Markets live chat transcript for the chat ending at 12:08 on 1 Jul 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
Neil is here, but not really himself
NH:
Therrr wundnt let me uss my BB in da chur
PM:
As you may have guessed by now, Neil has been to the dentist.
NH:
Yeah, I have to make sure I make appointments now.
NH:
I missed too many and got thrown off the NHS list. Now I have to pay.
NH:
But I don’t mind, cos dentists deserve to work three day weeks, and spend the remainder down on the Hamble.
NH:
Tending to their yachts.
NH:
They’ve worked hard for it. Not easy – being told you can’t get into medical school and having to do just teeth instead.
NH:
A quarter of a bar a year is the least they deserve.
PM:
Don’t worry Neil. The ibuprofen will kick in soon enough.
PM:
See of blue this morning – but the foundations are shallow.
NH:
just more end of quarter stuff really
NH:
was whacked a bit late yesterday
NH:
just recovering today
NH:
nothing to see here really
NH:
but not before giving a price check
NH:
up 60 points at 4,309
PM:
We should start with the miners – they’re the main prop.
NH:
wow, dominating the FTSE 100 leaderboard
Vedanta Resources (VED:LSE): Last: 1,402, up 114 (+8.85%), High: 1,404, Low: 1,304, Volume: 1.32m
Xstrata (XTA:LSE): Last: 692.10, up 34.8 (+5.29%), High: 699.80, Low: 658.80, Volume: 6.35m
Lonmin (LMI:LSE): Last: 1,216, up 43 (+3.67%), High: 1,230, Low: 1,172, Volume: 197.39k
BHP Billiton (BLT:LSE): Last: 1,412, up 48 (+3.52%), High: 1,424, Low: 1,356, Volume: 4.27m
NH:
What has set these things alight?
PM:
AUSTRALIA’S iron ore miners appear set for a win in their long-running battle with China’s huge state-owned steel producers.
The promising signal emerged as the China Iron and Steel Association backed down from its tough position on price cuts amid growing government concern over speculation and uncertainty in the sector.
At the same time, China is battling to avoid the complete collapse of the 40-year-old benchmark pricing system, which would pitch the country’s steel sector into the uncharted waters of relying on short-term index and spot-pricing.
Business magazine and website Caijing magazine and the state-controlled Shanghai Securities News said officials attending a closed meeting of the China Iron and Steel Association late yesterday said they would accept a lower price.
PM:
That’s from the Australian
NH:
while we are on the miners
NH:
Xstrata gave a presentation at Morgan Stanley last night
NH:
Mick the Miner Davis presenting
PM:
South Africa’s youngest every umpire
NH:
yeah, what a bizzare thing to brag about
NH:
see Paul’s earlier post
PM:
Was in the People’s Col
NH:
had some interesting stuff to say about china
NH:
in the wake of yesterday’s Takeover Panel intervention Dickie Bird II was very careful about what they had to say about synergies from the proposed Anglo deal
NH:
: Quick Comment: Looking forward to coming out of
the downturn with confidence. Xstrata management
presented to our sales force yesterday. Overall, the
company emphasized the proactive approach to dealing
with the downturn it had taken with closing down
high-cost production, capex reductions and capital
raisings. Now, with the worst in commodity prices
seemingly behind us, the company’s focus moves on to
emerging from this as one of the winners in the industry
reorganization forced by the crisis, with all optionality
retained, if not enhanced.
NH:
On Anglo American: Xstrata reiterated its publically
stated stance on the US$1bn synergies, the natural fit
between the two and emphasized it believes a merger of
equals is the most appropriate. Because of new
resources being in more challenging geographical areas,
while being more technically difficult, economies of scale
and size will continue to be crucial over the coming
years. It said it would look to continue to diversify in
commodities such as platinum, iron ore, alumina and
manganese. No news on Lonmin’s future or Glencore’s
intentions with its holding.
NH:
Positive outlook for commodities in H2 and
continued Chinese demand growth: Xstrata expects
a recovery in China during 2H 2009 to be sustained.
Government spending and domestic demand should be
the drivers rather than export sectors, and copper is
likely to be one of the winners, Xstrata believes.
PM:
(Driss — sorry to hear you’ve lost your job…. there is a table in the LR for discussing such matters…)#
NH:
nice umpiring dicussion going on to the left
NH:
I think Harper is pretty poor
PM:
Actually, talking about China, I can reveal that the local Commies have decided they are going to have a new bull market.
NH:
Won the 3000 Rainbow momentum bull mark the opening of the second half or at the top of the signal?
PM:
Thats a translation of a headline at Shanghai Securities
PM:
3000 is a new starting point up 牛市下半场大幕开启 Bull market in the second half大幕开启
金叉再现!万事俱备只欠耐心 金叉again! Everything is ready due to be patient only 让散户入场行情诱多 Admission is to allow retail prices lured more
跨过3000是否预示顶部信号出现 机构重点加仓3000大盘谁主天下？ 3000 across the top of the signal indicates whether or not there agencies who focus on the main Opening 3000 the world market?
The Truth! Unvarnished. The price of rice always falls. Shanghai investors do not sell stocks. Torch protestors are vile.
PM:
Ah , but has it worked
PM:
What’s the shanghai composite showing?
PM:
Hey! There’s a command economy for you
PM:
State sponsored capitalism in action
NH:
(Taxloss, hope the missus is OK)
PM:
News this morning the Win Bischoff being linked up as the next chairman of Lloyds
PM:
That story from our esteemed banking editor Patrick Jenkins.
NH:
Isn’t he Sam’s new boss?
PM:
He is – runs the financial services team at the FT, where Sam will be the hedgie corr.
PM:
Thought id better be nice to Jenkins before he realises he’s taking our cast-off.
PM:
Anyway, back to Lloyds
NH:
Is this good news for Lloyds?
NH:
I mean, was Bischoff such a great success at Citigroup. I seem to remember it didn’t quite work out as planned when he was asked to run things there.
PM:
Hang on Neil, this man is a serious City grandee.
PM:
Built Schroders into a real powerhouse.
PM:
Very successful at integrating that with Citi – when you think about it…
PM:
Old City advisory business – difficult to meld that with Citi and also Salomon Smith Barney.
NH:
So he was a great success at the back end of the last decade. So what. Move on.
PM:
You should watch your lip.
PM:
Bischoff is top drawer. And you should respect that.
NH:
surely there must have been someone else out there willing to do the job.
NH:
but they would have probably rocked the boat
NH:
the govt are pulling the strings here
PM:
Look, Win Biscoff is pukka stuff. Final
NH:
I reckon it is an imaginative appointment
NH:
that stinks of establishment
NH:
Lloyds have failed to join in the rally this morning.
NH:
Im rather more inclinced to focus on this – from Jonathan Pierce at Credit Suisse
NH:
Short and medium term profitability a major concern for us
■
We forecast a decline in NII from £15bn in 2008 to £12bn in 2009
■
Remain on Underperform. Target price lowered to 50p from 55p
PM:
Oh, that is a bit heavy
PM:
Got a bit more on that?
NH:
An increasing part of the market is warming to LBG. We are not. Some of our concerns are short term, like shrinking deposit revenue that we don’t think will be significantly assisted by structural hedges. Indeed, we doubt HBOS, which accounts for 56% of LBG deposits, has any significant formal hedge in place. There’s also increasing basis risk. We don’t have the numbers for Lloyds TSB but HBOS now has over £90bn more funding priced off LIBOR than assets.
NH:
But many of our concerns are medium term, like the fact that 19% of HBOS corporate loans (ex overseas and financials) are not paying. As these are written off, income should fall. Deposit competition is also intensifying and combined with a likely mix shift towards fixed rate bonds – LBG is paying 190bps over swaps on one-year products – we see a marked impact on margin. Similarly, terming out its relatively short funding structure will also likely push income lower – LBG’s latest unsecured term issue cost swaps + 310bps.
NH:
In time, better asset yields should partly offset these issues, but we expect weak new business volumes and the mix effect of writing higher quality lending to delay the impact. In the long-term pre-funded deposit protection schemes, more onerous capital requirements – particularly as risk weighted assets reinflate – and the potential impact of any EC ruling also concern us. With the
outlook so unclear, we don’t much like the concept of “normalised EPS”, but we think 8p post 2012 is reasonable. This is 6p in present value terms and given the risks, that leaves LBG looking expensive, in our view.
PM:
19% of HBOS corporate loans are “not paying”.
PM:
That’s a terrifying figure.
NH:
Well. That’s fat boy finance for you.
NH:
sorry Fat Bloke Finance
NH:
lending to fat people to invest in hair brained property schemes
PM:
OK, let’s take a look at National Express
NH:
R Bradley says the East Cost Mainline is not very good
NH:
had a lovely ride on it a whileback
NH:
to cover Northern Crock
Readers may also know this former bank as Northern Rock.
NH:
just getting some feedback from the conference call
NH:
well, words like disaster, shambles are what seems to be appearing in my Inbox
NH:
basically a huge fight has broken out between the company and the transport minister Lord Adonis
NH:
who is one of those weirdo Blarite types
PM:
another unelected minister
NH:
anyway, National Express think they can hand back the keys to the East Coast mainline without any penalties, such as losing their other rail franchises
NH:
the Essex boy franchise
PM:
in fact that is what they are proposing to do
NH:
that’s right, when the cash in the SPV that houses East Coast Mainline runs out
NH:
the keys get handed back
NH:
but Lord Adonis begs to differ
NH:
his view is this ‘those who have defaulted are no longer in the railway industry’
PM:
tough guy then — he’s right tho
PM:
And its something you’ve been saying for some time as we have watched Nat Express go down the pan
NH:
well, he is pretty passionate about the rail industry, rides around the network at the weekend
NH:
and I suspect he is not going to let National Express just walk away because this would set a terrible precedent for the rail franchise system
NH:
and in these particular type of battles I back the government to come out on top
NH:
after all it can just make up the rules
PM:
Okay, what’s the share price action??
NH:
Nat Express are the biggest faller in the FTSE 250 at the moment
NH:
and I am seriously starting to wonder if a merger with FirstGroup is best the course for the new chairman John Davaney
NH:
because even if they do extricate themselves from the mess that East Coast mainline
NH:
without incurring any penalties
NH:
they need a big rights issue
NH:
new banking facilities that will cost more
NH:
welcome to the British transport sector
NH:
I suppose at least the CEO had the good grace to fall on his sword
PM:
Some good points over on the right
PM:
Cityunslicker for one
PM:
And taxloss on the SPV side
PM:
This was the government falling in love with structured finance, of course
PM:
Felt sexy and modern, as with the PFI
NH:
also on Taxloss’s point
NH:
will Nat Exp be able to defend themselves in court re their other franchises
NH:
sure the govt can’t pursue them for damages
NH:
but the other routes they run??
NH:
if they can’t that’s another stuff up by the government
PM:
and what about the City scriblers, any reaction??
NH:
yep, this from Investec who were a big bull of National Express
NH:
bizarrely their confidence shaken is not shaken by today’s announcements
NH:
A dramatic statement from National Express announces the resignation of the
chief executive and planned withdrawal from the East Coast rail franchise.
This could mean an exit from rail altogether, but does pave the way for a
£400m+ fundraising later this year in our view. Trading in non-rail businesses
appears reasonable and we think that, post a rights issue, the business would
look attractively valued. As such, we retain our BUY recommendation
NH:
Withdrawal from Rail. NEX has indicated this morning that it plans to exit the
loss-making East Coast rail franchise once committed funding runs out.
Liabilities on the franchise are a £40m intercompany loan and a £32m
performance bond – ie £72m in total. NEX legal advice suggests that this would
not imply cross-default on the profitable East Anglia franchise, although
Department for Transport comments this morning appear to dispute this.
Liabilities across all rail franchises are £118m in intercompany loans and
performance bonds. In addition, season ticket bonds comprised £86m at the
financial year end.
NH:
Finances. We expect H1 net debt/EBITDA of c.3.4x - within the renegotiated 4x
banking covenant. However, covenant breach remains a risk for the full year in
our view, when we expect the ratio to be in line with the tighter 3.5x covenant.
Exiting Rail (wholly or partially) would open the door to a large equity fundraising
(c.£400m-£500m is likely in our view). We expect this to come later this year,
given the need to refinance a €540m loan by September 2010.
Estimates. We currently target £130.0m PBT (61.0p EPS) this year, falling to
£115.6m PBT (54.2p EPS) in FY10E. We will review estimates later today.
NH:
Valuation and view. Risks surrounding Rail and the group financial position
have acted as a drag on the share price and today’s statement appears
alarming at first sight. Hypothetically, however, even if the group were forced to
cross-default on Rail (costing c.£140m+), if it then raised £430m (we model a 4
for 1 rights issue at 70p, a 40% discount to the TERP), based on our existing
forecasts, the remaining bus business would be valued on c.8x 2010 P/E, which
would appear to offer reasonable value. Disclosure this week of a preliminary
approach by Firstgroup (rec: Buy) also highlights other options available to
management. We retain our BUY recommendation, but place our 350p P/Ebased
price target under review.
NH:
here’s Arbuthnot who are more in touch with reality
NH:
Trading statement and update on East Coast franchise
Trading conditions have remained challenging in H1 with all of the group’s businesses experiencing difficult market conditions. We expect consensus estimates for all divisions to be reduced, but with the greatest impact in UK Rail due to the East Coast franchise (to lose £20m in H1 vs. our FY divisional forecast of a loss of £8.5m). Spain has continued to experience lower underlying revenue, although there are signs that the rate of decline is beginning to slow. Management expects profit in North America to be flat in H1, but only due to the stronger dollar. UK Bus & Coach appears to be slightly softer.
NH:
There has been no progress in reaching a solution to the group’s problems at the East Coast rail franchise. However, the financial exposure of the group to any eventual franchise default may be more modest than we had previously estimated. The performance bond for the franchise is £32m, and there is a subordinated loan from the group to the franchise of £40m (of which £17.5m has already been drawdown - further drawdowns are likely to fund the ongoing cash burn). Once the current committed support from the group to the franchise subsidiary has been exhausted NEX intends to withhold further support, and we believe this would trigger a franchise default. NEX believes that the DfT cannot exercise the cross default clauses in the other franchises in these circumstances, but we do not believe this is what the government intended when it introduced these clauses.
NH:
Separately, the DfT has issued a statement saying that it is making preparations to take control of the East Coast franchise if/when NEX defaults on the contract, pending refranchising at the end of 2010. The DfT believe it does have the right to terminate the group’s other franchises, and is exploring all options. It has also made it clear that NEX will not pre-qualify for any future franchise competitions, thereby excluding the group from the industry in the long term.
Richard Bowker, CEO, has resigned to become Chief Executive Designate of Union Railway in the UAE. Chairman John Devaney takes up an executive role, with Ray O’Toole becoming COO, pending the search for a replacement.
We see the lack of a solution to the problems at the East Coast franchise and the soft trading in other divisions as negative. The continuing uncertainty over the group’s exposure to rail, due to the lack of clarity on the validity of the cross default clauses in the group’s other rail contracts, is an obstacle to a refinancing and a rights issue to sort out the group’s capital structure. Our recommendation remains Reduce
PM:
Tghis debate over the other franchises and whether court action could be in prospect
PM:
fact is — if it ended in the courts, Nat Express wouldnt get its refinancing away
PM:
But then no one needs this to end in corporate collapse
PM:
Railways are bad enough already
PM:
Think how bad the trains would be if we (taxpayers) hadnt spent scores of billions on the network voer the last few yars
NH:
the NEX chairman Devaney of course
NH:
has experience of dealing with the govt
NH:
didn’t he restructure Brit Energy
NH:
the big govt debt for equity swap
NH:
also chairman of Marconi
NH:
not a great precendent
PM:
depends at what point
PM:
That was during the rescue/death throes period
NH:
the guy is a turnaround expert
NH:
debt for equity expert
NH:
just been sent an interesting email
NH:
he says FTSE are making changes to the quarterly reshuffle
NH:
they were announced yesterday
NH:
FTSE yesterday announced a number of changes to their index rules. Key Changes are summarised below:
Annual Review
The annual review which is currently carried out in December each year, will be moved to June. As a result, it is expected that there will be no annual review in December 2009, rather the next annual review will occur in June 2010. The liquidity test will remain a part of the annual review, and as such the next liquidity test will occur in June 2010, based on the 12 month trading period to the end of April 2010. As a result, the key period for passing the next liquidity review is 1 May 2009 to 30 April 2010.
NH:
New Issues (AIM transfers to Main Market)
Provided the company had a trading record of at least 20 days on the Main Market, only the liquidity of Main Market trading was previously used for the liquidity test. Under the new test, both the trading record on AIM and on the Main Market will be used for the first quarterly review test. If the company fails on that basis, at the next quarterly review, only Main Market trading will be used.
NH:
Liquidity
Trading volumes for assessing liquidity will now include volumes from other trading venues operating in similar time zones.
Secondary Lines
Where secondary lines were previously assessed for eligibility to remain in an index at quarterly reviews, this will now only occur at annual reviews.
PM:
any thoughts on the trading update?
NH:
well, on the face of it looks very good
NH:
a small rise in like-for-like sales
NH:
but remember, this time last year was an unmitigated disaster for M&S
PM:
so the comparatives were weak
NH:
then you have to factor in the boost from easter
NH:
and then the fact that M&S is on something like 15 times perspective earnings, and it needs upgrade to sustain its ludicrous rating
PM:
and upgrades are coming through??
NH:
yes, but they are small
PM:
the market likes it though
PM:
Shares are up 14p at 320p
NH:
they have been stuck at that level for quite a while
PM:
Still defying gravity
PM:
in the scheme of theings
NH:
as are most retailers
NH:
all the foodies taking market share
NH:
and even shops like Debenhams doing well
NH:
no one seems to be having a tough time
PM:
OK, on Marks what have the analysts made of it?
NH:
right, here’s some feedback from the analyst conference call
NH:
M&S conf call just finished: lots of headlines from it on Bloomberg. 2 main features: Rose admitted that the weather this year has been net more helpful and the FD kind of admitted that Food gross margins were as much as c250bps down in Q1 (although they stick to no more than 175bps down for the full year, given H2 promotions anniversary). Overall Rose said that it would be wrong to get carried away by one reasonably decent quarter, which is good advice, though consensus PBT forecast seem to be drifting up. Sell MKS into the rally.
NH:
here’s Nick Bubb of Pali
NH:
Marks & Spencer (MKS: 306p, Sell): A year ago June was so bad that it forced M&S to issue a profit warning, so the Q1 comps were pretty weak and the weather this year has probably been net more helpful. So Q1 this year was only down 2.1% LFL Easter adjusted. But, given lower gross margins, we still expect full-year PBT for 2009/10 to drop further, from c£600m to £460m, on which basis the shares are trading on a forward PE of nearly 15x after the recent rally over 300p. Weak comps may well be making LFL sales look less bad, but there is no disguising the structural or management problems that M&S faces, so we suspect we are not going to hear “Game set and match to Stuart Rose” in the near future. We stick with our Sell view on M&S (265p TP) and switching M&S into Sainsbury (Buy: 380p TP) still looks the smart play on a six month view
NH:
here are the thoughts of house broker Citigroup
NH:
1Q UK LFL -1.4% (Citi -3.5%) and International total sales +15.9% (Citi +10%)
— Specifically, across 1Q, UK LFL sales have declined -1.4% (Citi -3.5%) split;
General Merchandise -2.4% (Citi -4%) and Food -0.5% (Citi -3%). From this we
derive 1Q clothing LFL -2.2% and Home -3.5%. In total, 1Q International sales
rose +15.9% (Citi +10%). Notably, adjusting for the change in Easter timing this
year, M&S estimates that the underlying 1Q LFL sales performance figures cited
above would be 70bp weaker.
Previous full-year gross margin and cost guidance maintained — As set out in the
group’s full-year results, M&S still expects full-year gross margins to decline
between -125bp and -175bp, and operating costs to decline -1%.
NH:
Consensus March 2010 PBT likely to increase +4% to c£520m — On the back of
today’s 1Q revenue statement, we expect consensus PBT March 2010 to increase
c.£20m to c.£520m (EPS c.24p, -15% yoy). This assumes that despite the betterthan-
forecast 1Q, consensus LFL revenue assumptions across the balance of the
financial year remain unchanged at -3.5%.
What does it all mean? — Given our view that sector-wide revenue trends should
improve through 2009 (as real household cashflow moves back towards zero), this
+140bp improvement in the group’s underlying 1Q LFL (Easter adjusted, up from
-3.5% in 4Q09 to -2.1% in 1Q10) marks an encouraging start to the year. While
there may have been some weather-driven flattery in this 1Q performance, we
argue that M&S earnings visibility should improve from here, driving potential
upside earnings forecast risk.
NH:
We have a Hold rating on the shares — Our target of 320p is based on a large-cap
sector-average 10x March 2011E EV/EBIT multiple. This equates to a 5% dividend
yield for the same year-end.
NH:
- Our full year FY10E estimate of £510m PBT (EPS: 23.2p) is based on lfl’s for GM and Food of -3% and -4% respectively. While Q1 has benefited from a late Easter and helpful weather, equally the comps in Q2 and especially Q3 present an undemanding challenge. Likewise M&S’ gross margin guidance for the year (-125bps to -175bps) looks too cautious in the light of the performance in Clothing. Ahead of the conference call, we are raising our full year PBT estimate to £530m (latest consensus per M&S website: £497m), giving EPS of 24.1p and a PE of 12.7x, a marginal discount to the sector.
NH:
- In the medium term we remain concerned about lack of market share impetus in Clothing as well as management stability/succession. However, while the bear camp may wish to write off today’s outcome as something of a weather/event boosted one-off, this looks like a brave call ahead of what could be another two quarters of positive newsflow, and we envisage further upside to consensus forecasts. With core sentiment to M&S basically negative, this suggests ongoing upward tension in the shares over the balance of the year.
NH:
Cityunslick, we are not debating if they were well preparer, we are puzzled that sales seem to be holding up so well.
PM:
Ive just got the Lex Lilve on Lloyds
PM:
The heart sinks at the prospect of the compromised figure of Sir Win Bischoff being lined up to take over as chairman of Lloyds Banking Group.
PM:
Lex needs to have a bit of respect
PM:
This is Win Biscoff we’re talking about here
PM:
I suspect Lex doesnt know who works in Win Bischoff’s off ice
NH:
any more from the note
PM:
Well… what i can tell you is this..
PM:
Lex are sacking Eric Daniels
PM:
Above all, Mr Daniels must go because he bought HBOS with only cursory due diligence, placing excessive faith in the government’s desperate offer of a waiver of competition rules.
NH:
the appointment really bothers me
PM:
Here’s the link, but you will need to be a subscriber
PM:
let’s mvoe on before we get in to trouble
PM:
that P45 outbreak might reach us, otherwise
NH:
(good point City. So sell them now before the hard times kick in?)
NH:
just looking at the Bischoff pic on the front page
NH:
he has just been offered the chairmanship of another big failing bank
PM:
STRATEGY time (replacing small cap corner
NH:
i have something for that later
PM:
There’s a seriously comprehensive Global macro tome out of the HSBC this morning
NH:
Q3 09 doc. Stuart Green and Jane Henry
NH:
It’s 94 pages tho cant put it up here
PM:
Can put up the summary.
PM:
Acutally, the title gives a good flavour
PM:
And now for the hard part…
Policymakers may have averted a prolonged spell in the financial wilderness…
…but the progress seen so far could yet prove to be the easiest part of the recovery…
….with a number of formidable, structural challenges awaiting on the horizon
PM:
Some big blocks of text here, but I think there are certainly worth the pixels
PM:
Meltdown averted, key challenges await
Given the gravity of the situation confronting policymakers in the dark days of last autumn, the positive developments seen since should not be downplayed. Due to the nature of the current crisis, conditions across both the financial markets and the real economy were always likely to prove more intertwined than usual, and both areas have seen substantial improvements in recent months. Although still subdued when compared to the ‘norm’ of recent years, risk appetite has made a welcome return, credit conditions have staged a cautious recovery and measures of both business and consumer confidence have bounced off exceptionally low levels. A spell in the financial wilderness now looks less likely for the major economies and our forecasts reflect this, with a slowly improving cyclical picture factored in for the rest of 2009 and 2010 across many regions.
However, financial markets, we suspect, may be about to find out that it’s often better to travel than
arrive. Despite all the developments of the past year, we believe that the most formidable challenges may lie ahead, and that the more demanding questions are yet to be answered. It now seems likely that the worst outcomes which threatened last autumn have been averted, but it’s far from certain that a solid, durable recovery will emerge over the coming twelve months or, when abstracting from the cycle
entirely, just what economic underpinnings remain.
The ‘needs must’ approach adopted by policymakers last autumn has presented investors with issues that will beguile for many years to come, while the worst excesses accumulated during the ‘boom’ years may be difficult to work off during the ‘bust’. The need for possibly painful structural adjustment, both within and outside of the financial sectors of the major economies, and the threat of more onerous regulation, now loom large. What lies in wait over the economic horizon, therefore, remains a source of major anxiety. Indeed, given the extent to which activity collapsed around the turn of the year, the progress seen to date could yet prove to be the ‘easiest’ part of the recovery, with the hard part of any broader return to health yet to begin.
PM:
An underwhelming forecast
Our forecasts acknowledge both the most recent improvement in higher frequency data releases, and the more structural constraints that are likely to be encountered over the coming years. With the first quarter GDP data generally proving weaker than expected, our global 2009 GDP forecast has been lowered slightly to -2.3% from -1.9% previously, but most regions have seen an upward revision to their 2010 prospects, and the global growth forecast has risen in turn to 2.2% from the previous 1.6% estimate.
Europe, both East and West, has proved the exception here, with no significant upgrade forthcoming,
except in the UK. The forecast for developed economy growth of just 1.2% next year, meanwhile, is
distinctly underwhelming given the extent to which GDP has now contracted, particularly as many
industrial sectors are still following a path more closely aligned to depression than recession. More
optimistically, the apparent early success of China’s fiscal stimulus is expected to sustain the clear outperformance of Asia, and emerging markets more generally, in 2010.
PM:
Reshaping the future, and the past
Financial crises have a nasty habit of not only lowering expectations for future growth, but also
challenging the assessment of earlier growth and the factors that drove this. Clearly, the prospect for a
further rise in household sector indebtedness within the developed world now appears wholly dubious,
not only due to the apparent willingness of individuals to pay down debt levels, but also because of the
impaired ability of the financial system to facilitate any further increase.
The degree of adjustment seen in the US household sector to date has actually been fairly quick,
reflecting among other factors the extraordinary decline in policy interest rates of the past year, and the
equally dramatic fall in oil prices, factors that have consumers to pay down debt without curtailing
spending too drastically. However, the lesson from earlier financial crises, which may yet be replicated
elsewhere, is that once underway, this process of adjustment can be prolonged, painful and extremely
disruptive to the establishment of a broader economic recovery.
Assuming the burden
It is important to remember that the often large-scale government intervention in financial sectors over the past year may not automatically lead to increased fiscal burdens, but the very volatile conditions across government bond markets have recently served as a powerful reminder of the fiscal challenges that now await many economies. Both the discretionary fiscal packages and the fiscal implications of economic downturn have proved hugely costly. But the ultimate bill facing taxpayers will remain unknown for years to come due to the government guarantees that have been extended to the various corners of financial markets. Given the looming demographic challenges, the current financial crisis and the ‘lost’ output (and therefore tax revenues) it implies have proved exceptionally poorly timed. Indeed, persistently higher government borrowing and a skyward trajectory of debt-to-GDP ratios could yet prove the most visible consequences of the credit bust and economic collapse of the past 18 months. Should the perception of the public finances deteriorate sufficiently, fiscal policy itself may lose some of its current efficacy, requiring ever greater government interventions to produce the desired objective and, presumably, ever larger economic distortions.
PM:
Navigating future challenges
The present and anticipated outperformance of China appears to be providing a substantial bid to
commodity prices, given that the economy’s more intensive (and likely rising) commodity demand per
unit of GDP growth. For most economies, the influence of energy costs upon inflation is expected to
move from the recently substantial negative to a positive by the final quarter of the year. But given the
economic current fragility, the risks associated with rising oil prices appear much more acute with regard to growth rather than inflation, particularly within the Eurozone. Moreover, with substantial spare capacity having developed across the major economies and unemployment approaching multi-year highs, the current cyclical position appears far from conducive to the development of underlying inflationary pressures. As a result, our 2010 global inflation forecast has increased only marginally to 1.8% from 1.6% previously.
Such disinflationary forces are expected to hamper the relative performance of developed market equities, and we remain underweight as result, with credit continuing as our preferred asset class. But with the recent (and in our opinion misplaced) concerns over an imminent reversal of monetary policy having provided the opportunity, we have shifted some exposure into long-dated Treasuries, gilts and core European bonds, which we expect to benefit from a growing realisation of the substantial obstacles that exist between the current turnaround in sentiment and the formation of a strong, sustained economic recovery.
NH:
PHEW! will need 10mins to digest all that
PM:
But people can make their own mind up if they want to read
PM:
Just wondered what these snaps were.
PM:
OVERVIEW
— We withdrew our ‘BBB+’ rating on Helium Capital Ltd.’s series 38 CDO notes.
— This followed the early termination of these notes.
Standard & Poor’s Ratings Services today withdrew its ‘BBB+’ credit rating on the EUR145 million limited-recourse secured principal protected fixed-rate notes series 38 issued by Helium Capital Ltd.
The withdrawal follows the early termination of the notes, which took place in September 2008. We were only recently notified of this early redemption.
PM:
Sam can deal with this – rating withdrawn on 38 CDOs
PM:
Sam, what does this mean.??
PM:
Where the hell has Sam gone.?
NH:
He’s just wandered off the desk
NH:
This is from the Skype chat
NH:
[10:34:51] Sam Jones: ok, am going to go meet some lawyers to talk about securitisation. Back in an hour or so.
NH:
Helium Capital – easy to say now, but
NH:
Who put money into a thing called Helium Capital and thought their money was safe.
PM:
Laughing gas investment.
PM:
Actually, looking up on Wikipedia
PM:
The Helium capital of the world is Amarillo
PM:
Here’s from an article in Wired mag
PM:
Nearly all of the world’s helium supply is found within a 250-mile radius of Amarillo, Texas (the Helium Capital of the World). A byproduct of billions of years of decay, helium is distilled from natural gas that has accumulated in the presence of radioactive uranium and thorium deposits. If it’s not extracted during the natural gas refining process, helium simply soars off when the gas is burned, unrecoverable.
PM:
Fools and their money…
NH:
we have not done 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:
some action in the German banks this morning, especially Comedybank
PM:
(Baz — hedge fund correspondent, poor lad)
PM:
Commerzbank, of course
NH:
rumours that the top man Blessing is to leave, which the market would appear to like
NH:
and also talk that German’s bad bank scheme could be tweaked and the terms made more favourable
NH:
here’s a quick round up of what could happen and why it would be positive
NH:
it’s from Morgan Stanley
NH:
for CBK and DP. Revising the valuation date for
securities transferred into the German Bad Bank vehicle
could lead to higher acceptance levels among banks
(the proposed ~10% haircut to Q109 book values
eliminates most of the RWA reduction). A move to YE08
values could provide for significant write-backs, boosting
capital (similar to the ING solution in the Netherlands). In
our view, this potential upside is not reflected in CBK’s
(UW) nor DBP’s (UW) share price. If agreed by the
parliament this week, it could have a significant impact
on share prices, as capital positions improve materially.
NH:
What’s new: This week the German parliament will
debate a revision of the terms of the ‘Bad Bank’ scheme
(finance select committee Wed, July 1; lower house vote
July 3). The proposed transfer of assets at a ~10%
haircut to Q109 book values has not been well received
by the banks, and so presents a hurdle to new lending to
SMEs, given the additional capital charges upon asset
transfer and/or exposure to the deteriorating quality of
assets not transferred. We note that by removing VAT
for the ‘Bad Bank’ vehicle last Friday, the German
government has shown increasing goodwill towards a
more workable ‘bad bank’ solution.
NH:
According to the German press (Handelsblatt, FAZ
29/30 June), the revised proposal could move the
valuation date of transferred securities to YE08 or even
June 2008 (when values were significantly better for
structured credit assets). Though unconfirmed, this
proposal could give substantial scope for write-backs for
CBK (total charges ~€11bn, much since H208) and DPB
(~€2bn). We caution that negative rating shifts and in
some cases index rebounds above YE08 levels make it
difficult to estimate potential benefits at this point, but we
think the risks from the review are skewed to the upside.
NH:
Longer-term upside still debatable: While such a
move would aid capital positions short term, we think it
would only postpone the overall restructuring process of
the German financial system.
PM:
that looks very muddled
NH:
i would say something worse than that
NH:
the losses look to much
NH:
so let’s change the transfer date
PM:
Actually, a note from CS has just dropped on the overall Greman bad bank scheme
PM:
Gremany, big european country
PM:
bombed our chippie or something
NH:
(sorry praxis, we had no idea)
PM:
Here’s CS on the matter, anyway
PM:
German bad bank scheme
Still unattractive
The proposed changes to the German bad bank scheme (allowing banks to transfer assets at December 08 valuations) do not change the fundamental unattractiveness of the scheme to private sector banks. We would be sceptical as to whether the changes will result in any participation on the part of the private sector banks, and indeed, would view any such participation negatively.
The important point about the German bad bank scheme is that it does not provide for any genuine risk transfer. As the ECB comment in their legal opinion on the scheme “the shareholders of the transferring institutions have to fully bear the cost of the scheme”. The ECB also notes that it is not obvious that the scheme would even work to gain the accounting treatment desired.
PM:
The mechanics of the scheme
In simple form, the German bad bank proposal is as follows:
1) Participating banks transfer assets at a given price to an SPV in return for government-guaranteed bonds. At the time of the transfer, SoFFin calculates its estimate of the true “fundamental” value of the securities.
2) Over a period of 20 years, the transferring bank makes a series of “compensatory” payments to the SPV, equal to 20 annual installments of the difference between the transfer price and the estimated fundamental value. These payments are made out of distributable profits – ie, they have the same level of seniority as “silent participations”
3) At the end of the 20 year period, the bank makes a further payment compensating the SPV for any extra realised losses.
PM:
It can be seen that the transferring institution retains substantially all the risks and returns of ownership; it is obliged to make the compensation payments as long as it is profitable and to settle up the final losses if it remains a going concern. The scheme would provide equity-like capital from a regulatory point of view, but from the point of view of shareholders it makes no difference.
It can also be seen that changing the transfer price does not make the scheme more attractive for shareholders – it simply increases the stream of compensation payments. As the ECB legal opinion notes, “it should be further assessed whether this scheme achieves its intended purpose given that it is unclear whether transferring institutions are required to set up provisions (against net income) for these additional losses in their annual financial statements.” Whatever the conclusions on accounting, the economic picture is clear.
Effectively, in raising the transfer price, the German government is offering private sector banks the opportunity to add a somewhat larger amount of silent participations which are senior to shareholders’ equity and put a larger wedge between accounting profits and cash, while offering no more genuine risk transfer than in the original scheme. We do not see how this makes the scheme materially more attractive and therefore doubt whether it will attract increased participation – even if it does, it is clear that there is no genuine subsidy to the banks here, and we would view substantial “transfers” under this scheme as adding nothing to a participating banks’ equity shareholders except worse transparency.
PM:
Well, cheers to Credit Suisse
NH:
need to look at this scheme more closely
NH:
right some flashes just coming across Thomsonwire on Vedanta
NH:
now this is interesting
NH:
they have bought back a large lump of stock
NH:
which has the effect of increasing the CEO’s stake
NH:
a takeover by stealth
NH:
On 2 December 2008, Vedanta Resources plc (”Vedanta”) announced a share
repurchase programme of $250 million to purchase up to 10% of the Ordinary
Shares in issue. Since the commencement of this programme Vedanta has purchased
16,210,700 shares, representing 5.62% of the Ordinary Shares at a total cost of
$226.9 million. Vedanta today announces that its Board has approved an increase
in the total programme size to $350 million.
In addition, Vedanta today announced that it will commence an irrevocable,
non-discretionary programme to purchase Vedanta Ordinary Shares on its own
behalf, to be held in Treasury, during its close period which commences on 1
July 2009 and ends on 31 July 2009.
Any purchases of shares pursuant to the irrevocable programme will be effected
within certain pre-set parameters, and in accordance with both Vedanta’s general
authority to repurchase shares and Chapter 12 of the Listing Rules, which
requires that the maximum price paid will not exceed 5% above the average market
value of Vedanta’s Ordinary Shares for the five dealing days preceding the date
of purchase.
PM:
Whittling away the London listing
PM:
Never been a happy listing here
PM:
Always corporate governance concerns
NH:
shares still motoring
PM:
What to finish off with
PM:
can we really get thru an ML session without something small cappish
NH:
we should mark the passing of Greg Hutchings
PM:
His passing from quoted company life
NH:
fired from his comeback vehicle
NH:
whose share price has puked this morning
PM:
I once set next to him at dinner. A very angry man
PM:
Was so so so angry and being kicked out of Tomkins.
PM:
Believed he was destined to run a major Footsie corporation
PM:
Didnt want to mess around building a tiddler
PM:
I think he will retire frustrated
PM:
Doesnt enjoy his money
PM:
But what went wrong at Lupus
NH:
well, this morning’s statement reveals that trading is difficult
NH:
and basically the whole conglomerate thing doesn’t work
NH:
trying to recreate his previous vehicle
NH:
the guns to buns conglomerate
NH:
they are conducting a review
NH:
and the whle thing could be broken up
NH:
Imagination Technology
NH:
you know how we thought it was expensive after Apple paid 150p for a block of stock
NH:
well, Caz don’t think it is expensive at all
NH:
even though it is on 35 times earnings
NH:
in fact they reckon it is cheap
NH:
so cheap they have upgraded it this morning
NH:
because the multiple is going so quickly, the multiple falls to 15 in 2011
NH:
Imagination Technologies - Upgrading to Outperform - [IMG.L, IMG LN] GBp136, OUTPERFORM
Strong royalty unit growth reported at full year results gives us confidence in Imagination’s ability to fulfil its potential of ramping royalties and thus profitability. Furthermore, increased equity stakes from Intel and Apple highlight the embedded nature of Imagination’s technology with leading OEMs and the importance of the company’s technology to the product roadmaps of industry leaders.
NH:
Although royalty units increased 83% on FY2008 to 86m units, the average royalty rate per chip was lower than expected. However, we see potential for this to stabilise or even increase in the medium term due to a positive mix effect. This combined with unit growth leads to an attractive investment case, in our view, given the high degree of operating leverage inherent in the company’s business model. Licensing revenues were stronger than expected, which in our view should also provide investors with confidence in the long-term prospects for Imagination.
Imagination’s exposure to high-growth consumer electronics sectors, such as smartphones, netbooks and PNDs, will, in our view, provide positive catalysts for the shares over the coming six months. The company’s graphics IP continues to be the de-facto standard in mobile graphics while also proliferating into a broader range of end-applications.
NH:
Imagination trades on 33.6x FY2010E and 15.8x FY2011E earnings. In our view, FY2011E earnings are more representative of the company’s long-term profitability and are consistent with a ramp in royalty revenues. On a sum of the parts valuation we conclude that the technology business is trading on 14.8x FY2011E earnings, which we believe represents an attractive investment case. OUTPERFORM (from In-Line).
NH:
also told Freedom4 Communications worth looking at
NH:
post the reverse takeover announced this morning
NH:
Peter Dubens still pulling the strings in the background
PM:
Okay — thanks for that Neil
PM:
Here’s a bit of lunch time reading material
PM:
Andrew G Haldane of the BoE
PM:
SMALL LESSONS FROM A BIG CRISIS
PM:
Lesson 1: Finance is no golden goose
NH:
(Merv, no. They are both ex-div.)
NH:
interesting story going around in Punch
NH:
seems some shareholders want to block the cash call
NH:
which was selling shares before the cash call was announced
NH:
By Andrew Cleary
June 30 (Bloomberg) — Punch Taverns Plc investors owning
at least 13 percent of the stock will oppose the U.K. pub
owner’s plan to raise 375 million pounds ($617 million) in a
share sale in protest at the potential dilution of their
holdings, two people with knowledge of the investors said.
Greenlight Capital Inc., the hedge fund that bet against
Lehman Brothers Holdings Inc. four months before the firm
collapsed, and QVT Financial LLP are among those who will vote
against the stock sale, according to the people, who asked not
to be identified because the voting is confidential.
Punch needs the approval of 75 percent of shareholders who
vote to proceed with the stock sale, most of the proceeds of
which will be used to cut borrowings. The pub owner, which had
net debt of 4.35 billion pounds at the end of May, will announce
the result at an extraordinary general meeting on July 3.
Punch is aware of one shareholder that has indicated they
will oppose the capital raising, spokesman John Kiely said.
“In determining the size of the offer we had to balance
the views of all our shareholders,” Kiely said. “We’ve seen
broad support from across our register.”
Spokesmen for Greenlight and QVT declined to comment.
Greenlight reduced its stake in Punch to 8.98 percent from 13.3
percent this month. QVT has a 4.1 percent holding.
One of the dissenting investors has told Punch that its
strategy of selling pubs remains a viable way of reducing debt,
the people said. Punch has sold 331 outlets this fiscal year and
sees the share offering as an alternative to selling more pubs
at prices that wouldn’t be in shareholders’ best interests.
The opponents of the share sale may be supportive of a much
smaller offering, the people said. The new shares to be issued
are equal to about 140 percent of Punch’s share capital.
Punch Taverns (PUB:LSE): Last: 100.75, down 0.75 (-0.74%), High: 104.75, Low: 98.75, Volume: 945.55k
NH:
not sure what blocking it would do
NH:
tip it closer to the edge
NH:
thanks for joining us
PM:
back tomorrow at 11am
