Markets live chat transcript for the chat ending at 12:18 on 2 Oct 2009. Participants in this chat were: Bryce Elder (BE) Tracy Alloway, FT (TA)
BE:
Right.
BE:
We’re late.
BE:
And it’s not our fault.
BE:
The FT internet fell over at 10:59am.
TA:
It’s still not entirely upright
BE:
Yeah – limping along and very slow
BE:
The hamster-powered servers that run FT.com may collapse at any minute
TA:
Ah, it’s back!
TA:
But possibly not for long…
TA:
A new hamster has been brought in
BE:
Ok – we have a brief window of communication.
BE:
We’ll have to type quickly while the stars are alligning.
TA:
Hurry hurry Markets Markets!
BE:
Right. Wider market.
11:12AM
TA:
FTSE?
BE:
Down
BE:
Testing the 5000 mark
BE:
Currently 45 points off at 5001
TA:
(Ptolemy – just wait a few minutes)
BE:
That’s after Wall Street took a bit of a tonking overnight
BE:
After “economic data cast doubt on the strength of the US recovery”
BE:
… as if the previous rally had anything to do with the strength of the US recovery.
TA:
I am having déjà vu this morning.
BE:
Why’s that?
TA:
This
TA:
Moody’s Says U.S., U.K. Ratings May Be ‘Vulnerable’
TA:
It’s happening all over again… the sovereign ratings debate.
BE:
The headline’s a bit misleading though isn’t it?
TA:
You betcha
BE:
Do you have the detail, Sarah Palin?
TA:
Err, golly, sure, here it is
TA:
Oct. 1 (Bloomberg) — The U.S. and U.K.’s ratings “could become vulnerable” after 2012 unless growth there “rebounds as expected” and the countries’ governments cut spending, Moody’s Investors Service said.
“We don’t see pressure on the U.S. or U.K. ratings for 2012,” Pierre Cailleteau, managing director of sovereign ratings at Moody’s, said in an interview today in Warsaw. “But if growth does not rebound as expected, interest rates go up — which is a key risk — and if there is no significant move in terms of raising taxes or cutting spending, the ratings could become vulnerable.”
This is the ratings service’s “worst-case” scenario and not “our central assumption,” he added. The U.S. and the U.K. are both rated Aaa by Moody’s, the highest investment grade.
BE:
Storm in a ratings tea cup, seems to me.
BE:
Not that the US/UK don’t have problems. But …
TA:
Let’s move on before I start talking like Sarah Palin again.
11:16AM
TA:
Shall we move to stock-specific stuff?
TA:
L&G?
BE:
Yeah – I guess that’s as good a place as any to start.
BE:
Leading the blue-chip fallers at the moment
BE:
Having had a hell of a run all week on bid stories
BE:
Which are still being pushed around this morning, of course
BE:
Same old punters are claiming NAB and Resolution have both appointed advisors and opened informal talks with L&G
BE:
etc etc etc.
TA:
So why the drop this morning?
BE:
Two things, I suspect.
BE:
First up, a Goldman downgrade
TA:
Wasn’t that yesterday? I read about that in today’s paper.
BE:
You did, yeah. But Goldman’s research distribution can be ….
TA:
Selective?
BE:
… er, let’s say inefficient.
BE:
So quite a few punters are only picking up on it this morning.
TA:
Can we see the note?
BE:
Of course.
BE:
Legal & General has been linked with M&A speculation (Times, September 29; Telegraph, September 30) and its shares have risen 17% in three days. Potential upside to our 3-month price target of 94p is now 7%, which is above our 2.3% sector median downside, but inadequate to justify a position on our Conviction List – we therefore remove it but retain our Buy rating. Since being added to our Conviction Buy List on May 5, 2009, the shares are up 46.3% versus the FTSE World Europe up 22%. Over 12 months, the shares are down 12.2% versus the index up 9.8%.
BE:
Current view
While potential M&A has been a contributor to our investment case (see, Change is coming, retain some exposure to the UK life industry, July 27, 2009), our primary argument has been that the market under-appreciates L&G’s cash generating ability. Writing annuity business in 1H09, when spreads were wide, defaults relatively contained and competition reduced, was very profitable. Now that spreads have narrowed somewhat, the cash flow dynamics of annuity business will most likely moderate, although higher equity markets and increased housing activity should improve cash flow in other areas of the business to compensate. We therefore believe L&G will comfortably achieve our £460 mn sustainable cash flow generation forecast (L&G generated £302 mn in 1H09).
While potential M&A has been a contributor to our investment case (see, Change is coming, retain some exposure to the UK life industry, July 27, 2009), our primary argument has been that the market under-appreciates L&G’s cash generating ability. Writing annuity business in 1H09, when spreads were wide, defaults relatively contained and competition reduced, was very profitable. Now that spreads have narrowed somewhat, the cash flow dynamics of annuity business will most likely moderate, although higher equity markets and increased housing activity should improve cash flow in other areas of the business to compensate. We therefore believe L&G will comfortably achieve our £460 mn sustainable cash flow generation forecast (L&G generated £302 mn in 1H09).
BE:
Our price target is based on an EVA methodology with a 10% cost of capital. We believe that new CFO, Nigel Wilson, who is noted for his past approach to simplifying and refocusing businesses, will make a positive impact at L&G, considering the complicated nature of the business.
TA:
Hang on. So that’s a downgrade from strong buy to buy?
BE:
Essentially, yes.
BE:
But I guess the market is reading it somewhat different …
BE:
Because there’s an epic internal process before any bit of research is released from the clutches of Vampire Squid into the outside world
BE:
This note would have crossed a lot of senior people’s desks, you’d have thought, and not one of them has said “hang on …”
TA:
Ok, so what’s the second reason?
BE:
Again, it’s something we flagged up here yesterday.
BE:
Namely, NAB felts are not exactly making encouraging noises.
BE:
This is from Dow Jones
BE:
The NAB spokesman said that “acquisition opportunities would be considered only where they are incremental or bolt-on in nature, strategically aligned, continue to keep the bank safe and improve the scale or distribution capability of our existing franchises.”
BE:
All of which fits L&G’s description in precisely zero ways
Legal and General Group (LGEN:LSE): Last: 83.15, down 4.8 (-5.46%), High: 87.25, Low: 82.75, Volume: 22.87m
TA:
Ok, thanks for that
11:21AM
BE:
Breaking news …
BE:
Evening Standard to become freesheet
BE:
The London Evening Standard, which is owned by they Russian businessman Alexander Lebedev, announced that it will become a free newspaper from October 12.
BE:
The decision, which makes the London evening paper one of the first major papers in Europe to drop its 50p cover price and rely entirely on advertising, will see circulation of 250,000 increase to a distribution of 600,000, Mr Lebedev said in a statement.
TA:
More paper all over the tubes then
TA:
Environmentalists will be upset
BE:
Yeah – don’t think anyone saw that coming.
BE:
I guess that means killing off London Lite
BE:
(No flowers)
TA:
So how are Daily Mail shares doing on this?
BE:
DMGT’s down 0.7% at 423p
BE:
So, not much.
11:24AM
TA:
Let’s talk of happy things
TA:
Like the global “sweet spot”
TA:
Neil says BarCap are always talking about this
BE:
Yep, stuff like this.
TA:
Yeah, Deutsche Bank are doing the same thing now – they’re on about it too.
TA:
We expect global growth to remain strong until at least the middle of 2010 due to a turn in the inventory cycle, easing credit conditions, further fiscal stimulus and sustained low interest rates. We believe the market is underestimating the quantitative impact of these factors and the length of time (6 – 9 months) it will take for them to work their way through the global economy. For instance, we believe US growth could be twice as high over the coming three quarters (4%) as the consensus forecast (2.3%).
TA:
This global “sweet spot” is historically very rare —improving economic data in the context of still extremely accommodative fiscal and monetary policies and abundant market liquidity—and provides the perfect mix for a range of risky assets.
TA:
On a 6-month horizon, we expect EM assets, high yield credit and gold to outperform on valuation, economic momentum and liquidity grounds. US equities are constrained by valuation but could significantly overshoot current fair value estimates, as earnings forecasts are not yet aligned with the likely near term growth overshoot. We like short fixed income positions on fundamental grounds, but in the short term the sell-off in rates is constrained by abundant liquidity and a structural shift back into the asset class.
TA:
Süße Spot
TA:
In German
TA:
That note by the way, is called “Trading the recovery: Six months of clear skies”
BE:
So H&M Capital have another six months of rallying? That will kill them.
TA:
Apparently. This is it, in a nutshell
TA:
We expect the rally in risky assets over the last 6 months to continue for another 6-9 months. Our view is predicated on a sharper than expected rebound in the real economy, supported by accommodative central banks and a shift back of liquidity into various asset classes. In some cases, our views are supported by compelling valuation arguments (e.g. short rates, long high yield, and long EMFX). In other cases, the dynamic associated with a sharp improvement in economic momentum should push assets to overshoot their fair value levels (e.g. equities and EUR/USD).
TA:
The main risks to our views over the 6-month horizon stem from a further soft patch in the economic data (possibly due to a brief period of further de-stocking and de-leveraging or the expiration of some stimulus schemes such as the car scrap schemes and housing programs), premature tightening of regulatory requirements or, a sharper then expected turnaround that fuels fears of a return of inflation and an earlier than expected exit from the present highly accommodative policy regime.
BE:
“further soft patch in the economic data”
BE:
We do have US payroll data coming up today, of course.
TA:
Ah yes, all eyes now on US payrolls
TA:
Coming out at 1:30 London time (8:30 DC).
TA:
There have been a lot of changes on this
TA:
But consensus is now between 170,000 and 190,000 jobs lost.
TA:
Which would be an improvement on August’s 216,000
BE:
Dollar’s seeing a wee bit of support on this, I think
BE:
But why all the changing?
TA:
Not sure. But Goldman Sachs revised their unemployment forecast higher yesterday, saying stuff like this
TA:
NEW YORK, Oct 1 (Reuters) – Goldman Sachs boosted its forecast for September job losses on Thursday, saying it now sees nonfarm payrolls falling 250,000 from its previous estimate of 200,000 after recent data pointed to a weaker reading.
‘The latest data points on the U.S. job market have been disappointing on balance, including the Monster index of on-line hiring, the ISM employment index, consumers’ assessments of job availability, and the total number of individuals receiving continuing claims for unemployment insurance, including those for extended benefits,’ Goldman said in a research note.
TA:
(Ptolemy had a thought on this earlier)
BE:
You have anything else?
TA:
Yeah, here’s a bit more detail from Marc Ostwald at Monument
TA:
The sea change in the ‘whisper on the street’ number from chatter about a possible marginal gain in Payrolls at the start of the week, which only ever seemed possible if a combination of revisions and statistical quirks which this series is quite capable of delivering, were to act in concert, but the expectation now is probably around the original -183.5K, given the (often erratic) indications from a weaker than
ADP Employment reading, an only marginal improvement in Initial Claims (with the improvement in Continued Claims likely to owe more to the expiry of benefit eligibility than Claimants returning to Employment), and the flat and weak Manufacturing ISM Employment Index profile highlighting that while orders and Inventories are improving, demand for labour is not. As for Hourly Earnings, the August report suggested the down trend was rather less pronounced than had been assumed, even if still clearly lower, and the consensus for a 0.2% m/m 2.6% y/y rise would fit with that picture. Last but as ever the most important aspect will be the Average Workweek, which is seen unchanged at 33.1, though the risk of a post cash for clunkers tailing off in auto output could create a wrinkle, so the breakdown will need to be watched carefully. Some may rightfully ask why is this often heavily revised Labour report actually important, after all estimates of what the real US Unemployment rate are generally around the 15-16% area, and there is a camp which fears that today’s official data will breach the key 10% level. The simple answer is that the Fed has emphasized that unless they are comfortable with the idea that the labour market has reached its nadir, they won’t be in any hurry to tighten policy.
ADP Employment reading, an only marginal improvement in Initial Claims (with the improvement in Continued Claims likely to owe more to the expiry of benefit eligibility than Claimants returning to Employment), and the flat and weak Manufacturing ISM Employment Index profile highlighting that while orders and Inventories are improving, demand for labour is not. As for Hourly Earnings, the August report suggested the down trend was rather less pronounced than had been assumed, even if still clearly lower, and the consensus for a 0.2% m/m 2.6% y/y rise would fit with that picture. Last but as ever the most important aspect will be the Average Workweek, which is seen unchanged at 33.1, though the risk of a post cash for clunkers tailing off in auto output could create a wrinkle, so the breakdown will need to be watched carefully. Some may rightfully ask why is this often heavily revised Labour report actually important, after all estimates of what the real US Unemployment rate are generally around the 15-16% area, and there is a camp which fears that today’s official data will breach the key 10% level. The simple answer is that the Fed has emphasized that unless they are comfortable with the idea that the labour market has reached its nadir, they won’t be in any hurry to tighten policy.
BE:
Great – thanks.
11:29AM
BE:
Right
BE:
Getting requests for some mining stuff
BE:
After Xstrata was given three weeks to make an offer for Anglo or walk away
BE:
Which, I thought, was the least surprising news of the week
BE:
Anglo always indicated they had the put-up-shut-up as a weapon in their armoury
BE:
And would use it whenever it was convenient
BE:
Now that the deal looks to be dead in the water anyway, they may as well force some kind of resolution rather than continue in this weird takeover purgatory.
TA:
Got any comment on this?
BE:
Yeah, few things
BE:
Here’s Citigroup’s Laim Fitzpatrick looking at Xstrata’s options
BE:
Formal approach for merger-of-equals — Implies a premium of 10% against the
current Anglo share price (current exchange ratio is 2.17 and merger of equals
offer is 2.38). However, we believe a merger-of-equals would be unlikely to
receive Anglo shareholder backing, given the lack of enthusiasm to date.
current Anglo share price (current exchange ratio is 2.17 and merger of equals
offer is 2.38). However, we believe a merger-of-equals would be unlikely to
receive Anglo shareholder backing, given the lack of enthusiasm to date.
BE:
Raised offer / cash sweetener — The Anglo board has firmly rejected the
merger-of-equals offer. XTA have gone hostile in the past but this would make
XTA the smaller entity within the larger group. XTA may be prepared to
increase their offer if they believe there are potentially more synergies than the
announced figure of $1bn. We estimate XTA could pay up to 2.93x using the
value of these synergies, however, we note XTA shareholders are likely to be
reluctant to overpay and pay away all the gains.
merger-of-equals offer. XTA have gone hostile in the past but this would make
XTA the smaller entity within the larger group. XTA may be prepared to
increase their offer if they believe there are potentially more synergies than the
announced figure of $1bn. We estimate XTA could pay up to 2.93x using the
value of these synergies, however, we note XTA shareholders are likely to be
reluctant to overpay and pay away all the gains.
BE:
Walk away for six months — Anglo’s performance will be looked at closely and
XTA could return in six months or pursue other options.
XTA could return in six months or pursue other options.
BE:
Conclusion — Overall, although we see benefits to XTA shareholders from the
deal (synergies, cost cutting, project optimisation) these must be weighed
against the inherent merger / integration risks. We note that Anglo are hosting
analysts to view their major growth projects, and continue to push the value
case of an independent entity. Given XTA are actively engaging stakeholders to
pursue the merger, we don’t expect silence on the merger proposal.
deal (synergies, cost cutting, project optimisation) these must be weighed
against the inherent merger / integration risks. We note that Anglo are hosting
analysts to view their major growth projects, and continue to push the value
case of an independent entity. Given XTA are actively engaging stakeholders to
pursue the merger, we don’t expect silence on the merger proposal.
BE:
We should put up some prices
Xstrata (XTA:LSE): Last: 837.50, down 34.5 (-3.96%), High: 870.00, Low: 830.00, Volume: 8.10m
Anglo American (AAL:LSE): Last: 1,885, down 1.5 (-0.08%), High: 1,893, Low: 1,854, Volume: 2.90m
BE:
And, of course, the third company in this relationship …
Lonmin (LMI:LSE): Last: 1,475, down 63 (-4.10%), High: 1,525, Low: 1,459, Volume: 757.90k
TA:
(Sparts – You will have competition from Boredwithbanks)
11:36AM
BE:
Actually, we should revisit the Lonmin story
BE:
Which is partly related to a bad debt from its Black Economic Empowerment partner
BE:
And the risk of a cash call because of this does seem to be a genuine one
BE:
Even though the sums mentioned up to now are not huge
BE:
I’ll turn to Charles Kernot at Evo for a neat summary of Lonmin’s troubles
BE:
Lonmin finds itself in yet another bind – which unfortunately
comes right at its year-end.
comes right at its year-end.
BE:
Poor Lonmin – first it suffers from low platinum prices and a
strong rand so it enters the market and raises sufficient cash to neutralise
its balance sheet. Then, just as the deal has closed, it suffers a further
problem with its No 1 furnace which leads to a reduction in platinum
production. This comes against the backdrop of mining problems and the
closure of the Limpopo operations where proposed mechanisation proved a
costly mistake.
strong rand so it enters the market and raises sufficient cash to neutralise
its balance sheet. Then, just as the deal has closed, it suffers a further
problem with its No 1 furnace which leads to a reduction in platinum
production. This comes against the backdrop of mining problems and the
closure of the Limpopo operations where proposed mechanisation proved a
costly mistake.
BE:
Now, the Incwala black economic empowerment vehicle
has fallen into default as it has not been able to repay the borrowings it
took on to acquire its interest in Lonmin’s mines.
has fallen into default as it has not been able to repay the borrowings it
took on to acquire its interest in Lonmin’s mines.
BE:
The concern is not just
that Lonmin guaranteed this debt but that a different transaction may be
required to resolve the problem. If, for instance, Lonmin was forced to buy
back or otherwise refinance the interest at today’s value, the call on its
cash could be significantly more than the ZAR930m (US$122m) of debt
that Lonmin guaranteed this debt but that a different transaction may be
required to resolve the problem. If, for instance, Lonmin was forced to buy
back or otherwise refinance the interest at today’s value, the call on its
cash could be significantly more than the ZAR930m (US$122m) of debt
BE:
We reiterate our Sell
recommendation given the ongoing uncertainty over Lonmin’s liabilities.
recommendation given the ongoing uncertainty over Lonmin’s liabilities.
BE:
And – in answer to User406814 – here’s how he thinks this plays for 25% shareholder Xstrata
BE:
We downgrade our recommendation on Xstrata from Add to
Reduce given the increasing financial uncertainties over its Lonmin position
and the rebuff that it has received from the Takeover Panel.
Reduce given the increasing financial uncertainties over its Lonmin position
and the rebuff that it has received from the Takeover Panel.
BE:
DETAILS – Following an approach from Anglo’s advisers, the Takeover
Panel has enforced a Put Up or Shut Up clause which means that Xstrata
has until 20 October to launch a formal bid for Anglo American or walk
away.
Panel has enforced a Put Up or Shut Up clause which means that Xstrata
has until 20 October to launch a formal bid for Anglo American or walk
away.
BE:
This comes four months after Xstrata’s approach first became public
– and only prevents Xstrata from launching a bid for a period of six
months. We believe that Xstrata is not now in a position to launch an offer
for Anglo American and that it has other issues to resolve which will absorb
a considerable amount of its time.
– and only prevents Xstrata from launching a bid for a period of six
months. We believe that Xstrata is not now in a position to launch an offer
for Anglo American and that it has other issues to resolve which will absorb
a considerable amount of its time.
BE:
Specifically, Lonmin’s Incwala situation
is becoming more of a worry and there is an increasing expectation that
Lonmin will have to raise external capital rather than refinance Incwala’s
debt. If Xstrata wants to retain its Lonmin stake at 25% there is a risk that
it, too, would have to raise external capital.
is becoming more of a worry and there is an increasing expectation that
Lonmin will have to raise external capital rather than refinance Incwala’s
debt. If Xstrata wants to retain its Lonmin stake at 25% there is a risk that
it, too, would have to raise external capital.
BE:
(Lorcan – excellent comment. Nail on the head.)
TA:
Ok, cheers for that
11:42AM
TA:
Speaking of cheers
TA:
Let’s talk about beer!
BE:
Hooray
BE:
Of course you mean SABmiller
BE:
Which is looking refreshed in this rather hungover market.
SABMiller (SAB:LSE): Last: 1,504, up 23 (+1.55%), High: 1,511, Low: 1,450, Volume: 2.93m
BE:
That’s after Mexican drinks group Femsa said it was looking at selling its brewery, Femsa Cerveza.
TA:
Who’s that exactly?
BE:
It makes Sol.
BE:
The beer that tastes of lime if you put a lime in it.
BE:
Femsa ADRs were up 17% on the news
BE:
And SABMiller and Heineken are widely reported to be in talks already.
BE:
With SAB reckoned to be the front runner, not least because they could do the deal entirely in debt
BE:
Here’s the FT story on all this
TA:
What’s so interesting about Mexican beer?
BE:
It’s interesting because it’s a duopoly
BE:
Divided up between Femsa and Grupo Modelo, which makes Corona
BE:
It’s the sixth largest beer market in the world, and Femsa has a 42% share
BE:
So, as you’d expect, the margins are mighty attractive
BE:
Here’s a line from Bloomberg’s report overnight
BE:
In 2008, Femsa’s beer unit had an operating margin of 13 percent. That compares with 26 percent for Modelo. SABMiller’s margin in the same period was 18 percent while Heineken’s was 8.3 percent.
TA:
So how much is Femsa worth?
BE:
$9bn is the figure most of the press arrive at
BE:
UBS reckons that might be a bit toppy, even though it would lift earnings from year one
BE:
Here’s their valuation work for SAB
BE:
On a fully debt funded basis, we estimate it would be EPS accretive immediately, by 8% in Yr 2 (12E FY), and 14% Yr 3. At 20% equity, it would be 2% accretive in Yr 2, and 7% Yr 3.
BE:
We see a valuation range for FEMSA Cerveza between US$7.5-9bn
BE:
We believe that a US$9bn valuation would be quite full (compares to 11.7x paid for AmBev and above the 10.1x paid by SAB for Bavaria). Whilst EPS accretive, SAB would struggle to cover cost of capital by Year 4 (we assume 10.6% deal WACC). However, we see the US$9bn as a start to negotiations. A valuation of US$7.5bn would cover deal WACC in Year 4. Some of our key assumptions are (1) cost synergies at 4% of PF Latam sales (US$372m) (2) 7% cost of financing new debt.
TA:
So what are the chances of a bidding war?
TA:
Battle of the beer bidders?
BE:
Well, as mentioned previously, Heineken really has to take a look
BE:
They already have a US distribution agreement with Femsa that runs until 2017, apparently
BE:
But they’re carrying a lot more debt, so SAB’s likely to have the upper hand here
TA:
Maybe we can get some more goodie bags at FT AV towers
TA:
We are all tired of chocolate
BE:
Yeah, the Cadbury/Kraft payola is losing its novelty value
BE:
Would be an interesting change if a few crates of Nastro Azzurro arrived at One Southwark Bridge
TA:
Actually Bryce… That already happened
BE:
Really?
TA:
Around this time last year
TA:
Paul did a special video for SAB Miller
TA:
On the importance of blogs
TA:
And he was paid in beer
BE:
Ah – they know his price.
11:49AM
BE:
Turning to the comments quickly …
BE:
Nothing new on Wolseley I’m afraid
BE:
I’m of the opinion these stake-building rumours look a bit doubtful
BE:
And recent price action has been driven by a few broker upgrades that hinge on a US housing recovery
BE:
But I’m more than prepared to be wrong about that if someone knows better.
BE:
As for Dragon Oil – no idea I’m afraid.
BE:
But if the STRNS reported it …
TA:
Speaking of Lisbon Treaty (LorcanRK at the right)
TA:
I have a bit of comment on the FX impact
TA:
From RBC
TA:
EUR/USD: Ireland votes on the Lisbon Treaty for the second time today. Counting, however, does not start until tomorrow and the result should be known early Sunday morning North American time. There is widespread assumption that Ireland will vote “yes” this time around and recent opinion polls have shown a 55/45 split in favour. Dissatisfaction with the incumbent government and risk that the referendum is used as a means of protest, however, mean the outcome is far from a foregone conclusion. Although of limited practical consequence, in the near term at least, a “no” vote would elicit a sharp knee-jerk sell-off in EUR when markets open on Monday, just as it did when Ireland voted no in its first referendum on the Treaty last year. Assuming a “yes” vote, attention then turns to the Czech Republic and Poland who have yet to ratify the treaty. The treaty needs to be ratified by these two countries in short order to avoid running into the next stumbling block – the UK general election next summer.
TA:
Actually, the rest of their commentary is interesting too
TA:
The sell-off in US equities into the close yesterday and further weakness on the futures overnight (DJI future -22pts), has resulted in a fairly “routine” risk-off day in FX today. JPY crosses are all lower, with CAD, AUD and GBP leading the way. That said, moves are relatively small ahead of the US payrolls release and other event risk in the form of the weekend’s G7 meeting and the Irish referendum on the Lisbon Treaty (see EUR/USD below). Media reports suggest the G7 may not release a post-meeting statement at all this weekend, as the Group recognises its diminishing relevance compared to the G20. If that is the case, market moving news is likely to be limited to comments from the sidelines of the meeting, in particular further whinging from the Europeans about the weakness of USD/strength of EUR. In that vein, French Economics Minister Lagarde today commented that “everyone needs a strong dollar”, echoing the sentiment expressed by a host of European policy makers yesterday. In contrast, Japanese Finance Minister Fujii said he would not be bringing up the issue of a stronger JPY at the meeting. Short EUR/JPY is the natural trade on the back of these contrasting positions.
TA:
Got that? Maybe no G7 statement on global economy/currencies
TA:
(Neil back on Monday)
BE:
(And, as for MONI, Neil’s the only one to know anything about that story so I can’t comment.)
11:55AM
TA:
Shall we do a quick bit on LSE/Turquoise?
BE:
Sure
BE:
Was a popular subject among commenters yesterday
BE:
Even though we totally forgot to mention it
BE:
So the story here is that LSE’s buying a third-rate trading system, right?
TA:
That’s about it. Paul did a post last night
BE:
And is there anything to add to that from the scribbler community?
TA:
Daniel Garrod at Citi has some interesting thoughts
TA:
LSE states it is in M&A discussions with Turquoise — efinancialnews reported on 1 October that LSE was in talks to acquire Turquoise. This prompted management to confirm that discussions were indeed taking place.
TA:
Turquoise boasts around 6% UK market share — Turquoise, the pan-European MTF, was reported by the FT1 to have been put up for sale in August, following an initial unsuccessful approach from Nasdaq OMX. Turquoise is reported to be loss making (FT, 1 October). September’s ADV totaled €1.2bn, giving the MTF ~6% market share in the UK, 5% of French equities and 4% of German.
TA:
No price tag indicated by LSE — Previously in August the FT quoted banking sources as saying a price range of £25 to £50m was appropriate. Valuing the MTF is highly difficult since so few financials are available and it is reportedly loss making. Turquoise’s September ADV totalled €1.2bn vs an estimated €8bn at the
LSE (UK and Italy).However, the pricing structure of Turquoise is much lower (0.08bps vs 0.8bps at the LSE).
LSE (UK and Italy).However, the pricing structure of Turquoise is much lower (0.08bps vs 0.8bps at the LSE).
TA:
Crucial issue is how independent the platform is from founding investment banks — Any purchaser of Turquoise runs the risk that the 9 original founding banks may no longer use the platform as soon as it is sold. The proportion of business Turquoise transacts outside of its founding shareholders and how sticky its volumes are is likely to affect its price.
TA:
NYSE/NDAQ followed similar strategy of buying up competitors in 05/06 — The difference here is that NYSE and NDAQ, when they purchased Arca and iNet respectively, were upgrading their technology systems. The LSE has already moved to upgrade its technology through the announced purchase of Millennium.
TA:
Evidence does not support weakening of competitive threat — We do not believe the possible sale of Turquoise reflects an easing of competitive environment. The LSE has continued to lose market share in September, now down to ~64%. In fact, it could be argued Turquoise is being sold precisely because its founding banks believe the environment is already competitive enough with the market leader Chi-X and price leaders of BATS and NEURO.
TA:
Last paragraph’s quite interesting…
BE:
It is, yes
London Stock Exchange Group (LSE:LSE): Last: 833.00, down 19 (-2.23%), High: 844.00, Low: 824.00, Volume: 277.18k
11:58AM
BE:
Ok – nearly midday and we haven’t mentioned airlines yet.
TA:
Shock
BE:
Your specialist subject (aside from being AV’s artist in residence).
BE:
So, anything caught your eye?
TA:
Ryanair London investor conference today
TA:
Most exciting thing that’s come out of it so far though, is that they hedged 50 per cent of their Q1 FY2011 requirements at $662 per tonne.
TA:
BUT they are holding a press conference later today, at 2pm
TA:
So something could come out of that
TA:
However, sources within the investor meeting say nothing big was mentioned, so don’t hold your breath
TA:
it could just be another O’Leary rant on BAA or something
TA:
On the BA front – I have nothing new to say really
TA:
Except that we may have an interesting take on the biz-class only stuff on Monday
TA:
And LorcanRK – Yes I’ve seen the Bloomberg stuff on AERL and others
TA:
Which all reminds me of my own work on the subject
TA:
And in the FT last week
TA:
Anyway, let’s move on
BE:
Sure – thanks for all that
12:03PM
BE:
Just before we go, should mention Accenture
BE:
Profit warning overnight
BE:
Or rather, 2010 guidance “disappointing”
BE:
Has an obvious readthrough for the likes of Logica
Logica (LOG:LSE): Last: 120.70, down 4 (-3.21%), High: 124.60, Low: 120.30, Volume: 2.89m
BE:
Here’s Caz to summarise where Accenture is suffering
BE:
Consulting revenues in all operating groups declined, with the exception of public sector.
Weakness was driven by 1) caution around launching new large programmes, opting instead for
more phased and flexible approaches, 2) a slower pace for ongoing projects, 3) deferred
decisions to expand work beyond current commitments, and 4) pricing pressure to reduce overall
costs. The CFO’s commentary on sequential growth suggests that fiscal Q3 was the steepest
decline, but that Q1 will still decline slightly, possibly turning to positive sequential growth by Q2
or the start of the calendar year 2010.
Weakness was driven by 1) caution around launching new large programmes, opting instead for
more phased and flexible approaches, 2) a slower pace for ongoing projects, 3) deferred
decisions to expand work beyond current commitments, and 4) pricing pressure to reduce overall
costs. The CFO’s commentary on sequential growth suggests that fiscal Q3 was the steepest
decline, but that Q1 will still decline slightly, possibly turning to positive sequential growth by Q2
or the start of the calendar year 2010.
BE:
Although some people think there’s limited impact for the European tech types
BE:
Will Wallis at Numis, for example
BE:
Actually, sorry, I didn’t mean will, who’s actually quite negative.
BE:
we highlight in particular that global leader Accenture now trades on the
same forward earnings multiple as the European IT services sector, yet has a very
substantially stronger track record for growth and cash generation, and a much
stronger brand. We reiterate our negative recommendation on Logica.
same forward earnings multiple as the European IT services sector, yet has a very
substantially stronger track record for growth and cash generation, and a much
stronger brand. We reiterate our negative recommendation on Logica.
BE:
I meant Adam Wood at BNP Paribas, who says this
BE:
Accenture’s 2010 outlook (-3% to +1% revenues and flat margins) includes
4 months of calendar 2009 where the company still has very tough base comparisons.
In contrast, the Europeans have comparables that ease in Q4 2009e and will guide on
a calendar 2010e that has an easy basis of comparison. As a result, we do not think
Accenture’s guidance is negative. Indeed, combined with the positive commentary on
the call, there are signs of recovery in the sector.
4 months of calendar 2009 where the company still has very tough base comparisons.
In contrast, the Europeans have comparables that ease in Q4 2009e and will guide on
a calendar 2010e that has an easy basis of comparison. As a result, we do not think
Accenture’s guidance is negative. Indeed, combined with the positive commentary on
the call, there are signs of recovery in the sector.
BE:
Right – all done on that subject.
12:09PM
BE:
Anything to close the week with, Tracy?
TA:
Yes, look at this press release someone sent me
TA:
WISH YOU WERE HERE – NEW YORK COMES TO LONDON
Hi Tracey,
Please see below info on the launch of Wish You Were Here, the New York/London swap that brings to the capital 11 exciting fashion brands from New York’s Lower East Side.
TA:
Ok, first of all they misspelled my name.
TA:
Second of all, don’t they know this is a sensitive issue?
BE:
Oh, you are missing Paul?
TA:
Terribly. There is no one to take the junior Alphaville to lunch. Or the Ivy.
TA:
Neil’s only offered the Nando’s next door…
BE:
BE:
Look – they are giving away free blueberry muffins
BE:
LAUNCH EVENT – SATURDAY 3RD OCTOBER – The 2 pop up shops open their doors, and between 11am and 1pm, shoppers can grab a free coffee and blueberry muffin in the Newburgh Quarter.
BE:
“Newburgh Quarter”?
BE:
That’s the wrong side of Carnaby Street, isn’t it?
BE:
Close to where they’ve opened a Central Perk, to advertise some box set of Friends DVDs for the dozen or so people who can’t get Channel 4
BE:
And – of course – you might run into Sam Jones.
TA:
(pop-up shops = temporary stores)
TA:
All I’m saying is Paul didn’t have to go to New York
TA:
New York is obviously in London
BE:
And you can browse How To Spend It from the comfort of your Manhattan loft now as well
BE:
Or, rather, will be able to from tomorrow
BE:
When www.howtospendit.com goes live
BE:
(Please buy some watches. Our wages depend on it.)
TA:
Watches feed FT Alphavillers
BE:
We owe everything to Hublot and Rolex
BE:
Anyway, we’d better go.
TA:
Yep, bye everyone. Have a good weekend.
BE:
(Sam – YOU’RE a man bad.)
BE:
Thanks for all your comments
BE:
Both today and this week.
BE:
Neil will be back on Monday, although Miles remains at his yoga retreat in the Bekaa Valley.
BE:
Hope you can join us then.
BE:
Bye.
TA:
Bye!