Markets live chat transcript for the chat ending at 12:10 on 11 Mar 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
Okay
NH:
hello
PM:
It’s 11.02
PM:
It’s Markets Live
PM:
FT Alphaville daily markets chat
PM:
Citigroup
PM:
It’s quite extraordinary, isn’t it.
NH:
CITIGROUP WENT THRU THE ROOF YESTERDAY !!!!!!
NH:
WHOA WHOA WHOA
NH:
END OF THE BEAR MARKET
NH:
CALL A PUBLIC HOLIDAY.
PM:
Yep – that fact is Neil, we were privileged enough to see shares in Citigroup rise all the way back to the place they were the week before last.
PM:
How about that.
PM:
Just extraordinary.
NH:
1.45 !!!!!!!!!!!!!!!!
PM:
Horray. What was the biggest bank in the world is not now gonna get kicked off to the pick slips bullet board, where sub-dollar stocks go after 30 days.
NH:
We’re saved.
PM:
Actually, seriously, Lex made a good point on this.
NH:
Put the full version up – some people wont have premium subscriptions.
PM:
Yeah, but the idea of the premium subscription is that we don’t give it away for free.
NH:
Citi memo
PM:
NH:
Published: March 10 2009 14:10 | Last updated: March 10 2009 14:10
If management e-mails actually “communicated” anything they would be banned. Risks of a leak means workers are subjected to anodyne words on how valued they are or that their company is uniquely positioned to cope with the challenges ahead. On Tuesday, however, a short memo from chief executive Vikram Pandit to staff at Citigroup set the entire US banking sector alight. Having dropped below a dollar last week, Citi’s share price rallied 35 per cent. What did the memo say? Three nuggets in particular seemed to dazzle investors. First that Citi was profitable in January and February and the quarter was looking the rosiest since the third quarter of 2007. Apparently, Citi made $19bn in revenues in the first two months of the year. Second, Mr Pandit calmed fears that depositors as well as clients were fleeing in their droves. Finally, the memo stressed Citi’s strong capital position.
If management e-mails actually “communicated” anything they would be banned. Risks of a leak means workers are subjected to anodyne words on how valued they are or that their company is uniquely positioned to cope with the challenges ahead. On Tuesday, however, a short memo from chief executive Vikram Pandit to staff at Citigroup set the entire US banking sector alight. Having dropped below a dollar last week, Citi’s share price rallied 35 per cent. What did the memo say? Three nuggets in particular seemed to dazzle investors. First that Citi was profitable in January and February and the quarter was looking the rosiest since the third quarter of 2007. Apparently, Citi made $19bn in revenues in the first two months of the year. Second, Mr Pandit calmed fears that depositors as well as clients were fleeing in their droves. Finally, the memo stressed Citi’s strong capital position.
NH:
But investors should not lose their heads. The headline-grabbing revenue number, of course, does not include costs or writedowns. Besides, Citi exceeded $20bn in adjusted revenues for eight quarters up until the end of September. Even in the nightmare final quarter of last year, revenues excluding writedowns were still a respectable $13.4bn.
NH:
So Citi having a bumper top line is nothing to get excited about. That “profitable” remains unquantified gives no comfort as to what extent writedowns have eaten into that haul. That is the problem. In volatile markets, flow businesses such as foreign exchange or cash equities will always do well. And all banks are benefiting from short-rates being close to zero. But provided the global economy keeps deteriorating, and house prices sink lower, balance sheets may fail even harsh stress-tests. It remains a brave investor who believes that this time bank revenues can overwhelm the writedown bogeymen.
NH:
Clever chap Mr Lex
PM:
Internal memos from chief executives don’t say anything meaningful, ever.
PM:
The risk of a leak is too great – potential price sensistivity – breach of regulations.
NH:
So did Vikram make insiders of all Citigroup personnel yesterday?
PM:
No – it wasn’t price sensitive information.
NH:
Yes it was, it was HUGELY price sensitive.
PM:
Oh yeah it was ! 
PM:
Okay – off with his head!
PM:
To be clear, we are not suggesting the Citi ceo profited personally for this, but he is certainly guilty under market abuse rule blah blah blah
NH:
Looking at a stretch of 7 -10.
PM:
Actually, seriously – another reminder about how the insider / market abuse rules don’t work.
PM:
Who’s to say how the market might react to any piece of news.
PM:
Insiders are always on risk – like everyone else.
PM:
I was thinking about that with the Resolution case, where Clive Cowdery et al are being investigated by the FSA.
PM:
The suggestion is that the issue is over whether enough information was released to the market in a timely fashion.
PM:
But you’d think that if it were ever to come to court it would be laughed straight out again.
PM:
Defence would just say: “Judge, the FSA is having a laugh. Just look at their own disclosure record over the past year and a bit.”
PM:
Anyway, im being distracted.
NH:
Here’s what Jim Reid was saying earlier.
NH:
This is the early morning Reid from Deutsche bank
NH:
We saw the best day of the year for equities with the S&P 500 up 6.37% in its best day since November. Financials (+15.58%) were the best performers for the second day. Citigroup (+38.10%) was seemingly a big catalyst for the rally after the CEO suggested that they are having their best quarter since Q3 2007. This follows on from comments in Barrons over the weekend (that we discussed in yesterday’s EMR) that BoA would become an “earnings powerhouse” once the economy recovers. Several other banks have also made positive noises about Q1 even in the face of the worst macro quarter for several decades. The key is that margins have increased and competition in the sector has reduced. All in all this means that Q1 will likely show some bumper earnings for several banks. However the key remains as to whether illiquid assets on these banks balance sheets will still eventually offset the profitability of the core businesses. The good bank/bad bank model and/or insurance schemes will still likely be needed going forward but at least banks are seemingly starting to generate decent earnings.
NH:
If we needed any reminder of the balance sheet problems for the banks, then we got them with a report from our US bank analysts which suggested that loan losses now should exceed those seen at the peak of the Great Depression. Its also worth putting Citigroup’s 38.1% climb yesterday in perspective. This only puts us back to levels just below where they were on February 27th. Citigroup now has a market cap of just under $8bn and it wasn’t long ago it was the biggest company in the world by this matrix. 3 Government bail-outs later and the company is a shadow of the former global leader.
NH:
Outside of Financials, Industrials (+8.50%) were the next best performing sector in the US. GE (+19.70%) led the way after the company’s credit spreads tightened again on the back of a $8bn FDIC sponsored deal on Monday. Credit overall had a much better day with CDX IG 21bps tighter. The biggest turnaround in credit though came in Europe, especially in Financials, with iTraxx Senior and Sub Financials 12bps and 27bps tighter respectively and 21bps and 43bps off the early wides for the session.
Overall it’s fair to say that the difference between the bear market of 2009 so far against the bear market of 2008 is that ’09 has had very few bear market rallies. This was a big feature of the last few months of last year. We’re not sure why that is but we’ve sensed a change in sentiment this year. In Q4 last year you would always find people that suggested that equities were historically cheap and were prepared to buy on dips. In Q1 this year we’ve found very few with such mentality. This may explain the lack of a decent bear market rally. Maybe we were due one.
NH:
Today we have another quiet day for data with the monthly budget statement the highlight in the US. The main focus will be on whether we can get follow through from yesterday’s rally.
PM:
ta for taht
11:08AM
PM:
to answer the odd q below — Helen enjoying Lex in NY apparently
PM:
Hard not to i guess
PM:
300 words a day
NH:
couple of newflashes – one of the bidders for Chaucer has pulled out
NH:
Novae
11:10AM
NH:
shall we take a peak at the wider market
PM:
yes let’s
PM:
Was up earlier — no — rally continued
NH:
the dead cat was still, er, alive
NH:
but showing fewer vital signs now
NH:
having traded up to 3763
NH:
now off 4.9 points at 3,710
PM:
Oh dear — that’s disappointing
NH:
it is
NH:
because a lot of people were talking up the prospects of a big rally
NH:
NH:
NH:
sorry, we have not used that one for a while
PM:
NH:
or that
PM:
the swag bag
NH:
all we have seen is this
NH:
NH:
and this
NH:
NH:
and this
NH:
NH:
and finally this
NH:
PM:
What sort of rally were people talking about
NH:
a monster one – 20% to 30%
NH:
in a short period
PM:
before we brought it to a juddering halt
PM:
On what basis — 20/30% ???????????? 
NH:
apparently there are a number of buy signals out there
NH:
the Put/Call ratio at its lowest level for a long time
NH:
big open interest to the upside ahead of expiry – triple witching next Friday
NH:
vols increasing on the upwards move (as per yday)
PM:
expiry
NH:
we have a triple witching next Friday
NH:
and it seems that open interest around that expiry is shaped to the call side
NH:
which, am I told, indicates that the market may have got overly comfortable with the bearish trade
NH:
so that could mean that any move to the upside could be dramatic as investors try to hedge these bearish trades
NH:
on top of that there are also a few technical indicators
NH:
which are flashing a buy signal
NH:
this idea was flagged up by Citigroup a couple of weeks ago
NH:
We have found one metric which has helped over the past couple of years in
timing when to raise/lower risk exposure — the corporate bond EYR. We are
not claiming that this is the definitive answer for investors. It is not. But, we do
think that this metric can provide useful information for helping investors ask
the right questions at the right time. That is half the battle.
timing when to raise/lower risk exposure — the corporate bond EYR. We are
not claiming that this is the definitive answer for investors. It is not. But, we do
think that this metric can provide useful information for helping investors ask
the right questions at the right time. That is half the battle.
NH:
Figure 3 compares Pan-European investment grade corporate bond yields
(BBB) to the European earnings yield (E/P). This shows how expensive/cheap
European equity looks relative to European credit. It therefore also represents
how risk is being priced in two risk assets. A low number represents a de-rating
of equity relative to credit, ie equity risk looks cheap.
(BBB) to the European earnings yield (E/P). This shows how expensive/cheap
European equity looks relative to European credit. It therefore also represents
how risk is being priced in two risk assets. A low number represents a de-rating
of equity relative to credit, ie equity risk looks cheap.
NH:
This metric was flagging risk warnings for equity investors in summer 2007,
November 2007, April-May 2008 and early-November 2008. We came close to
a one standard deviation risk warning at the start of this year too following the
post-November 21 rally.
November 2007, April-May 2008 and early-November 2008. We came close to
a one standard deviation risk warning at the start of this year too following the
post-November 21 rally.
Conversely, this metric would have encouraged investors to be
raising/neutralising risk exposure in mid/late-January 2008, October 2008 and
mid/late-November 2008. Now, the corporate bond EYR is back below minus
one standard deviation. Previously this has been followed by greater success
for the risk trade within the equity market.
NH:
of course, there were some other, more simplistic reasons for why we might enjoy a huge rally, such as short covering
NH:
and the fact that traders have been told in the past couple of weeks to cut their books
NH:
as a result no one has got any stock
NH:
and if buyers come in
NH:
whoosh
NH:
off we go
PM:
11:16AM
11:16AM
NH:
Right I have this Ryanair statement on aer lingus
NH:
and it is typically bombastic
NH:
RYANAIR CALLS ON AER LINGUS TO APOLOGISE FOR MISLEADING SHAREHOLDERS AND THE STOCK EXCHANGE ABOUT ITS LOSSES IN 2008 AND AGAIN IN 2009
NH:
Ryanair, Ireland’s favourite airline today (Wednesday, 11th March 2009) called on Aer Lingus Chairman Colm Barrington to apologise for misleading Aer Lingus shareholders and the Stock Exchange in its 22 December Defence Document – published just 9 days before the year end – in which Aer Lingus made the following claims – which have now been proven to be untrue by the enormous losses announced this morning by Aer Lingus for 2008 and again in 2009.
PM:
NH:
In Aer Lingus’s 22 December Defence Document – published just 10 weeks ago,
Aer Lingus Chairman Colm Barrington made the following false claims:
Aer Lingus Chairman Colm Barrington made the following false claims:
NH:
Despite these extremely challenging conditions we expect to achieve profit overall in 2008″.
NH:
We expect that significantly reduced fuel prices and a number of management cost reduction initiatives will enable Aer Lingus to continue to enhance profitability in 2009 and beyond”.
NH:
“Aer Lingus is and will be profitable”.
NH:
Our long-haul business also continues to grow”.
NH:
Ryanair called today on Aer Lingus Chairman Colm Barrington and its Board to explain to shareholders why they continue to preside over an enormous collapse in shareholder value and why they recommended rejection of Ryanair’s €1.40 per share offer just 10 weeks ago, at a time when they were presiding over enormous losses in 2008, increased operating losses in 2009, and a share price which has collapsed by more than 50% from €1.40 to less than 70 cents today.
NH:
Speaking today Ryanair’s Michael O’Leary said:
NH:
“Today’s results from Aer Lingus prove conclusively that the Chairman Colm Barrington, Board and Management of Aer Lingus misled shareholders and the Stock Exchange in their Defence Document of just 10 weeks ago. Shareholders are entitled to ask why there is no mention in today’s results about restoring or improving shareholder value. It would appear that the Board and Management of Aer Lingus care more about lining their own pockets with excessive and unjustified Director fees and multi million euro resignation bonuses for failed management than they do about growing Aer Lingus, delivering profitability or shareholder value.
PM:
thanks for all that
PM:
tracy just mentioned the free flights angle
PM:
Ryan air to give away 1000 flights for every one mill euro of after tax losses at Aer lingus
NH:
and Aer Lingus lost 108m eur
NH:
er, that’s a lot of flights
NH:
can they afford it
NH:
will they honour the debt?
PM:
yeah — these are “free” flights
NH:
or perhps they will use another loss meteric
PM:
Nah — its not a lot of flights from Ryanair — think how many people the ship around the place
PM:
Good publicity stunt tho
NH:
sure, they give away a 1m at a time
11:21AM
PM:
where we going?
NH:
off to the races
NH:
Cheltenham
PM:
Went in search of advice yesterday, but my main tipster confesses that she’s had bad form recently and that we shouldn’t wager too much on her selections.
PM:
So usual caveats apply. Also, she says the flat is more her thing rather than Cheltenham.
NH:
Woman, eh? Your tipster.
PM:
Yes, a shrewdette. Hopefully.
PM:
Horses are the same as stocks. Woman are better at picking the winners. Dozens of academic studies showed that. It’s just a fact.
NH:
Well, i’m not going to challenge it.
NH:
What she saying?
PM:
14:40 RSA Chase
Cooldine at 4/1 favourite but worth taking at that price even though
I don’t usually bet favourites. And if you bet by name, well here’s
one for you – Gone To Lunch! Not the youngest in the field but has
form and AP McCoy in the saddle, so at 13/2 worth a flutter.
Cooldine at 4/1 favourite but worth taking at that price even though
I don’t usually bet favourites. And if you bet by name, well here’s
one for you – Gone To Lunch! Not the youngest in the field but has
form and AP McCoy in the saddle, so at 13/2 worth a flutter.
15:20 Queen Mother Champion Chase
Simply can’t bet against the favourite Master Minded (Ruby Walsh) –
think he is a class above the rest and at 5/2 everybody else thinks
so too. But if you must bet against him (and I am not) Petit Robin
could be worth a flutter.
16:00
I’ve gone for Pause & Clause at 10/1 – in a fairly open field.
Interesting one Gee Dee Nan, a good stayer on the flat but
inexperience in this sphere might count against him, worth an E/W
flutter.
NH:
So you put any money on those?
PM:
Well I was, cos I have a few quid sitting in some bookies account
NH:
well, here’s my list
NH:
1.30 can’t buy time
2.05 mikael d’haguenet
2.40 gone to lunch
3.20 petit robin…. each way
4.00 ninetieth minute
4.40 mr thriller
5.15 sicilian secret
2.05 mikael d’haguenet
2.40 gone to lunch
3.20 petit robin…. each way
4.00 ninetieth minute
4.40 mr thriller
5.15 sicilian secret
PM:
Why does everyone suggest we back Gone to lunch??
NH:
I can’t think
NH:
right, I hope you have all had time to digest those tips
NH:
a full post mortem tomorrow
PM:
be spending the winnings!
NH:
of course, you will.
PM:
thank you Pakora below
11:26AM
NH:
right, the readers want some banks
NH:
and we will give it to them
NH:
Barclays up again
Barclays PLC (BARC:LSE): Last: 72.80, up 5.3 (+7.85%), High: 75.70, Low: 69.10, Volume: 29.18m
NH:
as are the state banks
Lloyds Banking Group (LLOY:LSE): Last: 52.00, up 1.2 (+2.36%), High: 53.00, Low: 48.90, Volume: 25.28m
Royal Bank of Scotland Group (RBS:LSE): Last: 21.90, up 0.9 (+4.29%), High: 23.00, Low: 20.70, Volume: 59.10m
NH:
but the Asian banks underperforming again
Standard Chartered (STAN:LSE): Last: 793.00, up 12.99 (+1.67%), High: 800.50, Low: 755.50, Volume: 5.28m
NH:
and Smug Bank
NH:
they continue to be volatile
PM:
I’m just off to do some zapping.
HSBC Holdings plc (HSBA:LSE): Last: 379.25, down 19.75 (-4.95%), High: 385.00, Low: 363.25, Volume: 43.05m
PM:
I’m sick of some of the idiots
NH:
now, the Stan Chart move seems to be down to a UBS downgrade
PM:
Not fair on the others
NH:
which I have
NH:
Downgrading rating We are cutting Standard Chartered from Buy to Neutral. Our forecasts are unchanged, while our price target rises by 50p to
reflect recent sterling weakness and a 0.2% higher sustainable return, given increased comfort on the balance sheet. Up by almost 40% in a week, the
shares are now modestly above our price target.
reflect recent sterling weakness and a 0.2% higher sustainable return, given increased comfort on the balance sheet. Up by almost 40% in a week, the
shares are now modestly above our price target.
NH:
Liquid balance sheet New disclosures with the results last week emphasised the short-dated nature of the Wholesale loan book – 72% less than one
year. This allows for the significant repricing of new business to flow quickly to revenues, in particular as the bank continues to lend. It also means
credit migration is a manageable issue, compared with real-estate heavy peers.
year. This allows for the significant repricing of new business to flow quickly to revenues, in particular as the bank continues to lend. It also means
credit migration is a manageable issue, compared with real-estate heavy peers.
NH:
Consumer lending highly secured and diversified Combined with a Consumer book that is 80% secured and an unparalleled diversification of the
loan portfolio geographically and by portfolio, we see the risks of a poor credit outcome as more limited here than almost anywhere else.
loan portfolio geographically and by portfolio, we see the risks of a poor credit outcome as more limited here than almost anywhere else.
Valuation: still modest At 8x current year earnings, Standard Chartered is close to a multi-year low. However, recent share price strength leaves the
relative valuation somewhat full, at more than twice that of the sector.
NH:
as for HSBC
NH:
traders are braced for a bit more volatility
NH:
apparently, the HSBC HK line trades ex-rights tomorrow
NH:
while the London line does not go ex until March 20th
NH:
the day of a triple witching
NH:
actually
NH:
I also have a good note on the banks
NH:
and yesterday’s massive rally from Merrill
NH:
and they show a health degree of pessimism about the whole thing
NH:
Banks – Reaction to yesterday’s rally
The bank sector was up 13% yesterday in a market up 5%. The top 10 shorted
names in the SX7P were up an average of 17% – so hedge fund clients had a
tough day. Why the sudden rally? Commentators site 3 reasons:
The bank sector was up 13% yesterday in a market up 5%. The top 10 shorted
names in the SX7P were up an average of 17% – so hedge fund clients had a
tough day. Why the sudden rally? Commentators site 3 reasons:
1. Relief that Q1 results at banks have been OK. In the last several days a
number of prominent bank CEOs have given upbeat statements on Q1 business
flow. By now, we should all know that Q1 results, particularly for wholesale
banks, will be OK. However, I remind you that our 2006 bank conference was
filled with CEOs talking about encouraging signs in credit markets and reaffirming
medium term profit targets – so an upbeat message by under pressure CEOs
doesn’t alter our fundamentally cautious view on the sector.
NH:
2. Excitement over suspension of “mark-to-market.” Yesterday investors were
excited about US congressional hearings on the subject of mark-to-market
accounting. In our view, changing accounting practices shouldn’t alter investor
concerns about banks’ ability to absorb losses – which is the key problem facing
banks. Furthermore, we argue that suspending mark-to-market accounting could
potentially diminish investor confidence in the bank sector. So we don’t see any
fundamental reason to be more upbeat on banks on the back of suspension of
mark-to-market accounting.
excited about US congressional hearings on the subject of mark-to-market
accounting. In our view, changing accounting practices shouldn’t alter investor
concerns about banks’ ability to absorb losses – which is the key problem facing
banks. Furthermore, we argue that suspending mark-to-market accounting could
potentially diminish investor confidence in the bank sector. So we don’t see any
fundamental reason to be more upbeat on banks on the back of suspension of
mark-to-market accounting.
3. A classic bear market squeeze. In the most recent fund manager survey
banks were the most underweight sector in Europe with a net 60% of fund
managers reporting an underweight position. Sell-side investors are equally
bearish – at BAS-ML we rate 59% of European banks Underweight. That degree
of negativism combined with a sector trading on 0.6x tangible book value – leaves
the sector open to days like yesterday. Indeed since the start of 2007 the bank
sector has fallen 71%, yet we have had 13 rallies over 10%, and 5 rallies over
20%. In the last 10 years, only one day has been better than yesterday for
European bank share prices, with the sector up 18% on September 19th 2008. It
took a full 13 trading days for the sector to make a new low.
NH:
which is an interesting stat
NH:
but Merrill are remaining cautious
NH:
Our fundamentally cautious view remains unchanged. What would make us more
positive on the banks? In our view, the key thing to watch for is a deceleration in
the rate of increase in non-performing loans. Unfortunately, we aren’t there yet,
NPLs grew at 25% in the fourth quarter up from 17% in the third quarter.
positive on the banks? In our view, the key thing to watch for is a deceleration in
the rate of increase in non-performing loans. Unfortunately, we aren’t there yet,
NPLs grew at 25% in the fourth quarter up from 17% in the third quarter.
NH:
Merrill’s insurance team have done the same thing for the insurers
NH:
which of course have had a rougher ride than the banks in recent weeks
NH:
and I quite like the title
NH:
Still a minefield to navigate in choosing stocks to buy
NH:
We provide a brief update on the sector, including what stocks you should buy if
you think yesterday’s rally will continue.
you think yesterday’s rally will continue.
NH:
Last year the sector managed to largely escape the limelight – it was down ‘only’
47%, broadly in-line with the market.
47%, broadly in-line with the market.
This year it’s been a different story, down 38% against a market down 16% and a
bank sector down 33%. In recent weeks we’ve been talking about the very poor
results season we’re going through, heightened concerns about solvency, quality
of capital and leverage. Generally, the complexity of the sector has become a
heightened negative this year as each of these items is very difficult to analyse,
especially for the life stocks.
NH:
You are now looking at what appears to us to be painfully low valuations – a
price/book for the sector of 1.0x, split 1.0x for life and 0.9x for non-life. We do
think though that further capital raising for the sector, especially for the life names,
is a possibility and this would be highly dilutive to valuations. Also, with the US
life sector at 0.5x, it’s hard to say you have good valuation support for the life
sector from elsewhere.
price/book for the sector of 1.0x, split 1.0x for life and 0.9x for non-life. We do
think though that further capital raising for the sector, especially for the life names,
is a possibility and this would be highly dilutive to valuations. Also, with the US
life sector at 0.5x, it’s hard to say you have good valuation support for the life
sector from elsewhere.
So, certainly for most of these life stocks we’re not yet prepared to relax our
cautious stance and say it’s safe to go back into the water. You can also say that,
while non-life has outperformed life (down 26% YTD vs 45% for life), the
divergence should be even sharper, in our view. Book values have held up much
better and so, as mentioned above, these non-life stocks are actually still on lower
price/book multiples than life. Our positive view on these non-life names has
been strengthening.
NH:
Given the very sharp, painful correction we’ve had, you can see how this can be
followed by a pressure relief valve such as what occurred yesterday. For
investors who would like to correct underweight insurance positions, we highlight
three stocks: ZFS, Allianz and Prudential. These 3 stocks are the ones on our
Most Preferred list this month and for anyone looking to increase weightings in the
sector, we see these three stocks as the most obvious ones to buy.
followed by a pressure relief valve such as what occurred yesterday. For
investors who would like to correct underweight insurance positions, we highlight
three stocks: ZFS, Allianz and Prudential. These 3 stocks are the ones on our
Most Preferred list this month and for anyone looking to increase weightings in the
sector, we see these three stocks as the most obvious ones to buy.
PM:
thanks for all that
11:32AM
PM:
Were q s below about Lloyds
PM:
And your call yesterday
NH:
we are not sure when they trade ex-entitlement on the £4bn of prefs
PM:
Fact is we were rather surprised by the weakness on Monday — government’s largesse
NH:
which Lloyds shareholders can pick up for 38.4p
NH:
against a current market price of 50p
PM:
Providing £15.6bn in the form of B shares that only covert at 115p
PM:
But the prefs are the key situation now
NH:
to keeping the govt’s holding below 50%
NH:
but we are not sure about
NH:
is whether the govt and investors can take up the prefs
NH:
ie Lloyds would be raising £8bn
NH:
not £4bn
PM:
Hmmm
PM:
Or is it the case that investors “clawback” from the government — who get repaid
PM:
Some of their money anyway
NH:
anyway, it looks an interesting opportunity at the moment. and yesterday’s headline of buy Lloyds, was meant a little tongue in cheek
NH:
of course, the risk is volatility
PM:
well sure
NH:
and the Lloyds price could be back at 30p before we know it
NH:
and this right, entitlement is worthless
NH:
but we think it was worth highlighting
PM:
yes
PM:
I just think your call is right, directionally Neil
PM:
Lloyds survival chances — ie avoiding natinalissation — have rocketed
PM:
anyway, lets move on
11:37AM
PM:
so what else is moving this morning?
NH:
apart from the financials – ex HSBC and Standard Chartered, of course
NH:
Xstrata are flying
NH:
well they were a little earlier
NH:
still strong though
NH:
up 23p at 346p
NH:
that’s a gain of almost 7.2%
NH:
and primarily that’s down to the results from Glencore
NH:
which seem to have eased a few nerves
NH:
although we are intrigued by the big impairment charge the company has taken
NH:
and the fact that the partner’s look to be pumping more cash into Glencore
NH:
here are the wire snaps from earlier
NH:
GLENCORE SAYS 2008 NET PROFIT FALLS TO $4.754 BLN FROM $5.190 BLN
NH:
RTRS-GLENCORE SAYS 2008 EBITDA FALLS TO $6.788 BLN FROM $7.703 BLN
NH:
GLENCORE – AVAILABLE LIQUIDITY, REPRESENTING CASH AND UNDRAWN AMOUNTS UNDER ITS COMMITTED BANK FACILITIES, INCREASED TO OVER US$5 BILLION AT 31 DECEMBER 2008
NH:
GLENCORE – DEBT REFINANCING REQUIREMENTS IN THE SHORT-TERM REMAIN MODEST, SUPPORTED BY A BROAD BANKING GROUP OF MORE THAN 75 FINANCIAL INSTITUTIONS
NH:
GLENCORE – CURRENT LOW PRICE ENVIRONMENT HAS ALSO CONTRIBUTED TO EXCEPTIONAL PROVISIONS OF AROUND US$ 3.7 BILLION FOR ASSET IMPAIRMENTS, PROVISIONAL PRICING AND INVENTORY ADJUSTMENTS
NH:
GLENCORE – HAS REPURCHASED BONDS IN EXCESS OF US$ 100 MILLION EQUIVALENT OF NOTIONAL VALUE ACROSS DIFFERENT MATURITIES AND WILL CONSIDER FURTHER PURCHASES EITHER IN CASH AS DONE TO DATE OR VIA SYNTHETIC MEANS
NH:
and here is a little bit of comment on the figures from Liberum Capital
NH:
they reckon it is good news
NH:
Glencore reports its 2008 results this morning, however as a privately owned company the results are not publicly disclosed. Whilst we have not yet seen the numbers, Bloomberg is reporting that 2008 EBITDA was US$6.79bn (versus US$7.7bn in 2007) and full year profit excluding exceptional items was down 8.4% at US$4.75bn (US$5.19bn in 2007); Glencore made US$3.7bn of provisions for provisional pricing and asset impairments and that it has injected a new layer of permanent equity equal to 15% of its share capital.
NH:
Glencore reports its 2008 results this morning, however as a privately owned company the results are not publicly disclosed. Whilst we have not yet seen the numbers, Bloomberg is reporting that 2008 EBITDA was US$6.79bn (versus US$7.7bn in 2007) and full year profit excluding exceptional items was down 8.4% at US$4.75bn (US$5.19bn in 2007); Glencore made US$3.7bn of provisions for provisional pricing and asset impairments and that it has injected a new layer of permanent equity equal to 15% of its share capital.
NH:
so that’s the bull case
PM:
Glencore has lots of liquidity and won’t need to sell its Xstrata stake
NH:
it is
NH:
but Sam is looking into the other stuff
NH:
including the impairment charge
NH:
this statement does not suggest everything is OK, IMO
NH:
anyway
NH:
there are some other factors pushing Xstrata higher
NH:
including coal price settlements
NH:
which appear to be in line with expectations
NH:
there were concerns they could come in realy low
NH:
as this note from Citi highlights
NH:
Settlement In-line — We believe JFY09 thermal coal prices have been settled at
$US70/t between Xstrata and Chubu. We also believe Rio Tinto has settled around
$US70/t. This is in-line with our forecasts of $US70/t.
$US70/t between Xstrata and Chubu. We also believe Rio Tinto has settled around
$US70/t. This is in-line with our forecasts of $US70/t.
Consumers Win — We understand the opening offer from utilities was US$70/t,
while producers opening bid was US$80/t. Given the weakness in demand we
expected prices to settle towards the level demand by consumers.
NH:
But Producers Not Losers — $US70/t will give producers a healthy margin.
Thermal coal median costs could fall ~10% to $US30/t this year as lower mining
costs and exchange rates impact.
Thermal coal median costs could fall ~10% to $US30/t this year as lower mining
costs and exchange rates impact.
Spot Market Pressured — Seaborne thermal coal prices have fallen sharply over last
two weeks (Newcastle falling from $US78 to $US62/t). Our trough cycle prices
estimate is US$45/t, implying a trough cycle margin of 30%.
PCI Settles — POSCO has settled JFY09 PCI prices at $US90/t with some
Australian suppliers. This is above Citi’s PCI forecasts of $US82/t. The PCI
premium to thermal coal is $US20/t, down from $US120/t last year but above our
forecasts of a $US12/t premium. Volumes will be key for producers given any
unsold PCI will likely be sold at a discount to thermal prices.
NH:
HCC No Deal — Traditionally coking is settled first followed by thermal. Coking coal
negotiations are being delayed by the wide spread between consumer expectations
of sub $US100/t prices and producer expectations of greater than recent spot sales
of $US140 – 180/t. Iron ore and steel prices are easing and Chinese steel
inventories have jumped sharply. This could see Chinese steel production slow.
Chinese domestic coking coal prices could weaken removing the import arbitrage
and pressuring the seaborne HCC spot market. We maintain our forecasts
US$120/t in JFY2009/10 and the same in 2010/11.
negotiations are being delayed by the wide spread between consumer expectations
of sub $US100/t prices and producer expectations of greater than recent spot sales
of $US140 – 180/t. Iron ore and steel prices are easing and Chinese steel
inventories have jumped sharply. This could see Chinese steel production slow.
Chinese domestic coking coal prices could weaken removing the import arbitrage
and pressuring the seaborne HCC spot market. We maintain our forecasts
US$120/t in JFY2009/10 and the same in 2010/11.
NH:
And one more thing on Xstrata
NH:
is also being helped by some positive rumblings coming out of the copper market
NH:
which is an important market for XTA
NH:
around 25% of operating profits
NH:
take a look at this from Cazenove
NH:
they have upgraded to “outperform”
NH:
Xstrata – copper outlook firming post our upgrade to OUTPERFORM [XTA LN, 323p] Outperform, sector Neutral
Xstrata’s second most important commodity, copper (25% of EBITDA), continues to surprise positively. Conversations with Antofagasta’s management suggest that the copper market was in heavy destocking mode prior to February. However, a lack of scrap availability combined with strategic restocking by the Chinese SRB and ‘massive fresh demand’ in the last four weeks has led to some retightening of the market.
Xstrata’s second most important commodity, copper (25% of EBITDA), continues to surprise positively. Conversations with Antofagasta’s management suggest that the copper market was in heavy destocking mode prior to February. However, a lack of scrap availability combined with strategic restocking by the Chinese SRB and ‘massive fresh demand’ in the last four weeks has led to some retightening of the market.
NH:
A significant increase in fresh demand out of China in the last four weeks is witnessed by metal premiums that have moved up from $40/t four weeks ago to as high as $80/t in recent days on a spot basis. ANTO has experienced very strong inquiry levels both for concentrate and metal from China – the period from new year to late May is seasonally a strong period for Chinese demand.
Both ANTO and XTA have highlighted tightness in copper concentrate markets as scrap supply dries up in the lower price environment. This is forcing spot TC/RCs down in response. There is so little profitability in smelting from resulting lower TC/RCs and the collapse in acid prices (to the extent physical storage of acid is becoming a problem for the smelters) that ANTO is convinced this is a good lead indicator for underlying metal demand.
Both ANTO and XTA have highlighted tightness in copper concentrate markets as scrap supply dries up in the lower price environment. This is forcing spot TC/RCs down in response. There is so little profitability in smelting from resulting lower TC/RCs and the collapse in acid prices (to the extent physical storage of acid is becoming a problem for the smelters) that ANTO is convinced this is a good lead indicator for underlying metal demand.
NH:
These aspects, combined with a levelling off in exchange stocks are now forcing holders of short positions on Comex to cover. This net short position still lies at a significant level relative to history. Whilst the economic background suggests a material pick up in industrial demand in world ex-China is unlikely in the short term (and both companies have remarked they see little activity on this front), we are becoming more convinced that our price forecast of $1.50/lb for the year is well supported and a much better number than we feared as little as a month ago.
Meanwhile Glencore’s numbers reported this morning show EBITDA down 44% Q4 vs Q3. For FY08 as a whole EBITDA fell 11%. The company reports available liquidity of $5bn as working capital inflows come from reduced commodity prices. Short term debt refi requirements remain modest and that secured against the Xstrata holding will beneift from a significantly higher level of underlying collateral following the rights issue. Given strong liquidity and credit spreads not reflecting Glencore’s view of its underlying credit profile, Glencore has repurchased bonds in excess of $100m equivalent of notional value across different maturities and will consider further purchases either in cash as done to date or via synthetic means.
PM:
thanks for all taht
11:43AM
PM:
Now — a quick note to Zoomy, if he’s still reading
PM:
We didn’t mean to ban you Zoomy
PM:
We just decided to use you as a guinnea pig for a new feature we have
NH:
the comment limiter
NH:
a new toy to play with
PM:
Yes — limits to a set number of comments pure hour
PM:
But we were not sure how it worked — so we tried it
PM:
And i suspect that if you have used up your allocation at the time of being “limited” it means you cant post at all for an hour
NH:
for example another comment from VP on Stan Chart trading ex-div and the limiter could be introduced.
PM:
So sorry about theat Zoomy 
PM:
We will “unlimit” you as sono as we find the swtich
NH:
User – got life, Tuna.
PM:
tracy has the new name
PM:
The Limitator
PM:
TheHoff — tehre’s a business plan there
NH:
Lemmy – careful. you might be limited
NH:
what about LTD
NH:
right we are going to attempt something we have not done before
NH:
we are going to try and bring Zoomy back
NH:
from the dead if you like
NH:
Paul, wave the magic wand
PM:
Oh no — i can’t reverse it!
NH:
HE’S BACK
NH:
not it is an imposter
NH:
a couple of imposters
NH:
ban them
NH:
limit them
PM:
Right — the Real Zoomy shuold be unlimited now
11:50AM
11:50AM
NH:
back to the market
PM:
yeah
PM:
Got any raw
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:
well, we were picking up rumours of a rights issue coming at Arcelor Mittal earlier this morning
NH:
and the company have issued a non denial to Bloomie
NH:
here’s what a company spokesman said.
NH:
ArcelorMittal does not need to raise additional capital at this timesince we have a successful debt reduction programme in place. However,as a responsible and forward looking Company we will of course reviewand consider all options that can help secure the future of our businessduring this challenging economic period
PM:
Hmmm
PM:
sounds like they are up to something
NH:
well, that’s what we hear
NH:
but it would be simplistic to assume that AM
NH:
would go for a rights issue
PM:
why??
NH:
well, from Mittal family’s perspective
NH:
a rights issue is a good way of raising money
NH:
in as much as they don’t get diluted – they keep their majority holding, which appears to be very important
NH:
however
NH:
they own 40% of the company
NH:
and as we saw with Glencore, most people just don’t have a load of cash lying around that they can use to take up rights issues
PM:
so, what are you saying
NH:
well, I guess I am saying that any fund raising will be more complex than a straight rights issue
NH:
a bond with warrants
NH:
though that could dilute the family holding
NH:
I just don’t know
NH:
and I guess some of the best brains in the City are working on this right now
NH:
actually just got hold of the full Bloomie story
NH:
March 11 (Bloomberg) — ArcelorMittal, the world’s biggest
steelmaker, doesn’t need to raise funds “at this time” as it
is already working to reduce its debt levels.
“ArcelorMittal does not need to raise additional capital
at this time since we have a successful debt reduction program
in place,” Luxembourg-based ArcelorMittal said today in an e-
mailed statement. “However, as a responsible and forward
looking company we will of course review and consider all
options that can help secure the future of our business during
this challenging economic period.”
ArcelorMittal rose 90.5 cents, or 5.8 percent, to 16.63
euros in Amsterdam trading. It is down 2.4 percent this year,
valuing the company at 24 billion euros ($31 billion).
steelmaker, doesn’t need to raise funds “at this time” as it
is already working to reduce its debt levels.
“ArcelorMittal does not need to raise additional capital
at this time since we have a successful debt reduction program
in place,” Luxembourg-based ArcelorMittal said today in an e-
mailed statement. “However, as a responsible and forward
looking company we will of course review and consider all
options that can help secure the future of our business during
this challenging economic period.”
ArcelorMittal rose 90.5 cents, or 5.8 percent, to 16.63
euros in Amsterdam trading. It is down 2.4 percent this year,
valuing the company at 24 billion euros ($31 billion).
PM:
thanks for that
11:53AM
PM:
We are being asked about the House sellers below
PM:
Any thoughts on those Neil — is true that it has been a while since we discussed this sector
NH:
it has been and TW I am worried
NH:
these debt refinancing talks keep being pushed back
NH:
that just does not bode well
NH:
I was impressed by the figures from Bovis this week
NH:
which I think has the best landbank and very little debt
NH:
the situation at Redrow is also interesting
NH:
and on that note
NH:
Merrill have pubbed a note this morning
NH:
Upgrading to Buy
We upgrade Redrow to a Buy. We believe that whatever the likely outcome of
Steve Morgan’s re-emergence as Redrow’s principal shareholder, will
demonstrate the underlying NAV attractions in the group. Our unchanged 198p
price target corresponds to what we judge to be realistic, written-down NAV.
We upgrade Redrow to a Buy. We believe that whatever the likely outcome of
Steve Morgan’s re-emergence as Redrow’s principal shareholder, will
demonstrate the underlying NAV attractions in the group. Our unchanged 198p
price target corresponds to what we judge to be realistic, written-down NAV.
NH:
The Return of Steve Morgan
With his initial long held 17% stake, subsequently boosted by acquiring a 6.5%
holding from Toscafund as well as CDS giving him a further 6.5%, Steve
Morgan’s total 29.9% holding in Redrow now gives him considerable potential
leverage. But why has he returned?
With his initial long held 17% stake, subsequently boosted by acquiring a 6.5%
holding from Toscafund as well as CDS giving him a further 6.5%, Steve
Morgan’s total 29.9% holding in Redrow now gives him considerable potential
leverage. But why has he returned?
NH:
Entrepreneurial but Emotional
We suspect that having exited from a management role at Redrow in 2000, at a
time when Redrow was regarded as a “premium” stock within its peer group,
Steve Morgan perceives the recent share price underperformance as an
opportunity to return to the business he founded in 1974. And sentiment clearly
believes that Morgan will not be content simply with board representation but will
instead seek a controlling influence on the group.
We suspect that having exited from a management role at Redrow in 2000, at a
time when Redrow was regarded as a “premium” stock within its peer group,
Steve Morgan perceives the recent share price underperformance as an
opportunity to return to the business he founded in 1974. And sentiment clearly
believes that Morgan will not be content simply with board representation but will
instead seek a controlling influence on the group.
NH:
Toscafund: Kingmaker
What Toscafund decides will ultimately determine what happens next. Their
20.5% holding effectively gives them a veto over any outcome proposed either by
Redrow’s incumbent management or by Steve Morgan.
A one-off situation
We must stress our view however, that we see the dynamics of what happens
at/to Redrow as something of a one-off; we do not see it as marking a return of
sector-wide M&A.
What Toscafund decides will ultimately determine what happens next. Their
20.5% holding effectively gives them a veto over any outcome proposed either by
Redrow’s incumbent management or by Steve Morgan.
A one-off situation
We must stress our view however, that we see the dynamics of what happens
at/to Redrow as something of a one-off; we do not see it as marking a return of
sector-wide M&A.
NH:
hope that helps
NH:
Sportbility not heard the Minerva rumour. Had rather given up on this one
NH:
but the second line property stocks will all take a bit of heart from yesterday’s refinancing at Quintain Estates
NH:
a company which was touched by the hand of HBOS and Cummings
NH:
they bought a big stake a while back
PM:
ta for that
11:57AM
PM:
Some first rate gags going on below 
PM:
Have us laughing a lot in the office here
PM:
I fear I have lost Zoomy tho
PM:
Got anything else Neil??
NH:
been looking at the oil sector
NH:
couple of E&P stocks underperforming
Cairn Energy (CNE:LSE): Last: 1,777, down 93 (-4.97%), High: 1,820, Low: 1,719, Volume: 1.16m
NH:
that’s following a small fund raising
NH:
and TLW:LSE
Tullow Oil (TLW:LSE): Last: 766.50, down 46 (-5.66%), High: 807.00, Low: 763.50, Volume: 2.07m
NH:
off following the publication of results, which has sparked a bit of profit taking
NH:
as for the big boys, BP and Shell
BP (BP:LSE): Last: 447.50, down 3.75 (-0.83%), High: 455.25, Low: 444.50, Volume: 24.74m
Royal Dutch Shell (RDSB:LSE): Last: 1,553, up 13 (+0.84%), High: 1,577, Low: 1,520, Volume: 4.64m
NH:
and Citi have published a big note on the sector this morning
NH:
cut their oil price forecasts 2009e (Brent) to $48/bbl (from $65/bbl) and 2010e to $55/bbl (from $75/bbl).
NH:
and slashed earnings forecasts
PM:
(Monkey — dunno — we’d better to test it properly)
NH:
but they concede most of the downside is already reflected in share prices
NH:
here’s the note
NH:
Downgrading Oil Price Assumptions — The realities of a -2.7% revision in CIRA
GDP growth estimates since Nov-08 lead us to cut oil price forecasts: 2009e
(Brent) to $48/bbl (from $65/bbl) and 2010e to $55/bbl (from $75/bbl). Looking to
the ‘mid-cycle’, we argue that cost cyclicality will drive the economic threshold for
the next generation of marginal projects lower and move to $65/bbl (from $85/bbl)
from 2012e. As a result, our earnings forecasts drop by an average 38% in 2009e
and 35% in 2010e.
GDP growth estimates since Nov-08 lead us to cut oil price forecasts: 2009e
(Brent) to $48/bbl (from $65/bbl) and 2010e to $55/bbl (from $75/bbl). Looking to
the ‘mid-cycle’, we argue that cost cyclicality will drive the economic threshold for
the next generation of marginal projects lower and move to $65/bbl (from $85/bbl)
from 2012e. As a result, our earnings forecasts drop by an average 38% in 2009e
and 35% in 2010e.
2010+ Consensus too high… — Despite a prolonged period of spot prices sub-
$50/bbl and the forward curve grinding lower, analyst consensus stubbornly retains
the view of a recovery to $75/bbl in 2010e and >$90/bbl at ‘mid-cycle’ — this is
c$25/bbl ahead of the forward curve for ‘10e and closer to $35/bbl long term. With
little prospect of a sufficiently material change in the near/medium-term
supply/demand balance to justify such a positive move and with evidence that costs
are falling, we believe that consensus estimates have to fall…sharply.
NH:
…Equity market already there — Does this imply a risk for oil sector equities? Not
in our view. As ever, the market is far more efficient than oil analysts. Our revised
PE multiples for ‘09/10e point toward a sector already trading on a market multiple
IF market earnings fall by a further 20% — consistent with the view of our
strategists. Equally, looking to the longer-term our DCF models at $65/bbl point to
c10% upside for the group.
in our view. As ever, the market is far more efficient than oil analysts. Our revised
PE multiples for ‘09/10e point toward a sector already trading on a market multiple
IF market earnings fall by a further 20% — consistent with the view of our
strategists. Equally, looking to the longer-term our DCF models at $65/bbl point to
c10% upside for the group.
But More Cautious on the Sector — The sector has been a strong relative performer
as oil prices have fallen, reflecting appetite for strong balance sheets and robust
dividends. However, we worry that against a back-beat of downgrades, concerns
over payout ratios, and apparently limited relative upside if the oil price breaks out
of the $40-50/bbl range in either direction (oil price >$50 = demand improving =
buy cyclicals vs oil price <$40 = dividend concerns realistic = not defensive) means
that risk/reward has now skewed toward the downside
NH:
Stock Specifics — With this note, we step back from our sector mantra of long
defensives, pointing instead toward stock specifics. BG (1M, £11.0 TP) is our top
pick, reflecting robust earnings into downgrades, positive newsflow potential and
low dividend risk. ENI (1M, €17.5 TP) looks heavily over-sold on dividend worries.
With the shares already pricing in a worst case outcome on Gazprom call options,
the valuation case is compelling, in our view. StatoilHydro (3M, NKr100 TP) is cut
to Sell. OMV (2H, €20.0 TP) is cut to Hold. RDS and BP preferred to Total. Please
see tables on page 2 and 3 for a complete summary of changes.
defensives, pointing instead toward stock specifics. BG (1M, £11.0 TP) is our top
pick, reflecting robust earnings into downgrades, positive newsflow potential and
low dividend risk. ENI (1M, €17.5 TP) looks heavily over-sold on dividend worries.
With the shares already pricing in a worst case outcome on Gazprom call options,
the valuation case is compelling, in our view. StatoilHydro (3M, NKr100 TP) is cut
to Sell. OMV (2H, €20.0 TP) is cut to Hold. RDS and BP preferred to Total. Please
see tables on page 2 and 3 for a complete summary of changes.
PM:
ta
12:02PM
PM:
We should put LIBOR rates up, given Sam’s post earlier
PM:
*DJ 3-Month Euro Libor Falls To 1.66563%, Vs 1.68563% Tuesday
PM:
*DJ 3-Month Sterling Libor Falls To 1.88875%, Vs 1.91% Tuesday
PM:
*DJ 3-Month Sterling Libor Falls To 1.88875%, Vs 1.91% Tuesday
12:03PM
PM:
can we go now neil?
NH:
No. I have just received an fascinating email from a very senior equity sales guy
NH:
and this is so daft it is almost unbelievable
NH:
apparently Lloyds are trying to set up an equity business
NH:
headhunters are calling round the City trying to hire 3/4 sales people
NH:
to sell the research of one analyst
PM:
?????
NH:
who covers
NH:
wait for it
NH:
building materials and housebuilders
PM:
NH:
the idea seems to be the only way Lloyds will offload their various stakes in housebuilder, retirements home groups, is to build an equities operation
NH:
the downside is, of course, that no one decent want to join
NH:
So there you have it
PM:
NH:
Lloyds trying to set up an equities operation
NH:
strange, but apparently true
12:06PM
PM:
Okay — thanks for all your comments today
PM:
Thanks for all the gags
PM:
Apologies to Zoomy, whose comments died in the making of this edition of ML
PM:
Ultimate sacrifice
PM:
We will be…..
NH:
before we do
NH:
Goldman has gone positive on the US financials
NH:
Morgan Stanley Raised To Buy Vs Neutral By Goldman Sachs
NH:
*US Bancorp Raised To Neutral From Sell By Goldman Sachs
PM:
NH:
here’s the note
NH:
Management meetings back Cautious View
Our recent management visits support our
Cautious view as credit deterioration accelerates
and government intervention hits valuations.
Stock conclusion: MS vs. AXP pair trade
Capital market activity is a relative bright spot in
conversations, while consumer credit appears to
be deteriorating by the day. We recommend a
Conviction List pair trade: MS (upgrade to CLBuy)
vs. AXP (downgrade to CL-Sell). MS offers
capital strength (4.4% TCE on a marked book vs. a
3% large-cap bank average) and valuation (0.8X
tangible book). We also upgrade USB from CLSell
to Neutral as our target now implies upside
and the dividend cut will quickly rebuild TCE ratio.
We are revising EPS and price targets for several
stocks in our coverage (MS, AXP and WFC).
Our recent management visits support our
Cautious view as credit deterioration accelerates
and government intervention hits valuations.
Stock conclusion: MS vs. AXP pair trade
Capital market activity is a relative bright spot in
conversations, while consumer credit appears to
be deteriorating by the day. We recommend a
Conviction List pair trade: MS (upgrade to CLBuy)
vs. AXP (downgrade to CL-Sell). MS offers
capital strength (4.4% TCE on a marked book vs. a
3% large-cap bank average) and valuation (0.8X
tangible book). We also upgrade USB from CLSell
to Neutral as our target now implies upside
and the dividend cut will quickly rebuild TCE ratio.
We are revising EPS and price targets for several
stocks in our coverage (MS, AXP and WFC).
NH:
Basket Trades: Capital and disentanglement
The meetings reinforce our Texas ratio trade
(Bloomberg: GSCBDLTX vs -STX) and our Non-
Financial Financial trade (GSRHLNFF vs -SNFF). In
addition, banks are eager to disentangle from
TARP but only a few can. We introduce a long
basket of banks we think can repay: GSRHAGOV.
The meetings reinforce our Texas ratio trade
(Bloomberg: GSCBDLTX vs -STX) and our Non-
Financial Financial trade (GSRHLNFF vs -SNFF). In
addition, banks are eager to disentangle from
TARP but only a few can. We introduce a long
basket of banks we think can repay: GSRHAGOV.
NH:
Visits: WFC, AXP, BK, PNC, FITB, HBAN, KEY
Five themes emerged from our recent meetings:
(1) Cost of government ownership: Banks were
comfortable with a consistent level of government
ownership: zero. Concerns: directed lending,
onerous operational controls, and 50% valuation
discount on government-owned banks abroad.
(2) Capital confusion: Banks are more willing to
increase common equity by cutting dividends or
swapping other capital into common. Problems:
limited options for banks and the lack of clarity for
the “right” level of TCE from the government.
(3) Liquidity is not the issue: Deposit insurance
and TLGP have alleviated run on the bank risk.
(4) Credit acceleration: Nonperforming asset
growth seems to be accelerating in 1Q to date. In
securities books, unrealized securities losses are
better in 1QTD but the weakest securities are
down. Thus, securities write-downs will continue.
(5) Mixed on pre-provision: Good: capital markets
(FX, Rates), mortgage (refis with wide spreads).
Bad: expenses (OREO, FDIC insurance, etc).
Five themes emerged from our recent meetings:
(1) Cost of government ownership: Banks were
comfortable with a consistent level of government
ownership: zero. Concerns: directed lending,
onerous operational controls, and 50% valuation
discount on government-owned banks abroad.
(2) Capital confusion: Banks are more willing to
increase common equity by cutting dividends or
swapping other capital into common. Problems:
limited options for banks and the lack of clarity for
the “right” level of TCE from the government.
(3) Liquidity is not the issue: Deposit insurance
and TLGP have alleviated run on the bank risk.
(4) Credit acceleration: Nonperforming asset
growth seems to be accelerating in 1Q to date. In
securities books, unrealized securities losses are
better in 1QTD but the weakest securities are
down. Thus, securities write-downs will continue.
(5) Mixed on pre-provision: Good: capital markets
(FX, Rates), mortgage (refis with wide spreads).
Bad: expenses (OREO, FDIC insurance, etc).
PM:
cheers for that neil
PM:
We’ve got to run
PM:
back tomorrow at 11am