Markets live chat transcript for the chat ending at 12:06 on 2 Feb 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
Okay – welcome everyone
PM:
This is Markets Live, the FT Alphaville’s daily markets chat.
PM:
I am ALL over the shop – back from a week and half’s hols.
PM:
And Neil
PM:
What the HELL have you done to the weather?
PM:
As recently as Saturday I was basking in 38 degree sunshine.
PM:
And now this.
PM:
PM:
The snow hasn’t stopped Market Live tho.
PM:
And that’’s despite Neil having to walk in from Hertfordshire.
NH:
Well, I ran actually.
PM:
Course you did.
PM:
I seem to have missed like a year of news.
11:04AM
PM:
rather than trying to catch me up with stuff….
PM:
what’s happening out there today???
NH:
well, the short answer is not a lot
NH:
and that’s because the UK is closed today because of the snow
NH:
very, very few, traders, dealers seem to have made it in
NH:
but for those who have
NH:
the market has suffered a bit of a wobble
NH:
we are down 91 points at 4,058
NH:
with just three FTSE 100 companies up at the moment
NH:
one being Rio Tino, which will revisit a bit later
NH:
now, London is weak because
NH:
of the weak finish on Wall Street Friday
NH:
finished at 8,000
PM:
ah
PM:
one of those physiological important levels
PM:
(that’s a very good gag below re Iceland)
NH:
something like that
NH:
actually, the Dow finished January down 8.84% on the month.
PM:
NH:
which I think I am right in saying is the worst Jan on record
NH:
I believe the previous worst Jan was 1916, when it fell 8.64%.
NH:
and according to the old stock market saw – Jan sets the tone for the rest of the year
NH:
anyway, Friday’s drop was all down to fears about the bad bank
NH:
will it/won’t it happen
PM:
(and the gag about bears being able to walk thru the snow — keep em rolling)
PM:
So it’s the banks leading the UK lower
NH:
they are
PM:
and what about some of these prices???????
PM:
what has been going on while I have been away
PM:
NH:
well, you remember all those worries about the Lloyds, Barclays and RBS being nationalised
PM:
yep
NH:
well, they all went away
PM:
er, why??
NH:
not sure
NH:
they were sort of here one minute and gone the next
NH:
everyone sort of decided that the govt could not take them on to their books
NH:
and they probably had enough capital to get through
NH:
so we have this monster rally
NH:
actually this will give you an idea of what’s going on
NH:
check these gains from last week
NH:
Barc up 107%
NH:
Lloyds up 84%
NH:
RBS up 80%
PM:
NH:
actually this will give u an idea of why they were rallying
NH:
this is an upgrade of Lloyds
NH:
came out of Caz this morning
NH:
: Lloyds Banking Group – (LLOY.L LLOY LN IN-LINE/NEUTRAL 89p)
For the next few weeks we expect international news to continue to be dominated by government actions on ‘bad bank’ style initiatives.
For the next few weeks we expect international news to continue to be dominated by government actions on ‘bad bank’ style initiatives.
These actions coupled with regulatory rule changes can lead to higher capital ratios.
Risks are still evident including failure by the authorities to implement their plans. After last week’s share price rises there is some expectation of good news.
NH:
Yet as a first step we change our recommendation on Lloyds Banking Group to IN-LINE from underperform. Trading on 0.5x book value, Lloyds has most to gain from the FSA altering capital requirements and as the provider of one in three mortgages in our view it is most likely to be a major beneficiary from government initiatives.
PM:
incredible moves
PM:
let’s see if why can’t bring a bit of normality back to proceedings
NH:
well, they is already some profit taking going on in the financials
NH:
and its Europe wide
NH:
on top of that Barclays has suffered a downgrade from Moody’s
NH:
usually my eyes tend to glaze over when I see these
NH:
as they are always backward looking
NH:
but this one
NH:
well, the wording is pretty aggressive
NH:
and reading between the lines
NH:
I think Moody’s are saying that Barclays
NH:
may not have enough capital to get through
NH:
although they have £17bn of surplus capital
NH:
that could be erased by losses on £10.2bn of commercial mortgages and non-US residential mortgage securitisations and on £23bn of notional mono-line-wrapped structured exposures
NH:
and we all know what would happen if Barclays was forced to go cap in hand to the govt
PM:
yes — was rading Sam’s post on the matter
PM:
reading even
PM:
we should put a few excerpts from the Moody’s downgrade
PM:
Feb 1 – Moody’s Investors Service has today downgraded the long-term ratings of Barclays Bank plc (“Barclays”) from Aa1 to Aa3 with a stable outlook. The Bank Financial Strength Rating
(BFSR) was lowered from B to C, with a negative outlook. This concludes Moody’s review of the bank’s ratings initiated on 17 September 2008. At the same time, the short-term P-1 rating was affirmed.
PM:
Moody’s downgraded the bank financial strength rating of Barclays from B to C (mapping to a baseline credit assessment of A3) and has a negative outlook.The downgrade to C with a negative outlook reflects Moody’s expectation that Barclays’ profitability and capitalisation will continue to be pressured by the ongoing need to implement further writedowns and build larger loan loss reserves. Based on Moody’s own stress tests, in a base stress scenario deteriorating values will lead to significant further writedowns on the bank’s credit market exposures, particularly for the GBP10.3 billion (as of Q308) commercial mortgages and non-US residential mortgage securitisation exposures and on the GBP23.0 billion notional of monoline-wrapped structured exposures – an area in which the rating agency considers the bank to be exposed to a potentially sharp increase in provisioning requirements.
PM:
Moody’s believes that this should provide Barclays with a buffer for additional writedowns or losses of up to approximately GBP16-17 billion whilst still retaining the current BFSR of C. The government’s announced Asset Protection Scheme could cap or reduce some losses and Moody’s will comment on the potential impact on the scheme as soon as more informationis available
NH:
thanks for that
PM:
Also — while we are on Barclays….
PM:
Do you know this guy — Bob Rickert?
NH:
never heard of him. what does he do?
PM:
Well apparently is/was Barc’s global chief information officer
NH:
and what do they do?
PM:
Well – head of IT i think
NH:
interesting
PM:
He’s gone — resigend last week apparently — and rather suddenly
PM:
Ive put a call in but heard nothing back
PM:
So dont know significance
NH:
Barclays media relations team snowed in
PM:
Well, the Jubilee line was suspended this morning — not easy to get to Canary wharf
PM:
Good gag below from Broke err
NH:
can’t find any analyst comment on Barc yet
NH:
seems most of the bank analysts can’t be bothered to come in
NH:
but I have got this snippet from the CDS market
NH:
Feb. 2 (Bloomberg) — Credit-default swaps on Barclays Plc rose 12.5 basis points to 185, according to JPMorgan Chase & Co. prices, after Moody’s Investors Service cut the bank’s long-term debt rating by two levels, to Aa3 from Aa1.
PM:
Lemmy — im sure everyone is having talks about upgrading risk management systems etc etc
11:18AM
PM:
shall we move on?
NH:
before we do
NH:
a few other things to wrap up in the financials
PM:
I should add that I belive this Barc GIO is moving to another job in the UK — not a forced resignation
PM:
Came as a surprise internally
NH:
first, the FSA is holding big meeting with analysts this afternoon
NH:
to explain their new rules and proposals
PM:
ah
NH:
on capital
NH:
it’s happening between 2-4 and is being hosted by a guy called Paul Sharma, think
NH:
anyway, it seems the FSA could be guilty of selective disclosure
PM:
why’s that
NH:
well, it appears not every bank analysts has been invited
PM:
really?
really?NH:
just a chosen few
NH:
yeah
NH:
look at this angry email
NH:
arrived earlier
NH:
An analyst writes
NH:
I have not been invited – but I was in Scotland on Thurs and Friday, so clients told me about it. Surely this contravenes FSA selective disclosure rules????
I can’t even find anything on Pesto-wire.
PM:
haha
PM:
very funny
PM:
anything else?
NH:
er, just been looking Icap
NH:
on the back of confirmation that they are looking to LCH.Clearnet
NH:
is the London-based clearing house
NH:
Icap are part of a consortium that’s looking to make an offer
PM:
what sort of price are we talking about?
NH:
around £800m
NH:
and that’s weighing on the Icap share price this morning
NH:
down 18p at 218p
NH:
that’s a drop of 7.6%
PM:
hmmm
PM:
what’s the view in the market?
NH:
it seems to be
NH:
this would be a good strategic move
NH:
but strategic always = pricey
PM:
NH:
especially given the lack of cost synergies
NH:
and then there is the related question of how it would be funded
NH:
here’s a something I picked up from Merrill Lynch
NH:
ICAP has today confirmed that it is part of a consortium of banks looking to
purchase LCH.Clearnet Group. LCH clears cash equities transactions executed
on LSE’s UK order book and NYSE Euronext. In the OTC markets, LCH has
strong presence in the clearing of fixed income products and is currently the
second largest clearer of fixed income and repo products globally. Its SwapClear
offering clears certain European interest rate swaps with its RepoClear clearing
product focussing on European Repo. In addition LCH clears a range of
agricultural soft commodities and metals derivatives products listed on
Euronext.Liffe and the London Metal Exchange. It is currently around 75%
owned by a bank consortium, 16% by Euroclear, again a user owned entity and
11% by various exchanges.
purchase LCH.Clearnet Group. LCH clears cash equities transactions executed
on LSE’s UK order book and NYSE Euronext. In the OTC markets, LCH has
strong presence in the clearing of fixed income products and is currently the
second largest clearer of fixed income and repo products globally. Its SwapClear
offering clears certain European interest rate swaps with its RepoClear clearing
product focussing on European Repo. In addition LCH clears a range of
agricultural soft commodities and metals derivatives products listed on
Euronext.Liffe and the London Metal Exchange. It is currently around 75%
owned by a bank consortium, 16% by Euroclear, again a user owned entity and
11% by various exchanges.
NH:
The strategic benefits to ICAP of such a move are clear to us. It has been looking
for a while to position itself in the post trade area, seeing this as crucially
important to the development of the OTC market. Being shareholder in a leading
clearinghouse for both exchange traded and OTC products would entail a large
leap in its post trade exposure. It would, in our view, put still more daylight
between ICAP and its competitors in the OTC area, and deepen ICAP’s links with
its clients.
for a while to position itself in the post trade area, seeing this as crucially
important to the development of the OTC market. Being shareholder in a leading
clearinghouse for both exchange traded and OTC products would entail a large
leap in its post trade exposure. It would, in our view, put still more daylight
between ICAP and its competitors in the OTC area, and deepen ICAP’s links with
its clients.
NH:
This all sounds very early stage, and so we have seen no discussion of financials,
though LCH does publish its own financial statements. We note that in the past,
ICAP has been happy to take on initially dilutive deals like BrokerTec and
Traiana, in search of medium term strategic objectives, but that the dilution, for
example in BrokerTec, has not been long lasting.
though LCH does publish its own financial statements. We note that in the past,
ICAP has been happy to take on initially dilutive deals like BrokerTec and
Traiana, in search of medium term strategic objectives, but that the dilution, for
example in BrokerTec, has not been long lasting.
There is no comment about pricing in ICAP’s release. The Observer suggested
on Sunday that the whole deal could be worth around $1.2bn. We would want to
do further work on this, but our initial view is that ICAP would want to fund a
participation in such a consortium out of debt; this has been its approach thusfar.
We believe that a participation in such a consortium would be possible within
ICAP’s guidance for debt at 2.5-3x EBITDA. We would presume that ICAP will
have a relatively small involvement in the consortium, as this has been the case
with its ownership of the Clearing Corporation, and its statement refers to “a
number of leading financial institutions”. So, we would see the possibility of a
noticeable equity issuance as slight.
NH:
Overall, this all sounds a long way from the endgame; DTCC’s current industry
position would make it a formidable opponent in any deal, for a start. However, if
the deal was completed at a sensible price, we would see it as a strategic price for ICAP
position would make it a formidable opponent in any deal, for a start. However, if
the deal was completed at a sensible price, we would see it as a strategic price for ICAP
NH:
and this is from Sarah Spikes at Arden Partners
NH:
ICAP this morning confirmed weekend reports that it is among a group of companies that is mulling a bid for LCH Clearnet.
The statement stresses that the talks are early and that ICAP is working as an equal part of a group with other members rather than singlehandedly making an approach – we believe that ICAP’s participation would likely cost in the tens of millions, if the approach is successful. Press reports say that LCH could be worth £800m to the consortium.
NH:
While potentially aligning ICAP more closely with the needs of its customers, there is no direct financial savings to be gained from owning part of LCH. This transaction would help ICAP with its ongoing development of post-trade services – one of the key parts of the company’s long-term development.
ICAP trades on a 2009 PE of 6.95X, while Tullett Prebon is trading on 4.8X 2009.
PM:
thanks for all that
11:23AM
PM:
Should catch up on the bank prices which we didnt put up earlier
PM:
barclays tops the faller board with a drop of 11.6%
PM:
Down 12p at 93.8
PM:
Obviously had a yo-yo five days or so
PM:
other notable bank fallers include HSBC and StanChart
PM:
Off 5.7 % and 6% respectively
11:25AM
NH:
just going back to Icap a moment
NH:
this seems like a pretty big u-turn
NH:
one theory in the market is they want Clearnet because they see the CDS market being more heavily regulated in future
PM:
In terms of a central counterparty — CDS potentially moving “on-market”
PM:
Sorry — “on exchange”
PM:
??
NH:
but weren’t we told by Icap that was rubbish and it would migrate
NH:
as with most other OTC products
PM:
Yes — well seem to be hedging bets now…
NH:
it would seem that way
PM:
okay — let’s move on
11:27AM
NH:
Didn’t ask you what your hols were like. Moz again?
PM:
Yes, and some time in South Africa.
NH:
Good?
PM:
Yeah, though I hadn’t spent any time in South Africa for a while – and its seems to have changed.
NH:
What – danger?
PM:
No – if anything felt a tad safer.
PM:
But it has become terribly corrupt.
NH:
??????
PM:
Well I got shaken down by the cops twice in two days.
NH:
???????
PM:
I was driving along, minding my own business, when suddenly this copper is alongside me in an unmarked car.
PM:
Stops me – tells me I overtook someone on a solid no-overtaking line.
PM:
Stops a passing car – asks the driver to confirm it – then demands a thousand rand spot fine.
NH:
what’s a 1,000 rand?
PM:
60 odd quid
PM:
I produce my Brit traffic license, which completely throwns him. He demands 400 rand, which I give him, and he buggers off.
NH:
Ha – could have been worse, Could have been a hijacking.
PM:
Well the very next day I drive into this police sweep, where they have stopped several cars – and the copper comes up and says
PM:
I can’t do anything for you but put you in handcuffs and take you in front of the majistrates.
PM:
I’m on the way to the airport. Im supposedly speeding – but its just like a huge organised shake-down.
PM:
The copper openly accepts about 20 quid and I drive off.
NH:
So you are feeling a bit lighter after your trip.
PM:
Well, I just think it’s sad. If all the traffic police are openly corrupt, think about the corruption higher up — when really money is involved.
NH:
doesn’t bode well for the World Cup
NH:
all that cash going in
PM:
ibndeed
NH:
a dread to think where it might end up
PM:
Another thing i would mention is that while the rand has just about fallen as fast as the krona
PM:
The Moz metical has not
PM:
We’ve been outperformed by blinking meticals
PM:
PM:
anyway — back to London
11:31AM
PM:
we should have a look at Rio Tinto
PM:
which is one of the stocks that is actually up this morning
NH:
it is
NH:
up 98 at £16.04
NH:
after the company confirmed the story in this weekend’s STRNS story
PM:
ha
NH:
STRNS
PM:
Sunday times/telegraph regulatory news service
PM:
confirming their own drop
NH:
indeed
NH:
here’s the short statement that popped up on RNS first thing this morning
NH:
Rio Tinto notes the recent press speculation regarding discussions with Chinalco, an existing shareholder.
As previously announced, the Boards of Rio Tinto are continuing to consider a range of options. In this regard, Rio Tinto confirms that it has held discussions with Chinalco regarding Chinalco acquiring minority interests in various operating businesses of the Rio Tinto group and also investing in convertible instruments.
There can be no certainty that a transaction will ultimately take place and any possible transaction would be conditional upon approval by the shareholders of Rio Tinto and all necessary government and regulatory authorities.
A further announcement will be made as and when appropriate.
PM:
so why the positive response???
NH:
well, while you were away
NH:
the market was alive with speculation that Rio was preparing a cash call
NH:
in fact the company was forced to issue a statement to the Australian stock exchange
NH:
saying a cash call was one of a number of alternatives being considered to reduce debt
NH:
which stands at around $38bn
NH:
anyway, if Rio can pull this deal off with the Chinese
NH:
they can avoid a cash call
NH:
the CEO Tom Albanese can keep his job
NH:
and everyone is happy
NH:
if they do a cash call you see, he has to go
NH:
having racked up all that debt with a really badly timed offer for Alcan
NH:
which was made in cash
PM:
so, they want to a deal a with the Chinese instead
NH:
yep
NH:
this has echoes of the Xstrata deal
NH:
one shareholder gets favourable treatment as the company looks to dig its way out of a hole
PM:
bad pun
NH:
I know, sorry about that
NH:
anyway, the whole thing is a clear as mud at the moment
NH:
we don’t know what these convertible instruments will be
NH:
which assets the Chinese might buy
NH:
whether they will increase their equity holdinig
NH:
whether the Aussie govenment will let them
NH:
anyway, the positive thing, from the equity market’s perspective, is that no cash call is coming
NH:
in fact have a look at these notes
NH:
this is from Cazenove
NH:
Rio Tinto – confirms talks with Chinalco [RIO LN RIO.L 1506p] stock recommendation – in line, sector recommendation – neutral
Rio Tinto has released a RNS this morning stating that it has held discussions with Chinalco regarding “Chinalco acquiring minority interests in various operating businesses of the Rio Tinto group and also investing in convertible instruments”. Chinalco is the majority partner in Shining Prospect (Alcoa is the other partner which injected $1.2bn of the $14bn stake) which owns a 12% stake in Rio Tinto plc equivalent to a 9% stake in the group. There has been much speculation that the Chinese aluminium producer would be looking to assist Rio meet its commitment to reduce net debt by $10bn through purchases of assets etc. which todays statement confirms.
NH:
This announcement, along with Friday’s sales of $1.6bn of assets, further diminishes the risk of Rio Tinto coming to the market for cash which, as we mentioned on Friday, is something we believe Rio Tinto’s management are trying to avoid if they possibly can. According to our current forecasts Rio Tinto’s net debt falls by $5.1bn using spot commodities and currencies post $1.7bn of dividends ($6.6bn using our commodity assumptions). We suspect Chinalco will be interested in a number of assets, not necessarily just aluminium based, and there is little point in trying to speculate which ones. We would note too that Chinalco is limited by various regulatory authorities in building a stake of more than 15% in the group equivalent to $1.7bn of additional purchases on the market although as we saw previously, Chinalco paid more than the market price for its original stake.
NH:
We believe Rio Tinto can place up to 5% of capital without triggering rights issue requirements and this may be another avenue being explored as part of any convertible instrument.
Rio Tinto’s share price is trading on 6.5x 2009e and EV/EBITDA of 4.6x with the multiples expanding to 8.0x and 5.5x using spot assumptions. We believe, as the threat of a rights issue recedes, these are looking increasingly attractive valuation metrics.
Rio Tinto’s share price is trading on 6.5x 2009e and EV/EBITDA of 4.6x with the multiples expanding to 8.0x and 5.5x using spot assumptions. We believe, as the threat of a rights issue recedes, these are looking increasingly attractive valuation metrics.
NH:
here’s Bar Cap
NH:
According to media reports this weekend, the
Chinese are considering injecting up to $15bn of
capital into Rio Tinto in exchange for shares,
convertible securities, and assets or stakes in
assets. Based on our analysis, $15bn of fresh
capital would be more than enough to remove the
pressing concerns over Rio’s overlevered balance
sheet and would likely result in a significant
rerating of Rio’s valuation versus the sector. While
we are sceptical that the Australian Foreign
Investment Review Board would allow the Chinese
to increase their interest in Rio as much as these
reports indicate, we are encouraged that Rio’s
leadership may find an outside-the-box solution to
the company’s financial problems.
Chinese are considering injecting up to $15bn of
capital into Rio Tinto in exchange for shares,
convertible securities, and assets or stakes in
assets. Based on our analysis, $15bn of fresh
capital would be more than enough to remove the
pressing concerns over Rio’s overlevered balance
sheet and would likely result in a significant
rerating of Rio’s valuation versus the sector. While
we are sceptical that the Australian Foreign
Investment Review Board would allow the Chinese
to increase their interest in Rio as much as these
reports indicate, we are encouraged that Rio’s
leadership may find an outside-the-box solution to
the company’s financial problems.
NH:
Summary
While now is not a good time to sell assets or sell
shares, in our view, Rio appears to have little
choice. We expect Rio’s share price to perform
well this week on this news.
We would be more aggressive on Rio if its
balance sheet issues are addressed without too
much dilution for current shareholders. For now,
our rating remains 2-Equal weight
While now is not a good time to sell assets or sell
shares, in our view, Rio appears to have little
choice. We expect Rio’s share price to perform
well this week on this news.
We would be more aggressive on Rio if its
balance sheet issues are addressed without too
much dilution for current shareholders. For now,
our rating remains 2-Equal weight
NH:
and UBS
NH:
which have some outlandishly bullish target price
NH:
Discussions with largest shareholder, Chinalco, are taking place
Rio has confirmed that it is discussion with Chinese mining company, Chinalco,
regarding Chinalco acquiring minority interest in various operations ‘and also
investing in convertible instruments’. Chinalco currently owns c. 9.3% in the Rio
group and has approval from the Australia Govn to increase this to 14.99%.
Rio has confirmed that it is discussion with Chinese mining company, Chinalco,
regarding Chinalco acquiring minority interest in various operations ‘and also
investing in convertible instruments’. Chinalco currently owns c. 9.3% in the Rio
group and has approval from the Australia Govn to increase this to 14.99%.
NH:
Many options to reduce net debt by US$10bn in 2009
In our opinion, Rio has more options to repay its US$10bn of net debt, targeted by
mgmt for 2009, than first appears. This may include: assets disposals (Rio
announced US$1.7bn of disposals last week and more may follow); JV’s (with
Chinalco etc buying into existing and/or growth projects with a cash injection up
front); cut the dividend (US$1.8bn pa); rights issue/placing (DLC structure may
mean placing is easier to execute); Chinalco increasing stake to 14.99% (worth
US$1.6bn). We continue to believe a placing is possible but is not a certainty.
In our opinion, Rio has more options to repay its US$10bn of net debt, targeted by
mgmt for 2009, than first appears. This may include: assets disposals (Rio
announced US$1.7bn of disposals last week and more may follow); JV’s (with
Chinalco etc buying into existing and/or growth projects with a cash injection up
front); cut the dividend (US$1.8bn pa); rights issue/placing (DLC structure may
mean placing is easier to execute); Chinalco increasing stake to 14.99% (worth
US$1.6bn). We continue to believe a placing is possible but is not a certainty.
NH:
Discount to BHP remains too large, in our opinion
Rio continues to trade at c.30% EV/EBITDA discount to BHP in CY’09, which we
consider to be too large (despite issues over Rio’s mgmt, growth and dividends).
We estimate Rio has a ‘09 FCF yield of 25%. Rio is due to release its FY’08
results on Feb 12th – we are forecasting EBITDA of US$22.2bn and net earnings of
US$9.97bn.
Rio continues to trade at c.30% EV/EBITDA discount to BHP in CY’09, which we
consider to be too large (despite issues over Rio’s mgmt, growth and dividends).
We estimate Rio has a ‘09 FCF yield of 25%. Rio is due to release its FY’08
results on Feb 12th – we are forecasting EBITDA of US$22.2bn and net earnings of
US$9.97bn.
NH:
Valuation: Buy rating and £22 target maintained
Our target is based on 0.5x NPV – the historic ave has been 1.05x. Rio is trading at
c.1.3x to BHP, the proposed merger ratio was 3.4x and the historic ave 2.5x plus.
Our target is based on 0.5x NPV – the historic ave has been 1.05x. Rio is trading at
c.1.3x to BHP, the proposed merger ratio was 3.4x and the historic ave 2.5x plus.
NH:
and here’s some more from another broker
NH:
The weekend press reports that Chinalco could be looking to
increase its stake in Rio. Chinalco currently owns 12.0% of RIO LN,
which equates to 9.3% of the Rio Tinto Group. Press indicated that
Chinalco could increase its stake in the LN line to 18% (we estimate
this would require the purchase of 60m shares), and could acquire 14% of
the AU line (we estimate this would require the purchase of 64m shares).
This would take Chinalco’s ownership in the Rio Tinto Group to 19%. As
a result, in Australia, a new FIRB review would occur, because Chinalco
currently only has permission to go to 15%. If FIRB does not permit
Chinalco to go above 15%, FIRB can force Chinalco to decrease its stake
to below 15%. So it would be a risky move for Chinalco to increase its
stake in Rio above 15% without knowing which way FIRB would go. Just an
FYI…
increase its stake in Rio. Chinalco currently owns 12.0% of RIO LN,
which equates to 9.3% of the Rio Tinto Group. Press indicated that
Chinalco could increase its stake in the LN line to 18% (we estimate
this would require the purchase of 60m shares), and could acquire 14% of
the AU line (we estimate this would require the purchase of 64m shares).
This would take Chinalco’s ownership in the Rio Tinto Group to 19%. As
a result, in Australia, a new FIRB review would occur, because Chinalco
currently only has permission to go to 15%. If FIRB does not permit
Chinalco to go above 15%, FIRB can force Chinalco to decrease its stake
to below 15%. So it would be a risky move for Chinalco to increase its
stake in Rio above 15% without knowing which way FIRB would go. Just an
FYI…
PM:
thanks for all that
11:40AM
11:41AM
PM:
Anything else to look at?
PM:
Note that comment below on FSA meeting being delayed…
PM:
thanks for that
NH:
perhaps they can invite everyone next time
NH:
NH:
right, here’s one thing to look at
NH:
MPC meeting this week
NH:
seems most people are going for 50bps cut
NH:
but not Michael Sanders at Citigroup
NH:
he is being bolder
NH:
100bps
PM:
really?
NH:
yep
NH:
in fact he reckons there is a chance the MPC cut them all the way to zero
NH:
and his argument is that the costs of delays exceed the risks of action
NH:
here’s the note
NH:
We expect the MPC to cut rates by 100bp (from 1.5% to 0.5%) at the upcoming
meeting. Indeed, the MPC may even accept the virtually-inevitable and cut rates all
the way to zero in February (or to some token low but positive level). Our forecast is
more aggressive than the consensus (which is for a 50bp cut) and than the January
cut (50bp). To be sure, there are always uncertainties, and it is possible the MPC will
dole out the remaining easing in stages over several months. Nevertheless, we expect
that the ongoing credit crunch, recent run of alarmingly weak economic data,
and preparation of the forecasts for the February Inflation Report will (as in
November) prompt a relatively large cut this month. Costs of delay probably
exceed risks of action. Why wait?
meeting. Indeed, the MPC may even accept the virtually-inevitable and cut rates all
the way to zero in February (or to some token low but positive level). Our forecast is
more aggressive than the consensus (which is for a 50bp cut) and than the January
cut (50bp). To be sure, there are always uncertainties, and it is possible the MPC will
dole out the remaining easing in stages over several months. Nevertheless, we expect
that the ongoing credit crunch, recent run of alarmingly weak economic data,
and preparation of the forecasts for the February Inflation Report will (as in
November) prompt a relatively large cut this month. Costs of delay probably
exceed risks of action. Why wait?
NH:
The consensus view that the MPC will cut by only 50bp (i.e. to 1.0%) seems to be
based on (a) the MPC has only ever twice cut by more than 50bp (last November and
December) and reverted to a 50bp cut in January; (b) there has been a huge monetary
stimulus in recent months, with BoE rates down by 3.5% and the pound down 18%
since mid-08; and (c) the MPC may be reluctant to go all the way to zero.
based on (a) the MPC has only ever twice cut by more than 50bp (last November and
December) and reverted to a 50bp cut in January; (b) there has been a huge monetary
stimulus in recent months, with BoE rates down by 3.5% and the pound down 18%
since mid-08; and (c) the MPC may be reluctant to go all the way to zero.
NH:
In our view, that consensus call understates the rapid deterioration in the
economy over recent months , and the likelihood that gradual easing probably
would be more dangerous and more risky for the economy than rapid easing. In
addition, the Inflation Report has often been a catalyst for more decisive MPC action.
In the November IR, the MPC forecast that GDP will shrink by 1.3% YoY in 2009
and rise by 1.7% YoY in 2010. That already was the gloomiest forecast the BoE has
published since it became independent, in terms of expected average GDP growth
over the next two years and the downgrade from the previous IR
economy over recent months , and the likelihood that gradual easing probably
would be more dangerous and more risky for the economy than rapid easing. In
addition, the Inflation Report has often been a catalyst for more decisive MPC action.
In the November IR, the MPC forecast that GDP will shrink by 1.3% YoY in 2009
and rise by 1.7% YoY in 2010. That already was the gloomiest forecast the BoE has
published since it became independent, in terms of expected average GDP growth
over the next two years and the downgrade from the previous IR
NH:
The recession is deepening with alarming speed. GDP fell by 1.5% QoQ in Q4 —
the sharpest drop since 1980 and the fourth biggest drop of the last 50 years. The
drop was far larger than the November IR forecast for Q4 (down 0.6-0.7% QoQ).
The QoQ rise in unemployment in Q4 was the fifth biggest of the last 35 years. All
economic surveys are extremely gloomy, with the European Commission reporting a
new record low in their seasonally adjusted reading for overall UK economic activity
in January — and widespread weakness across all sectors
the sharpest drop since 1980 and the fourth biggest drop of the last 50 years. The
drop was far larger than the November IR forecast for Q4 (down 0.6-0.7% QoQ).
The QoQ rise in unemployment in Q4 was the fifth biggest of the last 35 years. All
economic surveys are extremely gloomy, with the European Commission reporting a
new record low in their seasonally adjusted reading for overall UK economic activity
in January — and widespread weakness across all sectors
NH:
The drop in consensus forecasts for UK GDP growth over the last few months has
been the sharpest within the last 20 years. Just in the three months October-January,
the consensus for UK 2009 growth fell by 2.0% (from minus 0.2% to minus 2.2%).
Even so, we suspect that the consensus is nothing like gloomy enough. The IMF’s
base case is for GDP to fall by 2.8% this year, the worst among major countries.
And, if Q1 GDP also falls by 1.5% QoQ then even if GDP then levels off in Q2, Q3
and Q4 (an optimistic forecast), GDP for 2009 as a whole will fall by 2.9% YoY.
Our own forecast is for GDP to shrink by 3.3% this year and frankly it may be even
worse. As Blanchflower — who has been more right than the rest of the MPC —
points out in his latest speech, the consensus usually understates the depths of
recessions until they have finished.
been the sharpest within the last 20 years. Just in the three months October-January,
the consensus for UK 2009 growth fell by 2.0% (from minus 0.2% to minus 2.2%).
Even so, we suspect that the consensus is nothing like gloomy enough. The IMF’s
base case is for GDP to fall by 2.8% this year, the worst among major countries.
And, if Q1 GDP also falls by 1.5% QoQ then even if GDP then levels off in Q2, Q3
and Q4 (an optimistic forecast), GDP for 2009 as a whole will fall by 2.9% YoY.
Our own forecast is for GDP to shrink by 3.3% this year and frankly it may be even
worse. As Blanchflower — who has been more right than the rest of the MPC —
points out in his latest speech, the consensus usually understates the depths of
recessions until they have finished.
PM:
thanks for that
11:45AM
PM:
Is libor out?
PM:
How’s that been last week or so??
NH:
3-month dollar has been rising
NH:
and is expected to post another gain today
NH:
we don’t have any readings yet
NH:
just waiting on them
NH:
should apear in the next couple of seconds
PM:
While we wait — got reading for the Krona?
PM:
1.4165 v dollar
PM:
So it’s rubbish
PM:
Euro is at 90 to £
PM:
So also pretty rubbish
PM:
How about Oil?
PM:
brent spot at 43.39
PM:
As paointed out below –given euro cold snap, price should be going up
NH:
front month contract is $44.71, down 117 in the day
PM:
hmmm
11:49AM
PM:
Note that BA say no heathrow flights before 17.00
PM:
Tracy her is just explaining to us that the Heathrow probs are primarily cos people cannot get in to work there
PM:
What a mess
PM:
Cypriot jet skidding off the runway has not helped
NH:
DJ 3-Month Euro Libor Fixed At 2.07625%, Vs 2.09063% Friday
NH:
DJ 3-Month USD Libor Fixed At 1.225%, Vs 1.18438% Friday
NH:
DJ 3-Month Sterling Libor Fixed At 2.16188%, Vs 2.16563% Fri
NH:
US 3-month up again
NH:
right, what else to look at?
PM:
just not much around
NH:
it really is very quiet today
NH:
feels and looks like Xmas Eve
NH:
FTSE 100 has rallied now, off just 66 points at 4,038
NH:
and what’s this with Gold Oil
PM:
ah GOO!
Gold Oil – little resources play, with assets in Peru, Colombia and Cuba. Not for the faint-hearted.
NH:
a small cap favourite of Paul’s
NH:
under a wee bit of pressure today
PM:
Not a buy — never has been ! Just a funny name — with funny assets
PM:
That’s funny as in odd — not funny ha ha
NH:
Columbia eh. Perhaps they know something about these Xstrata assets
PM:
NH:
stocks down this morning
Gold Oil (GOO:LSE): Last: 2.10, down 0.85 (-28.81%), High: 2.65, Low: 2.10, Volume: 1.02m
PM:
ouch
PM:
News of a placing
NH:
ouch
NH:
looks like people might not cough up the cash
NH:
after last week’s drilling update/upset
PM:
oh dear me
PM:
That looks very worrying
NH:
no gold, no oil
NH:
name change pls
PM:
And no financing
NH:
and no cash from investors
PM:
NH:
11:56AM
NH:
OK, before we wrap up
NH:
questions below about webby drinks
NH:
and the possibility of a sponsor
NH:
over to Paul
PM:
No news i am afraid
PM:
No sponsor as yet
NH:
but we have emailed them back, right?
PM:
yes…
PM:
We’ll find one shortly, im sure
NH:
Monkey – how’s day time tv?
PM:
Don’t be cruel
PM:
Stacy — dont goad!
PM:
The US stuff is a smart mvoe by SMI to hijack the canceled Money Tech conference in NY
NH:
hang on a minute, you have just been on hols and then it’s off to the US for drinks with the readers
NH:
will we plough through the snow to work
PM:
We are holding a mini-conference — some good speakers promised
PM:
We ahve a venue — and some drinks i believe
NH:
nice
NH:
don’t worry we will keep slaving away in the engine room
PM:
yeah yeah
PM:
I think the site’s been great while i have been away
NH:
although, there has been perhaps a more aggressive edge to it
NH:
in terms of comment
PM:
Au Contraire says RBS is closing its trading floor cos of snow…
PM:
Public sector workers…
PM:
We should check that…
NH:
actually, I have to think about how I am going to get home
NH:
perhaps I should go now
NH:
don’t won’t to be here at 7.00pm if it starts snowing again
NH:
so far no more snow at No1 Southwark Bridge
NH:
but the clouds are goose grey
PM:
(thank you taxloss )
)NH:
and if anyone’s interested
NH:
my half marathon time from yesterday was 1.27:09
NH:
slightly annoyed I did not brek 1:27
NH:
and I would have, were it not for a tiolet stop at 6.5miles
NH:
too much lucozade sport before the race
NH:
still I could run home
NH:
only 30 miles through the snow and slush
PM:
PM:
Right — we are done
NH:
FKA – £60 for your room service
NH:
FKA – the place I stayed it in Milan it would have been £60
NH:
right, I think we are done
NH:
until tomorrow
NH:
when hopefully we will be here
PM:
thanks for all the comments!
PM:
Seeya at 11am tomorrow