FT Alphaville » Markets Live transcript 5 Oct 2010

Share Print

Markets Live transcript 5 Oct 2010

Posted by Neil Hume on Oct 05 11:02.

Markets Live chat transcript for the chat ending at 11:19 on 5 Oct 2010. Participants in this chat were: Tony Tassell Neil Hume, FT

good morning…kind off

Surprise

we are early

Good morning

and welcome to Markets Live

stoic face on

FT Alphaville’s daily discussion about the small cap oil sector in the UK

only joking

we don’t just cover oil stocks

we also look at small cap miners

and other minnows

right

once again Tony is here

and please

why is there not a stoic face icon below

could we resist mentioning the Test match result please

I’d quite like Tony to come back on the show

mmmm…not looking good for the Ashes..i have been a bear for awhile on the Aussie prospects

that’s true

ATE 1-Cricket-Brilliant Laxman clinches shock win for India

* Brilliant Laxman sees India home

* Hosts take 1-0 lead in two-test series

(updates at end of match)

MOHALI, India, Oct 5 (Reuters) – Vangipurappu Laxman produced a stunning innings to lead India to a dramatic one-wicket victory over Australia in the first test on Tuesday, managing the tail to perfection with an unbeaten 73 to frustrate the tourists.

have you put on an emotional hedge yet?

going long the Aussie dollar…a reasonable in this time of currency wars

(endgame – does that mean you want to talk about tesco? have you no manners?)

11:05AM

Okay

let’s get going

and start with the Kerviel trial news

05Oct10 RTRS-EX-SOCGEN TRADER KERVIEL ORDERED TO REIMBURSE 4.9 BLN EUR TO SOCGEN – COURT

09:56 05Oct10 RTRS-EX-SOCGEN TRADER KERVIEL SENTENCED TO 5 YRS IN PRISON, INCL 2 YRS SUSPENDED – COURT

Now, I can understand the prison sentence

but the fine

What exactly is the point of that?

the French establishment strikes back

he was always going to get the book thrown at him

but eur4.9bn?

what is the point?

(pakora – funnily enough he was able to bat though…what do they call him – the wall isn’t it)

why don’t they just hang the guy

and have done with it

i dont think that the preferred method of french execution

maybe the could have just deported him along with the Roma

yeah

send him to Elba

whenever kerviel i am reminded how quickly things can change in the career of a bright young prospect

we had a intern at the time who was very quick on his feet…he helped us get the world exclusive in naming kerviel

Stanley Pignal was his name..he is now our Brussels correspondent

I wonder what the interest is on his fine?

actually someone has worked it out

Le problème de Kerviel est que sa condamnation produit un intérêt légal de 0,65% par an. Sa dette augmente de 87 260€ par jour.

a bit of Francias for you readers

that is what Lloyds is currently charging on its mortgages i believe

the interesting thing is that Kerviel was working in SocGen’s Delta One team – currently a growth area for most banks

he was

moving on

11:11AM

Oilwatcher, who must be an equity salesman judging by the tone of his comment

mentions the float today of Pandora

what is in that box of tricks

a luxury jeweller

listed in Denmark today for eur5bn

I’d never heard of the company

and neither had Izy or Tracy

i am surprised you were not shopping there neil

although Tracy saw an advert last night

anyway the stock is off the races

for a ear stud or something

and the chairman is Allan Leighton

Mr Going Plural Himself

Shares in Danish jewellery maker Pandora debut on the Copenhagen bourse 7 percent above their IPO price and climb to 241.60 crowns by 0826 GMT — up 15 percent from the offering price of 210. [ID:nLDE694066]
“There has been phenomenally high demand, higher than I expected,” says Danske Invest portfolio manager Jesper Poll. “A number of investors did not get an allocation, and there is still demand.”
A heavy 9.6 million shares change hands.
Mads Zink, chief traded at Danske Bank, says overseas investors are the biggest buyers led by Morgan Stanley, followed by Goldman Sachs and J.P. Morgan.
“We will have giant turnover today. Some choose to take profits while others buy what they couldn’t (in the IPO) because it was oversubscribed,” Zink says.

Well if you are going to do an ipo, leighton is pretty good face to front it…

apart from anything else, i still remember how he rescued lastminute

http://www.pandora.net/Welcome

nifty website…

hmm

PANDORA was founded in 1982 in Copenhagen, Denmark and employs over 4,500 people worldwide, of whom more than 3,300 are located in Gemopolis, Thailand, where PANDORA manufactures its jewellery. The company is privately owned by the founders and – since March 2008 – funds managed by the private equity firm Axcel as the majority shareholders. In 2009, PANDORA generated revenue of approximately DKK 3.5 billion (approximately EUR 465 million) and EBITDA of approximately DKK 1.6 billion, and in H1 2010 generated revenue of approximately DKK 2.6 billion (approximately EUR 345 million) and EBITDA of approximately DKK 1.0 billion.

bling has obviously not gone out of fashion

the biggest company the FT has never head of

PANDORA is a designer, manufacturer, marketer and distributor of hand finished and modern jewellery made from genuine materials – primarily sterling silver, gold, precious and semi-precious stones and Murano glass. As at 30 June 2010, our jewellery was sold in 47 countries on six continents through approximately 10,000 points of sale, including over 260 PANDORA branded concept stores.

Right

enough of that I think

i think so

let’s head to the market

how are we doing neil

11:16AM

small

13.5 points better at 5,569

but no real conviction out there

everyone seems to be using Friday’s payrolls as an excuse to twiddle their thumbs

(shaun – he had his moment of fame but he hardly seems to be minting it at the moment despite all the speaking fees…there is only so long the notoriety has a value)

the real action is in action in currency markets

and in aluminium

yep

the yen had a sharp move after the surprise QE move by the BoJ

calmed down a bit since

but news of more money printing has been good for the glod price

on the aluminium market, we had a nother strange price move…more fat finger than kerviel though

SINGAPORE, Oct 5 (Reuters) – The London Metal Exchange canceled more than 200 lots of aluminium trades after a possible input error, metals traders said Tuesday.

Prices of aluminium fell by more than 3 percent for a few seconds in early in the day before recovering after what traders described as a “big figure typo”.

“It was unfortunate. We picked up a bit and I was telling a client we had a great fill for his order when the message on the cancellation came through,” one dealer said.

“It was a good thing Shanghai was shut. Had you opened an arbitrage at that point, you’d end up holding a position in one market, while the other half of your transaction was canceled.”

putting my finger in the air

I’d say fine someone

£3bn for that

But currencies is the theme du jour…

teh Boj’s move basically confirms that we are in era of currency wars with quantitative easing a main weapon

indeed

and the most interesting aspect of the announcement

was that the BoJ seems to have abanonded its bank note policy

this really is the race to the bottom

Simon derrick of Bank of New York Mellon was characteristically good on this theem

the past day has seen a wide range of policy
decisions or hints that seem designed, either directly or indirectly, to
lead to currency weakness. The most direct action came yesterday from the
Brazilian government when it doubled the tax due on foreigners’ purchases
of local fixed-income assets to 4.0%. This, of course, followed the comment
last week from Finance Minister Guido Mantega that “We’re in the midst of
an international currency war … This threatens us because it takes away our
competitiveness….The advanced countries are seeking to devalue their
currencies.” South Korea’s announcement that it intends to conduct
inspections of FX derivative positions at selected local and foreign banks
seemed equally direct and came after reports of very heavy intervention by
the authorities in recent days.

Equally direct were the actions of the BOJ in cutting its overnight call
rate target and setting up a JPY 35 Trn pool of funds to buy, or accept as
collateral, assets such as government bonds, commercial paper and
asset-backed securities. Although overtly aimed at providing support for a
slowing economy, there can be little doubt that this move came about in
part because of concerns over the impact of a persistently strong JPY. The
move makes even more sense from a currency perspective in light of Ben
Bernanke’s comments overnight. With the Fed Chairman throwing his weight
behind “additional [asset] purchases” it seemed clear that further downward
pressure on the USD was likely to emerge.

As a result the most effective
way for the Japanese authorities to fight this threat was to pre-emptively
make the same move themselves

All this serves to highlight the tensions building in the run up to the
(seemingly low key) G7 finance ministers meeting in a few days time and the
G20 meeting in Seoul between those who believe in the need for greater
“discipline” in the currency markets and those who believe that official
interference leads to ever increasing distortions in the global economic
system.

thanks for that

currency wars

just one more bit of that

It seems likely that calls for some kind of currency accord will rise in
volume in the days ahead (the latest came from the Institute of
International Finance overnight). However, with the US and China (and
arguably Europe and Japan) holding to almost exactly the same positions
they had in the run up to the November 2004 G20 meeting in Berlin, it seems
reasonable to suppose that the outcome will be the same as six years ago
(i.e. none whatsoever).

I have some comment from Goldman

on the likelihood

of the Fed hitting back at the BoJ

with a bigger QE package

at the Nov 2-3 meeting

Last Friday, we hosted our annual Pension & Insurance conference in
London. In one of the panels, we asked the 100-odd senior investment
professionals attending the event to vote on a number of questions related
to the risks of a ‘double dip’ and the ensuing policy response. Two views
stood out as largely consensual.

First, to the question ‘how do you think Fed QE will be carried out?’ 76%
of respondents thought the increase in the central bank’s balance sheet
would come in amounts reviewed at every meeting, akin to changes in the
Fed funds target. Only 17% expected a ‘big bang’ announcement, with a
definite amount and a schedule. Second, almost half of respondents thought
that QE would result in a flattening of the term structure of rates, with
the ultra long-end being the best performing sector.

Turning to the yield curve, we would start by noting that ‘QE talk’ (take
for example Bill Dudley’s prominent speech from last Friday and Brian Sack’s
remarks yesterday), are impacting interest rates much less than was the
case this Summer. The trade that is gaining more traction ahead of
potential further easing appears to be selling Dollars. As we have argued
in previous research, at the current 2.5%, 10-yr US Treasury yields are
trading below their global ‘equilibrium’ level of around 2.9%, and are
arguably already discounting QE.

As to what will happen to yields and the curve when QE is eventually
enacted, our view is that the main beneficiary will be the 5-yr sector,
which we see trading around 1%. This should result in the 5-10-yr part of
the yield curve moving steeper relative to the forwards (which are pricing
a 20bp flattening on a 12-month horizon). Our forecasts for 10-yr rates
are unchanged at 2.5% through the end of this year, then gradually higher.
Some argue that the Fed purchases, reducing the amount of duration in the
marketplace, can only result in lower yields (the so-called ‘portfolio
balance channel’).

(Who saw when Piers met Lord Sugar at the weekend? Who would have though the Lord has had plastic surgery and is a keen cyclist)

one more take on Japan from Rabobank..an under-rated house for strategy

We suspect there is also another constituency that the BoJ is hoping to influence with today’s
decisions; Japanese savers. Japan’s structural current account surplus, which is a reflection of high
domestic savings, translates to an ongoing need to recycle this surplus into foreign assets. In the
absence of capital outflow, Japan’s current account surplus will drive the currency stronger and
challenge the ability of Japan’s exporters to successfully compete on the international marketplace.
The strong rise in the yen through recent months is a clear sign that Japanese savers are reluctant to
invest enough of their savings to offset the current account surplus. One reason they are reluctant is
because they are faced with the US Federal Reserve seemingly intent on weakening the US dollar to
aid US recovery. Unsurprisingly, Japanese investors fear translation losses if they invest in dollar assets
only to see the dollar weaken further vs their own currency.
Viewed this way, the BoJ’s announcement today is partly an extension of the FX intervention
undertook by the BoJ several weeks ago i.e., aimed at weakening the yen to bolster Japanese
competitiveness.
Time will tell whether this latter goal is realized but we note this intention is consistent with our own
forecast outlook for the yen to weaken vs the dollar in the months ahead. Our primary reason for this
forecast is the expectation that US interest rates will begin to move higher as double-dip fears in the
US fail to materialize. Today’s policy announcement supports our yen forecast outlook. See our latest
FX Outlook, dated 4 October by Jane Foley.

right

let’s cut to some stock stuff

plenty to talk about this morning

always good to talk stocks..where shall we start

11:28AM

Well

with the biggest fallers

Inmarsat plc (ISAT:LSE): Last: 633.50, down 21.5 (-3.28%), High: 643.00, Low: 610.00, Volume: 8.29m

the Harbinger placing has been done

at 630p a share

around 13% of the company placed, by UBS and others

so it is not stock overhang then..just reduced takeover prospects

I think so

the view out there now seems to be

Harbinger used the stake for leverage

in negotiation for spectrum

got what they wanted and decided to cash in for a nice profit

well it seems like Harbinger does not have to hurry anyway – it can buy back later when it is more flush

any idea of where the stock has gone Neil

I think trackers took quite a bit of it

Insmarsat gets a big free float as result of the sale

up to 70%

so that generated some demand

hang on I have a note from Morgan Stanley

that explains all

Harbinger placing: Free float rises from 57% to 70%.
Harbinger announced it is selling 60mn shares (13% of
share capital) of Inmarsat. Following the placing, the
free float in the company rises from c57% to c70%. We
estimate the core-value of the business is 655p, and
therefore, the current stock price appears to ascribe little
value to Inmarsat’s spectrum assets in the US.

Harbinger proceeds likely to eventually return to
Inmarsat. It seems plausible that the sales proceeds
could be used to fund Harbinger’s 4G wireless network
rollout in the US, called LightSquared. The rollout costs
could exceed $10bn ($7mn equipment contract signed
with NSN, plus operational costs) and LightSquared has
a cooperation agreement to lease Inmarsat’s spectrum
in the 1.5GHz band. Inmarsat is already receiving
$40mn every 3 months as part of the lease agreement,
and in a separate announcement, LightSquared said
that it was going to accelerate the cooperation
agreement in Q4, and so trigger $115mn pa growing at
3% in payments to Inmarsat. We ascribe 80% of
success (unchanged) to realizing value for Inmarsat’s
spectrum assets, which derives a 150p per share value.

Key risks: i) Further sell-down of Harbingers stake; ii)
Sustainability of $115mn payments to Inmarsat, given
that LightSquared has yet to find a co-investor/ renter for
its capacity; iii) Inmarsat is also in an new satellite
investment phase on Ka-band costing $1.2bn.

Target reduced to 805p driven by. i) normalized capex
rising from $160mn to $190mn for Ka-band (30p); and ii)
3% lower maritime estimates due to weak H1 (35p). The
shares trade at 20.0x 2011e P/E and 9.2x EV/EBITDA.
We would be more positive towards 600p where the
shares would start to trade at a discount to core
valuation AND imply no long-term value for spectrum.

and there are a few people buying on the dips today

11:31AM

Tony anything you want to look at

there was a really exiciting test match today

well given the discussion about Sugar on the right, should turn to another prominent business leader

go on

the last results of Tesco to be presided over Sir Terry Leahy

(NJS

)

(yes NJS’s point “knowiung French accounting, I bet Soc Gen will now write back the E4.9bn and leave it as an aged debtor”

the Tesco results seem to have please the City….at least the analysts

what have the shares done

small down

Tesco PLC (TSCO:LSE): Last: 430.85, up 0.5 (+0.12%), High: 438.00, Low: 430.55, Volume: 11.20m

not that much in there to get excited about

well they seem to be calling an end to the losses at fresh and easy

that’s good

I guess

the chain that Sir Terry once wanted to build into 10,000 stores across the US

actually

Tesco results are usually quite difficult to read

lots of exceptions

but Nick Bibb of Arden reckons they were a bit above

Background: The Tesco figures are always hard to interpret: they adjust for “exceptionals”, but still include property disposal profits, whereas we and most other people exclude property profits. On a “clean” basis, though, interim PBT of £1531m is pretty strong, up 14.5% on last year’s H1 and a tad ahead of expectations, led by Asia profits growth (up 30% to £228m) and a lower interest charge. Apart from some robust comments from Terry Leahy about the economic recovery, most focus today will be on the performance of CEO-elect Phil Clarke at the 9am meeting and…the commitment to get the US into profit in 2012/13, by accelerating store openings.

Forecasts: (y/e Feb)

PBT 2010/11 £3453m (31.8p eps)
PBT 2011/12 £3872m (35.5p eps)

Valuation:

PE 2010/11 13.5x; 2011/12 12.1x

Conclusion: On a PE of only 13.5x at 430p the shares look quite good value, especially relative to Sainsbury (Neutral), so we stick to our Add view and, as the price is likely to go better today, we have our 445p target price under review. SBRY has had an amazing run ahead of tomorrow’s Q2 sales (+2.0% LFL ex-petrol expected), but will have to come up with something dramatic to sustain a PE of nearly 17x at 390p, notwithstanding its huge freehold property backing.

I have a bit more comment

from merrill

Most encouraging, however, is the better momentum in the business, particularly
internationally, with management now talking to the ‘tailwinds’ of economic
recovery. Certainly, the >4% international LFL in Q2 was ahead of our c2%
expectation; and even in the UK the Q2 LFL was ahead of our forecast at 0.4%.
UK ‘solid’ but with new space back-end weighted
Tesco’s UK’s trading profit, up 5.5%, was 0.5% below our forecast with sales
coming in light as a result of lower petrol inflation and a slight delay in new
opening. Against a broadly flat LFL performance, however, this shows both the
rationality of the UK market and Tesco’s strong cost control.
International back on the front foot

Asia continues to perform ahead of Tesco’s European assets, but both sported
stronger profit than we’d forecast and Q2 trading momentum was good in both
regions, up 5% in Asia and 3.1% in Europe
US profit by 2012/23
Losses in the US were slightly worse than modelled as the acquisition of 2
suppliers weighed. However, with c10% LFL in H1 management now is talking to
an ‘economic model’ and profitability in 2012. We’ll need to see more evidence
but it is encouraging.

this is Clive Black of Shore on the results

• Fresh & Easy – perhaps the big surprise today is the announcement by Tesco that it expects Fresh & Easy to be profitable by 2012/13, three years ahead of our expectations. This is a material development and one that could significantly swing sentiment for the group. LFL sales were up by 9.6% with total sales up by nearly 50%. Losses amounted to £95m, including the acquisition costs, and the company expects an unchanged year-on-year outturn.

Following this update we are retaining our present estimates for 2010/11F so CPTP (pre-property) of £3.45bn, EPS of 31.6p and DPS of 14.3p. However, following these results the model suggest greater upgrade rather than downgrade pressure. Shore Capital has a BUY recommendation on Tesco stock with the shares trading on a 2010/11 PER of 13.4 times (x), an EV/EBITDA ratio of 7.8x and an EV/sales multiple of 0.7x; the stock is expected to yield 3.8%.

(VP the clue in the Harbinger statement was that two UBS corporate brokers were listed as contacts. That sort of suggested something was coming)

mmm..a side point on Tesco was raised by Execution Noble, pointing out how well the company is doing out of property

oh yes

the idea that Tesco is really just a giant property company

i knew it was pretty good property manager but not this good

go on

Tesco’s Interims makes you feel slightly envious as a property analyst. In the six months to the end of August, Tesco realized a profit of £261m from the sale and leaseback of £1.2bn in property from its store portfolio. The UK real estate sector dreams of development profits of 27% on cost and in absolute terms none of the listed REITs (including Land Secs and British Land) is likely to generate similar levels of development profits over the next three years

The secrets of Tesco’s success as a developer are simple; zero pre-letting risk and a rock-solid tenant covenant (loan to value ratio of 23%). As a result, when Tesco comes to sell one of its superstores, typically with a 20-30 year lease and RPI-linked rental uplifts, there is sufficient institutional demand to bid yields below 5% (the last major sale and leaseback of £950m of property in July 2010 was at 4.9%). The other key reason that Tesco is able to generate liquidity and attractive pricing for its developments is the ability to self-finance disposals through securitized debt packages. The latest 30-year Tesco securitization had a starting loan to value ratio of 103%, which will amortize down to zero over the term of the loan.”

good work

and while we are in retailer land

an update on our favourite interenet grocer

Ocado Group PLC (OCDO:LSE): Last: 132.00, up 0.5 (+0.38%), High: 132.00, Low: 131.10, Volume: 28.14k

11:39AM

Right what else is moving?

you cant resist can you Neil

I know

Kazakhmys PLC (KAZ:LSE): Last: 1,394, down 29 (-2.04%), High: 1,408, Low: 1,359, Volume: 1.48m

that great FTSE 100 company

chairman selling £830m of stock today

now is the biggest director share deal ever in UK corporate history

i understand that the widows and orphans fund of kazakhstan have been persuaded to buy in

that’s right

the Kazkh govt were the buyer

and guess what

they didn’t demand a discount

bought the stock – which is up 33% in three months – at market price

how generous

the Kazakh government really knows how to drive a bargain

it does

compare that to the discount the Kuwait Investment Authority managed to get on the AIA float in Hong Kong

(Oh yes Monkey and Tony is loving it)

apparentlly the stake was driven by the need to meet Hong Kong listing rules ahead of kazakhmys’s planned secondary listing there.

really

I thought it was for portfolio diversification

isn’t that what all directors say when they slot lots of shares

so do you think this makes Kazakhmys a takeover target…after all i assume the pension fund will want to get the best value for their shares

I don’t know

what we do have

is creeping government control of the company

i am sure they not motivated by anything else but to seek the best possible investment returns

some people think that binding the company closers to the govt is a good thing

I’m not so sure

anyway here’s a bit of comment on the sale

from Liberum

well their interests are aligned

Kazakhmys this morning announced the sale of 11% of Chairman Vladmir Kim’s stake in the company to pursue other investment opportunities. The stake has been purchased by the National Welfare Fund Samruk-Kazyna JSC, effectively increasing the government’s stake in the business to 26%. With the stock up 32% since the 25th of August and at its highest level since April we think the market will see two negatives from the announcement 1) the state’s increasing control of the business and 2) Mr Kim being a seller at current levels. As a result we expect profit taking in the near-term but see no change to the underlying investment case

Kazakhmys is a business that operates under a close relationship with the state as evidenced by its investment in the power grid (a 50/50 JV with Samruk) and its significant social spending initiatives including the construction of a library at a cost of $100m and continuing capital expense towards various other recreational and health facilities. This considered, we see little reason to shift our view on the underlying investment case which remains compelling relative to its peer group. Kazakhmys trades on a 2011 mark to market EV/EBITDA of 3.3x vs Antofagasta at 6.3x, but with materially higher copper equivalent growth from 2012-15 driven by the development of Bozshakol and Aktogay.

So one could argue

that Kaz

will become the state social security fund

on hand to pay for new libriaries etc

and bought by UK tracker funds

(Senior what are you rattling on about? if it edwards then I think the piece was slightly tongue in cheek)

yes

in all our pension funds

and one more bit of comment

from Collins Stewart

they aren’t worried either

But I would be

The chairman of Kazakhstan’s copper miner, Kazakhmys, has sold 11% of the total
shares in issue to the Kazakh government, which brings its total holding to 26%. We
see nothing sinister in the announcement, in our view Mr Kim is simply taking profits
from his investment, with the sale price 240% above the IPO price in 2005, whilst
the
Kazakh government is increasing its stake in the national copper champion in the light
of the likely copper supply shortages in the mid to long term

The statement also briefly mentioned the possibility for the secondary listing on the
Hong King stock exchange in 2011. Whilst we see this as a likely development,
the
appetite amongst the Hong Kong investors for the resource stocks in the FSU is
difficult to gauge at this point, with the Russian aluminium giant Rusal currently
trading at 15% below its January IPO price

What a disaster Rusal’s float has been

(Taxloss watch it pls)

it has

11:48AM

well the best thing i have seen all day is a beautifully caustic note from bracing Bruce Packard of Seymour Pierce on Lloyds

sounds interesting

particularly good as it came after this heart-warming news overnight

UK banks to pledge £1bn to venture fund
By Patrick Jenkins, Banking Editor

Published: October 4 2010 23:58 | Last updated: October 4 2010 23:58

Britain’s six big banks will next week pledge to inject something approaching £1bn into a new venture capital fund designed to help recapitalise financially stretched smaller businesses, as the much-maligned banking industry tries to make its peace with the government and society at large.

In a high-street twist on the popular BBC show Dragon’s Den, the fund would inject equity into a business, putting it on a firmer footing to then seek a bank loan. This “equity gap” has been widely blamed for banks’ reluctance to lend to some otherwise healthy smaller companies.

The measures are part of a project undertaken under the auspices of the British Bankers’ Association, and in conjunction with both the Treasury and the Department of Business. The “taskforce”, originally headed by now outgoing HSBC chairman Stephen Green, has been taken on in recent weeks by John Varley, chief executive of Barclays, and is set to report to the government later this week, following a timetable agreed over the summer.

oh yes

reheated policy from the past government

zzzzzzz

these are the banks proving their enornmous social worth…

you gotta love them

I bet they do good work for charidee too

a colleague pointed out that: “This plan was part of the govt’s July white paper Financing a Private Sector Recovery – and was first floated by the last govt – so hard to see how it can be construed as a bank initiative. It seems to me they’re simply acting on what was previously proposed. And it’s taken them at least 2 years to do so.

so what’s all this got to do with Lloyds?

basically Packard is questioning the source of their high profitability

surely he can’t mean

remember about a month ago analysts at JPMorgan estimated that the bank’s return on equity in UK retail banking could rise from 7.5 per cent last year to 33 per cent by next year – unusually high for a retail bank.

their monpolistic hold on the mortgage market

this is what he is saying

When a business delivers services that enough customers
value, the business generates excess capital available to fund
growth or return to owners. LLOY may well have wider margins
and excess financial capital, but we voice concern about the
source of this excess.
We highlight the structural challenges an incoming Chief Executive of LLOY will face
If inflation remains above interest rates, we think the new Chief Executive may
struggle to attract deposits while maintaining NIM. Lloyds customer deposits grew
1.3% year on year, helped by rule changes which meant over-50s were able to
invest £5,100 in a cash ISA, we believe.

We can get to a target price above 100p, but there are other scenarios
We struggle to value Lloyds. The bull case is well understood: rising NIM and
sustainable loans/deposit ratio. But most industries which are recipients of
Government subsidies are not known for value creation; we draw a comparison
between UK bankers and European dairy farmers.
We keep our HOLD rating and target price of 72p
We have moved our forecast for FY 2010 down to £1.8bn PBT pre exceptional
(previously £2.9bn, and consensus £1.35bn). Near-term eps movements have
minimal significance for valuation in our view. For now our recommendation remains
HOLD, TP 72p.

that the more straightforward bits of the note

then he starts to open the shoulders a little

Perhaps high market share and Government support for LLOY funding will result in
many years of supernormal profits? Much of the re-rating in the LLOY share price
came after regulators decided the Net Stable Funding ratio would be delayed, we
believe.
The first point to note is that officials from the Bank of England, including the
Governor, have repeatedly asserted that Lloyds will need to fund without the help of
the Central Bank.
A central bank should not allow its liquidity operations to become, or even to be
perceived as a source of sustained funding for banks or for any other form of
medium-term lending. The only medium-term source of commercial bank funding,
and hence for their lending, is private sector savings, whether channelled through
retail or wholesale markets. A central bank does not have access to those private
sector savings.
Source: Paul Fisher, Managing Liquidity in the System: The Bank’s Liquidity Insurance
Operations 30 Sept 2010 to the LMA Syndicated Loans Conference
But even if UK banks were to receive support indefinitely, the experience from the
other side of the Atlantic suggests this would not be a positive for shareholders. The
Government Sponsored Entities between mid 2007 and August 2010 lost $226bn
according to their regulator the Federal Housing Finance Agency. 73% of the losses
came from mortgages originated in 2006 and 2007.

This is despite at least one US politician warning that GSE subsidies would distort
the market and might cause a financial crisis, and would need to be bailed out by tax
payers when the housing bubble burst (Ron Paul, October 2005).
We highlight an extreme example of recipient Government subsidies not generally
known for their shareholder value credentials: European farmers. According to
figures from the World Bank, the European Union subsidises dairy farmers at a rate
of $913m per cow annually. In 2003 there were around 1 billion people worldwide
who scrape by on just $1 a day, while European Union cows were subsidised to the
tune of an average $2 per day (NY Times Harvesting Poverty; the Rigged Trade
Game quoted in Bazerman/Watkins).
Some of the dairy subsidies were later removed when prices rose, only to reintroduce
them when prices fell. While we believe that the UK Government was right
to step in and save the banking system, we struggle to understand why equity
investors should provide more capital until structural reform has been implemented.
Subsidies are as addictive as hard drugs.

interesting stuff

I think Joseph is looking at this

and it’s something the Independent Banking Committee should lool at

packard adds

.That is, there is a chance that the Government stake in Lloyds will be offered to the
market, at a time when the bank is reporting peak profitability but high levels of
customer dissatisfaction. We believe investors should be more concerned about the
latter.

thanks for that

and one more bit

It is very hard to think of businesses which generate a high Return on Capital
through the cycle, but where customers are unhappy with the main product. When
we canvassed opinion from friends, Microsoft Vista and “any foreign owned utility
company” were suggestions which kept cropping up. But we can’t think of any
others. Normally businesses that offer an attractive service can charge enough to
self finance growth without running out of capital.
Banking is a little different in that banks tend to be unpopular with overleveraged
customers in a recession. But we are concerned that in the first half of the year
Lloyds received more than 280,000 complaints according to the FSA (albeit this is
less than 1% of 30 million customers).

comparing lloyds to microsoft..harsh..

complaints

looks like my inbox

each day

anyway

Packard has also been looking at Barclays

busy man

which seem to be taking some pretty huge punts on the has price

have a look at this

and remember Diamond Bob is now at the helm of the whole bank

Barclays has bought 390bn cubic feet of shale natural gas proved reserves for $1.15 billion, as the exploration company, Chesapeake Energy, looks to lighten its debt load. WSJ suggests that for Barclays, the purchase amounts to a bet that gas prices will remain steady or rise, allowing the bank to sell the gas at a profit. Barclays stands to benefit should gas demand recover or if drillers reduce their activity because of low prices.

Other large banks, including UBS and Goldman Sachs have made similar acquisitions of energy assets as they have expanded their commodities trading operations. Many banks are active in both the physical and futures markets.

Comment: no doubt Barclays will say that this transaction is “hedged” as is not just a punt on the price of natural gas. But it does give fuel to those who think that if commodities become the next bubble, if/when things go wrong, it shouldn’t be taxpayers (implicitly or explicitly) who are subsidising this.

Barclays PLC (BARC:LSE): Last: 299.35, down 0.45 (-0.15%), High: 303.00, Low: 298.50, Volume: 8.83m

interesting I thought

there’s a big piece on the punt in the WSJ

sorry

we seem to be having some tech issues

the page not refreshing and no comments coming up

an in no way does that represent casino banking

of course not

mmm

back again i think

good

bruce packard is apparently English, Neil says…whart kind of english person names their son bruce

11:59AM

Right it’s past midday

I we still haven’t mentioned a dozen or so small cap oil stocks

so we must push on

first back to the FTSE 100 and the biggest riser today

TUI Travel Plc (TT.:LSE): Last: 227.40, up 10.6 (+4.89%), High: 228.00, Low: 220.10, Volume: 1.65m

upbeat trading statement

(taxloss..i thought was pretty extraordinary that the AIA float is not raising much more than the Pru offer..they should have snapped the Pru’s fingers off when they came courting)

and here’s what the Citi likes

Tui Travel has released an upbeat trading statement
Post the recent bearish update, the company seems more confident with the
Summer 2010 programme almost sold and the Winter 2010 and Summer 2011
programme having started well. Full year guidance remains unchanged and the
net debt number will be better than previously guided (we now expect just over
£400m). In addition the company will be reviewing its cost base in the UK.
Trading improves in August and September

Winter 2010 and Summer 2011 start well
Winter 2011 is now 30% sold and capacity is expected to be broadly flat. Total
sales are strong up 23% in the Northern Region and 12% in Germany and prices
are also strong, up 5% in the Northern region and 1% elsewhere. Early Summer
2011 bookings are also encouraging although the programme is only 10% sold at
this stage. Bookings are up 5% in the UK and 18% in the Nordic region.
Positive read across for Thomas Cook
These trends reinforce Thomas Cook’s positive update last week which was
overshadowed by the £10m of extra costs announced. We think both updates
indicate that trading trends have improved for the industry as a whole.
Earnings achievable but valuation fair
We think earnings forecasts in 2010 and 2011 are achievable for Tui Travel.
However, trading on 9.2x 2011e P/E and without a clear catalyst for re-rating, we
think the stock is fairly valued.

as for Man Group

not sure of the reason for the bounce

Man Group Plc (EMG:LSE): Last: 224.70, up 7.1 (+3.26%), High: 224.90, Low: 216.80, Volume: 3.16m

am checking though

well maybe the more positive noise on the hedge fund sector’s performance in september

i could be that

so any raw around today..more meaty than the quorn on offer yesterday

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.

there is one bit

but it’s oil

and in Kuridstan

however

it’s not

The next supermajor, potentially sitting on 60bn barrels of oil in Kurdistan. Loved by muppets across the globe.

Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 142.75, down 1 (-0.70%), High: 146.75, Low: 140.50, Volume: 1.15m

but something called DNO in Norway

talk that there biggest shareholder, RAK

is doing a fund raising and the proceeds will be used to make an offer for the company

while we are talking M&A

Citigroup are also talking down the chances of a bid for Burberry

Burberry Group PLC (BRBY:LSE): Last: 1,014, down 12 (-1.17%), High: 1,028, Low: 1,013, Volume: 343.44k

Takeover speculation: little rationale — Recent media speculation of private equity
interest has pushed shares above the £10 mark on 24/9. We do not see much
strategic and financial rationale for private equity money to enter so late in
Burberry’s transformation story. Management is now in the execution phase and
has already rejuvenated the brand, modernised the supply chain, removed some
historical costs and announced most key strategic initiatives (China, Spain, Japan
etc). Likewise, we struggle to find strategic rationale for PPR and LVMH to add
another soft luxury brand to their portfolio, notwithstanding the difficulties these
conglomerates have historically had in creating value from M&A.

Positive news priced in, Hold rating — Shares trade on 20.5x calendar 2011e P/E,
at a 10% premium to the peer group (vs. 10-15% historical discount), we believe
partly justified by the margin expansion potential and the announcement of
initiatives aimed at controlling and enhancing the brand globally. While we see
upside risks from a long-term, growth story, we believe the short-term positive
newsflow is largely priced in. We do not see multiple expansion potential nearterm
unless Burberry delivers significant margin progress ahead of schedule. Hold
rating maintained, target price raised to 900p from 835p to reflect sector peer
group re-rating.

(NJS – yes this could be athreat to charity stores…but have you noticed that in many charity stores, the hardbacks are cheaper than the soft-backs..the hardbacks are harder to shift apparently)

(Marcus

)

any more stock specific stuff neil

in the small cap world there is

but it’s all oil

and I know some people

aren’t terribly keen on the subject

but what the hell

but you have them over a barrel anyway

here’s some reflections of yesterday’s news from Encore Oil

Encore Oil Plc (EO.:LSE): Last: 129.75, down 5.25 (-3.89%), High: 137.00, Low: 127.00, Volume: 3.54m

from the sector watcher

Encore scored another big success in the North Sea yesterday afternoon with a second successive sidetrack well on the Cladhan discovery beating expectations. The 210/29a-4Y well, in which EO has a 16.7% interest, reached TD of 9,643 feet, encountering 258 feet of gross and 108 feet of net additional oil pay, taking the total for the discovery and 2 sidetracks to 425 feet gross. Moreover the well did not encounter the oil water contact, suggesting further potential upside. Describing it as an “excellent result” was no exaggeration by CEO Alan Booth. Whilst it was still too early for him to give explicit reserves guidance, we understand that oil in place could now be nearer the P10 estimate of 235m barrels than the P50 total of 90m barrels

Assuming healthy recovery factors we see ultimate recoverable oil of up to 100m barrels, and we would stress the possibility for further upside – additional appraisal drilling is expected before year-end which could feasibly double this number. Moreover a four-well exploration programme is about to commence on the licence containing the Catcher discovery (EO 15% interest), targeting 147m barrels gross (22m barrels net). I’d value the Cladhan/Catcher discoveries to date, using NPV12% of $12/bbl, plus cash, at just over 100p/share, vs an all-time closing high yesterday of 135p/share. Hence although the price looks pretty full, there is clearly still material exploration upside, as well as the possibility of Premier Oil bidding for the group, as suggested in last week’s press. Whilst I wouldn’t be piling in at these levels, I certainly wouldn’t be selling the shares

and a bit on Bowleven too

Bowleven – BLVN LN
We’ve upgraded our NAV and target price for BLVN following last week’s news that Vitol has revised its farm-in arrangements with the group. Although the new arrangement leaves the company less well-funded than would have been the case had its partner exercised the original option, it values MLHP-7 alone at over US$325 million (gross) or US$25 million more than the implied valuation of the entire Etinde permit under the previous arrangements. In the event the IE and IF fields prove to be commercial, there is also a smaller transfer of value away from Bowleven. On balance, then, we like the new deal. Assuming the IE and IF fields offshore Cameroon contain 55mmbbl and 82 mmbbl between them and have a 65% chance of being successful, we estimate Bowleven has an NAV of 208p/share using an oil price of US$70 flat real and a 15% discount rate. We are raising our target price to this level from 193p/share and maintain our recommendation at BUY.

BowLeven PLC (BLVN:LSE): Last: 178.50, up 2.5 (+1.42%), High: 179.00, Low: 175.75, Volume: 402.25k

(And Rudi I have some notes on Hawk if you want to mail me – neil.hume@ft.com)

(foxie..that was a very mysterious..a bit bloody particularly for a company that high ideals. maybe it was a falling out of the founder of the microfinance group and the outsted chief executive)

12:08PM

And just going back to POG for a moment

Petropavlovsk PLC (POG:LSE): Last: 1,082, down 1 (-0.09%), High: 1,095, Low: 1,068, Volume: 1.10m

I am picking up vibes

that the list of their iron ore business in Hong Kong is not going to well

In fact it is all proving a bit of struggle

and on top of all that

there’s a sitte visit tomorrow

(foxie…apologies..that is what you get for asking about SKS from an ex-Mumbai correspondent)

and it will be interesting to see if the company

is sticking to its hugely ambitious H2 production forecasts

here’s a note on that

from Canaccord

Event
Petropavlovsk is hosting a site visit to its gold and iron operations in Far East Russia scheduled from 6-11 October 2010.

Key issues
We thought it would be useful to re-visit what we believe are the key issues before making the trip in order to provide a reference point for any new information that might arise.

We are lowering our gold production estimate for the second half of this year from 515,000ozs to 450,000ozs with the full 76,000oz difference coming from Q3 production. We understand operations remained without access to the high grade material in either pit until right at the end of the quarter.
This leaves our gold production estimate for the year at 615,000oz, a number that we think is now balanced in terms of risk to the upside and downside but is significantly below the low end of company guidance of 670,000ozs and our previous estimate of 680,000ozs.
Our market-based value for the magnetite resources suggests a market price of US$809 million for ILC Limited pre money and before any discount for pre IPO investors.
Our target price for Petropavlovsk remains £15.50/share, which is after a 50% haircut on our NAV at spot gold prices with a 5% based NPV.

they don’t believe the forecasts

and nor do I

12:10PM

Ok Tony

anything else you want to look at?

well i liked a note on divis from markitt…..

(Tuna. Bryce is in Canada and according to a tweet earlier this morning in some gentleman’s club, which I think was a joke).

they are pretty rich on the FTSE 100 at the moment

. Given the clouded economic outlook, the country’s changing demographics and the fact that dividend yields in the UK have risen above the income offered on government debt, it is easy to understand the renewed interest in dividends.
The most commonly touted stocks are defensive FTSE 100 stalwarts like Royal Dutch Shell, AstraZeneca, Vodafone and GlaxoSmithKline, all of which have solid yields, impressive dividend histories and safely covered payments. According to Markit data for the forthcoming year the FTSE 100 is forecast to yield 4% compared with 3% for the FTSE 250*.

(Money – Tui has been covered)

However the relatively low yield forecast by Markit for the FTSE 250 is partly explained by the large number of companies in the index which either do not pay any dividends or have yet to resume payments after forgoing them during the financial crisis: 7% of the FTSE 100 is not expected to pay any dividends within a year compared with 19% of the FTSE 250. In fact, there are six FTSE 250 stocks which are currently forecast to yield more than the highest-yielding FTSE 100 stock, RSA Insurance Group Plc at 7.6%. Being a function of both price as well as the dividend level, these high yields are also reflective of the fact that the stocks have fallen out of favour in the financial markets on fears that profitability could fall. However, with the exception of Drax, these companies were all able to resist cutting their dividends during the market downturn despite seeing profits decline, and Markit expects that they will continue to stave off any pressure to reduce their distributions.

its six divi stock picks are

Cable & Wireless Communications Plc: forecast to yield 9.3%*
The Group has confirmed its intention to pay $0.08 in dividends this year following March’s demerger. Trading has improved in most regions against a backdrop of improving economic conditions, although the Caribbean region saw a sluggish first quarter. Beyond this year, Markit expects the Group to keep its payments flat, taking into account the slow rate of profit growth which is expected and the already high payout ratio.
Brit Insurance Holdings NV: forecast to yield 8.9%
Brit Insurance held its interim dividend level when reporting its first half results and Markit’s expectation is that the full-year payout will also remain flat. Pre-tax profits for the first half of 2010 were up on last year and the Group states that it is on track with its preparations for Solvency II. Further, Markit expects dividend growth next year, albeit at a very conservative rate of 3%.
Provident Financial Plc: forecast to yield 8.4%
Provident Financial has a generous dividend policy, targeting a payout ratio of 80%. In recent years, however, a dip in profits has pushed this metric towards 90% as the Group has held its dividend level constant, and the Board intends to maintain dividends until profits recover to the extent that dividend growth can resume.

Provident Financial Plc: forecast to yield 8.4%
Provident Financial has a generous dividend policy, targeting a payout ratio of 80%. In recent years, however, a dip in profits has pushed this metric towards 90% as the Group has held its dividend level constant, and the Board intends to maintain dividends until profits recover to the extent that dividend growth can resume.
Drax Group Plc: forecast to yield 8.3%
Drax has a very chequered payout history but has recently revised its dividend policy to target a 50% payout ratio Markit is forecasting the 2010 annual dividend level to almost double to 30.0p. However many are negative about the outlook for UK gas prices going forward meaning earnings are currently predicted to drop almost 20% next year, which we expect will be matched by a similar drop in dividends.

Catlin Group Ltd: forecast to yield 7.9%
Catlin has been able to deliver dividend growth in recent years and despite an expected drop in profits this year the Board decided to increase the interim dividend by 5% in August. Markit expects that the Group will continue to increase its payouts, albeit at a more conservative rate. Even when factoring in the drop in earnings, Catlin’s dividend will be covered relatively comfortably for the sector.

12:13PM

Okay, that’s it for today

but before we go

a couple of things to mention

remember that Frankenfish company?

nope..searching for fish now on the wires

it’s Aim listed company

that can produce GM salmon

now in spite of being close to getting the approvals to sell the fish to the public

(ptolemy..sure..neil will post it…there was not much more of it though i have to say)

it’s done a little fund raising that will see an exisiting shareholder

become a majority shareholder

all very weird if the prospects for this company were so great

AquaBounty Technologies, Inc. (AIM: ABTX), a biotechnology company focused on enhancing productivity in the aquaculture market, announces that the Company is proposing to raise approximately £3.18 million (c.$5.0 million) before expenses by means of a subscription (the “Subscription”) of new Common Shares (the “Subscription Shares”) by Linnaeus Capital Partners B.V. (“Linnaeus”). This is conditional on the Company obtaining shareholder approval at a General Meeting to issue the Subscription Shares and to waive the requirement for Linnaeus to make a mandatory offer for the Common Shares not otherwise owned by it.

(excllent – seniormuppet)

As at today’s date, Linnaeus owns 15,107,740 Common Shares, representing 29.95 per cent. of the Existing Common Shares. Following the Subscription, Linnaeus will hold 32,774,406 Common Shares, representing 48.12 per cent. of the Enlarged Issued Share Capital. Linnaeus has confirmed that it wishes to see the Company retain its quotation on the AIM market.

The effect of the Resolutions will principally be to allow Linnaeus to acquire a shareholding in the Company in excess of 30 per cent and to do so without the need to make an offer to Shareholders for the remaining issued Common Shares and those under option or subject to a warrant. The Resolutions will also authorize the Board to issue the Subscription Shares to Linnaeus without first offering them to all Shareholders pre-emptively on the terms set out in the Certificate of Incorporation.

all very strange

and I have also been told to keep an eye on STV

STV Group PLC (STVG:LSE): Last: 118.00, up 13 (+12.38%), High: 122.00, Low: 104.00, Volume: 176.23k

moving on this

Google tv announces partners. No mention of Stv here but stv have already sold 2500 hours of programming via google to you tube. this bunch of partners increases likelihood of its success as a platfrom

12:17PM

just on the fish. ii remember george graham, the former head of lex and now member of the corporate strategy team at rbs was very keen on salmon fishing..produced a chart one day that the farmers use to decide what colour the salmon should be..apparently you get can any shade of salmon you want)

we are done

that’s for logging on today

time to call it a day…have managed to avoid too much discussion about the australian cricket team

thanks for having me again..it has been an honour

the pleasure was ours

and thanks rable for joining in

(monkey – or the chemicals they put into the food)

cya tomorrow

bye

This entry was posted by Neil Hume on Tuesday, October 5th, 2010 at 11:02 and is filed under Uncategorised. Edit this entry.

Share Print

Markets Live transcript 5 Oct 2010

Popular posts

Most commented

Tags

Blogroll

Site Navigation

Categories

The Cut by date

Jump to day