Markets live chat transcript for the chat ending at 12:11 on 17 Dec 2008. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
Okay – welcome to Markets Live, FT Alphaville’s daily markets chat.
PM:
We are up and running again after yesterday’s little outage.
PM:
it wasnt maintenance
NH:
(Pedant, we had 33 comment yest)
PM:
Was a blown server
PM:
There was a big server problem – but IT worked round the clock to fix it – finally accomplished around midnight.
PM:
So we are up and running and happy and positive.
PM:
In a ZIRPY sort of way.
PM:
I should quickly say that I’m only here for a few minutes.
PM:
I have to go of to a special internal meeting that I can’t miss.
PM:
So I am going to have to leave Neil on his tod.
PM:
Hopefully, you won’t see too much deterioration in quality.
NH:
Hello?
PM:
Monkey — we had a session of sorts yesterday — but people could not comment
NH:
between overselves
NH:
actually quite refreshing
PM:
Some people mailed comments in, which we repubbed
NH:
no background noise
PM:
NH:
we discussed the shredding of the 3i share price
NH:
and its scary debt level
NH:
and there are some more flahes on 3i coming through now
NH:
obviously looking to conserve cash
NH:
3I TO CLOSE OFFICES IN HONG KONG & SHANGHAI
3i Group (III:LSE): Last: 254.00, up 11 (+4.53%), High: 259.25, Low: 234.75, Volume: 2.16m
11:07AM
NH:
so what is this meeting you are going to??
NH:
important?
PM:
its a big year end thing to do with the new FT.com
PM:
There’s lots of back end work being going on — as well as the pretty design
NH:
timley, then.
PM:
Er, yes
PM:
Though i will have to apologise to certain people for losing rag etc
NH:
Oh, you didn’t did you.
PM:
Hmm
11:09AM
PM:
A note on refreshing — as TB says…
PM:
To have ML stream properly you should avoid having any other AV pages open
PM:
Otherwise your computer will get confused
11:10AM
NH:
Before Paul departs he wants to talk about this Deutsche bond stuff
NH:
which ironically seems to be the only story in the equity market this morning
PM:
yeah, you know we are on thin ice when it comes to the bond market
PM:
Big dicussion in the LR on that
NH:
but we are trying to learn
PM:
And now we’ve got a proper bond story
PM:
Deutsche
NH:
They have refused to call a load of lower tier II bonds – and everyone has gone beserk.
NH:
The convention is that this sort of paper is called by a bank at the earliest opportunity – and then re-issued.
NH:
But Deutsche has just let these bonds roll over and turn into FRN.
NH:
And everyone’s furious.
PM:
yep
PM:
Here’s some research on the matter from BarCap
PM:
We expect Deutsche Bank’s (DB) surprise decision today not to call its
Lower Tier 2 (LT2) bonds (EUR1bn 3.875% ’14c09) to rattle valuations of bank bonds with callable structures globally, as investors adjust to the higher probability that other banks will follow DB’s lead. Simply put, while the impact DB’s move is still unclear, in our view banks can now very easily cite the precedent that has been set by DB as a reason not to call if it does not make economic sense for them to do so. In view of prevailing spread levels and market conditions, we would, in fact, be surprised if a number of banks did not follow DB. In terms of pricing impact, after months of speculation, arguably a lot of the extension risks are already priced in. Even so, we believe that a revision of expectations will still have a notable impact on the valuation of some shorter-dated structures as these are repriced closer to maturity.
Lower Tier 2 (LT2) bonds (EUR1bn 3.875% ’14c09) to rattle valuations of bank bonds with callable structures globally, as investors adjust to the higher probability that other banks will follow DB’s lead. Simply put, while the impact DB’s move is still unclear, in our view banks can now very easily cite the precedent that has been set by DB as a reason not to call if it does not make economic sense for them to do so. In view of prevailing spread levels and market conditions, we would, in fact, be surprised if a number of banks did not follow DB. In terms of pricing impact, after months of speculation, arguably a lot of the extension risks are already priced in. Even so, we believe that a revision of expectations will still have a notable impact on the valuation of some shorter-dated structures as these are repriced closer to maturity.
PM:
In Asia, we believe the availability of local market funding alternatives and, increasingly, the extent of regulatory pressure will be a major factor influencing the banks’ decisions on whether or not to call. The extension risk to Asian LT2 bonds will be tested in Q1 09, with EON Bank, Bank Danamon Indonesia (BDI), Woori Bank and Industrial Bank of Korea (IBK) all facing first call date on LT2 issues. Our base case is that the banks will still call their bonds, but also acknowledge that extension risks have risen across the board.
PM:
And here is Roberto Henriques of JP Morgan on the matter
PM:
We believe the decision taken by Deutsche Bank to extend a LTII instrument (DB 3.875% €14) is a negative and potentially transformational move for the European bank capital market, which we think creates a powerful precedent which may condition the behavior of other European issuers. We think that there are likely to be implications both for DB and
for the wider market, in particular for deeply subordinated capital instruments where ‘reputation risk’ has formed the basis of investor rationale with regard to callable bank capital instruments.
for the wider market, in particular for deeply subordinated capital instruments where ‘reputation risk’ has formed the basis of investor rationale with regard to callable bank capital instruments.
PM:
Our base case for callable LTII is that these instruments would be called at the first call date, a thesis which has held up relatively well with few exceptions. Given the increased regulatory focus on Tier I capital, we expected issuers to have greater flexibility in calling LTII instruments which represent ‘lower quality’ bank capital instruments and which
provide a lower degree of financial flexibility. Under these circumstances, our expectation was that an issuer with a comfortable Tier I should encounter limited resistance from a regulator when calling such instruments. This rationale would have extended to DB which with a Tier I ratio of 10.3% as at Sep’08 should theoretically have had no difficulty
in getting any type of regulatory approval to call the LTII instrument. We therefore think that the decision taken by Deutsche Bank to extend a LTII instrument may be more indicative of balance sheet pressures, rather than the mere exercising of an ‘in-the-money’ option. We think that with the extension of the LTII bond, DB is running the risk that this may be seen as more symptomatic of capital and funding pressures which the institution may be facing, rather than just an opportunistic capital optimisation strategy. In this instance we would expect some
pressure on the institutions with increased risk premia on the back of such investor concerns.
provide a lower degree of financial flexibility. Under these circumstances, our expectation was that an issuer with a comfortable Tier I should encounter limited resistance from a regulator when calling such instruments. This rationale would have extended to DB which with a Tier I ratio of 10.3% as at Sep’08 should theoretically have had no difficulty
in getting any type of regulatory approval to call the LTII instrument. We therefore think that the decision taken by Deutsche Bank to extend a LTII instrument may be more indicative of balance sheet pressures, rather than the mere exercising of an ‘in-the-money’ option. We think that with the extension of the LTII bond, DB is running the risk that this may be seen as more symptomatic of capital and funding pressures which the institution may be facing, rather than just an opportunistic capital optimisation strategy. In this instance we would expect some
pressure on the institutions with increased risk premia on the back of such investor concerns.
PM:
We think that the biggest impact may be across the more deeply subordinated parts of the capital structure, where the benefits of extending callable instruments are even more pronounced, both in terms of refinancing costs and structure, with perpetual instruments not losing any regulatory capital effectiveness and clearly never needing to be refinanced. Clearly having a major European issuer extending a callable capital instrument does create a powerful precedent and one which we think will reduce some of the pressure that other issuers may have felt previously. Under these circumstances, the first extension by a major, benchmark issuer does become transformational for the market and could cause the market to reprice to a worst case scenario. For LTII, we think that the impact may be more limited given that in most instances these instruments were being priced to final maturity, rather than first call.
PM:
Quickly add that a good table from JPM has just gone up on the home page
PM:
Bascially details every bank capital note that is callable in 2009
PM:
to the reader that forwarded that. Very usefull
to the reader that forwarded that. Very usefullNH:
and Tracy has just sent this over from Dresdner
NH:
Deutsche Bank’s decision not to exercise the call option of one of its LT2 bonds could be the final nail in the coffin of the callable LT2 asset class
NH:
We questioned already the viability of this asset class before as the natural buyers base had already largely disappeared and LT2 has no loss absorption characteristics.
NH:
We expect all callable debt to reprice today, as bondholders will likely value these bonds to maturity or perpetuity from now onwards. We reiterate our strong preference for senior over subordinated debt.
Deutsche Bank will not exercise its call option on its LT2 bond, callable in January 2009 and maturing in 2014 (ISIN: DE0003933511).
Deutsche Bank will not exercise its call option on its LT2 bond, callable in January 2009 and maturing in 2014 (ISIN: DE0003933511).
NH:
Deutsche argues that refinancing costs are more expensive and that calling will not serve the best interest of its stakeholders, on balance.
NH:
We think the longer term implications could be potentially very negative for the banking sector as investors are likely to price callable bonds to either maturity or perpetuity going forward, implying that future financing costs increase significantly. Essential for the future of the market will be whether other banks in the sector follow Deutsche’s example, or whether this decision turns out to be an exception.
NH:
Now a major bank has broken a longstanding taboo, we think the latter is less likely. Also, we doubt whether this decision is the right strategy at a time that banks need to strengthen the capital base. Not honouring investor expectations will make it more difficult for banks to attract fresh capital, we think.
NH:
Call options in regulatory capital, both Tier 1 and Tier 2, have been based on the arbitrage of regulatory needs, tax and investor requirements. Despite the extreme nature of current market conditions, markets are likely to regard Deutsche’s move as a profound shift
NH:
The ‘unwritten’ rule regarding a borrower’s obligation to call, whatever the circumstances, has been broken and that trust is likely to be very difficult to rebuild.
It may be that with spreads at c.400bp, investors will be prepared to take a more positive view of call options due in 5 years time and hence accept call options on the basis that spreads are going to be much tighter in future. But, this is a long shot, in our view.
It may be that with spreads at c.400bp, investors will be prepared to take a more positive view of call options due in 5 years time and hence accept call options on the basis that spreads are going to be much tighter in future. But, this is a long shot, in our view.
NH:
More likely is further weakness in LT2, the effective death of the 10 non-call 5 structure, and very close attention needs to be paid to the call options in perpetual debt too. If others follow Deutsche’s example, the ground rules for regulatory capital as we have known them so far, may changed for good.
NH:
We questioned many times in the past the relevance of LT2 in the bank capital structure as the asset class does not have any loss absorption features. Natural buyers of callable LT2, like SIVs and conduits, have already largely disappeared, and we think that the decision taken by Deutsche could actually be the final nail to the coffin. We expect callable subordinated debt to reprice today on the back of the news and reiterate our strong preference for senior bank debt.
PM:
Who says we don’t do fixed income and credit on ML?
NH:
(Taxloss, you were virtually banned for the day, after making a comment of a sexual nature that involved Michael O’Leary)
NH:
hang on, a broker has just sent over an interesting flash on Taylor Wipeout
NH:
*BUILDING MAGAZINE CITES EMPLOYEE LETTER FROM CEO REDFERN
*TAYLOR’S DEFAULT RISK `MATERIALLY’ REDUCED, BUILDING REPORTS
*TAYLOR WIMPEY SEES REFINANCE BY END OF FEBRUARY, BUILDING SAYS
*TAYLOR’S DEFAULT RISK `MATERIALLY’ REDUCED, BUILDING REPORTS
*TAYLOR WIMPEY SEES REFINANCE BY END OF FEBRUARY, BUILDING SAYS
NH:
now, Buillding Magazine has not been the most reliable of sources
NH:
so beware
Taylor Wimpey (TW:LSE): Last: 9.70, down 0.1 (-1.02%), High: 10.00, Low: 9.67, Volume: 2.32m
PM:
Right — ive got to run Neil — if i can sneak back out will do so
PM:
Seeya later
PM:
Keep yer fingers off the zapper
NH:
(FKA we have a story on the site)
NH:
I will
NH:
it is only comments of a sexual nature that we have had to ban
NH:
insults and the normal reader abuse is fine
11:18AM
NH:
OK, Paul really has gone
NH:
and I am flying solo now
NH:
in full control of ML
NH:
feel the power
11:18AM
NH:
Right, Paul J Davies on the Capital Marekts desk has been in touch
NH:
he is our expert on this Deutsche bond move
NH:
and this thoughts are
NH:
This Deutsche business is very interesting for us debt market geeks. Essentially, these kinds of intruments were always a bit of a game – the rating agencies got to call them “equity-like” because they had this perpetual feature, but everyone else called them “debt” because they have what was meant to be a punitive step-up in their coupon rates after a non-call period, normally five or ten years.
NH:
This Deutsche bond would be among the first such “hybrid debt intruments” ever issued. They became hugely popular with banks and insurance companies and with a few corporates like, (I’ll send this in a second…)
NH:
The fact theat DB has opted not to call its bond tells us a couple of interesting things. Firstly, that the cost of issuing a replacement instrument is so expensive right now that it is cheaper for DB to pay the “punitive” coupon rate (in Deutsche’s case this is three-month Euribor plus 88 basis points – or roughly 4 per cent). This is what Deutsche means in its statement when it says ” In light of the fact that the early redemption option is not in-the-money,”
NH:
We have been expecting that someone would opt not to call one of these notes, but I’m not sure anybody expected it would be a bank as big and seemingly as stable as Deutsche. So the second thing it tells us is that if refinancing is too expensive for Deutsche, it will definitely be too expensive for lots of other, less atteactive banks and insurers.
NH:
For investors, this is likely to be bad news if you mark your book to market because the prevailing market yeild must be higher than that on the hybrid, hence as with all debt the price must be marked down.
NH:
Thanks for that Paul
NH:
expect more in tomorrow’s paper on this
11:20AM
NH:
back to Wipeout for a moment
NH:
getting more stuff through on this mysterious CEO letter
NH:
Analysts have said that an internal email sent by Taylor Wimpey chief
executive Pete Redfern to staff on 12 December suggests an increased
likelihood of a refinancing deal in the new year.
executive Pete Redfern to staff on 12 December suggests an increased
likelihood of a refinancing deal in the new year.
NH:
In a letter to staff, Redfern said debt talks with lenders are
progressing well and that a formal deal is likely by the end of
February.
progressing well and that a formal deal is likely by the end of
February.
NH:
One analyst said: “It doesn’t mean they are out of the woods, but it
looks like they’ll get a lifeline. It could be that he expected this
email to be leaked and is a parting shot to the City before it closes
down for Christmas.”
One analyst said: “It doesn’t mean they are out of the woods, but it
looks like they’ll get a lifeline. It could be that he expected this
email to be leaked and is a parting shot to the City before it closes
down for Christmas.”
NH:
The letter in full reads as follows:
NH:
“Dear all,
“Given that our share price is ‘somewhat volatile’ and that over the
last few weeks we have had more press coverage than if Angelina Jolie
gave birth to Siamese twin chimpanzees, I thought it was time for a
further update.
“We have had a very productive couple of weeks on our debt negotiations
with our banks and US lenders, significantly increasing our confidence
of reaching an acceptable solution for the company. We have also had our
first meetings with Eurobond representatives, which have been
constructive and sensible.
NH:
“There is still plenty of water to go under the bridge, as there are is
a formal process to go through that will probably run until roughly the
end of February, however, the risks have reduced materially.
a formal process to go through that will probably run until roughly the
end of February, however, the risks have reduced materially.
“It is critically important that we continue to focus on our underlying
business, particularly delivering year end completions and keeping cash
outflows to a minimum – I have no doubt that you are all fully focused
on this.
NH:
“I am very proud of the way everyone has continued to pull in the same
direction through such a difficult time and again, I would like to thank
you for all the hard work. At this point, I would particularly like to
thank the Corporate team who have been heavily focussed on the debt
process over the last few months and the High Wycombe team, who have
been working hard to provide the data and support to this.
“I am very proud of the way everyone has continued to pull in the same
direction through such a difficult time and again, I would like to thank
you for all the hard work. At this point, I would particularly like to
thank the Corporate team who have been heavily focussed on the debt
process over the last few months and the High Wycombe team, who have
been working hard to provide the data and support to this.
“I would anticipate one more update before the Christmas break, which
should confirm this progress and perhaps set out the broad timetable you
can expect in the New Year.
“With best regards, Pete”
NH:
Pete
NH:
not CEO
NH:
but Pete
NH:
11:22AM
PM:
Im back!
NH:
what happened?
PM:
NH:
were you slung out?
NH:
banned
PM:
Will catch up on it later — i missed ML
NH:
were you banned?
PM:
No — I just wasnt needed there and i missed ML
PM:
it felt weird walking aroudn the building late morning — i havent had the freedom to do that for two years
PM:
Anyway — whats going on?
PM:
What’s this TW letter — it hilarious
NH:
don’t worry about that
NH:
it is just the joker Pete from Taylor Wimpey
NH:
he’s not a boss
NH:
more of an entertainer
11:26AM
NH:
let’s get back to the market
PM:
Monkey — that’s true you know
NH:
I would look like to welcome you all to Planet ZIRP
NH:
now, the American’s liked the place last night when they landed
NH:
the Dow et al shot up
PM:
Dow was up 4.2 per cent
NH:
but in Europe not so much
NH:
FTSE been down for most of the morning
NH:
now 20 points better at 4,328
NH:
which is all pretty feeble
NH:
of course the recent for the muted reaction could be nothing to do with Planey ZIRP
NH:
it could be down to the banks
NH:
which are pretty weak across the continent
NH:
BNP Paribas is off 15% on the back of its profits warning
NH:
in London
NH:
HSBC
NH:
sorry Smug Bank
PM:
Former Smug bank
NH:
is down 37.25p at 677.75p
NH:
which is a big fall for a big bank
NH:
smug or not
PM:
Why is this?
NH:
it is these fund raising rumours
NH:
they just won’t die down
NH:
in fac they are gathering pace
NH:
this all kicked off yesterday when
NH:
CLSA
NH:
said HSBC could be the next bank to raise capital
NH:
and it might need as much as $14bn
NH:
given its exposure to over-geared US consumers
NH:
and over-geared UK consumers
NH:
Now, this was pretty much rubbished in London
NH:
analysts said things like
NH:
high cash generation reduced the need for it to raise capital.
NH:
but the story seems to be gaining credence
NH:
helped by things like this
NH:
from Breaking Views
NH:
The UK bank has made it through the last 18 months without tapping either the state or its own shareholders for capital. This luxurious position may be hard to sustain. On almost every measure, HSBC is still in a robust position. Its core Tier 1 ratio is 7.8pc. Liquidity is strong too: HSBC has more deposits than loans. And the bank’s diversity has proved a huge advantage given the relative health of its Asian markets. Diversification should ensure only 10pc is shaved off HSBC’s pre-tax profits this year, according to consensus estimates.
NH:
While HSBC may not need capital, it could still benefit from a boost. It wants to fund growth while maintaining its present capital ratios and continuing to pay its $11bn (£7.1bn) dividend. That is bold for any lender in this environment, even one which can rely on retained earnings.
Nor is HSBC immune to the challenges facing the wider banking industry. Arrears on credit cards and mortgage loans made by HSBC’s US sub-prime business are shooting up. UK arrears will follow as unemployment rises. And then there are other credit-crunch nasties to insure against, like the potential $1bn hit that HSBC could take from the Madoff scandal. Of course, HSBC could always cut its dividend or let capital ratios slip if things got tough. But it would probably be loath to risk its “most favoured” status.
NH:
Broker CLSA estimates that HSBC would have to find $14bn to raise the same proportion of share-holders’ equity obtained by its Asian peers.
Rivals Royal Bank of Scotland and HBOS have lost over 90pc of their value this year. HSBC is only down 16pc. That suggests the bank is under no pressure to act, but it is an advantageous position to do so.
Broker CLSA estimates that HSBC would have to find $14bn to raise the same proportion of share-holders’ equity obtained by its Asian peers.
Rivals Royal Bank of Scotland and HBOS have lost over 90pc of their value this year. HSBC is only down 16pc. That suggests the bank is under no pressure to act, but it is an advantageous position to do so.
NH:
but the banks are also been hitting by this Deutsche news
NH:
sorry pressed the wrong button there
11:32AM
11:32AM
NH:
Libor is out
NH:
DJ 3-Month Euro Libor Fixed At 3.145%, Vs 3.2025% Tuesday
NH:
DJ 3-Month Sterling Libor Fixed At 3.0525%, Vs 3.1075% Tuesday
NH:
THREE-MONTH DOLLAR LIBOR/OIS SPREAD AT 141 BPS VS 153 BPS – REUT
NH:
LIBOR THREE-MONTH DOLLAR RATES FIX AT 1.57750 PCT V
PM:
Dollar fall is to be expected
11:33AM
PM:
Now — meant to say — could do with some help from a Spanish speaker
NH:
ah yes, this Santander story
PM:
Yes, its somewhere on this site:
http://www.elconfidencial.com/portada/indice.html
http://www.elconfidencial.com/portada/indice.html
NH:
it’s Horlicks isn’t it
PM:
yes — some who fell for Madoff’s snake oil line..
NH:
pretty recently too
PM:
Actually — here’s a snip from Bloomie
PM:
Dec. 17 (Bloomberg) — Optimal Investment Services, the hedge
fund arm of Banco Santander SA, met with Bernard Madoff’s
allegedly fraudulent investment firm a month ago, El Confidencial
Web site reported.
A senior team from Optimal traveled to New York for extensive
discussions with Madoff and came back thinking he was a genius,
the Web site reported.
A spokesman for Santander reached by Bloomberg News declined
to comment on the report. Santander said Sunday clients had 2.33
billion euros ($3.1 billion) at risk from investments with Madoff.
fund arm of Banco Santander SA, met with Bernard Madoff’s
allegedly fraudulent investment firm a month ago, El Confidencial
Web site reported.
A senior team from Optimal traveled to New York for extensive
discussions with Madoff and came back thinking he was a genius,
the Web site reported.
A spokesman for Santander reached by Bloomberg News declined
to comment on the report. Santander said Sunday clients had 2.33
billion euros ($3.1 billion) at risk from investments with Madoff.
PM:
Now, Neil and I are rubbish at languages
NH:
including english
PM:
So we couldnt find it on the el confidencial site
PM:
Maybe someone else can
NH:
talking of Horlick
NH:
very amusing post on Naked Shorts
NH:
about a revised website
NH:
at Bramdean
NH:
just getting the link
NH:
http://nakedshorts.typepad.com/nakedshorts/2008/12/robust-thorough-due-diligence-is-off.html
11:38AM
NH:
let’s return to Plant ZIRP
NH:
plenty of comment on last’s night’s incredible move from the Fed
NH:
obviously US markets really bullish about the move to quant easing
NH:
but no one seems to be asking if this will work
NH:
anyway
NH:
Here’s the thoughts of Monument Securities
NH:
But more important is the gritty determination of the Fed to
deploy quantitative easing with maximum force:
deploy quantitative easing with maximum force:
“The Federal Reserve will employ all available tools to promote the
resumption of sustainable economic growth and to preserve price
stability. …. The focus of the Committee’s policy going forward
will be to support the functioning of financial markets and stimulate
the economy through open market operations and other measures that
sustain the size of the Federal Reserve’s balance sheet at a high
level.”
NH:
Purchasing “large quantities of agency debt and mortgage-backed
securities to provide support to the mortgage and housing
markets” will also be welcomed by all, but this is not news.
securities to provide support to the mortgage and housing
markets” will also be welcomed by all, but this is not news.
The controversial item is the confirmation that the “Committee is
also evaluating the potential benefits of purchasing longer-term
Treasury securities.” It remains very unclear what the objective
of this is. In other words do they wish to:
NH:
a) target the long-term cost of money?
b) add to the monetary base by purchasing long-dated securities
with ‘freshly printed’ money?
c) bail-out the US govt by soaking up some of the deluge of
fresh supply that accompanies the current explosion in
the fiscal deficit?
or some combination of all three?
NH:
Both b) and c) are understandable in the current circumstances,
though it is questionable whether this will succeed in breaking
the ‘liquidity trap’ in which global financial markets find
themselves. As far as a) goes: this is THE recipe bar none for
the mother of all bond bear markets, because at some point this
will all have to be unwound, and hence even if successful in
lowering long-term rates in the near term, it would de facto
sow the seeds of destruction of that success.
though it is questionable whether this will succeed in breaking
the ‘liquidity trap’ in which global financial markets find
themselves. As far as a) goes: this is THE recipe bar none for
the mother of all bond bear markets, because at some point this
will all have to be unwound, and hence even if successful in
lowering long-term rates in the near term, it would de facto
sow the seeds of destruction of that success.
CONCLUSION: It looks as though the Fed has finally come clean
and sees the solution to current problems as printing money ad
infinitum to stave off deflation. It has very tacitly admitted
that if the USD goes into free fall as a result, it can only
help their current strategy. As yet, it does not appear that
they have really really given to any exit strategy (a culturally
typical move, e.g. Iraq). The end result looks likely to be
a potentially very destructive fall in the USD, and by extension
an almighty rally in commodities, which yesterday’s announcement
by the Chinese that they wish to increase “reserves of strategic
raw materials” will only exacerbate. One has to add that inflation
protection looks very cheap at current levels.
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:
this from Dresdner Kleinwort
NH:
FOMC sets low target range for fed funds and pledges to employ
balance sheet
The FOMC policy statement today is one for the history books. Pulling out
all the stops, the Fed slashed the federal funds rate target and discount
rate and pledged to “employ all available tools to promote the resumption
of sustainable economic growth and to preserve price stability.” The
statement also included an introduction to the concept of “quantitative
easing”, although those particular words were not used. The vote for
today’s action by the FOMC was unanimous.
balance sheet
The FOMC policy statement today is one for the history books. Pulling out
all the stops, the Fed slashed the federal funds rate target and discount
rate and pledged to “employ all available tools to promote the resumption
of sustainable economic growth and to preserve price stability.” The
statement also included an introduction to the concept of “quantitative
easing”, although those particular words were not used. The vote for
today’s action by the FOMC was unanimous.
NH:
And this from UniCredit
NH:
The Fed is going all out, virtually adopting a ZIRP which it expects to maintain “for some time”, and articulating more explicitly its commitment to a QE policy that it has de facto already employed in the last two months.
NH:
The statement included three key features: (1) The Fed has set a 0-0.25% target range for the Fed funds rate, and stated that it will keep exceptionally low rates for “some time”; (2) The Fed indicated it will continue to use its balance sheet to directly support economy activity, in particular household consumption and the housing market, through continued and possibly increased purchases of agency debt and mortgage backed securities, and reiterated its intention to implement the already announced Term Asset Backed Loan Facility to foster the extension of credit to households and small businesses; (3) The Fed is evaluating the possibility of direct purchases of long-term US Treasuries.
NH:
The Fed’s move represents a clear acknowledgement that the already deep recession carries further downside risks to both growth and inflation, and the statement was unambiguous in its candid assessment of the dire macroeconomic situation. The Fed sees a significant danger that the recession might be even longer than currently anticipated, eventually pushing the economy into deflation – note that the Fed made an explicit reference to its commitment to preserve price stability, which in this context is an open acknowledgment of deflation risks. Moreover, the Fed is carrying the entire burden until a new Administration can take charge and launch a substantial fiscal stimulus package, which may have contributed to the clarity of today’s statement
NH:
The move will weaken the USD further in the short term, particularly as the ECB is signaling quite clearly that it might pause in January, reluctant to accept the need to move rates below 2.0%. I still believe the harsh macro reality will eventually force the ECB’s hand, but in the meanwhile its reluctance could push EURUSD towards 1.45 by January. This is disturbing, as it will reignite fears of a more structural flight from the dollar. The move to ZIRP will put further downward pressure on the US yield curve across maturities, with the long end supported by the possibility of direct Fed purchases and 10Y yields likely moving towards 1.5%.
NH:
The Fed’s move to decisively position itself as lender of first resort to the economy at large strengthens the chances that the US will be the first to start glimpsing the light at the end of the tunnel in the latter part of 2009 – with the help of a substantial fiscal stimulus, of course. Together with the large increase in public debt and attendant supply pressures, this should set the stage for an upward shift in yields towards the end of next year.
NH:
actually we should probably have a quick look at the dollar
PM:
Taken another beating against the Yen
PM:
Currently trading at 88.46
NH:
1.41 against the euro
PM:
Dunno whether this is those Power reversal thingies
PM:
$/Y
NH:
and for those of you who are wondering
NH:
the GBK
NH:
that’s weak too
NH:
0.91p vs euro
NH:
and has even lost ground against the dollar
NH:
which is quite an achievement
NH:
$1.54
PM:
NH:
which brings us on to this morning’s minutes from the Bank of England
NH:
unanimously decision to cut the repo rate by 100bp to 2%
NH:
but the BoE also discussed a bigger move.
NH:
which suggests another hefty interest rate cut is on the way at the Jan meeting of the MPC
NH:
so, us here in Blightly could be joining the US on Planet ZIRP
NH:
here’s Howard Archer of HIS Global Insight
NH:
Not only did all nine MPC members vote in favour of slashing interest rates by 100 basis points from 3.00% to 2.00% in December, but the minutes reveal that the committee considered that “a cut of at least 100 basis points was needed” and they discussed whether a larger cut was warranted. The MPC considered that without a further interest rate reduction, consumer price inflation would be likely to substantially undershoot its 2.0% target over the medium term given the sharply deteriorating UK economic performance and outlook, growing spare capacity, the ongoing dislocations in the financial markets and the worsening, synchronized downturn in global economies.
NH:
The decision not to go for an even bigger cut than 100 basis points in December was partly due to concern that this could lead to an excessive fall in sterling and could also further undermine confidence in the economy. It was also considered questionable whether there was much to be gained in cutting interest rates by more than 100 basis points given that they had now been cut from 5.0% to 2.0% in 8 weeks and this would take time to feed through to boost the economy.
NH:
The fact that the MPC considered a deeper interest rate cut in December, coupled with the ongoing evidence that the downturn is deepening and that inflationary pressures are retreating sharply, reinforces our belief that the Bank of England will reduce interest rates by at least a further 75 basis points from 2.00% to 1.25% in January. We believe that the Bank of England may moderate the pace at which it is cutting interest rates as they near zero and the previous large cuts take time to feed through. Even so, another 100 basis point reduction is certainly possible in January if the data show further serious deterioration. Further out, we expect interest rates to fall to a low of 0.50% in the second quarter of 2009 and then stay there for the rest of the year. However, it is far from inconceivable that interest rates could come all the way down to zero.
11:43AM
NH:
Paul is just looking at the Bronte Capital site
PM:
Got to be careful what I quote here….
PM:
But Bronte is one of the very best hedge bloggers around
NH:
isn’t he a lifeguard in Sydney?
PM:
Part time, yes
PM:
He’s dug out this statement from Bramdean’s annual report
PM:
The investment process is systematic and disciplined. Due diligence is at its heart and around 3-4 months are typically spent analysing a potential manager, a process which includes a number of on-site visits with that manager. The process culminates in the provision of a detailed report that is then presented to and discussed at Bramdean’s Investment Committee, where a selection decision will be made on all private equity funds, specialty funds, and transitional investments. That Committee has to approve an investment unanimously before it can proceed. Where required, Bramdean will also conduct legal diligence.
Ongoing monitoring is similarly robust and includes regular reviews of market conditions and their potential effect on the underlying funds and any direct private equity investments. In response to the conclusions drawn from this process, the Investment Committee will decide whether or not to retain an investment.
PM:
And then asks
PM:
OK – it is time for Nicola to come clean. According to Nicola 3-4 months was spent analysing the Madoff investment and a number of on-site visits were made. There was a detailed report presented at the Investment Committee.
Release that report now. Go on.
NH:
now, there’s a challenge
NH:
PM:
Lets move on
11:46AM
NH:
right time to look at some stock specific stuff
NH:
M&S
NH:
shares small up
NH:
0.5p better at 228p
NH:
which is surprising
NH:
because there are all sorts of tales swirling about poor trading
NH:
According to Nick Bubb at Pali International, for example
NH:
last week was dire
NH:
and I mean really dire
NH:
sales down as much as 20-25%
NH:
here’s his note
NH:
which makes interesting reading
NH:
think M&S is due to issue is Christmas trading update on Jan 7
NH:
but I wonder if they will have to preannounce
NH:
here’s the note
NH:
Under pressure…” (Sell: 175p target)
NH:
Industry sources indicate that M&S had an appalling week last week, with sales as much as 20-25% down on last year in some stores, with consumers clearly unimpressed by the modest promotions they had to offer last week and waiting for them to go on full Sale again.
NH:
However successful the two “20% Off Everything” One-Day Sales were on Nov 20th and Dec 4th, it looks as if they simply pulled business forward and undermined consumer trust in the brand. With Debenhams upping the promotional ante again this week, with more “Up to 50% off” discounts, M&S’s hand may be forced and they may have to have another One-Day Sale again pre-Xmas, which would destroy what’s left of their pricing power.
NH:
Either way, we need to further downgrade our LFL sales and gross margin assumptions for H2. We are sticking with our -7% LFL and -170 bp gross margin assumptions on Food in H2, but for Non-Food we are moving from -8% to -10% LFL sales in H2 (to end March) and building in more gross margin pressure (-65bps).
On this basis, ahead of the Q3 update on Jan 7th, we are cutting our full-year PBT forecast by 7% from £640m (which is much in line with consensus) to £599m (27.2p eps) and running that through to next year, cutting by 10% from £500m PBT to £450m (20.0p eps).
NH:
Is the dividend safe on this basis? Well, just about for this year, with cover of 1.2x, but the 22.5p divi won’t be covered next year and is certain to be cut. We stick to our 14p div forecast (1.4x cover) and stick to our 175p TP (for an 8% yield for 09/10 and a similar PE).
M&S has many problems, with market share under pressure in both Food and Clothing, in a fast-declining retailing market and we still think the fast-depreciating freehold properties will be worth no more than the expected net debt of £3.1bn at year-end. M&S should survive the downturn, but investors have to appreciate that we have not yet got to the bottom of the alarming earnings and dividend decline it will suffer over the next 2 years to get there. We re-iterate our Sell.
NH:
now, in the interests of balance
NH:
I must point out that that Soc Gen remain positive on M&S
NH:
not sure I agree with their thinking
NH:
especially the idea that M&S has a strong balance sheet
NH:
sure it has a lot of property
NH:
but it also has a lot of debt
NH:
debt that it used to fund a share buyback programme
NH:
which now looks a complete waste of money
NH:
We remain Buyers of M&S. In the context of the UK non-food
retail sector, M&S has a strong balance sheet. Moreover, the shares have ceased to
react in a meaningful way to negative earnings forecast momentum (see chart on page
retail sector, M&S has a strong balance sheet. Moreover, the shares have ceased to
react in a meaningful way to negative earnings forecast momentum (see chart on page
NH:
2). We view M&S as a key cyclical recovery play for 2009. Target price of 282p
maintained. Our TP now represents a 13.8x P/E in calendar 2009 compared to the
sector on 9.4x, but we think a premium P/E should be applied to trough EPS at this
point, given the strong cyclicality of this company.
maintained. Our TP now represents a 13.8x P/E in calendar 2009 compared to the
sector on 9.4x, but we think a premium P/E should be applied to trough EPS at this
point, given the strong cyclicality of this company.
NH:
Next events & catalysts
NH:
staying with the retailers
NH:
there is some surprising news this morning
NH:
and this really is surprising
NH:
a good set of figures from Mike Ashley’s Sports Direct
NH:
well, relatively good
NH:
ok, so the company is still heamoraging cash
NH:
and the divi has been cut by 20%
NH:
but there is no profits warning
NH:
of course things could quite easily unravel at the analyst meeting under questioning
NH:
here’s a quick round up of the numbers from Investec Securities
NH:
Underlying” interims are broadly flat, which is a better result than we had
expected given the market environment. However, despite big capex
reductions which look unsustainable, the cash position continues to
deteriorate and the interim dividend has been cut from 2.1p to 1.2p. We expect
H2 will be rocky for the sports retail industry and remain sellers.
expected given the market environment. However, despite big capex
reductions which look unsustainable, the cash position continues to
deteriorate and the interim dividend has been cut from 2.1p to 1.2p. We expect
H2 will be rocky for the sports retail industry and remain sellers.
NH:
Reported underlying profit of £51.8m excludes the forex gyrations, and reflects a
broadly flat performance from UK Retail (EBIT £54m) and a 12% increase in the
Brands division to £6.7m (with the benefit of currency gains).
broadly flat performance from UK Retail (EBIT £54m) and a 12% increase in the
Brands division to £6.7m (with the benefit of currency gains).
There are still no LFL figures given, but it looks as if UK Retail LFLs must have
been broadly flat in H1 despite the market background. We are not surprised
that the Retail gross margin improvement has ceased, therefore.
NH:
The company is warning about the impact of sourcing cost inflation and forex on
H2 margins – which given the extensive hedging activity looks odd – but still
indicating that underlying EBITDA of £135m is on target, compared with our
forecast of £119m
H2 margins – which given the extensive hedging activity looks odd – but still
indicating that underlying EBITDA of £135m is on target, compared with our
forecast of £119m
Despite an enormous decline in capex (£120m to £18m in H1) the company saw
a cash outflow of £27m in H1, leaving net debt at £478m. Consistent with the
payout at the full year, the interim dividend has been cut to 1.2p from 2.1p
NH:
Sports Direct up 3.25p at 39p
11:52AM
PM:
Cant get a word in edgeways
NH:
sorry about that
PM:
People were asking about HBOS earlier
PM:
Stock is off 2p at 70p currently
PM:
Very aggressive note from Jason Napier at Deutsche
PM:
HBOS’ recent trading update suggested a ~ £2bn pre-tax loss in Oct and Nov,
substantially driven by corporate loan losses of around 800bps annualised. We are
reducing earnings forecasts for higher bad debts, FSCS costs and lost PPI
revenues in particular and see the combined group as little better than break even
in 2009 (though forecast risk is high at present, we believe) and that capital
uncertainties will restrain share performance. Our 110p target price, 50% of
estimated tangible NAV, is reduced from 180p; Sell from Hold.
substantially driven by corporate loan losses of around 800bps annualised. We are
reducing earnings forecasts for higher bad debts, FSCS costs and lost PPI
revenues in particular and see the combined group as little better than break even
in 2009 (though forecast risk is high at present, we believe) and that capital
uncertainties will restrain share performance. Our 110p target price, 50% of
estimated tangible NAV, is reduced from 180p; Sell from Hold.
PM:
Loan loss charges up 70% QoQ
HBOS’ trading update on 12 Dec highlighted domestic loan impairment charges in
October and November of £2bn or ~327bps annualised. Within this, the
deterioration was sharpest in Corporate, booking impairments of ~810bps of loans
from 428bps in 3Q08 and 83bps in 1H08, almost 3x the 1992 recession peak of
284bps. We estimate that the group suffered a £2bn pre-tax loss during the
period, potentially reducing combined tier 1 ratios by 27bps.
HBOS’ trading update on 12 Dec highlighted domestic loan impairment charges in
October and November of £2bn or ~327bps annualised. Within this, the
deterioration was sharpest in Corporate, booking impairments of ~810bps of loans
from 428bps in 3Q08 and 83bps in 1H08, almost 3x the 1992 recession peak of
284bps. We estimate that the group suffered a £2bn pre-tax loss during the
period, potentially reducing combined tier 1 ratios by 27bps.
PM:
Part of a trend deterioration or one-off spike?
We would generally hesitate to annualise loan loss figures reported over just two
months, but evidence of a sharply weaker UK economy and lower property
recovery values is widespread. Whilst we believe much of the QoQ shift in
mortgage charges could relate to re-provisioning of existing arrears, the same
cannot be said for the Corporate losses, we believe. Though we concede that
forecast risks are arguably higher than usual at present, we see these losses as
evidence of a weaker economy and struggling HBOS loan book. Increased loan
loss provisions, FSCS costs and lost PPI revenues for the combined Lloyds
TSB/HBOS lead to our forecast of a roughly breakeven group in 2009.
We would generally hesitate to annualise loan loss figures reported over just two
months, but evidence of a sharply weaker UK economy and lower property
recovery values is widespread. Whilst we believe much of the QoQ shift in
mortgage charges could relate to re-provisioning of existing arrears, the same
cannot be said for the Corporate losses, we believe. Though we concede that
forecast risks are arguably higher than usual at present, we see these losses as
evidence of a weaker economy and struggling HBOS loan book. Increased loan
loss provisions, FSCS costs and lost PPI revenues for the combined Lloyds
TSB/HBOS lead to our forecast of a roughly breakeven group in 2009.
PM:
Price target reduced to 110p/share (previously 180p/share); Sell
We expect the group will trade at a substantial discount to its net asset value
whilst it generates low earnings and whilst a weak economic environment
suggests material risks of further capital requirements. We value Lloyds TSB at a
50% discount to forecast tangible book value per share of 216p, arriving at our
revised target price of 110p, reduced from 180p beforehand. Sell from Hold.
Key upside risks include the potential for a higher than expected tangible book
value per share for the combined Lloyds TSB/HBOS group or a significant
improvement in the UK economic outlook and debt market conditions.
We expect the group will trade at a substantial discount to its net asset value
whilst it generates low earnings and whilst a weak economic environment
suggests material risks of further capital requirements. We value Lloyds TSB at a
50% discount to forecast tangible book value per share of 216p, arriving at our
revised target price of 110p, reduced from 180p beforehand. Sell from Hold.
Key upside risks include the potential for a higher than expected tangible book
value per share for the combined Lloyds TSB/HBOS group or a significant
improvement in the UK economic outlook and debt market conditions.
PM:
I also had an interesting mail from an HBOS insider earlier 
PM:
Talking about the loan book etc
PM:
He was basically wondering whether a particular corporate loan has gone bad at HBOS very recently – causing the rest of the loan book to be marked down further
PM:
I suspect we might have more on this a bit later
NH:
is that corporate book
PM:
yep
NH:
there was huge jump impairments in the past three months
PM:
yep
NH:
but I guess Lloyds knew all about that
PM:
Course they did. Ahead of the curve Lloyds are
NH:
in fact they are not surprised by anything that comes out of HBOS
PM:
Thats why they agreed to buy HBOS and destroy their standing in the market
NH:
yeah, Blank Cheque and Daniels have destroyed a perfectly good bank
NH:
all for the promise of monopoly position in the UK banking market
PM:
hmm
NH:
which is not worth what it was
PM:
Deutsche say they wont make any proftis for the next two years
PM:
The PE is something like 65 times
NH:
Eric – you recked my bank
PM:
anyway — that’s enough bank bashing. We’ll end up in jail
NH:
that’s true
12:00PM
PM:
Nice idea from londonbus below — wreckless eric should stick
NH:
Paul Davies has been back in touch, he has spotted a very cheeky sign off in the Deutsche Bank statement
NH:
Deutsche Bank as issuer may repurchase Notes at fair market value from investors who wish to sell part or all of their holdings.
NH:
IE. if you’re willing to take a bath, we will call your notes…
NH:
which is nice touch
12:01PM
NH:
one final thing before we wrap up
NH:
couple of people been in touch asking about Wolsley
NH:
and why they are up
NH:
up 19.75p 388.75p
NH:
a gain of nearly 5.5%
NH:
apparently all down to a note out of MF Global
NH:
BUY Wolseley (TP 700p) – BREAKING OUT AGAINST THE MARKET & THE SECTOR
NH:
When looking at the performance of Wolseley against the UK market and the building sector (see Charts 1 and 2), it appears that it is on the way to break out and this despite the continued bad news from US housing. We think that the rate cut in the US yesterday, and more importantly the Fed’s buying of mortgage backed securities beforehand, should do the trick and result in solid outperformance of this highly US skewed stocks.
NH:
When you look to the USHomeBuilders’ share price performance on the day yesterday and other US construction/housing exposed stocks on a more longer-term basis, then Wolseley really should follow and outperform strongly against the sector. In addition, we believe that the benefit of a stronger US$ and € against the pound still has not been played with this stock. In our view, this is after CRH ‘the’ early cyclical to benefit from a stabilisation in US housing, albeit it has a higher level of debt and the risk of a rights issue attached. When you put all of the above in context of valuation, then we would see every reason for this stock to break out against the sector. BUY Wolseley with a TP of 700p.
PM:
Right we are done
PM:
Thanks everyone for joining us today — and for bearing with us yesterday
NH:
Have a safe trip Taxloss.
PM:
Hey, taxloss — we will miss you
NH:
Will you be returning?
PM:
have a good trip anyway
PM:
Q on ML hours over Xmas
PM:
Right, deep breath…
PM:
We will be in next Monday and Tuesday as per usual
PM:
And then we will be off….
NH:
I am in Xmas Eve for the paper
PM:
to….
PM:
Jan 5. 
NH:
crikey I am writting for Jan 2 as well
PM:
AV as a whole will be on hols from Dec 24 and Jan 4
NH:
I have got the rough end of the deal here
PM:
Hard luck Neil
PM:
Obviously if something big happens we will post on AV from home
NH:
actually RunOnTheSpot we are planning ML PM for the new year
NH:
with Stacy and I
NH:
will aim to discuss US markets and wrap up for the UK
NH:
round about 3.00pm ish
NH:
hopefully
PM:
Yep — The Neil and Stacy show
PM:
Right — got to go now
PM:
back tomorrow at 11am
NH:
cya then