Markets live chat transcript for the chat ending at 12:07 on 13 May 2009. Participants in this chat were: Neil Hume, FT (NH) Paul Murphy, FT (PM)
NH:
Okay
NH:
It’s 11.03
NH:
and that means
NH:
it’s Markets Live
PM:
11.04 actually
PM:
Incorporating H&M Capital Management
NH:
This is the onshore wing of the group.
PM:
We are going to make a firm recommend on asset allocation this morning.
NH:
Mystic Murph is back, eh?
PM:
No, Neil – we’ve gone legit.
PM:
No more end of the pier stuff. H&M Capital remember.
NH:
Albeit authorised by no one. Clients and readers beware.
NH:
Anyway, what’s the call?
PM:
This delusional rally is over.
PM:
It’s toast. Stock are going down.
PM:
We’re calling a reversal to below 4000 on the FTSE 100.
NH:
By when?
PM:
Oh, I don’t know – what do you reckon?
NH:
How about by the time we come back from our Webby jaunt to New York – what’s that by week ending June 11?
NH:
We should have sobered up by then.
PM:
Er, Neil I have some bad news on the Webby jaunt front.
NH:
Oh no, don’t tell me Mr Dan won’t let us stay at the Hudson?
NH:
lovely bar there
PM:
No.
NH:
Suppose we can wear something a bit cheaper. I’ll get some recommendations.
PM:
No, I mean it’s not just the hotel.
PM:
He won’t wear any of it.
NH:
What, we can’t go at all!?!
PM:
(coughs)
NH:
WHAT, JUST YOU ARE GOING !?!?!?!?
PM:
NH:
WTF
NH:
OMG
PM:
Hang on hang on. Cool it Neil.
PM:
Let’s just see how it pans out.
PM:
Neil
PM:
Neil!
PM:
Come back
PM:
Come back to the desk
PM:
Let’s be professional about this.
PM:
We’re in the middle of making an important investment call.
NH:
Oh, yeah.
NH:
This rally’s cooked.
NH:
Dash for trash is going to end in some sort of car crash – even if it is in slow motion.
NH:
Calling the Footsie back below 4400.
NH:
big call
NH:
a whole 13 points
PM:
No! — 4K
NH:
alright, now that’s a call
PM:
But we could start by calling 4400
NH:
yeah, little steps
NH:
What has convinced us on this.?
PM:
Well, we never bought the rally – and clearly got egg on our face for that.
PM:
But it was actually this…
PM:
That’s the final strategy report from David Rosenberg at Merrill Lynch – now on his way.
PM:
HT to RK for posting that.
NH:
Tracy did some stuff on it last week.
NH:
But I was just re-reading it – and you thought well, yeah, this clown rally just cannot last.
NH:
Recovery is being priced in WAY WAY WAY too early.
NH:
Employment nowhere near bottomed.
NH:
Housing nowhere near bottomed
NH:
Corporate defaults long way off their peak.
PM:
The banks have just had PR paint smeared over the cracks.
PM:
The Western world needs to deleverage – consumers as well as institutions.
NH:
Rather than spending the reduced mortgage charges on frocks. – got to reduce debt.
PM:
Process has hardly started.
PM:
Stocks are going DOWN.
NH:
H&M Capital goes underweight.
PM:
Hey, Neil, there’s a marketing line in there.
PM:
H&M Capital, lightweight and underweight
11:11AM
NH:
there is one prob about sending even NY Alphav staff to the Weeby’s
NH:
the small matter of the ticket
NH:
$400 a piece
PM:
Webby racket
NH:
I think there should be some sort of competition commission investigation into it
PM:
Anti-trust case there
NH:
like the UK pubs
NH:
well the toxic pubs
NH:
which are being hammered at the moment
PM:
Oh my, have they been
NH:
on the back of this call from a Commons select committee to have them investigated
PM:
Enterprise Inns down 34p at 125p — poor things
PM:
Punch taverns off 26 at 112
NH:
and let that be a warning
NH:
you hold trash at your peril
PM:
Toxic waste
NH:
we don’t have any of this stuff in the H&M portfolio do we??
PM:
Er,
PM:
Is futuregene in ?
PM:
no
PM:
I think we’re clean
NH:
actually, to be serious
NH:
the analysts are pretty sanguine about this
NH:
don’t think the tie will be investigated
NH:
and the report does look pretty loppsided
NH:
they talked to just 1000 landlords
PM:
I’m a little surprised by the analysts being so relaxed — there is a very long history of government meddling in the brewing / pubs industry
PM:
And in anycase — just look at the share prices
NH:
yeah, yeah but remember
NH:
this things were one of the prime beneficiaries of the dash for trash
NH:
those gains just being unwound
NH:
anyway, I have a really amusing note from the leisure guy at Numis
NH:
he is furious
PM:
PM:
Do share
NH:
The BEC report states that it had “neither the resources not investigative powers to
reach firm conclusions on every issue”. Nor does its “recommendations carry the
force of law.” The OFT has already rejected it, stating that “there is no significant
competition problem in relation to the beer and pub market”. Strong opinions within
the BEC review could unsettle share prices in the short-term, but whether it leads to
anything further than what the pubcos are already doing is questionable.
reach firm conclusions on every issue”. Nor does its “recommendations carry the
force of law.” The OFT has already rejected it, stating that “there is no significant
competition problem in relation to the beer and pub market”. Strong opinions within
the BEC review could unsettle share prices in the short-term, but whether it leads to
anything further than what the pubcos are already doing is questionable.
NH:
The BEC Report appears like a one-sided result of asking 1,000 licensees if they think
they are overpaid. It fails to prove whether tenants would be better off as free traders, and
when it considers the cost of tenants being tied on beer, it over-states pubco beer
discounts by c20% and free trade discounts by over 50%.
they are overpaid. It fails to prove whether tenants would be better off as free traders, and
when it considers the cost of tenants being tied on beer, it over-states pubco beer
discounts by c20% and free trade discounts by over 50%.
NH:
Abolishing the beer tie is not being proposed, although the “dispute over the tie
could be ended easily; every lessee could be offered the choice of being free”. Since
November, Enterprise Inns has offered 400 contracts with possible freedom from the tie
on wines, spirits and minerals; of these, only 11% (46) chose to be free of tie.
could be ended easily; every lessee could be offered the choice of being free”. Since
November, Enterprise Inns has offered 400 contracts with possible freedom from the tie
on wines, spirits and minerals; of these, only 11% (46) chose to be free of tie.
NH:
Abolishing the tie on slot machine income (on average, 4% of pubco profits) would
result in loss of purchasing power and higher dry rent. Fortunately, the 2004 TISC
recommendation to abolish this tie was rejected by the pubcos, resulting in them
suffering (as well as their tenants) the effect of subsequent declines in AWP income
result in loss of purchasing power and higher dry rent. Fortunately, the 2004 TISC
recommendation to abolish this tie was rejected by the pubcos, resulting in them
suffering (as well as their tenants) the effect of subsequent declines in AWP income
NH:
An inexpensive, independent rent arbitration system. The pubcos are currently
working with the BII to implement such a system.
working with the BII to implement such a system.
NH:
The BEC “does not see why the pubcos should not themselves take out insurance …
directly”. As with any interference over the beer tie, such changes would be reflected in
the dry rent. Either way, it is questionable whether legislation could affect the existing
myriad of openly-negotiated long-term contracts. The key point is that pubco effective
rental yields are below 5.5% versus c7.5% in commercial property.
directly”. As with any interference over the beer tie, such changes would be reflected in
the dry rent. Either way, it is questionable whether legislation could affect the existing
myriad of openly-negotiated long-term contracts. The key point is that pubco effective
rental yields are below 5.5% versus c7.5% in commercial property.
NH:
Normally, any change would involve a Secretary of State referral to the OFT, which
could reject it, investigate or refer it to the Competition Commission. Obviously. the
BEC wants a direct referal to the latter, which responsibility is to the consumer, for
whom CGA and AC Neilsen data proves that tenant retail drinks retail prices are
little different to managed. Such an investigation could take years.
could reject it, investigate or refer it to the Competition Commission. Obviously. the
BEC wants a direct referal to the latter, which responsibility is to the consumer, for
whom CGA and AC Neilsen data proves that tenant retail drinks retail prices are
little different to managed. Such an investigation could take years.
PM:
So he doesnt think it’s going to happen then eitehr
NH:
err, no and there’s plenty more comment like that out there
NH:
not seem one analysts who thinks this is bad news
11:17AM
PM:
Important: Clarification on the Webbys
PM:
PM:
The Webby Drinks for readers still stand
PM:
You have my word
PM:
I am just organising some funds
PM:
Got seed capital from the marketing budget
NH:
seed capital????
NH:
what does that mean??
PM:
First few hours of drinking
PM:
But we need to raise so more dosh
PM:
Which i will do very soon
PM:
So stay tuned
NH:
are you going to have a rights issue
NH:
H&M cash call
PM:
Well, everyone else is
NH:
PM:
Deeply discounted etc
11:19AM
NH:
right , interesting story just come out of the FSA
NH:
and it is not often we say that
NH:
they have fined Morgan Stanley and banned one of its star traders
PM:
ooooh
PM:
Who is this
NH:
this guy was a real hot shot and v smart
NH:
The Financial Services Authority (FSA) has today fined Morgan Stanley & Co International Plc (Morgan Stanley) £1.4 million for systems and controls failings in relation to trader mis-marking which led the firm to make a $120 million negative adjustment in June 2008.
The FSA has also banned Matthew Sebastian Piper, a former proprietary trader at the firm, from performing any function in relation to any regulated activity on the grounds that he is not a fit and proper person. Piper was also fined £105,000.
The FSA has also banned Matthew Sebastian Piper, a former proprietary trader at the firm, from performing any function in relation to any regulated activity on the grounds that he is not a fit and proper person. Piper was also fined £105,000.
NH:
In breach of FSA Principles, the firm failed to effectively use the controls it had in place for dealing in illiquid financial products. It failed to ensure adequate supervision of Piper’s books and as a result, did not price certain positions accurately. Further, the firm failed to prevent or detect the mis-marking in a timely manner.
The firm further failed to respond quickly enough to changing conditions in the credit markets (namely an increase in volatility and a decrease in liquidity) by making adjustments to its existing systems and controls which would have enabled it to detect the mis-marking of the illiquid products in a timely manner.
Piper deliberately mis-marked the positions he traded on behalf of Morgan Stanley and sought to hide losses by manipulating the processes the firm had in place to monitor trading activity.
The firm further failed to respond quickly enough to changing conditions in the credit markets (namely an increase in volatility and a decrease in liquidity) by making adjustments to its existing systems and controls which would have enabled it to detect the mis-marking of the illiquid products in a timely manner.
Piper deliberately mis-marked the positions he traded on behalf of Morgan Stanley and sought to hide losses by manipulating the processes the firm had in place to monitor trading activity.
PM:
goodness me — that sounds a very interesting story
NH:
difficult to see what Piper has done wrong
PM:
Actually, reading the release he’s gone for the early settlement with the FSA
PM:
% discount on his fine
NH:
he did
NH:
Morgan Stanley cooperated fully with the FSA and agreed to settle at an early stage of the FSA’s investigation. The firm qualified for a Stage 1 discount under the FSA’s settlement discount scheme. Without the discount the fine would have been £2 million.
The FSA took into account Piper’s early admission of misconduct and his cooperation with both the FSA and Morgan Stanley. He agreed to settle early and also qualified for a 30% reduction to his fine. Without the discount the fine would have been £150,000.
On discovery of the mis-marking, the firm suspended Piper and senior management commissioned a review into the marking of his positions. The review identified serious weaknesses in the implementation, operation and management of Morgan Stanley’s systems and controls.
The FSA took into account Piper’s early admission of misconduct and his cooperation with both the FSA and Morgan Stanley. He agreed to settle early and also qualified for a 30% reduction to his fine. Without the discount the fine would have been £150,000.
On discovery of the mis-marking, the firm suspended Piper and senior management commissioned a review into the marking of his positions. The review identified serious weaknesses in the implementation, operation and management of Morgan Stanley’s systems and controls.
PM:
Here’s the link for the final notice
NH:
crikey the fines are raining down this morning
NH:
Brussels fines Intel record €1bn
NH:
http://link.ft.com/r/EB8122/MZ77U/C5LZ0/NAI0B/SKM1K/B7/t
11:24AM
PM:
We should get on to some stocks
NH:
yeah
NH:
bow returning to this idea that the dash for trash is over
NH:
and people left holding this rubbish could get their fingers seriously burnt
PM:
go on
NH:
Land Securities
PM:
harsh!
PM:
one of the UK’s biggest property companies labelled trash
NH:
Murph I don’t mean that
NH:
Look, the company filed annual results this morning
NH:
and the outlook statement was gloomy
NH:
not a green shoot in sight, just weeds coming up though the cracks in the pavement
NH:
We expect property market conditions to remain challenging, with vacancy rates rising as businesses fail or contract and, as a result, rental values weaken. These trends will put downward pressure on our rental income.
NH:
Occupational markets will display the full impact of economic conditions relatively late in the cycle, so we expect the period of recovery in our sector to be extended. Investment property pricing may reach a turning point ahead of
the rental markets, and the yield gap between property yields and gilts or cash on deposit can be expected to stimulate some buying interest. Indeed, this is just beginning to become apparent for well-let prime properties.
the rental markets, and the yield gap between property yields and gilts or cash on deposit can be expected to stimulate some buying interest. Indeed, this is just beginning to become apparent for well-let prime properties.
Whether the market cycle changes quickly or slowly, we will remain patient, making well-timed transactions that fit with our strategy, skills and strengths.
NH:
In the meantime, we will continue to take a positive and pragmatic approach to managing through the downturn – acting decisively, protecting value and planning for the future. We will respond to changing conditions quickly. We
will take difficult decisions as and when required. And we will use our strengthened balance sheet to address future growth opportunities at the right point in the cycle
will take difficult decisions as and when required. And we will use our strengthened balance sheet to address future growth opportunities at the right point in the cycle
PM:
So vacancy rates rising, rental value falling
PM:
I see what you mean
NH:
yeah and that has sort of spooked the sector this morning
PM:
indeed
PM:
Land Sec down 44p at 494
PM:
however, that fall can’t be just done to that outlook statement can it??
NH:
actually I think it is
NH:
most of the notes I have seen this morning, say the numbers are line
NH:
but the tonne, is just well depressing
NH:
look at this from Merrill
NH:
Land Securities still remains very cautious on the outlook for the market – very
little reads positively. The underlying fundamentals continue to deteriorate. Whilst
the recent rights issue has addressed balance sheet issues, our concern is cash
flow and rents will continue to deteriorate in the current economic climate. We
believe the market will start to focus more on underlying fundamentals going
forward including cash flow generation out of individual assets.
On current pricing we prefer to stay Underperform as current pricing looks
stretched – trading at a 20% premium to our forward NAV forecast. Our
preference is for companies with good quality portfolios, sound strategies and
well positioned to capitalise on opportunities – we think for now Land will be
operating on the back foot.
little reads positively. The underlying fundamentals continue to deteriorate. Whilst
the recent rights issue has addressed balance sheet issues, our concern is cash
flow and rents will continue to deteriorate in the current economic climate. We
believe the market will start to focus more on underlying fundamentals going
forward including cash flow generation out of individual assets.
On current pricing we prefer to stay Underperform as current pricing looks
stretched – trading at a 20% premium to our forward NAV forecast. Our
preference is for companies with good quality portfolios, sound strategies and
well positioned to capitalise on opportunities – we think for now Land will be
operating on the back foot.
NH:
and that is really the key point here
NH:
in the dash for trash a lot of the property stocks got pushed up to silly levels
NH:
I mean should anything be trading at a premium to forward NAV at the moment????
PM:
in a word, no
PM:
that’s nuts and it is good to be see a bit of sanity returning to the market
NH:
indeed
NH:
here’s some other prices from the property sector
Hammerson (HMSO:LSE): Last: 301.50, down 21.5 (-6.66%), High: 336.50, Low: 299.75, Volume: 1.17m
British Land Co (BLND:LSE): Last: 405.75, down 16.25 (-3.85%), High: 422.50, Low: 403.00, Volume: 2.88m
Great Portland Estates (GPOR:LSE): Last: 292.50, down 17.5 (-5.65%), High: 310.50, Low: 289.25, Volume: 466.01k
PM:
thanks for those
11:27AM
PM:
Think we are getting some snaps from across the Irish sea…
NH:
er, only got the Chairman’s speech
NH:
no wire flashes at the moment
NH:
I suppose an egg beats the shoe used at the Fortis meeting
PM:
PM:
Should mention that was AIB meeting in Dublin
PM:
Actually — just on banks, you did a post earlier on KBC
PM:
You got any more on that — such as why they were suspended
PM:
?
NH:
nothing more than was in the Belgian business newpaper
NH:
BRUSSELS, May 13 (Reuters) – The Belgian government is working on a new
rescue plan for KBC because the financial group is set to write down a further 1
billion euros ($1.4 billion) on its debt portfolio, Belgian business newspaper
De Tijd said on Wednesday.
Top ministers met late on Tuesday to discuss a plan to safeguard
investors’ confidence in the banking and insurance group before it announces
first-quarter results on Thursday, the daily said.
KBC said in a short statement on Wednesday morning that it had requested
its shares be suspended. It said it would not comment on what it called “wild
rumours” before Thursday morning because it was in its pre-earnings black-out
period.
The Belgian financial markets regulator, CBFA, confirmed the shares would
be suspended.
rescue plan for KBC because the financial group is set to write down a further 1
billion euros ($1.4 billion) on its debt portfolio, Belgian business newspaper
De Tijd said on Wednesday.
Top ministers met late on Tuesday to discuss a plan to safeguard
investors’ confidence in the banking and insurance group before it announces
first-quarter results on Thursday, the daily said.
KBC said in a short statement on Wednesday morning that it had requested
its shares be suspended. It said it would not comment on what it called “wild
rumours” before Thursday morning because it was in its pre-earnings black-out
period.
The Belgian financial markets regulator, CBFA, confirmed the shares would
be suspended.
NH:
although Bloomie have a higher figure – EUR2bn
PM:
hmm
NH:
May 13 (Bloomberg) — KBC Group NV must write down an additional 2 billion euros ($2.7 billion) to 4 billion euros on its portfolio of collateralized debt obligations, De Tijd reported, citing no one.
PM:
Talking about the banks — UK versions are under pressure again today
PM:
RBS down 3.4p at 40
PM:
fo rexample
NH:
hmmmm, Jonathan Pierce at Credit Suisse seems to be on a one man mission to talk down the sector
PM:
The man’s obviously looking for a job at H&M
NH:
our first high
NH:
we could be the new Lansdown – experts in banks and financials
PM:
INdeed
PM:
here’s his latest note – or extracts from
PM:
UK Banks
Royal Bank of Scotland’s slide 6
Royal Bank of Scotland’s slide 6
Summary
RBS presented at the UBS conference yesterday and slide 6 was particularly pertinent to the note we published, also yesterday.
http://files.shareholder.com/downloads/RBS/637647076x0x294087/f79e5901-d66f-4b6c-b67c-aad8b2c0a32d/ubs051209.pdf
It discusses liquidity requirements and margin headwinds (which it describes as “serious”) and reproduces a Bank of England chart (the same one on page 2 of our note) showing how “liquid” assets (being cash at Central Banks and eligible bills) have moved over time. The company then gives the first guidance we have seen on the amount of high quality Government securities they might have to hold – it suggests that in time (we think 2-3 years) about 5-10 percent of assets will be held in these instruments, similar to the 1980s. That would be up to £120bn on our estimates versus around £60bn (or 5% net of derivatives) at the moment.
PM:
The additional £60bn is broadly in line with our assumption that the three domestic banks as a whole might have to boost Government bonds by around £200bn in total, although we still think there is upside risk to this. At 100bps negative carry (assuming funding costs at 50bps over swaps and gilt swap spreads at 50bps) the reduction in pre-provision profit would be about 6%, on our estimates.
This is manageable but there are several other headwinds and RBS also points to the extension of wholesale maturities, although it doesn’t quantify this. At the moment it has around £1.2trn of funds, and tells us around £400bn of that is sub 1 year wholesale. We believe at least 75% of this is sub 3 month with a large proportion of that sub 1 month. If it pushed half of this over 1 year (at say 50bps more than current cost) and all of the > 1 year wholesale refinanced (again at 50bps more than current cost) that would take another 20% off pre-provision profits, on our estimates. We clearly don’t know where longer term spreads will settle so we caveat this heavily, but it demonstrates the mechanics in our view.
PM:
It is not out of the question therefore that these two issues – -which it describes as secular – could eventually take around 30bps (or more) off group banking margin (2.1% last year) on our numbers.
It is not out of the question therefore that these two issues – -which it describes as secular – could eventually take around 30bps (or more) off group banking margin (2.1% last year) on our numbers.
Then there’s deposit margin pressure, very important as we estimate 30% of pre-provision profit or 50bps of margin comes from here. RBS highlights this issue, but suggests it is cyclical rather than secular. To an extent, we agree, but new liquidity requirements will also increase the general competition for deposits in the medium term – and the CEO seemed to say this himself on the conference call on Friday. Indeed, in the presentation the group formally states it is targeting a loan to deposit ratio of towards 100%.
Overall, the message is clear and the bank’s conclusion mirrors our own primary concern on the sector – “margin headwinds are serious”.
PM:
Carries on yesterday’s theme of severe margin pressure
PM:
While we have RBS on Underperform, we again look to LBG – with a 178% loan to deposit ratio and rising – as offering the greatest downside risk on margins, in our view. It is also worth noting that Lloyds announced a new issue of $6bn of Government backed bonds yesterday. This comes on top of around £6bn of Government backed issuance in the last month, on our analysis, and we believe takes total CGS utilisation towards £50bn since November 2008. We estimate that these issues will effectively cost Lloyds around LIBOR + 150bps including the CGS fee and are not simply a function of the bank extending its wholesale duration, but also replacing old, legacy term funding. There is plenty more for the bank to do in this regard and LBG remains our least favoured UK bank.
While we have RBS on Underperform, we again look to LBG – with a 178% loan to deposit ratio and rising – as offering the greatest downside risk on margins, in our view. It is also worth noting that Lloyds announced a new issue of $6bn of Government backed bonds yesterday. This comes on top of around £6bn of Government backed issuance in the last month, on our analysis, and we believe takes total CGS utilisation towards £50bn since November 2008. We estimate that these issues will effectively cost Lloyds around LIBOR + 150bps including the CGS fee and are not simply a function of the bank extending its wholesale duration, but also replacing old, legacy term funding. There is plenty more for the bank to do in this regard and LBG remains our least favoured UK bank.
11:34AM
NH:
before we move on and discuss Rio and the miners
NH:
what about the inflation report??
PM:
i havent had a chance to read really
PM:
Here’s the link
PM:
The Governor doesnt buy this green shoots stuff — at all
NH:
good man
NH:
we should invite him for lunch at H&M
NH:
his comments indicate that rates are set to stay low
NH:
and a little bit more QE is possible
PM:
10 year gilt yields come in
PM:
trading at 3.58
NH:
pretty dovish on inflation outlook
NH:
I have a quick bit of comment from Howard archer at Global Insigh
NH:
Critically, on the market assumption that interest rates will start to rise gradually from the beginning of 2010 and Quantitative Easing amounts to £125 billion, the Bank of England’s central projection shows consumer price inflation only rising from a projected 0.5% in late-2009 to around 1.2% in two year’s time. This is still appreciably below the 2.0% target level for inflation. Even on the assumption that interest rates remain at 0.50% over the next two years while Quantitative Easing amounts to £125 billion, consumer price inflation is forecast to be just below the 2.0% target level on a two-year horizon
NH:
Meanwhile, although the Bank of England’s forecasts show a pretty decent recovery in GDP in 2010 and beyond, the Bank of England is clearly very cautious about the strength and sustainability of any upturn. While acknowledging current “promising signs” that the rate of economic decline is moderating, Mr. King has highlighted the major uncertainties surrounding the outlook, particularly given the ongoing need for financial institutions, households and companies to adjust their balance sheets.
NH:
We certainly suspect that while latest data and survey evidence have been markedly improved and even hint that the economy could be close to stabilizing, significant relapses remain highly likely and we could well be in for a very bumpy period for some considerable time to come.
Bottom line – interest rates look poised to stay at 0.50% well into 2010.
NH:
shall we move on
NH:
Paul has just picked up a note, which backs out view
PM:
yeah, these GS crew — any bandwagon
PM:
Stocks that had most out on loan have outperformed
There is evidence that a short squeeze boosted performance in this recent
rally. Using Euroclear stock lending data for UK and Ireland, we find that
those companies in the top quartile are up 55% from the low, vs. around
30% for the other quartiles. This result holds even adjusting for the size
and sector of stocks on loan.
…and the amount on borrow has declined to a 5-year low
In addition, the amount on loan has fallen significantly suggesting many
shorts have now been taken off. On average 2.9% of stock was borrowed
in April a drop compared with recent months and a low vs. the last 5 years.
There is evidence that a short squeeze boosted performance in this recent
rally. Using Euroclear stock lending data for UK and Ireland, we find that
those companies in the top quartile are up 55% from the low, vs. around
30% for the other quartiles. This result holds even adjusting for the size
and sector of stocks on loan.
…and the amount on borrow has declined to a 5-year low
In addition, the amount on loan has fallen significantly suggesting many
shorts have now been taken off. On average 2.9% of stock was borrowed
in April a drop compared with recent months and a low vs. the last 5 years.
PM:
Any ‘push’ to equities from the short squeeze is likely to fade
While a short squeeze has influenced some names, we think the improved
economic data has been the more important driver for the majority of
stocks. But given the fall in stock lending, any additional ‘push’ from a
short squeeze is likely to be less evident from here; momentum in the
economic data will be even more crucial if the rally is to be sustained.
While a short squeeze has influenced some names, we think the improved
economic data has been the more important driver for the majority of
stocks. But given the fall in stock lending, any additional ‘push’ from a
short squeeze is likely to be less evident from here; momentum in the
economic data will be even more crucial if the rally is to be sustained.
PM:
that’s from Sharon Bell at Goldman
NH:
that’s very interesting
NH:
a lot of contacts have been trying to put some firm numbers on the impact of short selling
NH:
and the degree to which positions have been closed
PM:
Well, you never know the full note might find its way into the LR
PM:
There are some interesting charts in the note
11:42AM
NH:
I wanted to have a look at the miners
PM:
yes
PM:
what’s all this talk about a rights issue coming from Rio??
PM:
mentioned in a number of papers this morning but not the FT
NH:
well, is there anything new here??
NH:
that the question I am asking
NH:
we all know that Rio has got a cash call on the shelf if the deal with the Chinese is either blocked by Aussie regulators and shareholders
NH:
and would it be such a terrible thing?
PM:
given the terms attached to the original Chinalco deal, I would say not
PM:
but it would still weigh on the share price
NH:
sure, but look Rio has had a good run
PM:
so further profit taking in inevitable
NH:
and furthermore industry executives are making really cautious noises
NH:
the CEO’s presentation at the Merrill/BoA mining bash in Barca yesterday was pretty cautious
NH:
as was the talk by Cynthia Carroll at Anglo’s
NH:
anyway, this idea that Rio is somehow turning against the Chinalco deal has been shot down by a few analysts this morning
NH:
Look at this from Liberum
NH:
Rio Tinto fell sharply at the UK close last night and was weak in Oz overnight (-5%, vs BHPB which was flat). The reasons for the weakness are confused – the Telegraph reports again that RIO management are considering a £5bn rights issue should the Chinalco deal fail. This is not new news as the contingency rights issue has been there since February. Our view is that RIO management remain committed to the Chinalco deal until it gets taken away from them either by the FIRB, shareholders or BHPB. Indeed CEO Tom Albanese spent a large proportion of his presentation yesterday at the Merrill Mining conference yesterday extolling the virtues of the deal.
NH:
We can understand why RIO has been seen as a natural target for profit taking in the cyclicals – it has been a stellar performer and now trades on c.12x 2010 consensus earnings – a significant premium to more defensive ‘safe’ havens in telco, pharma and utilities. However, we would be buyers on weakness as we think commodities will be firm in the coming months, RIO is still cheap relative to BHPB, has the potential for bid action and newsflow in the next month will be heavy (feedback from du Plessis roadshow, FIRB approvals and possible Chinalco deal re-negotiation are all potential triggers aside from a new bid from BHPB). The ratio of RIO to BHPB is now 1.89x, significantly off its peak of 2.05x two weeks ago. On our numbers for the two shares to have parity PERs the ratio should be closer to 2.6x. Finally, how much would RIO now need in a rights issue? If they were considering $9bn in Feb, would it be that much now post the recent disposals and the run in commodities? Even if the rights isn’t downsized it would be a max c.14% dilutive at current prices.
PM:
ta for that
PM:
Not only Rio that is weak this morning
PM:
Kazakhmys have taken a thump – off 65p at 601
PM:
what’s happening there?
NH:
well, the results from rival Kazak miner ENRC this morning are nothing to write home about
NH:
and then there is a Morgan Stanley downgrade
NH:
We downgrade Kazakhmys and Antofagasta to Underweight as we believe that the current rally in copper stocks is overdone, but we adjust our price targets upwards to reflect investors’ renewed appetite for risk (see ‘Today’s changes’). We have ‘reverse-calculated’ the implied long-term copper prices discounted in current share values, and we calculate the stocks are starting to discount long-term copper prices of $2.50-2.70/lb.
This is significantly above current marginal costs and incentive prices for most major copper projects. Even at the peak of the commodity bull market, few argued for a long-term copper price above $2.50/lb. With costs falling at high cost mines, marginal cost support is also declining.
11:45AM
NH:
just going back to oil
NH:
Royal Dutch heading higher
NH:
but not BP
NH:
odd??
PM:
Well, we think BP is trying to buy something — but we have no idea what it is
11:46AM
PM:
STOP PRICE
NH:
4395
PM:
NH:
H&M Asset Management , eh
PM:
NH:
ah, BP ex 9.6p divi today
PM:
Thanks fatdaz, doh
NH:
actually the oil move is interesting
NH:
looks like there is quite a bit of sector rotation going on
NH:
out of trash into defensives
NH:
weakness in banks, props and miners, offset by strength in defensive stocks like Unilever and the oils
NH:
and also Compass
Compass Group (CPG:LSE): Last: 362.75, up 30 (+9.02%), High: 363.75, Low: 344.75, Volume: 12.59m
NH:
the market likes their update
NH:
Unilever also a good market
Unilever (ULVR:LSE): Last: 1,543, up 72 (+4.89%), High: 1,554, Low: 1,479, Volume: 2.75m
NH:
being pushed by a couple of brokers this morning
NH:
Bernstein and Noumra
NH:
and the guy at Bernstein, Andrew Wood, is really highly rated
NH:
always picking up awards
NH:
and when he upgrades Unilever
NH:
it moves
PM:
Is he that influenctial — Andrew Wood??
NH:
in his space, yes
NH:
and he is big fan of the new man at Unilever – Paul Polman
NH:
here’s the note
NH:
When we launched coverage on Unilever in February 2002, the title of our report was “Persistent Purgatory”…and this is where Unilever’s stock has been for the best part of the decade. We are upgrading Unilever to Outperform as we believe that Unilever now has 3 attributes that could contribute to a re-rating and sustained strong stock performance: i) prospects for strategic, operational and cultural improvements, led by new CEO Paul Polman, ii) good short to medium-term catalysts for H2 2009 and 2010 driven by significant commodity cost relief, potentially strong reinvestment behind growth, recovering volumes and still low investor expectations, and iii) attractive valuations.
NH:
In mid 2007, we presented to some senior Unilever managers a “provocative view” of the company, aimed at getting those managers to question themselves and their company. Our overall view was that Unilever is a company with some great assets (e.g. emerging markets exposure, Personal Care), but that it had been “under-managed” for some time, as reflected in below-average operating performance, which in turn drove weak stock performance and valuations near the bottom of its Global Food & HPC peers.
NH:
At the end of the presentation, we outlined 7 recommendations that we believed would improve Unilever’s strategic direction and operating focus…and thus change investor perceptions and improve its valuation. We have been tracking progress against these 7 recommendations for the last 2 years. Progress has been mixed, but generally strong, and we have seen sufficient evidence to suggest that Unilever is on the way to unlocking its full potential. More specifically…
PM:
sounds a bit cheeky
PM:
presenting to senior Unilever staff
PM:
bet that went down well
PM:
being told you are rubbish by a City analyst
NH:
We have long argued that if Unilever was managed better, there would be a big valuation upside. 2010 valuations (10.9x PE, 6.6x EBITDA, 8.7% FCF, 5.1% Dividend Yield) look hugely attractive for a company as strong and stable as Unilever. Additionally:
- Unilever now trades at about a 10% discount to its European Food Group peers. It is worthwhile remembering that throughout the whole of the 1990s, Unilever traded at over a 10% premium to its peers in Europe. It dropped to a discount in January 2000 and has been in purgatory ever since.
NH:
- In our 14-company Global Food Group, Unilever trades 3rd from the bottom, and in our 11-company HPC Group, it is 2nd from the bottom. Merely trading at parity to its global Food/HH/PC peers would give a +19% re-rating of Unilever’s stock.
- With some prudent assumptions (WACC 8.3%, 10-year cash flow growth of 3%, and terminal growth of 3%), our DCF still gives a massive 57% upside.
In summary, we now see sufficient progress on many strategic, operational and cultural aspects at Unilever that we feel it is time to turn positive on the stock. We believe that medium-term and long-term prospects for Unilever are stronger than they have been for many years…and we see attractive valuations. We are upgrading Unilever to Outperform based on moving from a “deserved” discount of 15% up to parity with its European Food peers, and with a +30-35% increase in our PTs to €22.50 (NV), £20 (PLC) and $30.50 (UN, UL).
PM:
and what about the Nomura note — got that?
NH:
hang on
NH:
We believe new management through commercial and cultural reform
will better leverage Unilever’s strong brands and category leadership positions to create a long-term volume-led growth/cash generative business. From a shorter-term perspective, Unilever swings from facing the largest RM&P cost headwind in 08/H109 amongst peers, to the largest tailwind in H209. This P&L flex (higher A&P spend/competitive pricing) should allow for a return to volume growth in H2 combined with margin uplift (well ahead of consensus) – also proving strong momentum for 2010. Upgrade to BUY.
will better leverage Unilever’s strong brands and category leadership positions to create a long-term volume-led growth/cash generative business. From a shorter-term perspective, Unilever swings from facing the largest RM&P cost headwind in 08/H109 amongst peers, to the largest tailwind in H209. This P&L flex (higher A&P spend/competitive pricing) should allow for a return to volume growth in H2 combined with margin uplift (well ahead of consensus) – also proving strong momentum for 2010. Upgrade to BUY.
PM:
ta
11:51AM
PM:
Right — Small Cap Corner
NH:
before that here’s a mid cap company that is fast headed for small cap land
NH:
it is our favourite emerging markets doorstep lender
PM:
oh yeah
PM:
IPF
NH:
International Personal Finance
PM:
Dont tell me — it’s plunged again
NH:
since Friday’s profit warning the price has been sliced in half
NH:
off a further 11.25p at 66.25p
NH:
can’t believe just how big an accident waiting to happen this was
NH:
and the price has just been blown to pieces
NH:
no reason why this morning
NH:
just more selling by shareholders
NH:
who probably think the problems in Hungary are going to be repeated elsewhere in Eastern Europe
NH:
and there’s always Mexico to think about
PM:
okay — ta for that
PM:
Moving on
PM:
Deeper into muppetland
PM:
AP — that’s very good shAIM
PM:
But look at this piece of research – from MOST apparently
PM:
Bwin: Initiate with an Overweight rating: Bwin has
shifted from a strategy of marketing-led growth to
profitability. We expect operating margins to rise from
-3% in 2008 to 16% in 2011, and see significant upside
beyond this. We think the 2009 P/E of 13.5x (adjusted)
fails fully to reflect the growth potential and option value.
We value the potential options for Bwin: 1) US
regulation. Worth €15-100 per share. 2) M&A. A €300
million deal would enhance EPS by around 30%, we
think. 3) Enforcement of the UIGEA, worth €12 per
share. 4) European market regulating, worth up to €34
per share, where Bwin is the market leader.
shifted from a strategy of marketing-led growth to
profitability. We expect operating margins to rise from
-3% in 2008 to 16% in 2011, and see significant upside
beyond this. We think the 2009 P/E of 13.5x (adjusted)
fails fully to reflect the growth potential and option value.
We value the potential options for Bwin: 1) US
regulation. Worth €15-100 per share. 2) M&A. A €300
million deal would enhance EPS by around 30%, we
think. 3) Enforcement of the UIGEA, worth €12 per
share. 4) European market regulating, worth up to €34
per share, where Bwin is the market leader.
PM:
PartyGaming: Initiate with an Overweight rating:
Under the current structure, we think the shares are
slightly overvalued, and see 19% share price downside
to our base case of 220p. However, the range of options
open to PartyGaming is wide, and we expect significant
structural change over the next 12-24 months. We do
not think these options are fully priced into the stock.
We value key options for PartyGaming: 1) US
regulation, worth 80-1300p per share. 2) M&A. A $400
million deal could enhance earnings by over 40%. With a
leading position and strong technology, Party is an
attractive asset in an industry that is likely to consolidate.
3) Enforcement of the UIGEA could boost poker
liquidity, worth 90p a share. 4) European markets are
regulating, worth up to 235p per share.
The main risks are regulation and recession.
Prohibition of the industry is almost impossible, and we
expect more markets to regulate and tax in time.
Structural growth drivers offset the weak economy, and
we expect continued growth in the industry.
Under the current structure, we think the shares are
slightly overvalued, and see 19% share price downside
to our base case of 220p. However, the range of options
open to PartyGaming is wide, and we expect significant
structural change over the next 12-24 months. We do
not think these options are fully priced into the stock.
We value key options for PartyGaming: 1) US
regulation, worth 80-1300p per share. 2) M&A. A $400
million deal could enhance earnings by over 40%. With a
leading position and strong technology, Party is an
attractive asset in an industry that is likely to consolidate.
3) Enforcement of the UIGEA could boost poker
liquidity, worth 90p a share. 4) European markets are
regulating, worth up to 235p per share.
The main risks are regulation and recession.
Prohibition of the industry is almost impossible, and we
expect more markets to regulate and tax in time.
Structural growth drivers offset the weak economy, and
we expect continued growth in the industry.
PM:
That looks like it was written purely for SCC
PM:
prty
Muppet stock. PartyGaming would be a penny dreadful, but for a share consolidation.
NH:
London’s junior shAIM market. I like that.
11:57AM
NH:
anything to finish up on
NH:
barratt developments
NH:
they have ruled out a rights issue this morning and their price is down
NH:
have they not been watching the market
PM:
Any green shoot stuff re Barretts, or is it just overgrown building sites?
NH:
nope
NH:
they are making quite a job of selling what they have
NH:
but not real upturn
NH:
and let’s face it, this is another fully valued stock because of the dash for trash
NH:
here’s a few bits of comment
NH:
Arbuthnot
NH:
Barratt Developments IMS covers the 19 week period from January 1st to 10 May (the majority of H2). On track to deliver volumes and margins in line with group’s expectations but again, in common with peers, cite downward pricing pressure from lender valuations. Since March 30th, net private reservations were up over 58% compared with last year (cancellation rates running at more normal 16%) and although the order book is given at £778.2m (5253 plots implying an average selling price of £148k), the more interesting figure would be a year-on-year comparison to see whether the gap has been closed (hopefully more from the conference call this morning).
Net debt at end of April in line with groups’ business plan (will be high before reducing ahead of year end); however we are still looking for £1.3bn by year end – not sustainable going forwards. It is clear that Barratt continues to outperform market in terms of trading for two main reasons: firstly, historically have been master marketers and selling is deeply ingrained in the business culture and secondly, Barratt is the most indebted housebuilder so it absolutely has to. We do not expect significant changes to forecasts today (conference call at 8am); however, we are pulling our recommendation back to a Neutral. The stock has achieved our target price of 157p and we believe is up with events for now; however, we do point out that on a reported tangible NAV basis (not our trough NAV) Barratt trades on a 66% discount versus the rest of the peer group (excluding Taylor Wimpey) on just a 17% discount.
NH:
and KBC
NH:
The ideal from BDEV was a rights issue but it was not to
be. The IMS is again cautious on outlook – spring surge to
fade and price still falling. Without new equity the risk
profile starts to look less comfortable and with a more
cautious NAV estimate, the discount is looking too low.
be. The IMS is again cautious on outlook – spring surge to
fade and price still falling. Without new equity the risk
profile starts to look less comfortable and with a more
cautious NAV estimate, the discount is looking too low.
NH:
More robust trading patterns have continued – Barratt is the best operator
out in the field, the most aggressive seller and the best proponent of using new
media to generate sales. All recent statements have shown strong visitor rates to
sites, so there is no real change in the trend here. There is a spring surge taking
place and a general uptick in housing market activity but, as we have rehearsed
before, the rate of improvement is not enough to reverse weak selling price
trends. Therefore, margins will erode further and land provisions will be larger
and go on for longer.
out in the field, the most aggressive seller and the best proponent of using new
media to generate sales. All recent statements have shown strong visitor rates to
sites, so there is no real change in the trend here. There is a spring surge taking
place and a general uptick in housing market activity but, as we have rehearsed
before, the rate of improvement is not enough to reverse weak selling price
trends. Therefore, margins will erode further and land provisions will be larger
and go on for longer.
NH:
We have revised down our base NAV – after TW’s decision not to capitalise
the tax losses on land provisions, we are making the same adjustment to the low
point or fully written down NAV for BDEV. We estimate that this reduces the NAV
estimate by 48p to 292p. Therefore, the discount to NAV appears to be less than
50% and, without any sign of new equity to lower the covenant risks, this feels
too high. A figure of 50-55% is ideal and this sets the fair value at 125-135p.
No more cash from winding down Wilson Bowden Development – some
£180m of realisations have been made from the commercial portfolio and there
will be no more. £180m is a good figure in a climate of rising yields but the
portfolio was always first class
the tax losses on land provisions, we are making the same adjustment to the low
point or fully written down NAV for BDEV. We estimate that this reduces the NAV
estimate by 48p to 292p. Therefore, the discount to NAV appears to be less than
50% and, without any sign of new equity to lower the covenant risks, this feels
too high. A figure of 50-55% is ideal and this sets the fair value at 125-135p.
No more cash from winding down Wilson Bowden Development – some
£180m of realisations have been made from the commercial portfolio and there
will be no more. £180m is a good figure in a climate of rising yields but the
portfolio was always first class
NH:
We look to take profits here and across the sector – stocks are still trading
too close to NAV given the poor outlook for pricing and thus margins and
landbank valuations. We still believe that having stocks supported by their landbacked
NAV when it becomes more obvious that the book NAVs overstate the
mark to market values of land by so large a margin.
too close to NAV given the poor outlook for pricing and thus margins and
landbank valuations. We still believe that having stocks supported by their landbacked
NAV when it becomes more obvious that the book NAVs overstate the
mark to market values of land by so large a margin.
12:01PM
PM:
We’re almost done, but note that another house has jumped on the H&M bandwagon
PM:
Dont these guys have any ideas of their own?
PM:
Becoming more defensive
We reduce the size of our overweight in our favoured three cyclical
sectors—autos, steel and technology—and raise food producers to
overweight from benchmark. We reduce weightings in cyclicals because:
■ Valuation: P/B of cyclicals relative to defensives is now nearly one st. dev.
above its norm (13%), while the P/E relative to the market is even more
extreme. The P/E ratio on average margins is 15.9x in Europe and 17.8x in
the US. On HOLT, the required CFROI® for cyclicals is about one
percentage point above their historical average in Europe and the US.
■ Magnitude of performance: Cyclicals have historically outperformed
defensives by 32%. So far, they have outperformed by 40%. Four out of the last
7 cyclical rallies have lasted less than 6 months—this one is 5 ½ months old.
■ W not V: We believe in an upward sloping W-shaped recovery. We are seeing
an inventory rebound (IP has to rise 5% to normalise inventories), but we think
growth will not return to trend for another couple of years, as we estimate there
is still $7trn of excess leverage in the G4 (28% of GDP) and US household
liabilities relative to assets have never been this extreme (we believe the US
savings ratio needs to rise to 10% from 4.2% now). Additionally, in most of the
world housing still looks expensive (though not in the US) and lending conditions
are still too tight. Even into a ‘normal’ economic recovery (1991, 2002), the initial
rise in ISM only lasted 7-8 months. Double dip concerns have been evident in
most ‘normal’ economic recoveries.
We reduce the size of our overweight in our favoured three cyclical
sectors—autos, steel and technology—and raise food producers to
overweight from benchmark. We reduce weightings in cyclicals because:
■ Valuation: P/B of cyclicals relative to defensives is now nearly one st. dev.
above its norm (13%), while the P/E relative to the market is even more
extreme. The P/E ratio on average margins is 15.9x in Europe and 17.8x in
the US. On HOLT, the required CFROI® for cyclicals is about one
percentage point above their historical average in Europe and the US.
■ Magnitude of performance: Cyclicals have historically outperformed
defensives by 32%. So far, they have outperformed by 40%. Four out of the last
7 cyclical rallies have lasted less than 6 months—this one is 5 ½ months old.
■ W not V: We believe in an upward sloping W-shaped recovery. We are seeing
an inventory rebound (IP has to rise 5% to normalise inventories), but we think
growth will not return to trend for another couple of years, as we estimate there
is still $7trn of excess leverage in the G4 (28% of GDP) and US household
liabilities relative to assets have never been this extreme (we believe the US
savings ratio needs to rise to 10% from 4.2% now). Additionally, in most of the
world housing still looks expensive (though not in the US) and lending conditions
are still too tight. Even into a ‘normal’ economic recovery (1991, 2002), the initial
rise in ISM only lasted 7-8 months. Double dip concerns have been evident in
most ‘normal’ economic recoveries.
PM:
That’s andrew garthwaite at Credit Suiss
PM:
Suisse
12:02PM
NH:
what are you doing for lunch? Fancy a curry?
PM:
Hmm — not really
PM:
Not for lunch
NH:
well you should
PM:
??
NH:
because it is good for stress
PM:
in what sense?
PM:
As in usually follows number of pints of lager?
NH:
no. RELEASING ENDORPHINS
NH:
CURRIES HELPING BRITS BEAT RECESSION STRESS – BY RELEASING ENDORPHINS
Research into the recent rise in takeaway sales by the UK’s leading takeaway portal* has found that eating curry, particularly spicier options, can relieve stress in much the same way as exercise due to the release of endorphins or ‘feel-good’ hormones. Takeaways including red chilli peppers are considered to be the number one edible way to help relieve stress, due to the active chemical, capsaicin.
Research into the recent rise in takeaway sales by the UK’s leading takeaway portal* has found that eating curry, particularly spicier options, can relieve stress in much the same way as exercise due to the release of endorphins or ‘feel-good’ hormones. Takeaways including red chilli peppers are considered to be the number one edible way to help relieve stress, due to the active chemical, capsaicin.
NH:
The recent increase in Brits turning to takeaways could be driven by something more than hunger, according to research carried out by www.Just-Eat.co.uk, the UK’s leading online takeaway portal. An accompanying study of 1,185 people conducted by the site has found that 92% of Brits say that they feel ‘happier’ after eating a takeaway.
NH:
Takeaways such as Vindaloo, Madras and Thai curry are among the takeaway meals most associated with stress-relief, with their mix of endorphin releasing red chilli peppers and serotonin-rich mood-enhancing vegetables, notably tomatoes. 84% of the participants in the study mentioned that the fact they didn’t have to cook when ordering in was a factor in improving their mood.
When asked, “Have you ordered takeaway food more regularly recently when compared to the same time last year?” just over three in five, 61%, agreed.
PM:
PM:
Scientific stuff!
NH:
The top five mood-improving curries, decided by Just-Eat meal experts comparing restaurant cooking methods and included ingredients are as follows:
1. Chicken/Beef Madras
2. Vindaloo
3. Thai red curry
4. Pasanda
5. Jalfrezi
Online ordering portal Just-Eat have seen a 250% takeaway order increase across their 2480 UK partnered restaurants since the recession when compared to the same time last year, with the site now servicing more than 40,000 meal orders every day.
PM:
Tamarind for lunch then its is, Neil
NH:
good idea
NH:
very nice place
NH:
in Mayfair
NH:
sadly I can’t make it today
NH:
have a luncheon appointment with Diageo
PM:
I’m sure that will be fascinating Neil
NH:
yeah, can’t wait till the LVMH story is brought up
PM:
___
PM:
Right we are done
PM:
Footsie holding below 4400
PM:
Thanks for all the comments and jokes
PM:
And for turning up each day
PM:
We will be back here tomorrow at 11am
PM:
sharp
PM:
ish
PM:
Seeya
NH:
bye
PM:
Have a good holiday Zoomy