Markets live chat transcript for the chat ending at 16:08 on 20 Jan 2009. Participants in this chat were: Stacy-Marie Ishmael, FT (SMI) Neil Hume, FT (NH)
SMI:
Morning
SMI:
Welcome to Alphaville NY’s inaugural (and inauguration) Markets Live
SMI:
Neil Hume is joining me from across the pond – Neil are you there?
NH:
Hello again
SMI:
Can you give us an update on the London market?
SMI:
Where’s the action?
NH:
I can
NH:
FTSE 100 now off 25 points at 4,083
NH:
been spooked by what’s happening in the US banks sector
NH:
and with companies like State Street
NH:
which has been blown out of the water know
SMI:
On poor results
SMI:
Any details on State Street?
NH:
well, looks like disappointing results
NH:
big write downs
NH:
got some notes
NH:
will dig a couple out
SMI:
Brilliant, wheel them out
SMI:
In the meantime, here’s a US markets update
SMI:
The Dow’s off 2.17 per cent at 8101.22
SMI:
Banks are really getting slammed
NH:
Bank of America
NH:
what’s that doing?
SMI:
BAC off 16.57 per cent at $5.99
SMI:
Citi down 11.43 per cent at $3.10
NH:
new york mellon
NH:
aren’t they getting hit as well
SMI:
BK – wow – off 26.48 per cent at $16.86
NH:
right, have some comment on the State Street figs
NH:
this from merrill’s
NH:
Decent EPS number, but weak TCE and lower ‘09 guidance
STT reported operating EPS of $1.18, beating consensus by a penny due to
growth in net interest income (NII), FX and sec. lending revs. However, balance
sheet issues increased in scale as unrealized losses in both the conduits and the
inv. portfolio increased significantly and drove the tangible common equity (TCE)
ratio to 1.05% post conduit consolidation (4.46% stated). Further, STT revised ’09
guidance and now expects revs. and operating EPS to be flat with ’08 (implies
EPS of around $5.20 for ’09 vs. our $4.75 estimate). Prior guidance implied EPS
growth in the upper-single digits (around $5.50-$5.60).
STT reported operating EPS of $1.18, beating consensus by a penny due to
growth in net interest income (NII), FX and sec. lending revs. However, balance
sheet issues increased in scale as unrealized losses in both the conduits and the
inv. portfolio increased significantly and drove the tangible common equity (TCE)
ratio to 1.05% post conduit consolidation (4.46% stated). Further, STT revised ’09
guidance and now expects revs. and operating EPS to be flat with ’08 (implies
EPS of around $5.20 for ’09 vs. our $4.75 estimate). Prior guidance implied EPS
growth in the upper-single digits (around $5.50-$5.60).
NH:
Income statement trends hold up well amidst challenges
NII increased 27% Q-Q on 6bp of margin expansion. Asset mgmt. and servicing
lines declined Q-Q as expected as both AUM and AUC fell 14% due to lower
market levels but pipelines remain strong with $317b of AUC and $24b of AUM to
be installed in ’09. FX and sec. lending surged Q-Q at 29% and 34%,
respectively. Management expects ’09 net interest margin and NII to be flat with
’08 levels. Cost lines were elevated in relation to strong revenues, which provides
some support to future EPS from lower discretionary spending and cost saves.
NII increased 27% Q-Q on 6bp of margin expansion. Asset mgmt. and servicing
lines declined Q-Q as expected as both AUM and AUC fell 14% due to lower
market levels but pipelines remain strong with $317b of AUC and $24b of AUM to
be installed in ’09. FX and sec. lending surged Q-Q at 29% and 34%,
respectively. Management expects ’09 net interest margin and NII to be flat with
’08 levels. Cost lines were elevated in relation to strong revenues, which provides
some support to future EPS from lower discretionary spending and cost saves.
NH:
Expect shares to be weak
While the company has indicated that it would not be raising capital currently, our
view is that the market could continue to value the shares as such. To illustrate
current valuation, we start with our $4.75 EPS estimate for ’09 and add in a $3b
equity raise at $25 to arrive at fully diluted 2009 EPS of $3.75. This implies a
current valuation of 9.7x based on Friday’s close. Should the stock trade at $25,
the shares would be valued at 6.7x the adjusted EPS estimate. This would mark a
meaningful discount to recent trading ranges and historical valuations. Our PO of
$48 is based on a 10x multiple on our existing $4.75 EPS estimate, which does
not bake in any additional capital.
While the company has indicated that it would not be raising capital currently, our
view is that the market could continue to value the shares as such. To illustrate
current valuation, we start with our $4.75 EPS estimate for ’09 and add in a $3b
equity raise at $25 to arrive at fully diluted 2009 EPS of $3.75. This implies a
current valuation of 9.7x based on Friday’s close. Should the stock trade at $25,
the shares would be valued at 6.7x the adjusted EPS estimate. This would mark a
meaningful discount to recent trading ranges and historical valuations. Our PO of
$48 is based on a 10x multiple on our existing $4.75 EPS estimate, which does
not bake in any additional capital.
SMI:
Markets not liking what they see at STT
NH:
looks like they too need capital
SMI:
Shares off 50.43 per cent at $18.02
SMI:
No sign whatsoever of that Obama-inspired exuberance some people were betting on
NH:
to put this State Street stuff into a bit of context
NH:
picked up something interesting from Dick Bove
NH:
Ladenburg
NH:
which details all the ways this company can loose money
SMI:
[CityRower - http://bits.blogs.nytimes.com/2009/01/19/the-inauguration-will-be-televised-and-twittered-streamed-flickrd/ for details]
SMI:
Neil – come on, tell
NH:
On Friday evening, State Street Corporation filed a new 8-K for the
purpose of adding new risk disclosures to its list of risk factors. The new
factors are described below. However, it is chastening to read this 31
page document which relates all of the fashions in which this company can
lose its investors money. Releasing it as this time may protect the
company but it certainly reinforces the fact that in this stock it is caveat
emptor
purpose of adding new risk disclosures to its list of risk factors. The new
factors are described below. However, it is chastening to read this 31
page document which relates all of the fashions in which this company can
lose its investors money. Releasing it as this time may protect the
company but it certainly reinforces the fact that in this stock it is caveat
emptor
NH:
The first new risk factor is that the company “may be exposed to customer
claims, financial loss, reputational damage, and regulatory scrutiny as a
result of transacting purchases and redemptions relating to the
unregistered cash collateral pools underlying our securities lending
program at a net asset value of $1.00 per share rather than a lower net
asset value based upon market value of the underlying portfolios.”
claims, financial loss, reputational damage, and regulatory scrutiny as a
result of transacting purchases and redemptions relating to the
unregistered cash collateral pools underlying our securities lending
program at a net asset value of $1.00 per share rather than a lower net
asset value based upon market value of the underlying portfolios.”
SMI:
[And here's the official inauguration schedule - http://latimesblogs.latimes.com/washington/2009/01/obama-inaugurat.html ]
NH:
This relates to the company’s decision to protect its clients in the securities
lending business from loss related to their cash float. The assumption had
been that State Street had paid out the monies in question and no new
funds would be exposed. This new risk provision raises questions as to
whether this assumption is correct or not.
lending business from loss related to their cash float. The assumption had
been that State Street had paid out the monies in question and no new
funds would be exposed. This new risk provision raises questions as to
whether this assumption is correct or not.
NH:
A second new risk factor states: “If all or a significant portion of the
unrealized losses in our portfolio of investment securities were determined
to be other-than-temporarily-impaired (OTTI), we would recognize a
material charge to our earnings and our capital ratios would be adversely
impacted.”
unrealized losses in our portfolio of investment securities were determined
to be other-than-temporarily-impaired (OTTI), we would recognize a
material charge to our earnings and our capital ratios would be adversely
impacted.”
NH:
This risk factor focuses on a core investment argument concerning State
Street. Investors do not believe that the company has properly marked-tomarket
its securities portfolio. This implies that the firm needs to
recalculate its capital with a higher accumulated other comprehensive
income (AOCI) number and that this recalculation could mean new
common equity offerings. The company has to this point argued that this is
not likely to happen and that new capital is not needed. The new risk
factor raises the issue as to whether the company has changed its mind on
this point.
Street. Investors do not believe that the company has properly marked-tomarket
its securities portfolio. This implies that the firm needs to
recalculate its capital with a higher accumulated other comprehensive
income (AOCI) number and that this recalculation could mean new
common equity offerings. The company has to this point argued that this is
not likely to happen and that new capital is not needed. The new risk
factor raises the issue as to whether the company has changed its mind on
this point.
NH:
However, the third new risk factor is the block buster. It states: “Our
business activities, including the unconsolidated asset-backed commercial
paper conduits we administer, expose us to liquidity and interest-rate risk.”
• For two years now investors have argued that State Street must
consolidate its off-balance sheet conduits. Moreover that this consolidation
will result in the need for more equity. I estimate that the consolidation
could cause the company to seek $4.8 billion in new equity or sell 140
million new shares, which may not be possible in this market.
• The company has always taken the position that this development is not
expected. The new risk factor raises the question as to whether it has
changed its mind on this issue and that consolidation may occur sooner
rather than later and force the equity raising issue to the front burner.
• In sum, nothing has outwardly changed at State Street. However the
acknowledgement of these issues at this time needs to be explained by the
company quickly.
business activities, including the unconsolidated asset-backed commercial
paper conduits we administer, expose us to liquidity and interest-rate risk.”
• For two years now investors have argued that State Street must
consolidate its off-balance sheet conduits. Moreover that this consolidation
will result in the need for more equity. I estimate that the consolidation
could cause the company to seek $4.8 billion in new equity or sell 140
million new shares, which may not be possible in this market.
• The company has always taken the position that this development is not
expected. The new risk factor raises the question as to whether it has
changed its mind on this issue and that consolidation may occur sooner
rather than later and force the equity raising issue to the front burner.
• In sum, nothing has outwardly changed at State Street. However the
acknowledgement of these issues at this time needs to be explained by the
company quickly.
SMI:
Gosh – that is a blockbuster
NH:
some interesting stuff in there
NH:
and what about the rest of the US banks
NH:
oh sorry done that
SMI:
JPM down 11.44 per cent at $20.21
NH:
jeepers almost at $20
SMI:
Fell below $20 today momentarily for the first time in about 15 years
NH:
wow
SMI:
Actually it dipped below $20 briefly in Nov too – and that’s when people thought we’d bottomed
SMI:
Someone asked for Pfizer – up 1.37 at 17.74
SMI:
Looks like people are getting into defensives here as well
SMI:
You and PM touched on that this morning on the UK end
NH:
we did
NH:
and that trend continues
Unilever (ULVR:LSE): Last: 1,633, up 25 (+1.55%), High: 1,666, Low: 1,593, Volume: 3.58m
Diageo (DGE:LSE): Last: 939.50, up 20 (+2.18%), High: 947.00, Low: 919.00, Volume: 4.43m
AstraZeneca (AZN:LSE): Last: 2,815, up 55 (+1.99%), High: 2,850, Low: 2,752, Volume: 3.50m
SMI:
What about the UK banks? How are they holding up?
NH:
since we were last on air
NH:
there has been something of a recovery
NH:
Lloyds now off just 24% at 50.4p
NH:
and Barclays down just 12.6% at 77.1p
NH:
as for RBS
NH:
they are about the same
NH:
actually
NH:
they have just gone negative
NH:
0ff 0.2p at 11.4p
NH:
the dead bounce is over
NH:
is lasted for what 7 hours
NH:
and gone
NH:
actually interesting story around in Barclays
SMI:
Spill it
NH:
well you know they refused to take money from the government in October
NH:
and decided to raise capital by issuing mandatory convertible notes
SMI:
Alida tells me Neil is one the phone – RAW on offer in a bit
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:
sorry just getting some RAW
NH:
rumours of a rights issue coming in Tullow Oil
NH:
either tomorrow
NH:
or later in the week
Tullow Oil (TLW:LSE): Last: 592.50, down 40 (-6.32%), High: 636.50, Low: 592.00, Volume: 4.41m
NH:
right, Barclays
NH:
where were we?
NH:
convertible notes
SMI:
yes – the ones they sold to their friends in the Middle East
NH:
and the talk in the market is that these can be re-priced is there is a big fall in the Barclays share price
NH:
which there has been
NH:
if that’s the case and they are repriced to the current level
NH:
if could be massively dilutive to Barclays
NH:
however, these notes don’t convert till June
NH:
so there is time
NH:
in any case
NH:
the documentation on the notes suggests that they can’t be reset
NH:
unless Barclays does a rights issue
NH:
or adjusts the nominal value of its shares
NH:
both of which are not on the cards
NH:
at the moment
NH:
here’s the relevant pars from the statement in October.
NH:
3. Details of the Mandatorily Convertible Notes
The MCNs will carry an annual coupon of 9.75%, payable quarterly in arrears, until conversion into Ordinary Shares. The MCNs will have a mandatory conversion date of 30th June 2009.
Conversion of any outstanding MCNs will occur on the mandatory conversion date and will be at the holder’s option up until the fifth business day prior to such date. The conversion price is
fixed at 153.276 pence, a discount of 22.5% to the Average Barclays Closing Price (subject to certain limited adjustment events summarised in Appendix 2).
Qatar Holding has agreed to subscribe for £500 million of MCNs and Challenger has agreed to subscribe for £300 million of MCNs. HH Sheikh Mansour Bin Zayed Al Nahyan has agreed to
subscribe for £2 billion of MCNs. Barclays Capital, Credit Suisse and JPMorgan Cazenove, who are acting as joint bookrunners, will undertake an accelerated non-underwritten bookbuild placing of up to an additional £1.5 billion of MCNs to existing institutional shareholders and other institutional investors
The MCNs will carry an annual coupon of 9.75%, payable quarterly in arrears, until conversion into Ordinary Shares. The MCNs will have a mandatory conversion date of 30th June 2009.
Conversion of any outstanding MCNs will occur on the mandatory conversion date and will be at the holder’s option up until the fifth business day prior to such date. The conversion price is
fixed at 153.276 pence, a discount of 22.5% to the Average Barclays Closing Price (subject to certain limited adjustment events summarised in Appendix 2).
Qatar Holding has agreed to subscribe for £500 million of MCNs and Challenger has agreed to subscribe for £300 million of MCNs. HH Sheikh Mansour Bin Zayed Al Nahyan has agreed to
subscribe for £2 billion of MCNs. Barclays Capital, Credit Suisse and JPMorgan Cazenove, who are acting as joint bookrunners, will undertake an accelerated non-underwritten bookbuild placing of up to an additional £1.5 billion of MCNs to existing institutional shareholders and other institutional investors
NH:
Books are open with immediate effect and are expected to close at 5:00pm today but may be closed
earlier or later at the discretion of the joint bookrunners and without further notice. Further details of the MCNs and the bookbuild placing are set out in Appendices 2 and 3. The issue of the MCNs is conditional upon receipt of necessary shareholder approvals. Subject to obtaining the required shareholder consents, the MCNs are expected to be issued on the
third business day following the General Meeting. The MCNs will not qualify as capital until conversion into Ordinary Shares. Applications will be made for the MCNs to be admitted to the Official List of the UKLA and to trading on the London Stock Exchange’s regulated market. Barclays has undertaken to apply for the OrdinaryShares to be issued upon conversion of the MCNs to be admitted to listing on the Official List
of the UKLA and admitted to trading on the London Stock Exchange’s regulated market.
earlier or later at the discretion of the joint bookrunners and without further notice. Further details of the MCNs and the bookbuild placing are set out in Appendices 2 and 3. The issue of the MCNs is conditional upon receipt of necessary shareholder approvals. Subject to obtaining the required shareholder consents, the MCNs are expected to be issued on the
third business day following the General Meeting. The MCNs will not qualify as capital until conversion into Ordinary Shares. Applications will be made for the MCNs to be admitted to the Official List of the UKLA and to trading on the London Stock Exchange’s regulated market. Barclays has undertaken to apply for the OrdinaryShares to be issued upon conversion of the MCNs to be admitted to listing on the Official List
of the UKLA and admitted to trading on the London Stock Exchange’s regulated market.
NH:
Adjustment to the Conversion Price: The issue of new shares or certain other securities and rights of Barclays PLC, at any time commencing on the Issue Date and ending on the Optional Conversion Date or on the Mandatory Conversion Date, at a price (the Future Placing Price) lower than the then current Conversion Price will (subject to exceptions for Ordinary Shares issued pursuant to employee share
schemes, under the Warrants or as a result of certain corporate events) result in a downward adjustment to the Conversion Price (subject to a minimum Conversion Price of the then par value per Ordinary
schemes, under the Warrants or as a result of certain corporate events) result in a downward adjustment to the Conversion Price (subject to a minimum Conversion Price of the then par value per Ordinary
NH:
share (currently 25 pence) so that it equals the Future Placing Price. The Conversion Price will also be subject to adjustment if Barclays PLC distributes an extraordinary dividend or certain dilutive events occur, including, bonus issues, rights issues or an adjustment to the nominal value
3:16PM
SMI:
Right let’s give the readers a second to digest all that
SMI:
While we’ve been talking
SMI:
The sell-off in banking stocks in the US accelerated
SMI:
BAC now off 16.43 per cent
SMI:
Though C has come back a bit – down 10.57
SMI:
And analysts are falling over themselves to downgrade State Street
SMI:
Bit late don’t you think?
NH:
yes
NH:
and I here there has been quite a bit of negative comment on BoA
NH:
analysts setting $5 target prices
SMI:
Quite so – I emailed you a couple of the notes. Can you put any up?
NH:
yep
NH:
getting
NH:
FBR Capital Markets
NH:
BAC Disappoints, Tangible Common Equity Ratio Drops to
2.6%, Target to $5
2.6%, Target to $5
NH:
We reiterate our Underperform rating on Bank of America and reduce our price target to $5,
equal to 0.4x of historical tangible book value. The bottom line is BAC is undercapitalized in
our opinion, and valuation should remain under pressure until its capital base is strengthened.
In 4Q08, BAC and MER lost a combined $17.1 billion ($15 billion loss excluding goodwill).
The company enters 2009 with just $61.7 billion (pro forma) of tangible common equity,
supporting $2.4 trillion of tangible assets. While loss sharing agreements reached with the
government suggest that future losses could moderate from 4Q levels, given continued growth
in credit costs and remaining capital markets exposures, our best-case scenario is that BAC
does not return to profitability until the second half of 2009. BAC’s pro forma tangible
common equity (TCE) ratio of 2.6% is just too low in our opinion, particularly for a company
with questionable near-term profitability and credit costs. We reduce our 2009 operating EPS
estimate to –$0.40 (from +$2.00), and initiate a 2010 estimate of $2.00. We note BAC’s
growing preferred balances are an increasing drag on earnings, which should reduce net
income available to common by $5.6 billion in 2009 and $5.8 billion in 2010 and 2011.
equal to 0.4x of historical tangible book value. The bottom line is BAC is undercapitalized in
our opinion, and valuation should remain under pressure until its capital base is strengthened.
In 4Q08, BAC and MER lost a combined $17.1 billion ($15 billion loss excluding goodwill).
The company enters 2009 with just $61.7 billion (pro forma) of tangible common equity,
supporting $2.4 trillion of tangible assets. While loss sharing agreements reached with the
government suggest that future losses could moderate from 4Q levels, given continued growth
in credit costs and remaining capital markets exposures, our best-case scenario is that BAC
does not return to profitability until the second half of 2009. BAC’s pro forma tangible
common equity (TCE) ratio of 2.6% is just too low in our opinion, particularly for a company
with questionable near-term profitability and credit costs. We reduce our 2009 operating EPS
estimate to –$0.40 (from +$2.00), and initiate a 2010 estimate of $2.00. We note BAC’s
growing preferred balances are an increasing drag on earnings, which should reduce net
income available to common by $5.6 billion in 2009 and $5.8 billion in 2010 and 2011.
NH:
Conclusion
Bank of America and Merrill Lynch’s 4Q08 losses were much greater than the market or the company anticipated, which prompted Bank
of America to ask the U.S. government for assistance to close its acquisition of Merrill Lynch. While it did receive assistance, losses
further impaired its already weak tangible common equity position. Further, we expect Bank of America’s 2009 earnings will be less
than its preferred dividend payment ($5.6 billion in 2009), which we believe will prevent the company from rebuilding its weakened
capital ratios. While still well capitalized from a regulatory perspective, Bank of America has more preferred equity than tangible
common, which sits in a first-loss position. As with most financial institutions, Bank of America’s valuation should remain under
pressure until its capital position improves. We would avoid not only BAC’s shares, but also shares of most financial institutions until the
companies are better capitalized.
Bank of America and Merrill Lynch’s 4Q08 losses were much greater than the market or the company anticipated, which prompted Bank
of America to ask the U.S. government for assistance to close its acquisition of Merrill Lynch. While it did receive assistance, losses
further impaired its already weak tangible common equity position. Further, we expect Bank of America’s 2009 earnings will be less
than its preferred dividend payment ($5.6 billion in 2009), which we believe will prevent the company from rebuilding its weakened
capital ratios. While still well capitalized from a regulatory perspective, Bank of America has more preferred equity than tangible
common, which sits in a first-loss position. As with most financial institutions, Bank of America’s valuation should remain under
pressure until its capital position improves. We would avoid not only BAC’s shares, but also shares of most financial institutions until the
companies are better capitalized.
NH:
here’s Meredith Whitney
SMI:
Oh dear
SMI:
Let me put my tin hate on
SMI:
NH:
Friday, Bank of America reported 4Q08 an EPS loss of $0.48 vs. our estimate of
$0.07 and consensus of $0.08. BAC also announced that the U.S. government had
agreed to assist it in its MER acquisition by making a $20B investment in BAC
preferred stock under TARP (also BAC will issue $2B in warrants to the Treasury),
as well as providing protection against further losses on $118B in selected capital
markets exposures (primarily from MER). As payment for this loss protection, BAC
will issue $4B in preferred stock to the Treasury and FDIC and $400M in warrants.
BAC noted it completed the MER acquisition on 1/1/09, and expects the transaction
to be dilutive to earnings for the next two years.
$0.07 and consensus of $0.08. BAC also announced that the U.S. government had
agreed to assist it in its MER acquisition by making a $20B investment in BAC
preferred stock under TARP (also BAC will issue $2B in warrants to the Treasury),
as well as providing protection against further losses on $118B in selected capital
markets exposures (primarily from MER). As payment for this loss protection, BAC
will issue $4B in preferred stock to the Treasury and FDIC and $400M in warrants.
BAC noted it completed the MER acquisition on 1/1/09, and expects the transaction
to be dilutive to earnings for the next two years.
NH:
and Mr Bove
NH:
but he is a buyer
SMI:
Of course he is
NH:
and something of a contra indicator
NH:
NH:
There is no excusing performance like this because the declines in these security values resulted in
one company having to sell itself, and the other to seek government aid diluting shareholder earnings.
Yet, one cannot help but notice that these huge losses did not happen in the early part of this decade
when the stock markets collapsed. A key difference between the earlier collapse and this one is that
the industry has grown its fixed income businesses meaningfully in the past few years; it has accepted
more risk in its operations; and it has become more vulnerable to changes in market sentiments.
one company having to sell itself, and the other to seek government aid diluting shareholder earnings.
Yet, one cannot help but notice that these huge losses did not happen in the early part of this decade
when the stock markets collapsed. A key difference between the earlier collapse and this one is that
the industry has grown its fixed income businesses meaningfully in the past few years; it has accepted
more risk in its operations; and it has become more vulnerable to changes in market sentiments.
NH:
However, the losses shown above are to a great extent due to non-cash valuation changes. A change
in the accounting rules is a large part of why these losses are so pronounced. The accounting
treatments used to value financial instruments, used today, were simply not in existence in 2000 to
2003 when the stock market fell.
The declines in value certainly reflect increases in actual losses and defaults on securities. However,
the magnitude of the value adjustments is far greater than any real world change in economic and
financial developments. Moreover, should interest rates fall meaningfully, back to the levels they held
in the third quarter of 2008, a great deal of these declines will be immediately reversed.
Non-cash charges based on adjusted accounting rules in a highly charged financial environment
caused the writedowns more than any other factor. Loan losses and defaults on securities were not
major drivers, although they certainly occurred. The change in accounting rules played a major role in
the earnings report of Bank of America and that of other banking institutions in the fourth quarter.
in the accounting rules is a large part of why these losses are so pronounced. The accounting
treatments used to value financial instruments, used today, were simply not in existence in 2000 to
2003 when the stock market fell.
The declines in value certainly reflect increases in actual losses and defaults on securities. However,
the magnitude of the value adjustments is far greater than any real world change in economic and
financial developments. Moreover, should interest rates fall meaningfully, back to the levels they held
in the third quarter of 2008, a great deal of these declines will be immediately reversed.
Non-cash charges based on adjusted accounting rules in a highly charged financial environment
caused the writedowns more than any other factor. Loan losses and defaults on securities were not
major drivers, although they certainly occurred. The change in accounting rules played a major role in
the earnings report of Bank of America and that of other banking institutions in the fourth quarter.
SMI:
Of course, he did say to buy LEH…
SMI:
Just saying
3:21PM
NH:
just going back to State Street for a minute
NH:
the problem here seems to be
NH:
whether they will have to write off these unrealized losses
SMI:
Uncertainty around marks and realised losses and disclosure generally is becoming a recurrent theme on both sides of the pond
SMI:
There are all sorts of questions around what Bank of America knew about MER and when, for example
SMI:
And of course, the Barc convertibles in the UK is representative also
SMI:
What do you think? Full disclosure?
NH:
not sure
SMI:
Alright, I know you’ve some more RAW
NH:
I have
NH:
Royal Dutch Shell
NH:
they report next week
NH:
Thursday I think
NH:
rumours the company
NH:
or someone close to the company
NH:
has been calling round
NH:
and noting that consensus figures might not reflect the impact of the strong dollar on earnings
SMI:
Really
NH:
yes, and that means
NH:
forecasts will have to come down by around 6%
NH:
in fact the talk in the market is that analysts are already tweaking the numbers
SMI:
And what’s the damage to the shares?
NH:
well, the London line is actually up
NH:
up 11p at £16.53
NH:
and that’s because UK investors
NH:
have been seeking big defensive dollar plays today
NH:
and they mistakenly think RDS is defensive
SMI:
Ha!
SMI:
Perhaps US investors are savvier (controversial…)
SMI:
But Royal Dutch Shell ADRs down 4.7 per cent over here
SMI:
Do you have anything else?
NH:
well, there are lots and lots and lots of rights issue rumours doing the rounds in Europe this afternoon
NH:
Deutsche Bank is said to be considering a cash call
NH:
which prompted this non response from the company
NH:
Jan. 20 (Bloomberg) — Deutsche Bank AG, Germany’s biggest bank,
declined to comment on rumors it may conduct a capital increase.
declined to comment on rumors it may conduct a capital increase.
Spokesman Armin Niedermeier referred back to the company’s Tier 1
capital ratio, used to measure a bank’s ability to absorb loan losses,
which was about 10 percent at the end of the fourth quarter, in line
with the bank’s target.
NH:
also picking up rumours that a Dutch bank is planning a big capital increase
SMI:
Really – everyone’s out raising money these days
SMI:
Or trying to
NH:
yep, ING the name in the frame
NH:
and this one could be a monster
NH:
between EUR20-EUR25bn
NH:
underwritten by the state of course
NH:
I have also been chasing these rumours about the UK short selling ban
SMI:
What that it will be reintroduced
NH:
well the guidance we are getting is no
NH:
as there have been no monster short selling disclosures since the ban was lifted on Friday
NH:
so that it means it is unlikely
NH:
however, we have been reminded that the FSA reserves the right to re-introduce the ban at any time
NH:
So you have been warned
3:29PM
SMI:
Gotta mention some of the currency action
SMI:
The sterling (hereafter, Great British Krona)
SMI:
getting slammed today
SMI:
Seven year low against the yen; fell below 1.39 vs the USD
SMI:
I’ve gotta say I’m quite pissed off about the yen move
SMI:
Was really hoping to go to Tokyo this summer
SMI:
However, more annoyed about this Bloomberg story
SMI:
Jan. 20 (Bloomberg) — The U.K. government may lose its top AAA credit rating after taking a 70 percent stake in Royal Bank of Scotland Group Plc, credit-default swaps show.
SMI:
Jan. 20 (Bloomberg) — The U.K. government may lose its top AAA credit rating after taking a 70 percent stake in Royal Bank of Scotland Group Plc, credit-default swaps show.
SMI:
As we’ve taken pains to point out here http://ftalphaville.ft.com/blog/2009/01/20/51425/bloomberg-no-uk-aaa-no-way/
SMI:
CDS is many things; in terms of the UK sov rating, is an indicator of sentiment
SMI:
So widening in UK Sov CDS does NOT mean the UK government ‘may lose its top AAA credit rating’
3:33PM
NH:
hi
NH:
am back
SMI:
Rant over
NH:
just been trying to dig out a statement from Icap
NH:
it seems the boss
NH:
Michael Spencer
NH:
has been pledging stocks as collateral for loans
NH:
now, he did this recently in a stockbroker he chairs
NH:
called Numis
NH:
but this afternoon
NH:
the following statement appeared on the official UK news service
NH:
Director/PDMR Shareholding
The Financial Services Authority (“FSA”) has recently issued a statement to clarify some divergent interpretations of the disclosure requirements under the Disclosure and Transparency Rules (“DTR”) for directors who grant security over their shareholdings by the creation of a security interest such as a pledge, mortgage or charge. The FSA now states that all grants of security over shares owned by persons discharging managerial responsibilities (“PDMRs”) and their connected persons are required to be disclosed to the market by 23 January 2009.
IPGL Limited (“IPGL”), a private investment company in which Michael Spencer, his wife and family trusts own approximately 55% of the issued share capital, has, in compliance with the Model Code, previously advised ICAP plc when ICAP shares owned by the IPGL group have been used as security for IPGL’s normal corporate borrowing facilities.
In response to the FSA’s statement, IPGL has now formally reconfirmed to ICAP plc under DTR 3 that, as part of its normal corporate borrowing facilities, a total of 123,420,724 Ordinary Shares of 10p each in the capital of ICAP plc registered in the name of IPGL’s wholly-owned subsidiary, INCAP Finance B.V. (“INCAP”), are included in a package of assets charged pursuant to a loan facility agreement dated 6 October 2008 between IPGL, INCAP, certain other subsidiaries of IPGL and HSBC Bank Plc, which facility consolidated and replaced various previous secured financing arrangements of the IPGL group. IPGL has reconfirmed to ICAP plc that the only other outstanding security over INCAP’s ICAP shares is the charge in favour of Barclays Bank PLC over 7,348,836 ICAP shares, pursuant to a financing arrangement structured as an equity swap transaction, which (due to its structure) was notified and announced under DTR 3 in July 2008.
In addition, Michael Spencer, having previously disclosed the same to ICAP plc, has also formally confirmed to ICAP plc under DTR 3 that security granted in 2004 in favour of HSBC Private Bank (UK) Limited over 996,800 ICAP shares held by him personally, remains in effect to secure an unrelated personal loan.
The Financial Services Authority (“FSA”) has recently issued a statement to clarify some divergent interpretations of the disclosure requirements under the Disclosure and Transparency Rules (“DTR”) for directors who grant security over their shareholdings by the creation of a security interest such as a pledge, mortgage or charge. The FSA now states that all grants of security over shares owned by persons discharging managerial responsibilities (“PDMRs”) and their connected persons are required to be disclosed to the market by 23 January 2009.
IPGL Limited (“IPGL”), a private investment company in which Michael Spencer, his wife and family trusts own approximately 55% of the issued share capital, has, in compliance with the Model Code, previously advised ICAP plc when ICAP shares owned by the IPGL group have been used as security for IPGL’s normal corporate borrowing facilities.
In response to the FSA’s statement, IPGL has now formally reconfirmed to ICAP plc under DTR 3 that, as part of its normal corporate borrowing facilities, a total of 123,420,724 Ordinary Shares of 10p each in the capital of ICAP plc registered in the name of IPGL’s wholly-owned subsidiary, INCAP Finance B.V. (“INCAP”), are included in a package of assets charged pursuant to a loan facility agreement dated 6 October 2008 between IPGL, INCAP, certain other subsidiaries of IPGL and HSBC Bank Plc, which facility consolidated and replaced various previous secured financing arrangements of the IPGL group. IPGL has reconfirmed to ICAP plc that the only other outstanding security over INCAP’s ICAP shares is the charge in favour of Barclays Bank PLC over 7,348,836 ICAP shares, pursuant to a financing arrangement structured as an equity swap transaction, which (due to its structure) was notified and announced under DTR 3 in July 2008.
In addition, Michael Spencer, having previously disclosed the same to ICAP plc, has also formally confirmed to ICAP plc under DTR 3 that security granted in 2004 in favour of HSBC Private Bank (UK) Limited over 996,800 ICAP shares held by him personally, remains in effect to secure an unrelated personal loan.
INCAP and Michael Spencer (as appropriate) remain the registered holders and beneficial owners of all of the relevant ICAP shares referred to above and retain control of the voting rights attached to such shares.
ICAP plc confirms that in respect of previous notifications received (in accordance with the Model Code), legal advice was taken which confirmed that disclosure to the market was not required at that time under the Disclosure and Transparency Rules.
ICAP plc (having made enquiry) is not aware of any other of its PDMRs or their connected persons who have granted any existing security interest such as a pledge, mortgage or charge over their ICAP shares.
SMI:
Translate that for US readers
NH:
Well
NH:
there has been a huge debate over here about whether directors should declare
NH:
when they pledge stock as collateral for loans
NH:
a lot of people haven’t been
NH:
as a result shares have ended up in the hands of lenders
SMI:
Haven’t been disclosing you mean
NH:
who have then liquidated positions
NH:
all the while shareholders have not had a clue what is happening
SMI:
Can we call this the Kaupthing effect
NH:
partly
NH:
a lot of these directors have taken out the loans and invested in the market or commerical property
NH:
and have been facing big margin calls they cannot meet
NH:
the result has been shares being sold
SMI:
So Spencer could be forced to sell some Icap shares then
NH:
if he can’t meet the margin call
3:37PM
SMI:
Here’s a US markets update
SMI:
Dow off 1.53 per cent at 8154.66
SMI:
I have to say I think it’s possible we’ll see a 7-handle on the Dow before the end of the year
SMI:
Banks seem to have come back a bit
SMI:
But BAC still getting sold off – down 18.38 per cent at $5.86
SMI:
What else have you been looking at
NH:
just looking at Tullow Oil again
NH:
this is a big FTSE 100 oil explorer
NH:
it has had amazing run of discoveries in the past year
NH:
in Uganda
NH:
and neighbouring countries
NH:
now it needs to get the oil out
NH:
which means building a huge pipeline
NH:
which will cost money
NH:
and as the banks are lending
NH:
it looks like shareholders will have to be tapped
SMI:
(@TB – Because I still think the US equity markets haven’t fully discounted just how fundamentally troubled the economy is)
NH:
hearing this rumours from a number of sources now
3:41PM
NH:
also been looking at the UK retailers
NH:
I can’t figure out why they have not fallen further
SMI:
Explain – I’ll comment on US retailers in a bit
NH:
the GBK
NH:
which is falling like a stone against the dollar
NH:
UK currency crisis here we come
NH:
anyway, this is very bad news for most retailers
NH:
as they buy in dollars
NH:
and sell in pounds
NH:
the likes of Next, Marks and Debs will all be hit hard by this
NH:
and yet
NH:
look at the non share price reaction
Marks and Spencer Group (MKS:LSE): Last: 219.00, down 6.75 (-2.99%), High: 232.75, Low: 218.75, Volume: 7.13m
Debenhams (DEB:LSE): Last: 25.00, down 2.25 (-8.26%), High: 28.00, Low: 25.00, Volume: 2.25m
Next (NXT:LSE): Last: 1,125, down 75 (-6.25%), High: 1,225, Low: 1,121, Volume: 2.73m
NH:
actually the falls are bigger now
NH:
than when we first came on air
NH:
so perhaps people are waking up
SMI:
The usual Markets Live effect then
SMI:
Do you have a latest GBP/USD
SMI:
Sadly, the NY office only has one bloomberg terminal (and no reuters) and it’s far from my desk
NH:
Stacy, it is not called the GBP anymore
NH:
the ticker has been changed
NH:
its the GBK
NH:
Great British Krona
NH:
and against one of your mighty dollars
SMI:
my bad. I do know better.
NH:
$1.3984
SMI:
And against the yen?
NH:
and against the Euro 0.923p
3:44PM
SMI:
On US retailers
SMI:
The whole country is one sale
SMI:
Jonathan Birchall, US retail correspondent, has had an excellent (if worrying) slew of stories
SMI:
Like this one
SMI:
“Saks, the US luxury department store chain, is cutting almost 10 per cent of its staff and making drastic cuts in its inventory as it faces what its chief executive called “some of the most difficult economic conditions in our company’s 84-year history”.
SMI:
Everyone is discounting but retail sales continue to decline
SMI:
The over-leveraged US consumer is officially credit-crunched
3:46PM
NH:
Moving away from the retailers
NH:
the other big movers today in London
NH:
aside from the banks of course
NH:
are the property stocks
NH:
and it is turning into something of a bloodbath
NH:
check some of the price action
Brixton (BXTN:LSE): Last: 99.00, down 20.5 (-17.15%), High: 119.25, Low: 98.00, Volume: 2.04m
SEGRO (SGRO:LSE): Last: 168.25, down 21.75 (-11.45%), High: 190.25, Low: 166.00, Volume: 3.39m
Hammerson (HMSO:LSE): Last: 410.25, down 35.25 (-7.91%), High: 450.75, Low: 403.75, Volume: 1.71m
Land Securities Group (LAND:LSE): Last: 659.50, down 52.5 (-7.37%), High: 725.00, Low: 652.00, Volume: 4.02m
SMI:
[doodlelogic - search various Alphaville posts on this, and there's an excellent comment from Felix at Market Movers that CDS on sovs is basically 'black swan insurance']
SMI:
What’s triggered that? Look’s pretty sharp
NH:
basically it is cash call fears, which have been stoked by a note out of Credit Suisse
NH:
penned by S. Bramley-Jackson
SMI:
cool name
NH:
yes
NH:
and his message is pretty stark
NH:
if capital values fall a further 20 per cent
NH:
then UK property companies need to raise £8bn
NH:
obviously they won’t be able to raise all of that cash just by selling assets
NH:
cutting costs and slashing dividends
NH:
they will also have to capital increases
SMI:
I see
NH:
here’s the executive summary
NH:
Capital value declines in Q408 were c. 4x greater than preceding quarters and will reveal a step-change in NAV declines in the forthcoming results.
If capital values fall a further 20% we estimate up to £8bn is required to maintain an average 45% LtV across our coverage universe and provide sufficient financial headroom for growth. Real estate company balance sheets remain under siege and credit starved, and so disposal activity is to gather pace.
NH:
However, it will not be sufficient to negate the need to raise significant equity to re-capitalise for future growth, in our view with issuance potentially causing ‘bottom line’ dilution of between 10%-15% dependent upon capital raised and issue pricing.
We have increased our price/trough nav discount from
10% (long-term average) to 25% to adjust for the risk of issuance and lowered our target prices by 20% on average.
NH:
• In our view, the sector will offer trading opportunities cum-issue, but investors should look to buy at, or post-issue once balance sheets are re-capitalised. Disposal news and broader market factors will provide trading opportunities within the
sector cum-issue, but we see the potential turning point for the sector at, or post-issue.
sector cum-issue, but we see the potential turning point for the sector at, or post-issue.
• We could now be on the cusp of deliverance for the UK REIT following a traumatic infancy, as with the US and Australian REIT markets. Our UK REIT universe now yields 7.5% compared to 4.8% for the FTSE 350 and 3.5% for UK Gilts. We
believe dividend risk among the majors to be relatively minor in the context of the broader market.
NH:
In our view, the turbulent transition to more appropriately capitalised balance sheets adjusted by a devaluation ‘black run’ has almost concluded.
Investors should look to buy into the sector at/post issue for relative outperformance due to sustainable and superior dividend yields.
Investors should look to buy into the sector at/post issue for relative outperformance due to sustainable and superior dividend yields.
• Rating changes: Brixton – downgraded to Neutral (from Outperform) with a revised target price of 146pps (from 235pps); Land Securities – upgraded to Outperform (from Neutral) with a revised target price of 965pps (from 1086pps); Liberty International – upgraded to Outperform (from Underperform) with a revised target price of 555pps (from 657pps); Segro – downgraded to Underperform (from Neutral) with a revised target price of 239pps (from 375pps) accompanying a dividend cut of 20% to our FY09 estimates.
NH:
And these are the companies he thinks are most in need to cash
NH:
Downgrading Segro to Underperform (from Neutral) with the target price revised to 239pps (from 375pps): The risk of a dividend cut for the Group is one of the highest in our coverage universe (second only to Liberty International) in our view, at a time in the cycle when investors will be seeking dividend reliance as a priority. Approximately 40% of the dividend is comprised of trading profits. Segro’s financial gearing relative to our universe ranks second (Figure 17) based on published results.
Downgrading Brixton to Neutral (from Outperform) with the target price revised to
146pps (from 235pps): We have been surprised at the level of underperformance of
Brixton, and our rating has been proven wrong. However, we still retain the belief that
Brixton will maintain its unbroken dividend record (40yrs) and thereby offer one of the highest dividend yields in our coverage universe, and that the capitalisation yields of the portfolio’s industrial assets will not reverse out to the extent that the share price is indicating.
SMI:
[@praxis - yes, see our posts on the subject...]
3:49PM
SMI:
Neil, by the way, meant to ask about your recent propensity to quote Ludwig von Mises
NH:
ah yes.
SMI:
What’s inspired that?
NH:
thought it sort of summed things
NH:
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as final and total catastrophe of the currency system involved.”
-Ludwig von Mises, Human Action (1949)
-Ludwig von Mises, Human Action (1949)
3:51PM
NH:
right, anything else?
SMI:
Have there been shorts updates?
NH:
we are starting to get a few through now
NH:
Lansdowne
NH:
who have been very bearish on the UK banks
NH:
and very right
NH:
have added to their short in barclays
NH:
1. Full name of person(s) holding the disclosable short position : Lansdowne Global Financials Fund Limited
2: Name of the issuer of the relevant securities Barclays plc
3: Disclosable short position -0.26%
4. Date that disclosable short position was held 19 January 2009
NH:
and Paulson has been lobbing out a few Lloyds as well
NH:
1. Full name of person(s) holding the disclosable short position :
Paulson & Co. Inc.
2: Name of the issuer of the relevant securities
LLOYDS BANKING GROUP PLC
3: Disclosable short position
0.79%
(*NOTE: change is due to acquisition of HBOS by LLOYDS)
4. Date that disclosable short position was held
19 January 2009
Paulson & Co. Inc.
2: Name of the issuer of the relevant securities
LLOYDS BANKING GROUP PLC
3: Disclosable short position
0.79%
(*NOTE: change is due to acquisition of HBOS by LLOYDS)
4. Date that disclosable short position was held
19 January 2009
SMI:
Jenn Hughes has just sent round an email
SMI:
Says Data Explorer numbers show no real uptick on Friday, not even in BARC
SMI:
So hard to blame Mayfair for Friday’s selling action
NH:
yes, hard to blame the monsters of mayfair for this one
NH:
all down to the banks
NH:
and the PM’s bailout plan
NH:
which has not exactly followed the script
SMI:
especially not the one handed to the Pestowire
Top News from Top Sources. The BBC’s Business Editor, Robert Peston, has played in important role keeping the British public fully informed during these difficult times.
SMI:
Right – we should wrap up soon, don’t want to detract from anyone’s Obama viewing time
NH:
so it kicks off at 4.00pm does it?
SMI:
Yep – here’s the schedule http://latimesblogs.latimes.com/washington/2009/01/obama-inaugurat.html
SMI:
And there are a bunch of ways to watch it
NH:
including here in the FT canteen on a big screen
SMI:
No such big screens in the US office alas
NH:
what’s the mood over there
NH:
excitement?
SMI:
Maybe in the DC bureau
SMI:
But FT types over here subdued
SMI:
As for New Yorkers – the parties started this morning
NH:
nice
NH:
SMI:
Hoping to hit up a few of those tonight
SMI:
SMI:
Right, before we go, here’s a Dow update
SMI:
Off 154.59 points or 1.87 per cent at 8126.63
NH:
the FTSE 100 off 30 points at 4,079
NH:
banks heading lower into the close
NH:
Lloyds of 26% at 47.1p
NH:
barc off 17.7% at 72.3p
SMI:
[I will have you know what I own no Obama swag]
SMI:
Gotta keep an eye on BAC today
SMI:
Now down 19 per cent at $5.81
SMI:
@Monkey – no swag at all
Royal Bank of Scotland Group (RBS:LSE): Last: 11.10, down 0.5 (-4.31%), High: 14.50, Low: 10.70, Volume: 457.55m
NH:
and while we were are talking about RBS
NH:
Another collateral disclosure. this time from the former Chairman of RBS of all people. Which goes to show they are still lending.
NH:
to some people
NH:
The Company announced on 4 December 2008 that Sir George Mathewson, a director
of the Company, purchased 35,800 ordinary shares in the Company on that day.
These shares represent Sir George Mathewson’s total interests in the share
capital of the Company. Sir George Mathewson has pledged the 35,800 ordinary
shares he holds in the Company as security against personal loan arrangements.
of the Company, purchased 35,800 ordinary shares in the Company on that day.
These shares represent Sir George Mathewson’s total interests in the share
capital of the Company. Sir George Mathewson has pledged the 35,800 ordinary
shares he holds in the Company as security against personal loan arrangements.
NH:
Mathweson also chairman of hedge fund Tosca in London
SMI:
Some people are more equal than others
SMI:
Neil – you’ve had a long day
SMI:
Two MLs on the trot
SMI:
And Paul’s on holiday effective immediately
SMI:
Off to Mozambique
SMI:
So we’ll all be taking turns on ML
NH:
hopefully
NH:
I will be the chair
NH:
with a guest blogger every day
SMI:
So readers – expect to see a slew of avatars on these pages over the next couple of weeks
NH:
Paul is missing 8 sessions
NH:
by which time
NH:
RBS could be nationalised
NH:
as could Lloyds
NH:
the FTSE 100 could be retesting november’s lows
SMI:
And the GBK might have reached parity with the USD
NH:
actually what’s the currency Mozambique
NH:
let’s hope he is getting hammered by the weakness of the GBK
SMI:
Alida says they basically deal in dollars
NH:
excellent, an expensive holiday for Paul and his father
SMI:
Sour grapes Neil
NH:
yeah, I have got half term to look forward with three kids
4:03PM
NH:
Broke err
NH:
on the French banks
NH:
i wonder if these rumours about ING are spooking the market
NH:
if you missed them earlier
NH:
talk of a huge capital raising
SMI:
Rumours of Pesto on ML
SMI:
Happy to spread those
SMI:
@praxis – John Authers sits opposite me, and says he’s game if Martin Wolf is
NH:
OK, that’s it for today
NH:
time for Mr President
NH:
thanks for joining us this afternoon
NH:
another US ML soon
SMI:
Definitely – we’ll keep you guys updated
SMI:
Gillian’s on book leave
NH:
actually you can pre-order a copy on Amazon
NH:
WH Smith
NH:
The Fool’s Gold
Gillian Tett
£12.91
RRP £18.99 Saving £6.08 (32%)
Format: Hardback
Availability: Pre-order – released on 26th Mar 2009
Average Review: Be the first to write a review
SMI:
Am just looking for the link
SMI:
Right – thanks for that Neil
NH:
we are off
SMI:
The first-ever NY/Lon ML seems to have come off without a hitch
SMI:
And even started on time
NH:
as praxis22 said
NH:
We’re part of history here and I don’t mean obama 
NH:
We’re part of history here and I don’t mean obama
NH:
a big thanks to everyone
NH:
cya