Markets live chat transcript for the chat ending at 12:00 on 22 Jul 2009. Participants in this chat were: Paul Murphy, FT (PM) Bryce Elder (BE)
PM:
Okay
PM:
It’s 11.05
PM:
We’re getting later
PM:
PM:
This is Markets Live
PM:
From FT Alphaville
PM:
First we should publish the news list – sent over by Andy Slade from the FT newslist this morning
BE:
Ha
BE:
Not true
BE:
We have some stuff to share.
BE:
Somewhere.
BE:
I think
BE:
Hope
BE:
Maybe
BE:
If we search hard.
11:06AM
PM:
First, an update on the H,M&E short position.
PM:
I have felt very uncomfortable since Bryce first got us into this yesterday morning.
BE:
PM:
Squeezed all afternoon yesterday
PM:
I couldn’t enjoy my lunch
PM:
Had to spend the evening dealing with stressed mail from readers operating H.M&E trackers.
BE:
Yikes
PM:
Must confess that we feel very unsure about this position.
PM:
So unsure that we are going to set a nearby stop.
PM:
Our stop is 4500
BE:
That’s pathetic.
BE:
Hardly worth doing the trade
BE:
Paying the spread
BE:
We could be stopped out before Noon.
PM:
Well, I said we felt unsure.
PM:
It was rash of you yesterday Bryce – to throw Webby Drinks money around like that.
BE:
Hm
PM:
So if you are also short, we would advise that you do lots of worrying.
PM:
Cos we don’t have a feel for this market.
BE:
That’s reassuring.
PM:
Hmm.
BE:
If you are worried about a trading position you should close it and stop worrying.
PM:
Sage advice.
BE:
Nearly a catchphrase, in fact.
BE:
Informa
We don’t know what’s going on. The original source that detailed the Providence approach for Informa will not talk to us at present. If you own the shares and are worried that the bid will fail, sell the shares and stop worrying.
PM:
Oh yes!
PM:
In at 4476 – short the footsie
PM:
Stop loss at 4500
PM:
How much are we out of the money now??
BE:
Footsie’s 4480
BE:
Up 0.5
PM:
PM:
Feel particularly uncomfortable about US corporates beating expectations.
PM:
There’s also the matter of the banks getting general clearance to fudge their accounts.
BE:
This sweep it under the carpet policy approach is very troubling.
BE:
But the market’s buying it.
BE:
Same in structured credit.
BE:
See this stuff about CMBS?
PM:
Commercial backed mortgage paper
BE:
Earlier in the month S&P started downgrading loads of this paper to junk.
BE:
But then someone noticed that no TARP funds were going into CMBS
BE:
Couldn’t cos you need AAA paper.
BE:
So the TARP was failing to restart the CMBS market.
PM:
Solution?
BE:
Upgrade the junk to AAA.
BE:
Magic!!
PM:
Seriously??
BE:
Yeah. There’s been no other explanation that I can see from S&P.
BE:
See Stacy’s post here
PM:
It’s nuts.
BE:
I know.
BE:
But the markets are buying it.
PM:
And in these weird, thin conditions – who are we to argue.
BE:
You really are determined to talk yourself out of our NEARLY PROFITABLE ……. H,M&E short
PM:
hmm
PM:
I feel uneasy
BE:
Hm
BE:
We should probably move on
11:13AM
PM:
Throg’s got piggy flu
BE:
Poor Throg
PM:
Says its loke a cross between a hangover and a mild summer cold.
PM:
loke?
PM:
like
PM:
Mervyn — that’s very good, AHEM Investmetns
PM:
We jsut need an A
PM:
Who can we get?
BE:
Can’t think of a single A surname in Southwark Bridge
BE:
Tracey!
BE:
Of course.
11:16AM
PM:
Just quickly on the 6am cut
PM:
For those wondering why it didnt arrive this morning
PM:
Gwen, fresh back from holiday, got hit by a car
PM:
She says she is fine
PM:
But no Cut i am afraid
PM:
Was a taxi
PM:
Taxi’s a write-off obviously
PM:
Back to normal tomorrow
11:18AM
PM:
Lets get into some stock stuff
BE:
Good idea.
BE:
Miners the big movers this morning
BE:
On the red side of the board anyway
BE:
Profit taking, of course
BE:
Had an amazing run
BE:
Anthough there are a few borderline stories around.
BE:
Some very very old raw. Serious listeria risk.
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.
PM:
For example?
BE:
Shell might bid for BG Group.
PM:
BE:
That was apparently retreaded in the Business Spectator’s “Lunch Deals” column yesterday
BE:
If a merger between Origin Energy and Santos goes ahead, as speculated here this morning, could that precipitate a takeover of BG Group, the former British Gas, by Royal Dutch Shell?
BE:
Besides Santos and Origin, BG is the obvious route to dominance in the burgeoning Queensland gas coal seam scene, which Shell has a foothold in via an alliance with Arrow Energy. Arrow, while significant in the local context, is just a drop in Shell’s ocean and a takeover might not necessarily give it the scale that it needs if it is to take advantage of a fourth train at the port of Gladstone and seriously scale itself against its rivals. BG, on the other hand, would be big enough and being headquartered in swinging London, alongside Shell, it would be an easier sell to the takeover-shy colonials in Australia.
PM:
“Swinging London”?
BE:
Apparently.
PM:
PM:
What, like in New labour’s day
PM:
Late 90s
BE:
I figured, since the BG takeover story just about dates from the 60s, they were using the vernacular of the time.
BE:
Anyway, story above also mentions Shell putting in another bid for Woodside Petroleum
BE:
Which is a theme that’s been getting a lot more play in recent days
BE:
Shell owns a 34% stake in Woodside of course.
BE:
Having had a bid blocked a few years ago on “national interest” grounds
BE:
And the drums have been getting louder recently about BHP Billiton having another punt at buying.
PM:
This story’s nearly as old as the BG one.
BE:
True.
BE:
But the gossip’s now loud enough for Dow Jones to publish wandery think-pieces on it.
BE:
TALK of an alliance between BHP Billiton and Woodside Petroleum has been around for years.
BE:
And, despite a recent resurgence of the rumours, neither company has indicated that such a move is imminent, with both declining to comment. But market participants speculate that with BHP cashed up and Woodside strong in areas in which the mining giant has expressed an interest to expand, a deal can’t be ruled out.
BE:
“(BHP’s) balance sheet is definitely in a good state and a sizable but digestible approach may be to beef up their oil and gas business with Woodside,” said a large international investment bank analyst who wished to remain anonymous.
“(BHP’s) balance sheet is definitely in a good state and a sizable but digestible approach may be to beef up their oil and gas business with Woodside,” said a large international investment bank analyst who wished to remain anonymous.
PM:
wandery — i like the word wandery
BE:
Now, if I were being cynical …
BE:
I’d suggest Woodside shares have been under pressure recently as project timelines slip
BE:
and some of its shareholders are probably getting a bit tricky with management
BE:
So talk of a hostile bid is part threat and part assumption, unless the company can get its act together.
PM:
Just going back to that Lunch Deals thing.
PM:
Did you see today’s update?
BE:
No. Go on.
PM:
Talk nevertheless continues that Xstrata is planning to raise £5 billion to top-up its nil-premium offer to Anglo with some cash to get key shareholders over the line. Such talk has been bolstered by rumours out of Switzerland that major Xstrata shareholder Glencore International has asked Morgan Stanley and Credit Suisse to find it $US1.5 billion in order to participate. Unlisted Glencore has in the past had to sell assets, sometimes even to Xstrata, to maintain its 35 per cent stake in the ever-growing Xstrata. It is believed that Glencore has been pressuring Xstrata not to be too hasty in lifting a bid.
BE:
Hm.
BE:
That seems a bit leftfield.
BE:
The background here is that a story went round yesterday that Anglo had applied to the Takeover Panel for a “put up or shut up”
BE:
Which we’re lead to believe is not true.
PM:
nope
BE:
Anglo is viewing the PUSU as one weapon in their arsenal that they have no reason to deploy at the moment.
BE:
And the central problem here remains insoluble
BE:
Anglo shareholders want a premium
BE:
Meanwhile, Xstrata shareholders won’t allow themselves to be diluted
BE:
And Anglo management won’t talk until Xstrata puts an acceptable offer on the table.
BE:
While Xstrata wan’t talk numbers without talking first
BE:
One person I talked to this morning summed it up to me this way
BE:
Absent a psychologist sitting them down and counseling them on the benefits of dialogue, this thing will never happen.
BE:
Oh, and one last thing on Anglo American.
BE:
Our friends at Mergermarket printed this this morning
BE:
Vale chief executive Roger Agnelli said the listed Brazilian mining group has no interest in bidding for Anglo-American (NASDAQ: AAUK). Earlier media reports had suggested that Vale could launch a counter-bid for Anglo, the listed British-South African mining group, or team up with listed miner Xstrata to do so.
BE:
Speaking to this news agency as part of a Brazilian trade delegation to the 4th US-Brazil CEO Forum, Agnelli said that the company is not looking to rival Xstrata’s bid for Anglo American, nor make its own bid for the company.
BE:
Also speaking with this news agency, Brazilian Trade Minister Miguel Jorge said that he believed that Vale (NYSE:RIO-) would never make a joint bid with Xstrata for Anglo American.
BE:
He said that he believed that Vale is always rumored to be eyeing large acquisitions, but that the company is now focused on organic growth.
PM:
Hmmm — now focused on organic growth, eh?
BE:
Yup.
BE:
Although that’s what they always say.
PM:
sure
PM:
But can we have some prices?
Anglo American (AAL:LSE): Last: 1,849, down 14 (-0.75%), High: 1,863, Low: 1,816, Volume: 2.39m
Xstrata (XTA:LSE): Last: 705.50, down 17.6 (-2.43%), High: 723.10, Low: 683.40, Volume: 6.66m
BHP Billiton (BLT:LSE): Last: 1,492, down 38 (-2.48%), High: 1,535, Low: 1,482, Volume: 5.27m
Royal Dutch Shell (RDSB:LSE): Last: 1,555, up 7 (+0.45%), High: 1,560, Low: 1,541, Volume: 1.18m
PM:
ta
11:27AM
PM:
Right, we’re officially scandalised
PM:
This is Lex on blogs
PM:
There are obstacles to the blogs’ advance. As with social networks, many big brands shy away from blogs because their content can be unpredictable, to an extent that makes advertisers nervous. Blogs are also less frequented than traditional outlets.
PM:
That’s why Lex wants its posts advertised on Alphaville – so they can get less traffic
BE:
Careful …
PM:
I’m only playing
PM:
Actually, taht Lex note is largely about The Business Insider — clusterstock
BE:
Can you put it all up?
PM:
yeah, why not
PM:
Blogs are going mainstream. The days are long gone when they could be dismissed as the preserve of pyjama-clad commentators with something to get off their chest. Some, such as the Huffington Post, have become fully fledged news organisations. Now, similar sites are attracting cash-rich backers.
Talking Points Memo, the US political website founded by a lone blogger during the 2000 US election recount, recently became the latest blog-turned-news website to pocket an investment round. The deal was small, rumoured at $500,000-$1m, but it came with a big name – Marc Andreessen, founder of the Netscape web browser. In May, he and a handful of other investors put $5m into The Business Insider, the website founded by Henry Blodget, the former internet stock analyst turned blogger. Not bad given that BusinessWeek is on sale for $1.
PM:
TBI charges up to $30 per 1,000 impressions for premium advertising space – about what a big newspaper charges. Not all of its ads will sell at premium rates but TBI’s ability to demand such sums shows web upstarts are giving traditional outlets a run for their money.
There are obstacles to the blogs’ advance. As with social networks, many big brands shy away from blogs because their content can be unpredictable, to an extent that makes advertisers nervous. Blogs are also less frequented than traditional outlets. TPM may be one of the most popular political blogs but it attracts about 1 per cent of the monthly unique visitors of The New York Times’ website or 8 per cent of The Guardian’s, according to Comscore.
The irony is that while blogs such as TPM and the Huffington Post have been winning awards and hiring reporting staff, much of their content still consists of riffs on mainstream news stories published by desperate old media companies.
BE:
Getting to be an old theme this.
BE:
Deadtree vs new media, glaring at each other from behind their screens.
PM:
Indeed
PM:
We’d better move on
11:31AM
PM:
Actually, meant to say earlier when we were discussing our fragile short position.
PM:
One reason for the jitters is that as soon as we closed yesterday this dropped into the inbox
PM:
Global equity strategy – Equities: raising our target
PM:
Blinking Credit Suisse
PM:
Andrew Garthwaite
PM:
In early June, we took our equity weightings down to benchmark and revised up
bonds to overweight. We believe investors should now revert back to an
overweight position in equities—and we raise our S&P 500 year-end target
to 1,050, from 920 (a target we put in place in the dark days of February), as:
■
A positive macro surprise in the second half of the year: We believe that
we are halfway through the first ‘V’ of an upward sloping W-shaped recovery,
with a likely peak in early Q4. Corporates have to rebuild inventories, which
could send global industrial production up 10% yoy. US housing affordability
is high—and there are signs that the housing market is stabilising. In China,
lending data in June was very strong and real estate is rebounding.
Corporate spend could kick in soon (FCF is at an all-time high and the
investment share of GDP extremely low). In the medium term, we are
worried about an estimated $7trn of excess leverage in G4 countries.
■
bonds to overweight. We believe investors should now revert back to an
overweight position in equities—and we raise our S&P 500 year-end target
to 1,050, from 920 (a target we put in place in the dark days of February), as:
■
A positive macro surprise in the second half of the year: We believe that
we are halfway through the first ‘V’ of an upward sloping W-shaped recovery,
with a likely peak in early Q4. Corporates have to rebuild inventories, which
could send global industrial production up 10% yoy. US housing affordability
is high—and there are signs that the housing market is stabilising. In China,
lending data in June was very strong and real estate is rebounding.
Corporate spend could kick in soon (FCF is at an all-time high and the
investment share of GDP extremely low). In the medium term, we are
worried about an estimated $7trn of excess leverage in G4 countries.
■
PM:
Earnings revisions are now positive for the first time since August 2007
(and this is usually associated with the market rising 5% over 3 months), in
spite of margins still being above the levels at which they troughed in
previous recessions. This is due to the fact that US corporates have never
shed labour so quickly, relative to the fall in GDP (hence, productivity growth
is higher than it has been in any recent recession), and to the outsourcing of
low-margin capital-intensive businesses.
■
Positioning. Money market funds are still 36% of market cap. Insurance
and pension funds’ equity weightings are very low. A rising market and
falling VIX ease solvency requirements and allow equity weightings to rise.
■
Risk & sentiment indicators have returned to more normal levels: VIX,
IG credit spreads, ISM new orders and consumer confidence are back to
pre-Lehman levels, when the S&P 500 was 1,252.
■
(and this is usually associated with the market rising 5% over 3 months), in
spite of margins still being above the levels at which they troughed in
previous recessions. This is due to the fact that US corporates have never
shed labour so quickly, relative to the fall in GDP (hence, productivity growth
is higher than it has been in any recent recession), and to the outsourcing of
low-margin capital-intensive businesses.
■
Positioning. Money market funds are still 36% of market cap. Insurance
and pension funds’ equity weightings are very low. A rising market and
falling VIX ease solvency requirements and allow equity weightings to rise.
■
Risk & sentiment indicators have returned to more normal levels: VIX,
IG credit spreads, ISM new orders and consumer confidence are back to
pre-Lehman levels, when the S&P 500 was 1,252.
■
PM:
Valuations are broadly neutral (not expensive): The equity risk premium
(ERP) is 4.6% on ‘trend’ earnings, compared to a long-run average of 3.6%.
On our warranted ERP model, if ISM gets to 57 (and it may), an ERP at that
level would be justified. But we suspect that equities could become one std
expensive. 1,050 S&P 500 would mean an ERP of 4.2%, P/E of 17x on trend
earnings (versus a long-run average of 15.6x) and 14.2x 2010E operating
earnings. The ERP in Europe is a more attractive 6% (on trend earnings).
The FCF yield is abnormally high relative to the corporate bond yield.
■
Lower core inflation (driven by falling wage growth) dampens fears of
monetary tightening, keeps mortgage rates low and supports valuations.
■
Some tactical indicators have improved: net issuance reached an all-time
high of 2.5% of market cap six weeks ago—and is now zero; breadth is
widening; and country risk appetite has retraced from the euphoria zone.
■
Implied inflation rates have risen from -0.5% in December to 1.7%—and
historically as this has happened, the P/E has risen from 14x to 20x. (Yet, if
inflation rises above 3%, equities tend to de-rate heavily.)
We still think that in the long run (5 years) margins can’t remain at abnormally
high levels and de-leveraging has to occur. But let’s worry about that next year.
(ERP) is 4.6% on ‘trend’ earnings, compared to a long-run average of 3.6%.
On our warranted ERP model, if ISM gets to 57 (and it may), an ERP at that
level would be justified. But we suspect that equities could become one std
expensive. 1,050 S&P 500 would mean an ERP of 4.2%, P/E of 17x on trend
earnings (versus a long-run average of 15.6x) and 14.2x 2010E operating
earnings. The ERP in Europe is a more attractive 6% (on trend earnings).
The FCF yield is abnormally high relative to the corporate bond yield.
■
Lower core inflation (driven by falling wage growth) dampens fears of
monetary tightening, keeps mortgage rates low and supports valuations.
■
Some tactical indicators have improved: net issuance reached an all-time
high of 2.5% of market cap six weeks ago—and is now zero; breadth is
widening; and country risk appetite has retraced from the euphoria zone.
■
Implied inflation rates have risen from -0.5% in December to 1.7%—and
historically as this has happened, the P/E has risen from 14x to 20x. (Yet, if
inflation rises above 3%, equities tend to de-rate heavily.)
We still think that in the long run (5 years) margins can’t remain at abnormally
high levels and de-leveraging has to occur. But let’s worry about that next year.
BE:
Love that payoff line.
BE:
Let’s worry about the bearish stuff next year.
PM:
Garthwaite has followed up today with this
PM:
Style update
■
We believe investors should focus on value, high dividend yield and
now earnings momentum and cease to focus on risk/leverage.
■
We believe investors should focus on value, high dividend yield and
now earnings momentum and cease to focus on risk/leverage.
PM:
Gone through each in that order
PM:
Value (combination of PE, DY and price to NAV) has been one of the best
performing styles since the market low, with good value outperforming bad
by 33% (and the market by 14%). Low PE was the only style to outperform
both from March 9th (market low) to June 6th and since June 6th (the period of
market consolidation). Typically the style outperforms for up to 8 months in a
row and we expect the style to continue to do well. The P/B relative of the
‘cheap’ stocks is still only in line with its average. Morrison, Santander,
Meggit and Unibail are Outperform-rated value stocks with positive earnings
momentum. Scania, Atlas Copco and Solarworld are expensive
Underperform-rated stocks with negative earnings momentum.
■
Dividend yield has been one of our preferred styles all year. Since the
market low, high yielding stocks have outperformed low yielding stocks by
21% (12% YTD) and outperformed the market by 8% (5% YTD). 72% of US
total returns have come from the dividend since 1900. We continue to favour
high yield stocks as the gap between the dividend yield and the bond yield is
abnormally low. Finmeccanica, Portugal Telecom, Reed Elsevier and Terna
feature on our ‘safe’ dividend quant screen of Outperform-rated stocks with a
yield above 4.5%, 2009E cover more than 3x, narrow dispersion of DPS
estimates and positive DPS upgrades over the last month.
performing styles since the market low, with good value outperforming bad
by 33% (and the market by 14%). Low PE was the only style to outperform
both from March 9th (market low) to June 6th and since June 6th (the period of
market consolidation). Typically the style outperforms for up to 8 months in a
row and we expect the style to continue to do well. The P/B relative of the
‘cheap’ stocks is still only in line with its average. Morrison, Santander,
Meggit and Unibail are Outperform-rated value stocks with positive earnings
momentum. Scania, Atlas Copco and Solarworld are expensive
Underperform-rated stocks with negative earnings momentum.
■
Dividend yield has been one of our preferred styles all year. Since the
market low, high yielding stocks have outperformed low yielding stocks by
21% (12% YTD) and outperformed the market by 8% (5% YTD). 72% of US
total returns have come from the dividend since 1900. We continue to favour
high yield stocks as the gap between the dividend yield and the bond yield is
abnormally low. Finmeccanica, Portugal Telecom, Reed Elsevier and Terna
feature on our ‘safe’ dividend quant screen of Outperform-rated stocks with a
yield above 4.5%, 2009E cover more than 3x, narrow dispersion of DPS
estimates and positive DPS upgrades over the last month.
PM:
Earnings momentum has had its second worst run of underperformance on
record. But the style didn’t start to outperform until 5 months after the start of
the last bull market (Aug 2003) and then did so for the next 12 months.
Moreover, since June 6th, earnings momentum has been the best performing
style. On average, earnings momentum outperforms 76% of the time. Stocks
with positive earnings momentum are cheap and trade on an abnormally
large P/E discount of 25% to stocks with poor earnings momentum. Retailing
and tech have the best 1m earnings momentum. Although it’s hardly begun,
the earnings season to date shows that European industrials and materials
are the only sectors with more negative than positive surprises. We screen
for Outperform-rated stocks with the best earnings momentum: Compass,
BNP Paribas, Johnson Matthey, Xstrata and Morrison (the last is also cheap
on HOLT). Lloyds, Volvo, Ferrovial and Commerzbank have the worst
earnings momentum, look expensive on HOLT and are Underperform-rated.
■
The magnitude of the risk style’s outperformance (high beta, high
estimate dispersion, low cover) is unprecedented: and the valuation of
the style is no longer attractive. Underperform-rated, high risk stocks that are
expensive on HOLT include Man SE, Solarworld and Scania. Low risk
Outperform-rated stocks include Vivendi, Eni and Mobistar. High leverage
stocks have outperformed low leverage stocks by 20% while credit
spreads were tightening. But the style is no longer cheap and performance
has stalled as credit spreads have stabilised. We also believe that the
implied default rates on high yield credit spreads are now close to fair value.
record. But the style didn’t start to outperform until 5 months after the start of
the last bull market (Aug 2003) and then did so for the next 12 months.
Moreover, since June 6th, earnings momentum has been the best performing
style. On average, earnings momentum outperforms 76% of the time. Stocks
with positive earnings momentum are cheap and trade on an abnormally
large P/E discount of 25% to stocks with poor earnings momentum. Retailing
and tech have the best 1m earnings momentum. Although it’s hardly begun,
the earnings season to date shows that European industrials and materials
are the only sectors with more negative than positive surprises. We screen
for Outperform-rated stocks with the best earnings momentum: Compass,
BNP Paribas, Johnson Matthey, Xstrata and Morrison (the last is also cheap
on HOLT). Lloyds, Volvo, Ferrovial and Commerzbank have the worst
earnings momentum, look expensive on HOLT and are Underperform-rated.
■
The magnitude of the risk style’s outperformance (high beta, high
estimate dispersion, low cover) is unprecedented: and the valuation of
the style is no longer attractive. Underperform-rated, high risk stocks that are
expensive on HOLT include Man SE, Solarworld and Scania. Low risk
Outperform-rated stocks include Vivendi, Eni and Mobistar. High leverage
stocks have outperformed low leverage stocks by 20% while credit
spreads were tightening. But the style is no longer cheap and performance
has stalled as credit spreads have stabilised. We also believe that the
implied default rates on high yield credit spreads are now close to fair value.
BE:
Where’s Albert Edwards when you need him?
PM:
Yeah, where is Edwards.?????
PM:
He’s disappeared.
BE:
Hibernating.
PM:
In a cave
BE:
Bear cave
BE:
Maybe we’ve just been struck off the list?
PM:
Surely not.
BE:
Maybe he’s just as confused as we are.
PM:
Indeed
11:34AM
BE:
Ah, here we go
BE:
MOST to the rescue.
BE:
A Rally, But One to Sell Into
BE:
The potential for US equities to trade higher than
our near term target of 950-1000 and closer towards
our stretch target of 1100 is rising as confidence in a
V-shaped recovery increases.
our near term target of 950-1000 and closer towards
our stretch target of 1100 is rising as confidence in a
V-shaped recovery increases.
BE:
However, we think the key drivers behind improving
sentiment – upside to near-term growth estimates and
continued positive earnings momentum – may prove
more transitory than the market believes.
sentiment – upside to near-term growth estimates and
continued positive earnings momentum – may prove
more transitory than the market believes.
BE:
We remain in the tepid recovery camp. Cyclical
growth risks have diminished but not disappeared. In
addition, 2010 consensus earnings expectations already
appear optimistic – implying a return to peak ROE (ex
Financials) from trough in just 5 quarters. Another leg up
would tilt the risk-reward to the downside. Unless
something changes our big picture view, equities could
face more than just a technical correction.
growth risks have diminished but not disappeared. In
addition, 2010 consensus earnings expectations already
appear optimistic – implying a return to peak ROE (ex
Financials) from trough in just 5 quarters. Another leg up
would tilt the risk-reward to the downside. Unless
something changes our big picture view, equities could
face more than just a technical correction.
BE:
If the market does rally further, we urge investors to
consider both sides of the trade. Being underweight
Staples, Telecoms and Healthcare provided as much
value add as being overweight Industrials, Materials and
Discretionary in the March through June rally.
consider both sides of the trade. Being underweight
Staples, Telecoms and Healthcare provided as much
value add as being overweight Industrials, Materials and
Discretionary in the March through June rally.
BE:
On the long side, we think the producer rather than
the consumer sectors will take leadership as the
differentiation between the recovery drivers and growth
itself intensifies. This would favor: Industrials, especially
Machinery within Capital Goods as well as Transport;
Equipment & Services as well as Drillers in Energy; and
Mining (esp. Steel) within Materials.
the consumer sectors will take leadership as the
differentiation between the recovery drivers and growth
itself intensifies. This would favor: Industrials, especially
Machinery within Capital Goods as well as Transport;
Equipment & Services as well as Drillers in Energy; and
Mining (esp. Steel) within Materials.
BE:
On the short side, we would be underweight Food &
Staples Retailing, Food & Beverage, and Telecoms into
a rally. Unlike early in the year, we don’t believe
Discretionary will be at the top of the cyclicals
(potentially with the exception of Autos). We expect
Financials will again set the direction for the market but
will not be the high-beta play as in the early stages of the
March rally.
Staples Retailing, Food & Beverage, and Telecoms into
a rally. Unlike early in the year, we don’t believe
Discretionary will be at the top of the cyclicals
(potentially with the exception of Autos). We expect
Financials will again set the direction for the market but
will not be the high-beta play as in the early stages of the
March rally.
BE:
That’s Jason Todd by the way
BE:
Not Draissma
BE:
Strategy out of the US.
PM:
cheers for that
PM:
We’re in the money gain. for what it’s worth
PM:
One footsie point
BE:
And it’s not worth much.
PM:
4475
11:36AM
PM:
What the update on GKN?
BE:
We’re up again
BE:
Ahead 3.75p at 92p
BE:
Had a very very good run
PM:
placing of the rum p this morning
PM:
Price was?
BE:
90p
BE:
That’s after they had 95.4% take up of the issue
PM:
hmm — so just a pretty small rump
BE:
39.3m shares
BE:
Went quick
BE:
Anyway, there are a couple of other things supporting the stock
BE:
Better than expected numbers from Caterpillar for starters
BE:
They’re a customer
BE:
And that follows Autoliv, maker of seatbelts and the like, being surprisingly optimistic about the second half yesterday
BE:
Bit of comment from Merrill on that
BE:
Better than expected Q2 09 results and positive outlook statements released by
Autoliv, Faurecia, Conti and some US suppliers support our Buy case on GKN
with 55% automotive exposure. Suppliers have been very good at tackling their
cost base and rapidly adjusting it for a 30-40% decline in volume. At GKN,
significant restructuring plans are paying off and we expect this to continue well
into H2 2009 (GKN cut 16% of its workforce). GKN Automotive divisions were
marginally profitable in May-June despite 30-40% decline in volumes. GKN aims
to come back to its pre-downturn 7-8% margin in Driveline based on 60-63mn
annual global vehicle production. At the H1 results on 04-Aug, we expect GKN to
issue a supportive outlook statement.
Autoliv, Faurecia, Conti and some US suppliers support our Buy case on GKN
with 55% automotive exposure. Suppliers have been very good at tackling their
cost base and rapidly adjusting it for a 30-40% decline in volume. At GKN,
significant restructuring plans are paying off and we expect this to continue well
into H2 2009 (GKN cut 16% of its workforce). GKN Automotive divisions were
marginally profitable in May-June despite 30-40% decline in volumes. GKN aims
to come back to its pre-downturn 7-8% margin in Driveline based on 60-63mn
annual global vehicle production. At the H1 results on 04-Aug, we expect GKN to
issue a supportive outlook statement.
BE:
EPS increase on average by 20% in 2009-11
We have raised our EPS estimates to 3.2p in 2009E (vs 3.0p), 8.9p in 2010E (vs
6.4p) and 12.4p (10.4p) in 2011E as we see better mix and volume for GKN from
H2 209 onwards. Sales at BMW, Audi and Daimler are coming back as of May
and June, as appetite for larger cars is recovering. As a result mix in Driveline
should improve. We have raised our 2010 divisional organic growth assumption to
9.5% (from 5%), and Driveline profitability from 4.2% to 5.5% (mix and volume).
We have raised our EPS estimates to 3.2p in 2009E (vs 3.0p), 8.9p in 2010E (vs
6.4p) and 12.4p (10.4p) in 2011E as we see better mix and volume for GKN from
H2 209 onwards. Sales at BMW, Audi and Daimler are coming back as of May
and June, as appetite for larger cars is recovering. As a result mix in Driveline
should improve. We have raised our 2010 divisional organic growth assumption to
9.5% (from 5%), and Driveline profitability from 4.2% to 5.5% (mix and volume).
BE:
Global light vehicle production estimates are being revised upwards in North
America (+25% production growth), Europe (flat) and Emerging markets (+5-10%)
in 2010. Higher volume in US automotive is good news for the PowderMet
division (c.40% op. gearing), hence we have raised our organic growth forecasts
from 5% to 11.5%, and our profits move from £(11)mn to £3mn.
Increasing our PO to 110p
We have raised our PO from 105p to 110p as we update our 2011 forecasts. We
value GKN using a 0.6x EV/Sales multiple to our 2011 forecasts.
America (+25% production growth), Europe (flat) and Emerging markets (+5-10%)
in 2010. Higher volume in US automotive is good news for the PowderMet
division (c.40% op. gearing), hence we have raised our organic growth forecasts
from 5% to 11.5%, and our profits move from £(11)mn to £3mn.
Increasing our PO to 110p
We have raised our PO from 105p to 110p as we update our 2011 forecasts. We
value GKN using a 0.6x EV/Sales multiple to our 2011 forecasts.
BE:
And Altium, which is a bit more cautious given the squeeze in recent days
BE:
Caterpillar is a significant customer and bellwether for the group’s off-road business supplying wheels and components. Q2 results were better than expected albeit this appears to be more down to the cost reduction programme than top line. Machinery & engine sales declined 41% organically in the quarter from the year which compares to -20% in Q1. This highlights the weakness in the market which has been compounded by destocking of the distributor chain. Company outlook was more positive for profits but showed no real change in terms of sales moving from $35bn +/-10% to a range of $32-36bn although management did indicate that markets had stabilized. GKN reported sales decline of 20% in Q1 and 45% in April and May mirroring Caterpillar. These results suggest that GKN are unlikely to see any upside in 09 but this is probably already factored into forecasts.
BE:
Valuation. Sentiment is positive for early cycle companies including the auto suppliers where production looks set to increase in H2. We remain concerned over the lack of changes in the automotive industry which suggests that over-capacity will remain and that pricing will therefore remain intense.
PM:
cheers for all that
BE:
TB – Phorm anecdotes always welcome
BE:
Thought they’d more or less given up on the UK
PM:
Fromage — a good lunch
BE:
KP – no idea about Caledon I’m afraid.
BE:
And “I’m afraid” was a carefully chosen phrase.
11:45AM
PM:
tell you what has just dropped into the inbox
PM:
Toxic Equity Trading Order Flow on Wall Street
PM:
This looks a really good read
PM:
But it is far too long to share in detail here
PM:
this is a paper from Themis Trading- a hedgie i think
PM:
By Sal L. Arnuk and Joseph Saluzzi
PM:
I will just run the intro — adn we can catch up on it later
PM:
will do a separate post
PM:
Retail and institutional investors have been stunned at recent stock market volatility. The general thinking is that everything is related to the global financial crisis, starting, for the most part, in August 2007, when the Volatility Index, or VIX, started to climb. We believe, however, that there are more fundamental reasons behind the explosion in trading volume and the speed at which stock prices and indexes are changing. It has to do with the way electronic trading, the new for-profit exchanges and ECNs, the NYSE Hybrid and the SEC’s Regulation NMS have all come together in unexpected ways, starting, coincidently, in late summer of 2007.
PM:
This has resulted in the proliferation of a new generation of very profitable, high-speed, computerized trading firms and methods that are causing retail and institutional investors to chase artificial prices. These high frequency traders make tiny amounts of money per share, on a huge volume of small trades, taking advantage of the fact that all listed stocks are now available for electronic trading, thanks to Reg NMS and the NYSE Hybrid. Now that it has become so profitable, according to Traders Magazine, more such firms are starting up, funded by hedge funds and private equity (only $10 million to $100 million is needed), and the exchanges and ECNs are courting their business.
PM:
This paper will explain how these traders – namely liquidity rebate traders, predatory algorithmic traders, automated market makers, and program traders – are exploiting the new market dynamics and negatively affecting real investors. We conclude with suggestions on what can be done to mitigate or reduce these effects.
PM:
To illustrate most situations, we will use a hypothetical institutional order to buy 10,000 shares of a stock at $20.00 that has been input into algorithmic trading systems, which most buy side traders use. Algorithmic or “algo” trading systems chop up big orders into hundreds of smaller ones that are fed into the market as the orders are filled or in line with the volume of the stock in question. Typically, such orders are easy to spot as they commonly show that the trader has 100 or 500 shares to sell or buy.
PM:
That should be or particular interest given all the recent stuff over Sergei
PM:
Sergei Aleynikov
PM:
how abotu that for live spelling
PM:
?
PM:
Actually, tracy skyped it
PM:
naw, there’s a spelling debate
[11:48:09] Tracy Alloway: it’s either serge or sergey
[11:48:22] Tracy Alloway: his linked-in profile says serge, and all media outlets have been saying sergey
[11:48:09] Tracy Alloway: it’s either serge or sergey
[11:48:22] Tracy Alloway: his linked-in profile says serge, and all media outlets have been saying sergey
PM:
As i say, more on that later this afternoon
PM:
Hoefully
PM:
Hopefully!
11:49AM
BE:
*GE CAPITAL GETS APPROVAL FOR TLGP EXIT PLAN
BE:
BnNY Mellon results look bang in line
BE:
Eli Lilly stronger than expected
BE:
Not much there to undermine the Wall Street rally
11:51AM
PM:
What the hell is this?????
PM:
Acta SPA
PM:
???????????
PM:
Stock up 72%
PM:
reuters quoting cfo saying smuggly that if there was anything to announce the company would have announced it
PM:
Stock has jumped 9.25p at 22p in the middle
PM:
STOP
PM:
Not 22p
PM:
0.22p
PM:
BE:
“If there was news we’d tell you.” Irritating answer.
PM:
Actually, i think it is a 22p stock — close yesterday was 12.75
PM:
But trades are printed on this reuters terminal at 0.23
BE:
Reuters really is rubbish for microcap pricing
BE:
Constant irritation
PM:
Trading update last friday
PM:
Catalyst technology
BE:
http://www.acta-nanotech.com/
PM:
hmmmmm
PM:
Fuel cell catalyst specialist
BE:
Acta was formed to exploit a breakthrough in catalyst technology, made by scientists in Tuscany, Italy. Our first products for the green energy market have unique performance advantages.
PM:
Reader beware
BE:
Tuscan energy.
BE:
Nice place to have your headquarters.
11:56AM
BE:
Four minutes to 12
BE:
Just about done
BE:
To wrap up, Boy Wonder has sent over the following link
BE:
EMBARGOED!Procter & Gamble Co. is getting closer to a possible sale of its prescription-drug business, and several parties, including specialty drug maker Warner Chilcott Ltd., and private-equity firm Cerberus Capital Management LP, are engaged in later-stage discussions, according to people familiar with the matter.
PM:
PM:
that is just brilliant
PM:
Scoop on a spoon
PM:
Exclusive press release
PM:
Embargoed news from people familiar with the matter
BE:
Some sub’s going to get their nuts in a vice over that one.
PM:
BE:
PM:
A lot of hard core investigative work went into that
PM:
Well spotted by Miles
BE:
(Note: please refer to glass house disclaimer on the Bloomberg post yesterday)
BE:
Ok, are we all done?
PM:
We are
PM:
got to go
PM:
have yet another lunch appointment
PM:
We wil lbe back tomorrow at 11am
PM:
Thanks for joining us
PM:
Hoefully the newsflow will improve!
PM:
Seeya
BE:
And Neil’s back I think, making my morning easier.
PM:
maybe
PM:
sseeya
PM:
and thank you for covering
BE:
Pleasure. Bye.