Markets live chat transcript for the chat ending at 12:11 on 23 Jan 2009. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder, FT (BE)
NH:
Good morning and welcome to Markets Live
NH:
Alphaville’s daily display of shredded nerves
NH:
and they really are shredded this morning
NH:
even for bears like us
NH:
UK officially in recession
NH:
and with an almighty bang
NH:
Q4 GDP plunged by 1.5%,
NH:
which is sharpest quarter-on-quarter drop since 1990.
NH:
GBK falling again -$1.354 vs the dollar
NH:
Barclays getting crushed again
NH:
insurance stocks on offer across Europe
NH:
and to top it all off
NH:
for another five ML sessions
NH:
Tracy has the day off
NH:
Gwen has had some very painful dental work done overnight
NH:
Sam is on the late shift
NH:
Izy, who has been doing a sterling job
NH:
or perhaps that should be a yen job
BE:
Hello all. Short straw drawn once again.
BE:
when I left home this morning
BE:
it was really quiet – was wondering what we’d find to talk about.
NH:
we should have a look at these insurance companies
NH:
here’s something that might bring a smile to people’s faces
NH:
a John Thain Decorating Spree slide show
NH:
it includes an $87,000 rug and $25,000 pedestal table….
NH:
not sure if the commode is on there
NH:
which are getting hammered here and in Europe
NH:
here’s some of the price action
BE:
Legal & General down 6.4p at 52.4p
BE:
Friends Prov 5.7p off at 69p
BE:
Aviva off 20p at 263p
NH:
and across the Channel?
NH:
and these rumours about a big cash call will not go away
NH:
which have now reached the Dutch press
NH:
and they are – the company is preparing a mega cash call that will be underwritten by the government
NH:
we heard earlier this week EUR20-25bn
BE:
It’s currently at just over 5eur
BE:
just getting back to these insurers for a moment
BE:
it’s Swiss Re that causing all this right?
NH:
concerns that the company might take huge write downs when it announces full year results
NH:
now this could be tied to the CDS’s it has on the balance sheet
NH:
or the tier bank bonds they own
NH:
which are trading at fire sale prices
NH:
Barclays tier one was trading around 15-20p on the pound earlier in the week
NH:
now, the insurers and pension funds
NH:
have been big buyers of this stuff
NH:
and given the collapse in the price of hybrid capital
NH:
write downs could be on the way
NH:
actually, this problem is not confined to the UK
NH:
have a look at this from Bloomberg
NH:
Jan. 22 (Bloomberg) — Aflac Inc., the largest seller of supplemental insurance, fell the most in more than a quarter century in New York trading as Morgan Stanley called the firm’s investments in U.K. banks “a rapidly escalating concern.”
Aflac plunged $13.37, or 37 percent, to $22.90 at 4:15 p.m. in New York Stock Exchange composite trading. The Columbus, Georgia-based firm has declined by about 63 percent in the past 12 months and ended today at an eight-year low.
NH:
The insurer may face losses on investments in hybrid securities issued by firms including Royal Bank of Scotland Group Plc, HBOS Plc and Barclays Plc, said Nigel Dally, an analyst at Morgan Stanley, in a note to investors today. North American insurers have posted more than $125 billion of writedowns and losses tied to the collapse of the mortgage market in the past two years.
“The hit to Aflac’s capital ratios could be substantial,” Dally said. “And their overall capital adequacy could be significantly less than most investors believe.”
NH:
More than $1 trillion in losses and writedowns by financial companies around the world are weighing on banks’ stock prices and their ability to repay debt. RBS, based in Edinburgh, has dropped about 96 percent in the last 12 months, while Barclays has declined 87 percent. New York-based Citigroup Inc. is down 87 percent.
NH:
“We are comfortable with our capital position and are constantly monitoring our investment portfolio,” Laura Kane, a spokeswoman for Aflac, said in a statement. The insurer will provide details on its investments when it reports fourth- quarter results on Feb. 2, she said.
RBS, facing the biggest loss in British history, secured a government investment this month by giving the U.K. sway over the bank’s lending practice. The move and the lender’s stock slump have sparked speculation that the government will take full control of the bank.
NH:
and to put things in a bit more context
NH:
this was published by Jim Reid at Deutsche Bank earlier this week
NH:
it highlights, what a massive problem this could be for the insurance industry
NH:
Linking this into the current banking problems, the UK Government has a delicate balancing act. They could ensure that further nationalising of banks doesn’t lead to swathes of subordinated debt defaulting. This would keep the ailing UK
pension/insurance industry much healthier. However it could lead to a big fall in Sterling and the possibility of an international buyers strike on the increased UK debt.
Alternatively they could allow mass subordinated bank defaults which could bring the
pension/insurance industry to its knees but probably limit the chance of a run on
Sterling.
NH:
There are clearly other issues but these are the extreme macro alternatives in
our view. We think the authorities will probably lean towards the former than the latter but accept that much of the UK subordinated bank paper would be worth zero under a free market. Indeed yesterday was shocking for UK bank sub debt. In particular RBS 7.0916% 49-17 T1 fell 20 points to 9-14 (price). Basically if you can get 1-2 years of coupons then you have paid for your investment in this bond. The Government will at some point have to balance the above factors with the additional one of a general lack of desire to de-stabilise these fragile markets even more. Personally we think they want to keep much of the subordinated market alive but the bigger question may be whether the currency market let’s them. Last night Mervyn King confirmed that the BoE will be buying high quality assets within “weeks and not months”. QE is alive in the UK.
NH:
do we have any comment on the insurers this morning
BE:
not on this story specifically
BE:
but there is a big note out of HSBC
NH:
(ha, ha Cityunslicker)
BE:
which looks at cashflows
BE:
and whether they will be enough to cover dividends
BE:
here’s some highlights
BE:
Key themes
Financial market recovery and non-life upturn
debates aside, we believe European insurance
share price performance will be dominated by
four key investment themes in 2009.
BE:
These are: announcement and execution of credible costcutting
initiatives – a new theme we explore
ongoing capital adequacy pressures which
could trigger insurance capital raising outside
Holland – we update our analysis
Insurers’ ability to illustrate cash flow
generation – this is an increasingly important
valuation metric
rising corporate bond defaults will hit
earnings and solvency levels for a sector that
is 29% corporate bond invested on average or
60% in extreme cases. But there might be
some respite from higher reported book
values should corporate bond yields fall
BE:
(Pagination’s stuffed again – sorry about that)
BE:
some stuff on capital also
BE:
ii) Capital adequacy concerns
Our solvency analysis reveals our coverage
universe has a EUR48bn buffer (21% market cap)
above ‘AA’ target requirements.
Unsurprisingly, reinsurers are better capitalised
than primary insurers, life better than non-life in
our base case, but non-life insurers are more
resilient than life insurers in our bear case.
On a more worrying note, Aviva, Euler Hermes,
Friends Provident, Prudential, Standard Life and
ZFS have absolute capital levels close to existing
credit rating requirements, raising fears of capital
raising or downgrades.
BE:
Our analysis highlights six insurers would have to
raise only a combined EUR2bn (4% of related
market cap) in our base case and 13 insurers
would have to raise a combined EUR30bn (18%
of related market cap) in our bear case for capital
levels to be consistent with existing ratings.
However, rating agencies consider a range of
additional criteria (dividend policy, earnings track
record, financial flexibility, growth plans and
enterprise risk management) in rating assessments
which may mitigate (or accelerate) the risks of
capital raising or rating downgrades.
NH:
Right plenty of questions below about Muprhy and these hybrid banks bonds
NH:
the boss has no email or blackberry access
NH:
but he did call in this morning
NH:
to check it everything is OK
NH:
and it certainky is OK at his beach hut
NH:
as for the these hybrid bonds
NH:
two reasons they trade where they do
NH:
one is fear that the govt will not permitt coupons to be paid
NH:
and second the banks in question might be nationalised
NH:
tier one holders will probably get wiped out
NH:
as they were in Nortnern Rock
NH:
and probably will be in Allied Irish
BE:
(Fitz – I’ll check with Rachel if she wants to make another guest appearance. But, as she’s moved onto more glorious things on the World desk, don’t hold your breath)
BE:
Neil’s just gone off to look up something …
Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville.
NH:
don’t think I will be putting that up
NH:
and sorry, I meant Anglo Irish
NH:
oh, hearing GE figs due out in 10 mons
NH:
right, let’s have a quick peek at the wider market
BE:
not looking good, as already noted
BE:
US futures pointing to a large drop at the opening
BE:
while the FTSE is now down 80 points at 3,971
BE:
insurers doing the damage
NH:
(Tuna – its on RNS and a non story IMO)
NH:
and what about the banks?
BE:
(IMO too. Definitely not a story.)
BE:
but once again Barclays is being hit harder than the rest
BE:
this really has been the week from hell for Barclays
BE:
and the shares are now just above 50p
NH:
barclays currently down 8.3p at 50.9p
BE:
just a total loss of confidence
BE:
doesn’t matter what they say
BE:
or what analysts say in their defence
NH:
yes, that does look to be the case
NH:
here’s an interview the CEO John Varley gave this morning
NH:
Jan. 23 (Bloomberg) — Barclays Plc would prefer to pay for the government’s toxic asset guarantee plan in cash rather than equity, Chief Executive Officer John Varley said in a video broadcast on the Web site of Cantos Communications Ltd.
“Our predisposition would be to pay in cash,” Varley said. “The government was very clear it’s not looking for ordinary equity as a means of satisfying that payment.”
NH:
The U.K. government announced plans, Jan. 19, to guarantee toxic assets for a fee and gave the Bank of England power to buy 50 billion pounds ($69 billion) of securities in the second effort in three months to underpin confidence in the banking system. Barclays has declined 55 percent in the past week on speculation it may take more writedowns and could be nationalized.
“There is no truth” in speculation the government is unhappy with how Barclays has valued some of its assets, Varley said. “We have a real-time obligation to ensure that the numbers that we publish are reliable and our numbers are reliable. We take that obligation with deadly seriousness.”
NH:
and what’s the response?
BE:
Oh, just another 15% off the share price
NH:
no one believes anything they have to say
NH:
actually this is not something to laugh about
NH:
this goes beyond being a PR disaster
NH:
and Barclays really can’t take another weak of losses like this
BE:
also did you see the note out of Oriel Securities this morning?
BE:
from their veteran banks analyst Mike Tripett
BE:
he has been looking at yesterday’s scare stories about Barclays effectively being unable to issue equity
BE:
The Times newspaper believes it has unearthed a hidden clause tucked away in the
prospectus of the convertible notes issue of last October.
BE:
• The clause is in fact on page 16 of the Barclays’ October 31st press release and clear for the world to read.
• It is a standard anti-dilution clause. The mandatory convertible notes (2,642), announced 31st October will convert into ordinary equity in June 2009 at a price of 153.276 pence.
• If a capital raising takes place between now and conversion date at a price below
BE:
153.276 pence, then the conversion price will reset down to the new capital raising price to avoid dilution for the convertible holders
• The Times concludes this will give the convertible notes holders a controlling share of Barclays.
• A reset in the conversion price would certainly give the convertible holders a greater
stake, but a capital raising would also increase the total shares in issue
• We estimate that prior to any capital raising, but after conversion of notes and exercise of warrants, Qatar Holding and Challenger (Qatar) would have a 16.7% stake, with HH Sheikh Mansour Bin Zayed Al Hahyan owning a 16.4% stake.
• SMBC, China Development Bank and Temasek would own 4.9% collectively.
• Other institutional investors would own 62%.
NH:
(TFT1 – spring ram, now there’s a name from the past)
NH:
but again it has done nothing to help the share price
NH:
and nor has this RAW rumour about Absa
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:
have you got any more on that?
BE:
There was a note out of Deutsche this morning flagging up the possibility
BE:
Give me a second to find it
NH:
oh, right. sounds interesting
NH:
would be a bit of a strategic u-turn
BE:
Yup – think HBOS and BankWest …
BE:
We believe Barclays is adequately capitalised but seek to address concerns
While we view it as a very remote scenario, press reports and Barclays’ falling
share price suggests that Barclays may require government support. In this report
we have sought to identify what the implication of such action could be for Absa.
Overall, under such a scenario, we believe the SARB would prefer independent
shareholders for Absa and may look to facilitate its sale back to SA institutional
investors. We maintain our Hold rating as it is trading close to our target value.
BE:
SARB/Minister of Finance would prefer independent shareholders of Absa
There are numerous sections of the Banks Act pertaining to shareholding that
would seem to disqualify the UK or any other government from being the ultimate
shareholder of Absa. Unfortunately, the infinite permutations of any potential
Barclays nationalisation mean that a proper evaluation of the Banks Act application
at this point is relatively fruitless. Nevertheless, we believe that the SARB and the
Minister of Finance would prefer to see Absa controlled by independent
shareholders, be it another bank or returned to SA investors. As such, we would
expect some SA government intervention if Barclays was to remain under state
control for a prolonged period of time.
BE:
Absa may be high on the list of Barclays disposals
While stressing again that we do not believe that Barclays will need government
support, we believe that, on the assumption that Barclays starts to dispose of
assets, Absa would be relatively close to the top of the list. This is due to the fact
that the sale of Absa could result in a GBP1bn release of capital in Barclays which
would add 0.3% to the current core tier 1 ratio. In addition, Absa is sufficiently
independent of Barclays operationally that its disposal limits execution risk.
Impact of possible sale could be slightly negative for minority shareholders
Aside from the obvious overhang/indigestion risk that exists, the loss of the
Barclays relationship is likely to be most felt in Absa Capital. Absa Capital has
grown by 38% compound in the past 3 years and now contributes 20% to the
group. Without Barclays infrastructure, distribution and technology, an
exaggerated slow down in this division may be on the cards.
NH:
that’s a very interesting angle. did know those rules were in place in SA
BE:
All viewed from the South African side of course, where Deutsche’s team tends to be pretty good.
NH:
while we are on Barclays
NH:
did you see the Guardian this morning
NH:
they are keeping up their war on short sellers
NH:
I suspect it could become a campaign
NH:
One of London’s most successful hedge funds has made £12m in just four days by betting on a fall in the Barclays share price, a move that will heighten the controversy over so-called short-selling strategies.
Lansdowne Partners, which also profited from the fall in the share price of Northern Rock at the height of its problems, sold Barclays shares last Friday – when the bank lost almost a quarter of its value in frenzied trading – and bought them back again on Wednesday after they had fallen by almost £1.
The disclosure is likely to fuel the row between politicians and the Financial Services Authority which lifted a ban on short-selling last Friday. The ban was introduced last September to try to protect the share price of HBOS which was in the throes of a rescue takeover by Lloyds.
NH:
While bank shares, particularly those of Barclays, Royal Bank of Scotland and the newly formed Lloyds Banking Group, have been savaged since the ban was lifted, the FSA insisted yesterday that short-sellers were not to blame.
But the FSA is demanding that short-sellers, who borrow shares they do not own to sell them with a view to buying them back at a lower price, disclose any such positions. Lansdowne is the only hedge fund to admit to such a trading strategy in Barclays. It revealed yesterday it had started to buy back the shares it began to sell on Friday, generating a profit of around £12m.
NH:
The lifting of the ban has infuriated the chancellor, Alistair Darling, who thought it should have remained in place. He was given just an hour’s notice of the FSA’s decision. Lord Turner, FSA chairman, told Radio 4′s Today programme yesterday: “I do think this issue of whether or not there was a minor hiccup in communications is less important than the substance. The substance is that so far we are seeing no signs that short selling, or abusive short-selling, has a major role.”
BE:
actually was just looking at some of the comments below that story
BE:
… if they were not actually serious
BE:
have a look at this one
BE:
Three easy steps, Darling.
BE:
1. Ban short selling under terrorism legislation. After all, if councils can use terrorism legislation to check if people are building oversized sheds, we must be able to use the legislation for somethige useful.
BE:
2. Arrest all traders with short positions and hold them for the maximum 28 days. Do likewise for the heads of all banks, hedge funds or other financial bodies with short positions.
BE:
3. Use the 28 days to force through an Act of Parliament making short selling a capital offence with the heads displayed on poles on London Bridge. Attach a clause to the Act that all that is required to add other financial dodgy dealing to the list of capital offences is an Order in Council.
BE:
That would restore confidence in the banks and show the world that the UK was prepared to defend its economy. Extreme times call for extreme measures.
BE:
What the British people want now is revenge. If NuLab is going to stand any chance of winning the next election, they must provide it.
It was the Governments who created this crisis. The banks didnt inflate the money supply by 14% a year! Gordon Brown did that. Revenge is coming mate. It will be New Labour that will be swinging from the gallows in a few months.
NH:
well, how do you follow that?
NH:
and Londonbus you are right
NH:
Lord Pesto of Muswell Hill
NH:
has joined our Save the Shorts campaign
BE:
To put it in stark terms, thanks to taxpayers’ largesse, short-selling bank stocks is no longer a potentially lethal activity.
BE:
many – including ministers – argue that the FSA was crackers to allow short-selling to start again.
They point to the collapse in the share prices of Royal Bank of Scotland, Lloyds Banking Group and Barclays as evidence that hedge funds and other short-sellers are up to their old tricks of destroying the infrastructure of the British economy for private profit.
There’s only one problem with this thesis: it’s not supported by the facts.
BE:
Most of the share price movements in the big banks have been caused by conventional selling of shares by the normal gamut of investment institutions.
NH:
Lord Pesto of Muswell Hill going against the HMT
NH:
that won’t go down well
BE:
The short-sellers are the convenient whipping boys, not the prime malefactors (if you think it’s a crime that the share prices have fallen, which is moot).
BE:
Worth keeping an eye on that comment blog for afternoon entertainment.
NH:
Right, just trying to get the GE snaps
NH:
which are hitting the tape now
BE:
In line with the December warning by the looks of it
NH:
General Electric Co.’s profit fell for a fourth straight quarter as the global credit crisis ate into income at the company’s finance segment.
Profit from continuing operations declined to $3.87 billion, or 36 cents a share, from $6.83 billion, or 68 cents, a year earlier, the Fairfield, Connecticut-based company said today in a statement sent on Business Wire. Per-share profit before the payment of preferred dividends was 37 cents. The company was predicted to earn 37 cents, the average estimate of 10 analysts surveyed by Bloomberg
NH:
market seems to like that
NH:
only off 44 points now
NH:
we have some more stuff on banks
NH:
but I think everyone has had enough of that for now
NH:
what about the housebuilders
NH:
I see Barratt Developments is weak
NH:
pretty hard hitting note of Citi?
BE:
Yup – the house sellers
BE:
The house collectors.
BE:
Note’s from Clyde Lewis, and is quite complicated for a Friday …
BE:
Talks about how the massive write-downs will lead to deferred tax assets being created by the overall loss.
BE:
Such losses can be be carried forward indefinitely under UK tax law, but not under the accounting rules.
BE:
Essentially, unless the companies can demonstrate to their auditors that they will use these tax losses in the foreseeable future, then the tax assets are effectively ‘parked’ off the balance sheet. This effectively means that reported asset values are unlikely to be as high as we had expected. This in turn should put some of the companies closer to their covenant tests on gearing and tangible net worth.
NH:
Right. Any more on that?
BE:
Asset writedowns and other operating losses are leading to deferred tax assets — but we think the bulk of them will not be carried on the balance sheet due to lack of visibility on future profits. The cash tax rebate is likely to have finished by the middle of the year.
We estimate there will be c. £4.9bn worth of reported losses in 2008-10 — with Taylor Wimpey and Barratt leading the way in terms of scale. Over the 2008-12 period, we expect the industry as a whole to make c. £1.1bn of profits, with over half coming from Berkeley Group.
BE:
There should be c. £890m of associated deferred tax assets — but the bulk of these, some £780m, will disappear from the balance sheet until the earnings outlook is more buoyant, on our estimates. This could hit the asset values by a third in some cases. In addition, we expect the industry to have clawed back some £500m from the Government in the form of cash tax rebates.
The follow-on is that the covenant tests are more likely to come under threat — while there is no change to cash flow from the treatment of deferred tax, the impact on the tangible net worth figure impacts both the minimum level test and the gearing covenant.
BE:
The most vulnerable companies are Barratt and Taylor Wimpey, with about £325m and £380m of deferred tax assets set to disappear, he says.
BE:
That leads him to cut Barratt to sell, 50p target.
BE:
We believe the group will have to renegotiate its bank covenants again on the back of its low tangible net worth / gearing figures. This will probably force a major equity issue and lead to large-scale dilution to existing holders, in our view.
BE:
“Modest” hits for Redrow and negligible or zero impacts at Bovis, Bellway, Berkeley and Persimmon.
NH:
Barratt’s already renegotiated its covenants, right?
BE:
Right. Back end of last summer.
BE:
And it said last week that it “continues to operate within its banking facilities and debt covenants”
BE:
Bit more from Citi on that.
BE:
When asked on the conference call about whether they were operating well within or just within the covenants, Barratt was non committal. Coupled with our analysis on the deferred tax, this suggests to us that the group is likely to breach its covenants on tangible net worth and net debt to tangible net worth in due course. On the former, we would be surprised if the covenant figure were less than £700m and on the latter we would be surprised if the gearing limit were more than 150%. On our estimates, tangible net assets drops to £555m
by June 2010 while gearing is 185%.
BE:
Just to wrap up the sector, Redrow made noises last week about having “adequate headroom”
BE:
And Taylor Wimpey and Persimmon still to wrap up their talks, of course.
NH:
Thanks for that. Barratt to have to renegotiate banking covenants again
NH:
not sure that would go down well
NH:
going back to the insurers for a mo
NH:
not sure this is driving the Pru down
NH:
but interesting none the less
NH:
Rumours from FPK that Pru to stage rights issue to buy AIG Asia
BE:
GE up 2.5% in premarket by the way
NH:
what else shall we look at?
NH:
drug companies perhaps
NH:
any follow through from the reports that Pfizer is in talks to buy Wyeth
BE:
Astra’s up a but – up 36p at 2816p
BE:
but that could be defensive buying
BE:
Actually – Shire, the much touted takeover target, is actually down now
NH:
yes, off 16.5p at 985.5p
NH:
the story was broken in the WSJ
NH:
but we have an version
NH:
which adds a few interesting angles
NH:
from our M&A editor Lina Saigol
NH:
Lina Saigol, M&A editor
Published: January 23 2009 09:38 | Last updated: January 23 2009 09:38
Pfizer, the US pharmaceuticals group, is in talks to acquire rival Wyeth, a deal that would create new drugs giant with a market value of around $60bn.
The two companies have been in on-and-off talks for six months, people close to the situation said. A deal could be announced as soon as Monday.
Pfizer, which is offering a mixture of cash and shares, is still negotiating over the mix, which could involve between $10bn-$15bn of equity, these people said.
The move comes as the world’s leading pharma companies face a slowdown in growth as revenues come under threat from the expiry of patents, shrinking pipelines and increased generic competition.
Pfizer has been facing greater pressure than many of its peers. Its blockbuster anti-cholesterol drug drug Lipitor – which accounts for almost a third of the group’s revenue and more than 40 per cent of its profit – goes off-patent in 2011.
Acquiring Wyeth would allow Pfizer to regain access to consumer products, having sold its over-the-counter unit two years ago to Johnson & Johnson for $16.6bn two years ago.
NH:
as you can see that could be out Monday
NH:
actually I am not surprised by the muted reaction
NH:
I guess big pharma deals have such a shocking track record
NH:
that no one gets excited any more
BE:
although shareholders of a Dutch vaccines company called Crucell might feel different
BE:
Weyth was in talks to buy them
BE:
and this morning’s news has seen their share price fall like a stone
BE:
on fears that a deal will be off
BE:
MF Global has an interesting take on the Pfizer move
BE:
they say it won’t lead to more consolidation because
BE:
most European drug companies are in the midst of cost cutting programmes
BE:
and don’t have a great deal of cash
BE:
Wyeth/Pfizer
No it won’t lead to more consolidation
MF Global
Even if the PFE/WYE deal did happen we do not believe this would trigger further consolidation in the European large cap Pharma sector for 3 reasons:
(1) Synergies: although EU Pharma still has fat to cut
out deal related synergies are more difficult to extract now than during the previous round of consolidation at the start of the decade. This is because most of the EU players are in either in the middle of existing restructuring programmes (AZN, GSK and NOVN) and/or have realised substantial margin improvement already (eg AZN).
BE:
(2) Financing: European large cap Pharma companies have much more leveraged
balance sheets now than during the last round of consolidation (ie AZN, Novartis and Roche have/are trying to increase leverage to acquire Medimmune, Alcon and Genentech respectively). In combination with the significant value destroyed in the last round of consolidation in the early part of the decade shareholder appetite for paper deals would thus be very limited in our view.
(3) Integration risk is higher now: as described above AZN, Novartis and Roche are already/about to integrate major acquisitions
which would significantly increase the execution risk associated with mega mergers. (Although Sanofi has the fire power for a mega deal and has no existing integration risk we believe the new CEO (ex GSK) strongly believes in the strategy of his former employer: longer term a successful Biotech in-licensing strategy adds more value than a shorter term mega marriage.
NH:
Great idea from LondonBus
NH:
blog the Treasury Select Commitee when the hacks appear
NH:
Pesto vs McFall should be fun
NH:
but I think our editor is up as well
NH:
if staffing levels permit
NH:
time for a little bit of LIBOR
NH:
DJ 3-Month Euro Libor Fixed At 2.19%, Vs 2.25313% Thursday
NH:
DJ 3-Month Sterling Libor Fixed At 2.19313%, Vs 2.20125% Thurs
NH:
DJ 3-Month USD Libor Fixed At 1.16938%, Vs 1.15938% Thursday
NH:
The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans in dollars rose to the highest level in two weeks, the British Bankers’ Association said.
The rate climbed one basis point to 1.17 percent today, the highest level since Jan. 9, the BBA said. The overnight rate increased three basis points to 0.24 percent, the highest since Dec. 5.
The Libor-OIS spread, a gauge of bank reluctance to lend, was little changed at 94 basis points.
NH:
it has crep up again dollar Libor
NH:
Ok, this was up on the site a little earlier
NH:
but we have a official copy
NH:
a letter sent to Jim Rogers
NH:
from a couple of senior guys at RBS
NH:
David Simmonds, Head of FX & Emerging Markets Strategy
Ross Walker, UK Economist
NH:
Dear Mr Rogers,
We followed with interest this week’s media scrum around your
Armageddon-esque vision of Britain.
That the UK economy faces serious recession is beyond doubt. Few
doubt either that the pound is at risk of further decline, possibly sharp
and disorderly. But some of the reasons that you wheel out in support
of the Anglo apocalypse cannot be allowed to pass without challenge.
Your pessimism on the UK and the currency seems to be premised
most heavily on North Sea oil running out and on the UK having
nothing to sell beyond financial services.
NH:
Your emphasis on the oil question is particularly intriguing, not least
because the UK has been running persistent deficits in its trade in oil
for over four years now (Chart 1). While some markets function with a
lag, to cite this as a major negative influence for 2009 and beyond
seems an implausible stretch. As far back as the 1990s, UK oil
exports averaged just 1.2% of GDP, a far cry from the 4.6% in 1984
(Chart 2). Oil has been a useful source of tax revenue for successive
governments, but there is really no basis for claiming it is central to
UK economic growth, let alone employment.
Your contention that the UK has nothing to sell also seems
exaggerated judging by the data. UK exports form a rising share of
output, reaching almost 30% of GDP in 2006-07 from an average of
11% in the 1960s, 15% in the 1970s and 17½% in the 1980s (Chart
3). The related argument that the UK no longer has any sort of
manufacturing sector is similarly open to challenge. As with most
developed economies, manufacturing is shrinking as a share of GDP
but – even in the UK – is still larger than the financial intermediation
sector.
None of this is to ignore the profound difficulties facing the UK
financial sector, of which we could hardly be unaware! In a stilldeleveraging
world, in which banks grapple with balance sheet
reduction and where capital flows home and stays home, both the UK
economy and sterling are most vulnerable.
But your argument that the UK goes to the dogs because the oil’s run
out and because it has nothing to sell, while making for good soundbites,
lacks rigour
NH:
anything to round up on?
BE:
Bit of comment from HSBC on the GDP, perhaps?
BE:
It speaks volumes of the difficulties facing the UK economy at present that this morning’s
fourth quarter GDP data, confirming the first technical recession since 1991, arguably
constituted one of the less significant releases of the week, at least for financial
markets. Only some miraculous statistical quirk, it seems, would have avoided that fate
today and a significant decline in GDP during the quarter was widely expected (consensus
-1.2% Q-o-Q). In the event, however, the data managed to fall beyond even this depressed
level of expectations, with headline GDP falling 1.5% over the quarter and, in turn,
providing the worst set of quarterly data for the UK since Q2 1980.
BE:
Only a limited breakdown was provided in today’s release, based along broad industrial
lines. All sectors, with the exception of agriculture (constituting just 1% of the economy)
recorded declines. Notable, outsize drops in output were seen in the distribution, hotels &
catering (-2.4%), transport & communication (-2.0%) and the manufacturing (-4.6%) areas.
But with this Q4 manufacturing figure implying only a decline around 1.3% in December output
(figures yet to be released), some downside risk surrounds this provisional estimate for the
quarter.
BE:
The higher frequency data releases point to broad-based weakness persisting into the first
quarter of the year, while Mervyn King’s speech earlier this week suggested that a
contraction is now expected for at least the first half of 2009. But whilst it is natural
to look ahead to the coming quarters, the extent of the fourth quarter decline should not be
overlooked. These are exceptionally weak figures on an absolute, historical and even
relative basis. Put bluntly, significant declines are expected to emerge within the fourth
quarter GDP data for practically all of the major economies, but today’s data risks forcing
the UK towards the bottom of this international league table. On an annualised basis, the
UK economy contracted by 6.2% during Q4, substantially worse than the consensus expectation
for a 5% drop in US GDP during the period (data released Thursday 29th), although the as yet
unconfirmed drop in German Q4 GDP may in fact have been larger.
BE:
The December retail sales figures were also released this morning, rising by an incongruous
1.6% during the month. The market has long since stopped concentrating upon this figure,
and confidence in the series is unlikely to return for some time yet, at least until the
various statistical inquires (relating mainly to the seasonal adjustment process) by the ONS
are completed. But there are two likely explanations for an increase that sits completely
at odds with practically any of the news relating to the UK retail sector at present.
Firstly, the official retail sales release relates to volumes not value, and the almost
unprecedented levels of retail discounting over the past month will have had an impact here.
Second, and most importantly, the December 2008 data proved exceptional in that they cover
a five week sample period that extended until January 3rd, and therefore both pre and post
Christmas trading. The factor introduces a clear downside risk to the January 2009 release,
and the small, dwindling group who still follow this series would be well advised to take
the December and January data together before formulating a view.
BE:
Oh, and there was – I’m afraid – something else to say on the banks.
NH:
what something positive?
BE:
Bruno Paulson at Bernstein is a
NH:
wow, still some believers
BE:
Keeps outperforms on Barclays and RBS.
BE:
Although it might be unfair to note he’s been pitching that line since July of last year.
BE:
Investing in the UK banking sector is now at best fairly binary, even arguably analogous to buying an
option. Nevertheless, we would argue that the recent share price collapses mean that the risk-returns are out of whack, and that the stocks have the potential for massive upside if (and notice the if) they avoid the perils of full nationalisation.
The current stock prices are at a fraction of the end 2008 tangible book values, ranging from 0.19x at RBS to 0.24x at Barclays, meaning that the prices imply minimal survival chances of 13 to 30% depending on the assumptions used in the analysis. These probabilities support our positive view on the sector, particularly given the UK authorities’ opportunities to boost the banks’ crucial capital ratios by squeezing down the Risk Weighted Assets (RWAs).
BE:
The main risk of nationalisation, and thus shareholder extinction, is likely to come from the Core Tier 1 ratios slumping towards the minimum 4% level, given that bank runs are now unlikely and the government should see nationalisation as a last resort. The severe erosion of the Core Tier 1 ratios in H2 2008 (pre-equity injections), particularly at RBS where there was a near 2% fall, does suggest that there is a risk of dropping dangerously close to the minimum levels. Our argument is that the regulators are in a position to give the banks extra breathing space by significantly driving down the RWAs.
NH:
OK, we need something to counter that optimism
NH:
what abiout this from Cazenove
NH:
on the Lloyds Banking Group
NH:
which has had a grim debut
NH:
a real baptism of fire
NH:
and this Caz piece might explain why
NH:
it seems Monday’s reassuring update on trading
NH:
was not a reassuring as it appeared
NH:
The share price of Lloyds has fallen 50% in the past four days since its trading statement. Though there was no detail, we inferred from the statement that capital is below our estimates. A change in ruling by the FSA has allowed Lloyds to classify £5bn as additional capital and add 100bp to the equity tier 1 ratio.
Classifying a gain from the fair value of HBOS debt that must
unwind on maturity does not match our view of equity capital; either permanent or available to absorb losses. In isolation the effect is to lift our estimate of equity tier 1 ratio from 6.0% to 7.0%, or the top of the range that Lloyds has newly provided for the pro forma combined equity tier 1 ratio at 31 December 2008. It has set a wide range, at 6-7%, which equates to £5bn and suggests to us that we would be too high at 7.0%.
NH:
Therefore we reduce our estimates for the following factors:
Reflect £5bn gain on fair value of HBOS debt within book value and equity tier 1
Further reduce earnings by a cumulative £0.5bn for H2 08E; a reduction made in the absence of specific guidance from the company’s 19 January statement, but the statement made it plain that Lloyds does not yet know the HBOS final results, in our view (“The Board understands from HBOS that …there has been no significant change”).
Increase insurance volatility by £0.8bn (pre tax, excluding policyholder) to reflect poor market performances in the second half 2008E
NH:
Therefore we reduce our estimates for the following factors:
Reflect £5bn gain on fair value of HBOS debt within book value and equity tier 1
Further reduce earnings by a cumulative £0.5bn for H2 08E; a reduction made in the absence of specific guidance from the company’s 19 January statement, but the statement made it plain that Lloyds does not yet know the HBOS final results, in our view (“The Board understands from HBOS that …there has been no significant change”).
Increase insurance volatility by £0.8bn (pre tax, excluding policyholder) to reflect poor market performances in the second half 2008E
NH:
Further the actions of the FSA suggest LBG will be a main
beneficiary, with action to reduce the cyclicality of Basel II as well as the relief on acquisition accounting.
Arguably in today’s environment the business mix of LBG is relatively attractive compared to its UK peers when the latter have investment banks with current exposures that are hard to scale and a future business model difficult to envisage. Yet the purity of the strategic advantage is tainted by the large ABS portfolio in HBOS treasury.
We retain an underperform recommendation because of the weaknesses riddled through HBOS and the consequent probability of needing additional
capital.
BE:
actually that’s a key line
BE:
from Monday’s trading statement
BE:
“The Board understands from HBOS that …there has been no significant change”
BE:
will they understand in a week that there is a problem?
BE:
that is not specific guidance
NH:
we haven’t got a clue
NH:
and out fingers are cross that everything will be alright
BE:
Would prefer to wrap.
BE:
Well, you’re younger than me I guess.
NH:
Mo Money, Mo Problems
NH:
there are a few things to finish on
NH:
Sainsbury up 7p at 305.5p
NH:
and that’s after Justin King popped into Caz for a little chap last night
NH:
Sainsbury presentation to Caz sales – antidote to the gloom SBRY.L SBRY LN 310p In Line; Sector Underweight
As usual Justin King offered a coherent, articulate view of the UK consumer economy and Sainsbury’s position and prospects within it. Nonetheless it was striking that this could have been regarded as a confident presentation even in far more encouraging market and economic conditions. Given that the UK consumer is in/faces a deep recession the tone was remarkably upbeat. Key points:
1. Above all else the major change in tone which we detected was the description of Sainsbury as a growth business. In the past the opportunity has been described in terms of recovery however it is clear that, emboldened by a very solid recent trading performance and the emergence of non-food (especially clothing) as a growth engine, the business now sees considerable opportunity for expansion.
2. Specifically King believes Sainsbury has the opportunity to do over the next decade “what Tesco has done over the last ten”. This encompasses a number of different facets (some interlinked):
NH:
Space: Sainsbury believes it is best positioned of the Big Four to expand its physical footprint. Tesco already has positions in most local markets and will, inevitably, increasingly struggle to win planning approval, Asda suffers from format constraint (it only operates big stores), and Morrison’s estate suffers from legacy issues (old Morrison stores lack development potential, old Safeway sites tend to be sub optimal relative to the competition). Sainsbury feels it has very few genuinely mature stores with no development/extension potential while it is increasingly confident in taking on ‘Big Space’ (50+k sq ft) and it is also a competent convenience/town centre operator
NH:
also been keeping a watch on a small cap company called Reneuron
NH:
which is a stem cell specialist
NH:
this week it got permission to start a trial of a stoke therapy in the UK
NH:
it has gained another 70% this morning
NH:
shares 4.25p higher at 9.75p
BE:
(Hoof – check out the Wall of Worry a bit later.)
BE:
Right. So what’s the story?
NH:
oh,. and here’s why Renueron are up
NH:
US FDA has approved the first use of embryonic stem cells in humans.
This, only two days after the inauguration of President Barack Obama.
The FDA authorised Geron to begin clinical trials on its GRNOPC1 cell therapy (cells derived from human embryos) for spinal cord injury.
Geron’s trial was put on clinical hold by the FDA, citing concerns over cell-based therapies.
This is good news for ReNeuron, as its ReN001 therapy (derived from similarly controversial foetal cells) is currently on clinical hold in the US.
It is possible that further FDA reversals may come in the near future
NH:
right, that’s it for this session and inded this week
NH:
thank you all for joining us
NH:
which we just can’t keep up with anymore
NH:
we will be Murphyless again next week
NH:
which on balance is probably a good thing
NH:
we just must mention this
NH:
Former French President Chirac hospitalised after mauling by his clinically depressed poodle
BE:
(Fitz – I refer you also to the Wall of Worry.)
NH:
Former French president Jacques Chirac was rushed to hospital after being mauled by his own ‘clinically depressed’ pet dog.
The 76-year-old statesman was savaged by his white Maltese dog – which suffers from frenzied fits and is being treated with anti-depressants.
The animal, named Sumo, had become increasingly violent over the past
NH:
The former president, who ruled France for 12 years until 2007, was taken to hospital in Paris where he was treated as an outpatient and sent home, VSD magazine reported.
Mrs Chirac said: ‘The dog went for him for no apparent reason.
‘We were already aware the animal was unpredictable and is actually being treated with pills for depression.
‘My husband was bitten quite badly, but he is certain to make a full recovery over the coming weeks.’
NH:
and point taken Taxloss, I will see if one of the female Alphavillers want to join an ML session
NH:
actually Izy has just been noting the gold price move this morning
NH:
it fixed at $873 apparently
NH:
something is going up at least
NH:
FTSE 100 down 45 points at 4,006
NH:
will it hold the 4,000 level today?
NH:
apart from this piece of RAW
NH:
Swiss Re down 15% – more rumours from several brokers that a German/Swiss insurer could go down on Tier 1 notes writedowns
