Divi to be held at 2007 levels (a
relief) and scope of asset sales to be broadened. Overall commitment is for
net debt to fall by $10bn in 2009 from current level of $38.9bn.
The announcement is more comprehensive than the capex plan expected by
the market, detailing $5bn of capex cuts in 09 as well as cost cutting ($2.5bn
from 2010) and some production guidance. Divi to be held at 2007 levels (a
relief) and scope of asset sales to be broadened. Overall commitment is for
net debt to fall by $10bn in 2009 from current level of $38.9bn.
BE:
Key points:
Capex reduction in 2009 from $9bn to $4bn implies only $2bn of growth capex
being executed in 2009. 2010 capex to be even lower at sustaining levels in the
absence of a recovery in markets.
Operating cost reduction plan of $2.5bn by 2010 led by 14,000 job cuts (vs
current 97,000 employees or c.50,000 ex the packaging and engineering
products businesses of Alcan). Such a big cull a very big event for conservative
RIO. Other savings from consolidation of HQs and slower exploration spend. FX
effects on lower costs highlighted – they say since Jul 1 FX moves have offset
half of the fall in commodity prices.
Divi held at 136c (7.3% yield) so the feared cut and/or the equity issue did not
materialise. This $1.6bn pa will be funded by cost cutting, so debt reduction left
to disposals and FCF generation.
Net debt in line at $38.9bn – no changes to sub 3% terms. Highlighted
current cost of debt is sub 3% (so v efficient to hold it) and it ticks only a little on a
ratings downgrade.
Increased scope to disposals: Minerals, US coal and and ali sales still “in
process” with new disposal candidates added to the list.
Pension Fund has $1bn unfunded liability (in line)
Production guidance should give comfort on iron ore in particular. RIO
reiterate FY2008 guidance for iron ore and suggest 2009E sales of 200mt (in line
with 2008 and our new assumptions). Ali to be 5% down YoY.
BE:
Copper in line.
Rio Tinto has continued to underperform BHPB and its more financially secure peers
in the run up to this announcement despite some recent evidence of Chinese destocking coming to an end and a mild improvement in spot steel and iron ore prices.
Although the company has yet to deliver on its promises laid out today, the 7.3%
yield and PER of 3.3x should surely be enough to get investors back into the stock.
Though it is terrifically difficult to call, we have a positive view on this cycle and are
tentative buyers of both the sector and the leveraged plays which have failed to
participate in this recent rally
Rio Tinto has continued to underperform BHPB and its more financially secure peers
in the run up to this announcement despite some recent evidence of Chinese destocking coming to an end and a mild improvement in spot steel and iron ore prices.
Although the company has yet to deliver on its promises laid out today, the 7.3%
yield and PER of 3.3x should surely be enough to get investors back into the stock.
Though it is terrifically difficult to call, we have a positive view on this cycle and are
tentative buyers of both the sector and the leveraged plays which have failed to
participate in this recent rally
BE:
And finally Caz
BE:
Overall a reassuring update from Rio Tinto which should be reflected in a bounce in the shares today following significant underperformance since the collapse of the BHP Billiton deal on concerns over financing. With the cuts to capex etc outlined above, there now appears to be sufficient capacity to meet the upcoming debt repayments ($8.9bn in Oct 09 and $10.5bn in Oct 2010) from internal sources and existing facilities even if it proves impossible to refinance any of the facilities in the term market which should calm market fears around a possible rights issue. Even under a bear case scenario they should still be able to meet the repayment. There is an additional theoretical 7% and 35% upgrade to our net earnings forecasts for 2009 and 2010 respectively pre unannounced volume and disposal effects. This leaves the stock trading on much more attractive valuation metrics than post the BHP Billiton withdrawal. The stock is trading on PER and EV/EBITDA multiples of 3.7x and 3.4x respcitvely for 2009 – a 17% discount to BHP Billiton which grows to 26% on spot number see below. We would expect the market to follow Australia overnight and close this discount by c.10%. Our longer term in line recommendation remains for the moment.
NH:
thanks for all that. for some reason that statement seems to have given the rest of the miners a boost
Xstrata (XTA:LSE): Last: 688.50, up 37.5 (+5.76%), High: 697.00, Low: 672.50, Volume: 6.46m
Antofagasta (ANTO:LSE): Last: 441.25, up 19.5 (+4.62%), High: 441.75, Low: 424.50, Volume: 1.04m
Kazakhmys (KAZ:LSE): Last: 248.75, up 9.5 (+3.97%), High: 255.00, Low: 240.00, Volume: 1.81m
Vedanta Resources (VED:LSE): Last: 638.50, up 22 (+3.57%), High: 654.00, Low: 618.00, Volume: 635.04k
NH:
seems slightly odd
NH:
not much good news in the Rio statement as far as I can see other than the face people will be mothballing production
NH:
and not starting any new products
NH:
but the guidance on production does not look good
NH:
that said
NH:
as Dre notes, perhaps the miners are tracking Dryships or the Baltic Dry Index
NH:
which has rallied hard in the past couple of days
NH:
Izy is about to do a post on this
NH:
and her thesis that it is an Obama bail trade
NH:
pretty much
NH:
that should be up soon
11:32AM
NH:
moving on
NH:
retailers, which were surprisingly strong in the wake of dreadful BRC figs yesterday
NH:
are under a bit of pressure
NH:
check these prices
Marks and Spencer Group (MKS:LSE): Last: 231.50, down 12 (-4.93%), High: 245.75, Low: 226.50, Volume: 6.15m
Next (NXT:LSE): Last: 1,077, down 47 (-4.18%), High: 1,135, Low: 1,040, Volume: 1.28m
BE:
yep
BE:
seems this plan by Marks to abandon one day 20% off sales
BE:
has gone done very badly
BE:
spooked a number of people
NH:
it has
NH:
rumours of profits warning in the air
NH:
and of a price war
BE:
urgh
NH:
actually rumours floating around this morning that Zaavi could be in trouble
NH:
and JJB delayed results and then filed a pretty dismal set of numbers
BE:
But they look like they might have a bit of breathing space on the debt
NH:
that’s true
NH:
stock still off though
JJB Sports (JJB:LSE): Last: 9.82, down 1.18 (-10.73%), High: 12.00, Low: 9.21, Volume: 2.51m
NH:
but back to M&S
NH:
view is that prices cuts from MKS in the run up to Xmas are bad news
NH:
here’s what Oriel Securities think
NH:
Flush with the success of its first 20% off day, M&S appears to have fared less well with
last week’s event and there are suggestions of severe overstocking following a poor
November.
last week’s event and there are suggestions of severe overstocking following a poor
November.
In a worrying change of strategy M&S is set to move to full scale discounting (20 to 30%
off) across a number of product categories in the run into Christmas
NH:
We have been concerned for some time that the ranges on the general merchandise side
were failing to excite an increasingly cautious consumer
were failing to excite an increasingly cautious consumer
On the food side we suspect even the very low margin ‘Dine in for £10′ has failed to halt
the loss of market share on the food side of the business
As a result, we are taking our gross margins down by 60bps in the general merchandise
business and 70bps in food to reflect what we believe is now a serious stock overhang
The effect is to take £50m off pre tax forecast to March 2009 to £590 and £40m off March
2010 forecasts to £530m, on 9.2x reduced 2009 eps, we reiterate our SELL
BE:
I have been hearing much the same thing
BE:
although there is a big, bad bearish note around on the retailers this morning from Morgan Stanley
BE:
and they really do not like M&S
BE:
or Kesa
BE:
Or Dixons
BE:
here’s a flavour of the note
BE:
and be prepared, it’s pretty gloomy
BE:
It’s bad. Christmas is shaping up to be the worst in many,
many years. Deloitte’s Retail Survey, BRC and John
Lewis sales trends all suggest that Christmas retail sales
will contract compared with last year’s record level. We
forecast that total (not LfL) retail sales as reported by the
BRC will fall by 1% in December. However, we expect
inflation-buoyed food sales (+5.0%) to be masking very
weak non-food performance (-6.7%).
many years. Deloitte’s Retail Survey, BRC and John
Lewis sales trends all suggest that Christmas retail sales
will contract compared with last year’s record level. We
forecast that total (not LfL) retail sales as reported by the
BRC will fall by 1% in December. However, we expect
inflation-buoyed food sales (+5.0%) to be masking very
weak non-food performance (-6.7%).
BE:
Potentially very bad. Worryingly, we believe that many
retailers have entered the crucial Christmas selling
period with too much stock. Most retailers will have
been ordering their Christmas stock since July, two
months before consumer expenditure turned down
sharply following the HBOS and Lehman Brothers crises.
As a result, we believe that profitability will come under
significant pressure from both lower sales and higher
discounting – a dangerous combination when coupled
with 2-3% cost inflation.
retailers have entered the crucial Christmas selling
period with too much stock. Most retailers will have
been ordering their Christmas stock since July, two
months before consumer expenditure turned down
sharply following the HBOS and Lehman Brothers crises.
As a result, we believe that profitability will come under
significant pressure from both lower sales and higher
discounting – a dangerous combination when coupled
with 2-3% cost inflation.
BE:
Marks & Spencer, Kesa and DSG International are
most likely to disappoint. We believe that those
retailers most at risk are those who expect a second half
improvement in performance due to a softer comp base
and those exposed to big-ticket discretionary items such
as electricals.
most likely to disappoint. We believe that those
retailers most at risk are those who expect a second half
improvement in performance due to a softer comp base
and those exposed to big-ticket discretionary items such
as electricals.
BE:
Sainsbury and HMV could surprise positively.
Although we continue to believe that HMV faces severe
structural problems, its competitive position has been
strengthened by the collapse of Woolworths and supply
problems at Zavvi. As the highest-quality mainstream
supermarket, we believe that Sainsbury will benefit from
consumers trading down from M&S and Waitrose, but
still wanting to celebrate Christmas with ‘quality food’.
Although we continue to believe that HMV faces severe
structural problems, its competitive position has been
strengthened by the collapse of Woolworths and supply
problems at Zavvi. As the highest-quality mainstream
supermarket, we believe that Sainsbury will benefit from
consumers trading down from M&S and Waitrose, but
still wanting to celebrate Christmas with ‘quality food’.
BE:
Still cautious on retail as a whole. For those looking
to play retail from a top-down perspective, we
recommend a cautious position in General Retail in early
January with a view to rebalancing on any over-reaction
to negative trading statements. However, on a
12-month view, we believe that both food retailers (price
deflation) and general retailers (overcapacity) face
significant problems, which may still not be fully reflected
in share prices.
to play retail from a top-down perspective, we
recommend a cautious position in General Retail in early
January with a view to rebalancing on any over-reaction
to negative trading statements. However, on a
12-month view, we believe that both food retailers (price
deflation) and general retailers (overcapacity) face
significant problems, which may still not be fully reflected
in share prices.
NH:
thanks for that, we need a quick recap on share prices in the retail sector I think
Marks and Spencer Group (MKS:LSE): Last: 231.25, down 12.25 (-5.03%), High: 245.75, Low: 226.50, Volume: 6.22m
Next (NXT:LSE): Last: 1,077, down 47 (-4.18%), High: 1,135, Low: 1,040, Volume: 1.30m
Kesa Electricals (KESA:LSE): Last: 100.00, down 5 (-4.76%), High: 106.50, Low: 98.00, Volume: 992.09k
DSG International (DSGI:LSE): Last: 14.50, up 1.75 (+13.73%), High: 14.50, Low: 13.00, Volume: 22.49m
NH:
hang on a minute
NH:
DSG is up
NH:
what is that all about?
BE:
As Tuna notes …
BE:
There’s a kamikaze call from Nomura today
BE:
they reckon it won’t go bust
BE:
and the shares are undervalued by around 200%
BE:
and yes
BE:
the analyst did stand up in the morning meeting and say all of that with a straight face
NH:
whose the analyst
BE:
hang on
BE:
will drag out the note
BE:
Fraser Ramzan I think
BE:
here’s what he said
BE:
DSGi is priced to fail, in our view. We believe the probability of this is over-stated, and see significant upside potential to DSGi’s share price. We therefore upgrade the stock to a Buy rating. DSGi has a number of strategic options, including disposals which could help to raise cash, pay down debt and increase headroom versus covenants. This will see DSGi trade through peak and allow it to execute its transformation plan. Execution of the plan will be key as the market continues to deteriorate. Failure to execute effectively could see further downside risk. We believe management is well positioned to see DSGi through the cycle.
BE:
Summary
Step 1: Strategic disposal of Swedish warehouse (£50m) reduces debt and interest payments.
Step 2: Disposal of Italian operation, improves covenant ratios.
Step 3: Cash efficiencies (£30m) and focus on debtors, potential to improve cash availability.
Step 4: Store refit uplifts (c.20%) highlight strongoperational potential.
Step 5: £75m cost removal, potential for further savings.
BE:
Think that’ll do for that one.
NH:
just seeing if i can get a price on the DSGI CDS
NH:
hang on seeing if Reuters can bring it up
NH:
and while we are on the retailers
BE:
Aha – this is likely to be a bit out of date …
BE:
Oh, hang on, we’re still trying to work the Reuters …
NH:
a couple of weeks back it was a distressed levels
NH:
(FKA watch the language pls)
NH:
right couple more things on the retailers
NH:
apparently there is a price war in toys
BE:
Ok – good
NH:
this is from a friendly broker
NH:
Mothercare (Buy, TP 430p)/Home Retail ~ Toy Wars. Following generally weak demand, late Xmas build-up, discounting at Woolies and over optimistic forecasts for demand, the big grocers have aggressively cut toy prices, often to below cost price. Argos, Debenhams and other seasonal players have also reacted aggressively with promotions and discounts to stay in the game. The price war is expected to last another 7-10 days but this depends on the retailers being able to get stocks back in line. This is a negative for Home Retail which is a big player in the Xmas toy market. Although Mothercare has a pretty small Toy mix, the ELC acquisition has increased its exposure to this competition. However, we have heard reports that suggest traditional toys are selling better than modern imports, which is an ELC focus and differentiator. Notwithstanding the dynamics of each business, the sudden and sharp reduction in prices across the industry is likely to weigh on sentiment in toy retailers. With both Mothercare (MTC +15%) and especially Home Retail (HOME +30%) having run ahead in the last 10 days we see scope for the bad news to reverse the gains.
NH:
and also worth keeping an eye on Game Group
BE:
Why’s that then?
NH:
Electronics Arts issued a profits warning overnight
NH:
and in spite what you may have read
NH:
demand for expensive computer games is being affected by the slowdown
NH:
all of which has an interesting read across to Game Group
Game Group (GMG:LSE): Last: 127.00, down 5.5 (-4.15%), High: 134.75, Low: 127.00, Volume: 748.17k
NH:
An after-hours warning from US games publisher, Electronic Arts, highlighted three
incrementally negative points. 1. US retailers are reducing inventories more rapidly
than anticpated underscoring the impact of the weaker US (read UK) consumer. 2.
An increasing polarisation to top-10 games titles risks ceding some of the
“specialist” competitive advantage vs supermarkets. 3. A global shift to on-line
game play would threaten to dis-intermediate retailers. While the last two points are
slow-burn (witness HMV), the portents are not positive.
incrementally negative points. 1. US retailers are reducing inventories more rapidly
than anticpated underscoring the impact of the weaker US (read UK) consumer. 2.
An increasing polarisation to top-10 games titles risks ceding some of the
“specialist” competitive advantage vs supermarkets. 3. A global shift to on-line
game play would threaten to dis-intermediate retailers. While the last two points are
slow-burn (witness HMV), the portents are not positive.
NH:
In response we revise our
numbers by 10% for Jan-09 to reflect a weaker Christmas, and by 20% for Jan-10 in
anticipation of negative LFLs. Trading on 7x Jan-10 EPS, with earnings risk to the
downside, we remain on the sidelines. HOLD.
n EA warning: Electronic Arts, the publisher of titles such as FIFA Soccer, Rock Band
and Madden NFL, warned after hours in the US, withdrawing guidance. While we
believe this is not the first time that EA has lowered expectations, and that the warning
may reflect the relative weakness of its line-up, aspects of its commentary and call can
be read-across to GMG and other industry particpants.
numbers by 10% for Jan-09 to reflect a weaker Christmas, and by 20% for Jan-10 in
anticipation of negative LFLs. Trading on 7x Jan-10 EPS, with earnings risk to the
downside, we remain on the sidelines. HOLD.
n EA warning: Electronic Arts, the publisher of titles such as FIFA Soccer, Rock Band
and Madden NFL, warned after hours in the US, withdrawing guidance. While we
believe this is not the first time that EA has lowered expectations, and that the warning
may reflect the relative weakness of its line-up, aspects of its commentary and call can
be read-across to GMG and other industry particpants.
NH:
Lowering Jan-09, Gaming not immune: Games recent update alluded to a
deceleration in LFLs as we approach the festive season. While admittedly reflecting the
weakness of the US consumer, EA’s comments on a lower inventory build, and
therefore lower retail sales expectations, have resonance in the UK. We now expect
1% 2H LFLs (FY 8%) as the tighter retail environment adds to the impact of the 3G
console cycle.
deceleration in LFLs as we approach the festive season. While admittedly reflecting the
weakness of the US consumer, EA’s comments on a lower inventory build, and
therefore lower retail sales expectations, have resonance in the UK. We now expect
1% 2H LFLs (FY 8%) as the tighter retail environment adds to the impact of the 3G
console cycle.
NH:
Revising Jan-10 with negative cash gross margins: In anticpation of negative LFL
exit rates for FY Jan-09 we now factor in -7.5% LFLs for Jan-10 (mid-range for 5 to
10% down), partially offset by a stronger gross margin from a higher proportion of
software in the sales mix.
n Shift to Top-10 and on-line represent emerging risks : EA cited a flight by
consumers to Top-10 titles and away from its ‘catalogue’ as a contributing factor. While
this primarily reflects the strength of its roster, such a trend would also begin to erode
the competitive advantage of retail specialists (vs supermarkets) in stocking a broad
range. EA’s conference call Q&A also highlighted an “ongoing (global) shift to online
game play” which if sustained could threaten to dis-intermediate retailers from
segments of the market. Our new target price is 135p.
exit rates for FY Jan-09 we now factor in -7.5% LFLs for Jan-10 (mid-range for 5 to
10% down), partially offset by a stronger gross margin from a higher proportion of
software in the sales mix.
n Shift to Top-10 and on-line represent emerging risks : EA cited a flight by
consumers to Top-10 titles and away from its ‘catalogue’ as a contributing factor. While
this primarily reflects the strength of its roster, such a trend would also begin to erode
the competitive advantage of retail specialists (vs supermarkets) in stocking a broad
range. EA’s conference call Q&A also highlighted an “ongoing (global) shift to online
game play” which if sustained could threaten to dis-intermediate retailers from
segments of the market. Our new target price is 135p.
NH:
oh, that was from Numis
BE:
Interesting stuff. If the gold-plated Fifa / Tiger Woods franchises are suffering, there’s no helping the rest.
NH:
that’s true
NH:
mind you these games are expensive
NH:
and the top of the range playstation is not cheap
BE:
Typical credit card purchase, I’d suggest.
BE:
So late stage discretionary, perhaps.
11:48AM
BE:
Anyway, while we’re on the subject of suicidal analyst calls …
NH:
go on
BE:
There’s a buy call out on Taylor Wipeout
NH:
what
NH:
from who
NH:
has he been sectioned
BE:
From Robin Hardy, at KBC Peel Hunt
BE:
Who has a reputation of being a bit contrarian
NH:
so what’s he saying?
BE:
Does a debt swap leave anything on the table?
Lenders want more than a rate adjustment to provide a lifeline –
they want participation. But a complex debt structure means a
complex swap. Assessing the remnant valuation post-swap is
difficult as the two key variables (amount swapped and strike
price) fall within a wide range. However, destruction of value has
already been so great that the NAV in most debt swap scenarios
is well above the current price. For those with enough appetite
for risk, the return on TW as a warrant could be considerable.
We move from Hold to BUY; with a 24p share price target.
Lenders want more than a rate adjustment to provide a lifeline –
they want participation. But a complex debt structure means a
complex swap. Assessing the remnant valuation post-swap is
difficult as the two key variables (amount swapped and strike
price) fall within a wide range. However, destruction of value has
already been so great that the NAV in most debt swap scenarios
is well above the current price. For those with enough appetite
for risk, the return on TW as a warrant could be considerable.
We move from Hold to BUY; with a 24p share price target.
NH:
so buy for the debt equity swap
NH:
that’s quiet a contrarian call
BE:
Isn’t it. Here’s a bit more.
BE:
The case for worthless equity is limited. If the lenders play hard ball and
demand repayments of the £1.6bn on the breach, the game is up – if the USPP
debt holders call their loans, TW does not readily have the £380m required. The
only option would be to render up the entire company to the lenders. This recalls
Marconi in 2002, when the board handed over 99.5% of the equity. However, we
think the banks want to avoid having a mass of housing assets on their balance
sheets, and the pension scheme deficit potentially undermines their position.
demand repayments of the £1.6bn on the breach, the game is up – if the USPP
debt holders call their loans, TW does not readily have the £380m required. The
only option would be to render up the entire company to the lenders. This recalls
Marconi in 2002, when the board handed over 99.5% of the equity. However, we
think the banks want to avoid having a mass of housing assets on their balance
sheets, and the pension scheme deficit potentially undermines their position.
BE:
Debt swaps allow a re-focus on gross asset value. TW’s gross (debt-free) asset
value is £3.9bn. With £700m of debt swapped and a further £1bn written off land,
the net asset value could be as high as £2bn. The per-share division of this ranges
widely, but with the share price having fallen so far already, most of the post-swap
valuation scenarios deliver an NAV per share materially above the current share
price level. Our base case NAV is 24p fully discounted, and this sets our share
price target.
Large swap, high dilution. If TW pre-emptively offers up a large amount of equity,
dilution could be lessened. By negotiation, the lenders might be persuaded to take
equity at the prevailing market price or even a small premium, appreciating the
unwinding effect on the share price of eliminating a large part of the debt. In this
note, we run scenarios on the impact of a larger swap, concluding that for a wellstruck
deal, the remnant NAV should be twice the current share price.
Smaller swap, pricier debt. Recent press speculation has suggested that the
banks will take a smaller stake (<10%) as part of a package focused on re-pricing
the debt plus fees and charges to waive covenants. The margin on the debt is likely
to be at least 500bp (and perhaps as much as 1000bp) over LIBOR, plus fees that
could easily run to 250bp. It is hard to see a small stake sufficing, unless it is the
initial slice of a later and much larger participation. The uncertainty on ultimate
dilution would make valuation difficult (if not impossible) in this case.
value is £3.9bn. With £700m of debt swapped and a further £1bn written off land,
the net asset value could be as high as £2bn. The per-share division of this ranges
widely, but with the share price having fallen so far already, most of the post-swap
valuation scenarios deliver an NAV per share materially above the current share
price level. Our base case NAV is 24p fully discounted, and this sets our share
price target.
Large swap, high dilution. If TW pre-emptively offers up a large amount of equity,
dilution could be lessened. By negotiation, the lenders might be persuaded to take
equity at the prevailing market price or even a small premium, appreciating the
unwinding effect on the share price of eliminating a large part of the debt. In this
note, we run scenarios on the impact of a larger swap, concluding that for a wellstruck
deal, the remnant NAV should be twice the current share price.
Smaller swap, pricier debt. Recent press speculation has suggested that the
banks will take a smaller stake (<10%) as part of a package focused on re-pricing
the debt plus fees and charges to waive covenants. The margin on the debt is likely
to be at least 500bp (and perhaps as much as 1000bp) over LIBOR, plus fees that
could easily run to 250bp. It is hard to see a small stake sufficing, unless it is the
initial slice of a later and much larger participation. The uncertainty on ultimate
dilution would make valuation difficult (if not impossible) in this case.
NH:
(Dre the only UK shoe company I can think of that is still listed is Stylo)
BE:
Anyway, I’m going along to KBC tomorrow so we can’t be too rude about them.
NH:
ah yes
NH:
not that’s interesting
NH:
Bryce trying his hand at trading
BE:
Indeed – KBC are letting a shower of journalists loose on the floor to run their own books.
BE:
Hopefully will be able to live blog the results on tomorrow’s ML.
NH:
that sounds like fun
NH:
who are you up against
NH:
we must smash the times and telegraph
BE:
Not sure yet. But I’d assume most of the papers will be sending representation.
11:53AM
BE:
So do we have any RAW for the readers?
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH:
a few bits but before we look at them – what is going on with 3i
NH:
price being absolutely flattened as we chat
NH:
down 38.2p at 317.25p
NH:
has a portfolio company gone bust??
NH:
right back to some raw
NH:
rumours circulating about a capital raising coming in the property sector
BE:
Any names?
NH:
well, one that is being mentioned is Land Securities
NH:
but this is all very RAW indeed
NH:
so RAW that it is still walking around a field and grazing on the grass
BE:
NH:
and it could all be done to this gloomy note out of Morgan Stanley
BE:
What, another one?
NH:
yep
NH:
this is on commercial property
NH:
which because of the problems David Ross has been experiencing is in sharp focus at the moment
NH:
basically they have crunched their numbers on commercial property again
NH:
and have come up with some scary numbers on negative equity
BE:
Got the note?
NH:
yep
NH:
here it is
NH:
Quick comment on the effect of more bearish
expectations for the UK commercial property
market on negative equity on UK commercial
property loans
expectations for the UK commercial property
market on negative equity on UK commercial
property loans
NH:
Back in August we published our analysis of negative
equity on property loans that were extended at the peak
of the commercial property boom (see Waiting for the
big recapitalisation trade, 20th August 2008). Since then,
expectations for falls in commercial property values in
the UK have increased significantly, so we have re-run
our analysis.
equity on property loans that were extended at the peak
of the commercial property boom (see Waiting for the
big recapitalisation trade, 20th August 2008). Since then,
expectations for falls in commercial property values in
the UK have increased significantly, so we have re-run
our analysis.
NH:
A simple re-run of our analysis, allowing for the
deterioration in the total return swap market’s
expectations for falls in the value of UK commercial
property to the end of 2009, shows an increase in total
negative equity from £13 billion to £41 billion, and an
increase in the amount of negative equity at risk from the
need to refinance rising sharply from £2.6 billion to £8.2
billion (see Exhibit 1).
deterioration in the total return swap market’s
expectations for falls in the value of UK commercial
property to the end of 2009, shows an increase in total
negative equity from £13 billion to £41 billion, and an
increase in the amount of negative equity at risk from the
need to refinance rising sharply from £2.6 billion to £8.2
billion (see Exhibit 1).
NH:
However, since August, the total return swap market’s
expectations for capital growth in 2010 have turned
negative, increasing the total expected downside in
capital values, and extending the period over which we
have to consider the impact of debt refinancings by a
year. Consequently, we have extended our modelling
period to end-2010 (see Exhibit 2). This results in an
increase in the negative equity by the end of the period
to £54 billion, and essentially a doubling of the amount of
negative equity that is vulnerable owing to debt
refinancings to £16 billion.
expectations for capital growth in 2010 have turned
negative, increasing the total expected downside in
capital values, and extending the period over which we
have to consider the impact of debt refinancings by a
year. Consequently, we have extended our modelling
period to end-2010 (see Exhibit 2). This results in an
increase in the negative equity by the end of the period
to £54 billion, and essentially a doubling of the amount of
negative equity that is vulnerable owing to debt
refinancings to £16 billion.
NH:
as you can see things are getting pretty bleak
NH:
and with £16bn of refinancing
NH:
I guess rights issues can’t be ruled out
NH:
actually I have a bit more RAW
BE:
Go on
NH:
Henderson Group
BE:
The fund manager?
NH:
yep, the shares have been strong this morning
NH:
currently trading up 5.25p at 58p
NH:
now there are rumours that it could be takeover target for Resolution
NH:
which has started full trading today
BE:
How’s that going?
NH:
pretty well acutally
NH:
issued at 100p
NH:
now at 115p, up 2.25p on the day
NH:
now, we have been hearing for a few weeks, that Clive Cowdery at Resolution
NH:
is not looking to buy an insurer
NH:
but a fund manager
NH:
obviously F&C Asset Management has been mentioned
BE:
and now Henderson
NH:
and it would make some sense
NH:
according to our former colleague Sarah Spikes
NH:
now at Arden Partners
NH:
Henderson is the top performer in the mid-cap today, up 14% as Resolution starts unconditional dealing.
NH:
While there has been no statement about which companies Resolution will approach, Henderson, as an asset manager, is seen as a possible target, and Resolution is a catalyst for speculation in the UK and continental European asset management sector.
NH:
Henderson’s valuation has declined in recent weeks relative to others in asset management. It has underperformed Aberdeen by 25% since mid-September and has underperformed Schroders by some 40% (also since mid-September).
NH:
Henderson is now trading on a 2009 PE of 6.9X, while Schroder is on 14.3X and Aberdeen is on 10.3X.
11:59AM
NH:
crikey it is midday
NH:
the end of the session and we have not even talked about the banks
NH:
and there are some interesting pieces of commentary around today
NH:
such as this from Sandy Chen at Panmure
NH:
and it starts with a quote from Blackadder, which is always good
NH:
“This is a large crisis”
NH:
“In fact, if you’ve got a moment, it’s a twelve-storey crisis with a magnificent
entrance hall, carpeting throughout, 24-hour portage, and an enormous sign
on the roof, saying ‘this is a large crisis’”. -
entrance hall, carpeting throughout, 24-hour portage, and an enormous sign
on the roof, saying ‘this is a large crisis’”. -
BE:
NH:
of course that is not the complete quote
NH:
which you can find here
NH:
http://www.youtube.com/watch?v=QnSDDXtd5qI
BE:
Excellent stuff. Pencils up the nose references from a teenage scribbler.
NH:
and pants on head
NH:
all before they go over the top in the final Goodbyeee’ episode
BE:
What does the note say anyway?
NH:
hang on
NH:
still laughing at the You Tube clip
NH:
We think the mutually reinforcing combination of deflation and deleveraging
will lead to a deadly spiral of falling prices, bad debts, credit contraction and
bankruptcies that will take years to play out. Banks’ shareholders will bear
the brunt of the pain; big Keynesian bailouts will only deepen and prolong
this crisis, in our view.
will lead to a deadly spiral of falling prices, bad debts, credit contraction and
bankruptcies that will take years to play out. Banks’ shareholders will bear
the brunt of the pain; big Keynesian bailouts will only deepen and prolong
this crisis, in our view.
NH:
We believe that the sheer pace and scale of central bank rate cuts worldwide points to a global concern about deflation. This concern is valid: underneath the torrent of micro and macro newsflow, the havoc that can be wreaked by the mutually reinforcing combination of deflation and deleveraging looms.
NH:
Over the past two decades, both the US credit markets debt/GDP ratio and the UK M4
lending/GDP ratio have more than doubled. In the current environment, we expect that both lenders and borrowers – being only sensible – will reverse this trend, with banks tightening their lending criteria even further, and borrowers paying down their debts first and thinking about consumption and investment later. Expected result: stagnant top lines and falling asset prices.
lending/GDP ratio have more than doubled. In the current environment, we expect that both lenders and borrowers – being only sensible – will reverse this trend, with banks tightening their lending criteria even further, and borrowers paying down their debts first and thinking about consumption and investment later. Expected result: stagnant top lines and falling asset prices.
NH:
As prices fall further, we expect more loan covenants will be breached, leading to more bankruptcies and more forced selling, putting more cash flows (both individual and corporate) under pressure. The expected result is further deleveraging and deflation, and further economic contraction.
NH:
Against this, there seems to be an almost worldwide consensus that the Keynesian fiscal and monetary policies being implemented (including moves towards quantitative easing) are good and necessary things, on the view that a lot of cash (read: sovereign debt) will stop this downward spiral.
NH:
We disagree. From a Hayekian economic viewpoint, bailouts could both deepen and
prolong the crisis, by sending conflicting signals to consumers, savers and investors.
Thus, instead of a recovery for the UK economy (and its banks) in 2009, we expect the opposite: further economic contraction and a further rise in bad debts and bankruptcies.
prolong the crisis, by sending conflicting signals to consumers, savers and investors.
Thus, instead of a recovery for the UK economy (and its banks) in 2009, we expect the opposite: further economic contraction and a further rise in bad debts and bankruptcies.
NH:
We have pushed through further forecast downgrades for all our UK banks (including
HSBC and STAN), and we have cut most of our price targets again. We maintain our
Sell recommendations on all the UK banks except for LLOY-HBOS, which we have
downgraded to Hold on our top-down view.
HSBC and STAN), and we have cut most of our price targets again. We maintain our
Sell recommendations on all the UK banks except for LLOY-HBOS, which we have
downgraded to Hold on our top-down view.
BE:
(Escarriot – think I read yesterday that the trailing PE on the FTSE 100 is 7.something, the lowest since the thirties.)
NH:
right, we have LIBOR
NH:
actually it came out a while ago
NH:
but we started late and are playing catch up this morning
NH:
*DJ 3-Month Euro Libor Fixed At 3.3775%, Vs 3.42% Tuesday
BE:
(although obviously the historic data’s on the FT30, or whatever it was called.)
NH:
DJ 3-Month Sterling Libor Fixed At 3.24813%, Vs 3.28125% Tues
NH:
DJ 3-Month USD Libor Fixed At 2.09875%, Vs 2.16375% Tuesday
NH:
actually talkling of LIBOR
NH:
Alex Potter at Collins Stewart has penned a note this morning
NH:
he reckons there is a LIBOR trading opportunity
NH:
buy banks as the spread narrows
NH:
here’s his thinking
NH:
Spread of Libor over base has been closing
At this stage of 2007, the spread of Libor (the London interbank offered rate – we use the main 3-month metric) over base moved aggressively wider as banks “dressed” balance sheets for the year-end. The spread subsequently recovered through late-December and moved close to zero in 1Q08. However, this was simply a pull-forward effect in the general ongoing widening trend. This year, concerted central bank liquidity provisions across the OECD, as well as
At this stage of 2007, the spread of Libor (the London interbank offered rate – we use the main 3-month metric) over base moved aggressively wider as banks “dressed” balance sheets for the year-end. The spread subsequently recovered through late-December and moved close to zero in 1Q08. However, this was simply a pull-forward effect in the general ongoing widening trend. This year, concerted central bank liquidity provisions across the OECD, as well as
NH:
spread actually closing for the last 8 weeks.
NH:
Bank sector performance well-correlated with this spread
In aggregate, the sector has declined broadly in line with the widening of the Libor-base spread. The correlation broke down this time last year as the market looked-through the pull-forward effect of banks dressing balance sheets for year-end. The correlation has again broken down but in the opposite direction – the spread has narrowed even as the banks have fallen.
In aggregate, the sector has declined broadly in line with the widening of the Libor-base spread. The correlation broke down this time last year as the market looked-through the pull-forward effect of banks dressing balance sheets for year-end. The correlation has again broken down but in the opposite direction – the spread has narrowed even as the banks have fallen.
NH:
Recent breakdown due to recapitalisations
We feel this breakdown is driven by the fact that the sector has been going through the painful process of recapitalisation. Barclays and RBS have now completed that process. The HBoS and Lloyds TSB recapitalisations are broadly synchronised with the delisting of HBoS, both occurring in the week commencing 12-Jan-09. In short, the process will be completed for all the banks in the next month.
We feel this breakdown is driven by the fact that the sector has been going through the painful process of recapitalisation. Barclays and RBS have now completed that process. The HBoS and Lloyds TSB recapitalisations are broadly synchronised with the delisting of HBoS, both occurring in the week commencing 12-Jan-09. In short, the process will be completed for all the banks in the next month.
NH:
Correlation likely to re-assert itself in coming weeks
Even if the Libor-base spread does not continue to narrow (though we would obviously hope it does), we feel that the bank sector’s correlation with this spread is well founded in the fundamentals of their business models. Once the indigestion of recapitalisations pass, we can see the sector moving back up to re-assert the correlation. The sector certainly has much pain yet to bear from the impending recession and rapid NPL formation but we can foresee a short-term trading opportunity over the coming weeks.
Even if the Libor-base spread does not continue to narrow (though we would obviously hope it does), we feel that the bank sector’s correlation with this spread is well founded in the fundamentals of their business models. Once the indigestion of recapitalisations pass, we can see the sector moving back up to re-assert the correlation. The sector certainly has much pain yet to bear from the impending recession and rapid NPL formation but we can foresee a short-term trading opportunity over the coming weeks.
NH:
HBoS and RBS show stronger correlations
Aside from the simple loan-deposit analysis and its linkage to the Libor-base spread, the measured correlation of stock prices with this spread show HBoS (Trading Buy, target price: 131p) as best-correlated followed by RBS (Trading Buy, TP 87p), Lloyds TSB (Hold, TP 217p) then Barclays (Sell, TP 172p) well behind. On this basis, we can see the reversion trade being led by RBS (which has completed its recapitalisation) and HBoS (which remains a cheap way into Lloyds TSB). We would be Trading Buyers of both stocks.
Aside from the simple loan-deposit analysis and its linkage to the Libor-base spread, the measured correlation of stock prices with this spread show HBoS (Trading Buy, target price: 131p) as best-correlated followed by RBS (Trading Buy, TP 87p), Lloyds TSB (Hold, TP 217p) then Barclays (Sell, TP 172p) well behind. On this basis, we can see the reversion trade being led by RBS (which has completed its recapitalisation) and HBoS (which remains a cheap way into Lloyds TSB). We would be Trading Buyers of both stocks.
BE:
Right – is that the lot for today?
NH:
well, Izy has been talking about gold
NH:
which drew my attention to Highland Gold
BE:
Oh yeah.
NH:
which is controlled by a certain R Abramovich
NH:
shares off 14% at 40.75p
NH:
seems he has been forced to shelve most of it development plans
NH:
anyway, that it is for today
NH:
Bryce will be reporting live from the KBC trading comp tomorrow
BE:
Assuming their firewall allows it
NH:
hopefully the Salmonella kid will be back
NH:
and another quick reminder
NH:
***QUICK REMINDER***
Alphaville Readers World’s Worst Banker Awards, 2008, the polling booths are open till Friday.
Click on this link to cast your vote:
http://tinyurl.com/65fqu5
NH:
pls vote
NH:
are one counts
NH:
Fuld in the lead at the moment, followed by Goodwin
NH:
TB – that’s harsh
NH:
he REALLY is ill
NH:
OK, until tomorrow
NH:
and thanks for keeping it clean this morning
BE:
Oh, and thanks for all your thoughts on Jet Set Willy versus Horace Goes Skiing.
NH:
the moderation button has not been needed
NH:
NH:
that’s a good point. We never realised how many ML’ers were avid gamers
NH:
there is no debate on the cause of PM’s illness
NH:
it was the food
NH:
OK, we must wrap this up
NH:
cya
BE:
Yup. Goodbye.