FT Alphaville » Markets Live transcript 25 Oct 2011

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Markets Live transcript 25 Oct 2011

Posted by support on Oct 25 11:03.

Markets Live chat transcript for the chat ending at 11:27 on 25 Oct 2011. Participants in this chat were: Bryce Elder/FT Tony Tassell

Good morning

And welcome, once again, to Markets Live

Alphaville’s daily live markets thing.

(I should really put more work into these intros)

Joining me today, as we’ve been De-Humed once more, is Tony.

Guten Morgen, Bonjour, Buongiorno, buenos días. Kalimera

Yo.

good to be back again

as the half-term stand in for a few days

We’ve an office full of youngsters and harassed-looking parents of toddlers at the moment.

and a fine morning it is awaiting the coming of the big bazooka

Yeah – tomorrow’s the big day.

hungry hippo – au contraire..lots of interesting things about today to look

(Hm.)

rapacious banks, the BP bounce, and lots and lots of euro speculation

So where to start. The top?

go for it Bryce

11:07AM

OK! So we’re up again.

That’s a 10 point rocket

yeah..we are trying hard not be depressed today

we have signed up to the glee club

FTSE’s up at the heady highs of a 5558

the rosy sunglasses are on

Been as high as 5574 earlier

my my

On results, pretty much.

who can doubt this rally

Rugrat asks how much of the FTSE is BG and BP ….

And, to answer, it’s 13 points today.

So, they’re the rise.

equal to qute a few russians presumably

what did you make of BP?

Well ……

On the face of it, decent numbers

And, more important, it’s another step towards rehabilitation

when you starting raising divestments targets and plotting cash backs, it is usually a sign of an absence of strategy

that is not necessarily a bad thing

Well, true.

focusing on returning cash to shareholders is pretty good

and we have seen how all those grand corporate strategies fall awry

and if you are lucky and the absence of strategy continues, there is a good chance of break up…

I’ve seen plenty of commentators getting tied up about what Dudley should be doing.

Splitting upstream and downstream, for example.

Which, as you say, may happen.

an old colleagueused to tell me a lot that nature abhors a vacumn…in the absence of strategy, ceos need to do something to justify their existence and pay packet

Though, as a counterpoint, companies are always loathe to break up.

They’ll build, but they’ll rarely split.

Even when it’s patently the right thing to do.

well they have been splitting a lot more recently, particularly in the US and particularly in this sector

(@Jarvis2009: that’s a rather neat and inventive way of blaming the press.)

(We encourage hopeless acquisitions by giving deals publicity. I like it.)

(itzman..could not agree more..look at what Michael Dobson has done for years with the Schroders cash pile..nothing)

Anyway, returning to today …..

have you seen any analyst reaction

Sure. So results beat by 9% or thereabouts.

Target asset sales up 50%.

Divi to be reviewed.

Milky: yellow.

Here’s UBS with the summary.

BP reported clean net income of $5.3bn, beating UBSe of $4.99bn by 7% and consensus by 8%. Earnings were down 4% y/y and 5% q/q. Operating profit ($8.1bn) beat by 5%, led by better than expected upstream earnings. The dividend was as expected at 7c/share. An additional $0.6bn (pre-tax) charge for Macondo was announced, bringing the total pre-tax charge to $41.3bn. The outstanding liability is $6.6bn. The $4bn contribution from Anadarko is to be recognised in 4Q.

Of more interest in our view was BP’s announcement that this marks a “turning point” for operations and production. BP has increased its disposals target to $45bn
from $30bn previously (new target includes the previously announced refinery sales). $26bn of sales has been announced so far. We think this increase in realising NAV will be taken positively by the market. BP is now targeting a 50% increase in operating cash flow by 2014 from 2011 at $100/bbl, which looks consistent with our targets. Production looks on track to hit/beat the 3.4Mboe/d FY target.

Upstream earnings of $7.1bn were an 8% beat on better gas realisations and a lower exploration charge. As expected, production was down 10%, largely on
lower GoM production and disposals. R&M earnings of $1.7bn were a 3% beat vs. consensus, flat y/y. Capex and net debt in 3Q were both a little lower than UBSe.

at least BP did not trot out the inflexion point line…its a turning point instead

The phrase that crossed my mind reading the statement

Was “drawing a line” ….

under the tar sand?

Possibly. I’m not sure people still say “drawing a line”

After Spitting Image did John Major on it.

Anyway, some more comment.

please go ahead..you were segueing into dangerous territory there…john major

Here’s Fred Lucas at JP Morgan ……

Who, if he’s not the top rated analyst in the sector, he should be.

Backdrop to results – BP shares have generated a £ YTD 2011 return
of -3% – this compares to -7% from the European market, +5% from the
European oil & gas sector and +13% from RD Shell B. So, BP has
underperformed its closest peer and the sector. We note that BP averages
a quarterly earnings surprise of +4% and a Q3 average surprise of +9%.
Alongside BG Group (+5% beat), BP is the first of the European
integrated companies to report Q3 2011 results. The oil price is stable
overnight with Brent 1-month trading $111 per barrel.

Headline results – BP has reported Q3 2011 headline replacement cost
earnings of $5,140m. Adjusted for non-operating items and fair value
adjustments of -$187m, underlying Q3 2011 earnings are $5,327m. This
is 8% above the market consensus of $4,955m and 11% above our
estimate of $4,800m. BP usually beats Q3 consensus by 9% (see chart) -
so today’s earnings beat is close to that trend level beat. 9M 2011 EPS of
around 55.8 pence is around 78% of FY 2011 consensus (source IBES)
of 71.4p (81% of JPMe 69p) – so supportive of that figure. The Q3 2011
DPS is, as expected, 7.0 cents.

Key Q3 2011 segment earnings variances – Upstream – clean EBIT of
$7,090m is 12% above our forecast of $6,331m and 8% above the
consensus of $6,570m. Production averaged 3,319 kboepd, a Q3-o-Q3
decline of –12% as per our forecast decline of -12%. Q4 production is
guided to be higher than Q3. Downstream – clean EBIT of $1,666m is
very close to our forecast of $1,663m and 4% above the consensus of
$1,610m. Refinery availability averaged 95.3% versus 94.8% in Q2 and
93.9% in Q1 2011. The statement refers to a stronger performance in
supply & trading and the benefits of feedstock optimization, partly offset
by adverse FX. The statement guides for lower turnarounds in Q4 versus
Q3. Other Business & Corporate – clean EBIT of $(406)m is very close
to our forecast of $(400)m and the consensus of $(390)m. Consolidation
Adjustments (CA) – $(213)m is more negative than our forecast of $0m
and the consensus of $(70)m. Core EBIT excluding CA of $8,756m is
7% above the consensus of $8,180m. The underlying effective tax rate in
Q3 2011 is 31% versus consensus 33%.

Other features of note – Divestments – Disposal agreements totaled
$26bn by end Q3 2011. BP has confirmed another $15bn of divestments
(incremental to the $30bn program that is almost completed) by end
2013. Specific assets include the Texas City and Carson refineries in the
USA. Gearing – BP ended Q3 2011 with net debt of $25.8bn (versus
$27bn at end Q2 and $27.5bn end Q1 2011) and a gearing ratio of 19%.

rightly said fred

He remains positive.

Comparative valuation highlights under-valuation – As further
evidence of the market’s continued negative bias, BP’s valuation
continues to languish. For example, we measure a 2011E PER and
EV/DACF multiple of just 6.3x and 4.6x respectively versus RD Shell
8.8x and 6.5x respectively. BP trades at a 45% discount to our SOTP (see
chart on first page) versus RD Shell’s 13% discount. On a downstream
adjusted basis, BP trades on a proven reserve multiple of $5.2 per boe
versus RD Shell $10.5 per boe. Interestingly, if we also exclude any
value / proven reserves for BP’s stake in TNK-BP, BP also trades on just
$5.2 per boe. We remind that BP’s non-core asset sales have realized an
average proven reserve multiple of $11.3 per boe.

And, to round up this BP fest, let’s find a negative voice.

Or at least a cautious one.

Collins Stewart.

We agree that these announcements are a reinforcement that in BP’s words, it has reached a turning point for operations and production. However, we think it important to see them in context. While the increase in disposals guidance (from $30bn) is a clear positive, we are much less convinced by the target on cash flow.

BP is targeting 50% growth in cash flow from 2011-2014, but 1) around half of this growth will come from the absence of spill fund contributions post-2013 (the remainder from a recovery in the US Gulf & new startups) and 2) it is unclear what the target implies in absolute terms and there is no hard (ie $bn) target. The uncertainty comes from what the assumed 2011 base is. We know it includes all spill contributions and working capital changes – YTD, these have been a big ($11.5bn) negative, after which YTD cash flow is $17.1bn. We would expect cash flow in 4Q to be around $7-8bn including w/capital movements, implying FY11 cash flow of $24-25bn. 50% growth from this base would take cash flow to an implied level of c.$37bn by 2014 at $100/b; this is pretty consistent with our existing forecast of c.$35bn at $90/b, and we do not believe it implies any significant upgrade to consensus estimates.

BP stated that around half of its cash flow growth will go towards capex. This supports our existing view that capex will rise towards the $25bn level from 2011’s c.$19bn. Nevertheless, free cash flexibility still looks good, especially post-2013, reinforcing BP’s confidence on long-term returns of cash to shareholders: BP stated that distribution plans are to be adjusted in line with the improving results in February 2012.

Good note, that.

Ok – I think we’re done on BP …..

yep…i have had my fill

Let’s take a break from oils

We’ll come back to BG later.

banks or strategy?

Let’s have some overview. Tell us we’re all doomed, Tony.

11:22AM

well there have been a few more positive notes out today

no one really knows what is going on but a fwe have put a more positive slant on it

who knows they might be right..am trying not to be depressed today

ok here is Andrew Garthwaite of Credit Suisse

never described as a styling when it comes to using language

but there is a lot of number crunching going on behind his conclusions obviously

There are almost as many questions as answers. Three issues are being addressed: bank recap (but this is about half of what is required, raising the concern that RWA fall), Greek solvency (an 84% PSI is enough to get to a 90% government debt-to-GDP ratio, but the deal could be very complex and lengthy) and a ring-fence for Italy and Spain. We think that releveraging via the EFSF as an insurance scheme and a SPV partly funded by the IMF/BRICs is the most sensible plan. We believe the scheme has to be cEu1.2trn to meet funding requirements of the periphery until mid-2013 (when the ESM starts). Our bond team highlights that excluding Italy and Spain there is just Eu200bn of guarantor capacity and believe into a crisis the guarantees risk being downgraded.
To be effective in the long run, two very simple issues have to be addressed: growth in Europe and mutualisation of liabilities. Since formal mutualisation takes too long (even with qualified majority voting), then the only alternative is informal mutualisation by the ECB expanding its balance sheet. Without growth, Italy risks moving from a liquidity to a solvency problem: i) Euro-area PMIs are consistent with zero growth; ii) fiscal tightening in 2012E is 1.2% of GDP; iii) banks are likely to reduce RWA; and iv) Italy and Spain, the 3rd and 4th largest economies in the Euro-area, need a 5-10% fall in wages to regain competitiveness. At a minimum, we believe the crisis in the periphery will not end until there are current account surpluses (only Ireland has that) or clearly cheap currencies. We believe that the ECB has to expand its balance sheet to weaken the Euro and thereby create growth (each 10% off the Euro adds 0.7% to GDP growth). The ECB has to be the ultimate backstop to the periphery.

Investment conclusions: don’t short equities yet (most tactical indicators are supportive still, macro surprises have turned positive for the first time since April, and QE3 talk is stepping up). Stay underweight continental Europe in dollar terms: it’s not cheap enough to compensate for worse economic and earnings momentum, in our view (in local currency terms, we are more positive as we believe that the euro should fall). Within Europe the preferred risk trades: dividend swaps (discounting a 35% fall in dividends by 2015E), insurance (Axa, Aviva), DAX (Heidelberg Cement, BMW), domestic Germany and Italy. The risk trades we would be selling are: expensive cyclicals (hotels, capital goods, retailing) and those stocks that have outperformed but still look expensive on HOLT (Saipem, Bilfinger Berger).

and here are some views of Erik Nielsen of Unicredit

the former goldmanite

a bit more positive

the words turning point are trotted out..i warn you

In the terms of timing, the Ecofin meets at 9am, which is followed by a meeting of the Eurogroup. The heads of state (of all 27 EU members) will meet tomorrow evening to seal the deal. With nothing being straight forward among so many participants it is probably going to be well into the evening before the white smoke emerges from the chimney.
I maintain my view that the package is likely to represent the turn of a corner in the European debt crisis, but it will not be a “one strike, the crisis is over” sort of thing, simply because there is no such strike available to policymakers. This imply some risk that there’ll be disappointments late tomorrow. But ultimately, it is a matter of confidence, and as in all previous debt and financial crises, confidence returns gradually on the back of the sum of several policy measures, not on the back of one set of decisions. The key is to convince the market that policymakers can and will do what’s necessary, and here the Europeans have a more complicated task than most others.

sorry turn of the corner..not turning point

The key problem the Europeans face is that markets still seem to favour less balance sheet adjustment, easy money and negative real rates over faster balance sheet adjustments and positive real real rates – and the Euro-zone is going for the latter. Part of the reason for this conundrum is market participants’ mis-judgement of the extent of short term growth pain coming from fiscal tightening, relative to the longer term benefits of such faster fiscal adjustments. My former colleague, Ben Broadbent, now at the UK MPC, co-wrote a very good piece about a year ago showing empirically that the negative growth effect of fiscal tightening does not need to be that dramatic, and may even be positive in some instances. Ben used his interview in the FT yesterday to reiterate that point. I wrote on the issue of how markets seem to evaluate different balance sheets and degrees of fiscal tightening two weeks ago – illustrating my point by comparing Italy with the UK – and today’s FT’s Lex column discusses the same issue by comparing France with the UK. Why investors seem to prefer negative real rates (e.g. in the UK sovereign market), i.e. a virtually guaranteed erosion of wealth, over positive real rates (e.g. on the Continent) beats me.

But make no mistake about it: The Continental Europeans are not about to shift away from balance sheet adjustments, and until the market gets the message that this is good for the long term, there will be measures to cope with the “investor strike”. With respect to the fundamentals, look out for two things tomorrow:
1. First, there is now agreement to work towards a change in the treaty to make budget adjustments enforceable in the European court of justice (with automatic sanctions kicking in if anyone breaches the agreement). This is not going to be easy, and it’ll take quite some time to get there, but I am pretty sure that that’s where the Euro-zone will be going. Very likely, this will end up as a treaty between the Euro-zone only, but that’s a topic for another day.
2. Second, after huge pressure, it is likely that Italy will announce a series of measures on the structural side tomorrow. The fiscal side has already been addressed (for now), but Italy needs to unleash its growth potential, and the rumour mill has it that Berlusconi will announce a package of structural reform measures tomorrow. Its never easy, but peer pressure inside the Euro-zone does work.

More specifically for the package, Nielsen reckons tomorrow’s deal will include three components

■ A ring fence around Greece. On the back of the paper my colleagues Tullia Bucco, Luca Cazzulani and Gillian Edgeworth published last week – in which they estimated that Greece will need on the order of EUR175bn to be out of the market for the next five years – I suggested that the haircut might be in the upper end of the 30%-50% range. Since then, it has appeared that policymakers may want to keep Greece out of the market even longer, maybe to 2020, which – obviously – raises the price and hence the need for greater participation by the private creditors. The press now talks about 60%. I suspect that there is no agreement on this year, but I think one has to welcome as tall a ring fence as possible, even at the price of greater haircuts. The key issue here is the CDS the risk of them getting triggered – and if so, knowledge about where the losses sit.

■ Bank recapitalisation seems to have been agreed. The press consistently reports that tier one capital needs to get to 9% by mid-2012, and that this implies about EUR108bn in new capital. In a macro sense, this would be peanuts under normal circumstances (1% of GDP), but these are not normal times, and such a requirement might well lead to severe balance sheet shrinkage in some instances. Policymakers are quoted as saying that there will be measures to prevent such a response; I have no idea what they are talking about! I – and others – have argued consistently for more liquidity in parallel with the recap. Ideally, a “Liquidity Tarp” from the ECB worth half a trillion or so (i.e. the ECB forces all banks to take liquidity against the collateral the ECB insists is out there) and a similar sized temporary interbank guarantee would do wonders. Unfortunately, I don’t think we’ll get it tomorrow – and that may be the missing part causing market disappointment.

■ The EFSF will be levered to get some EUR700-800bn in effective firepower. There are lots ideas being discussed – the more innovative ones include substantial money from sovereigns outside the Euro-zone, but I rather doubt that we’ll go there. My money would be on something less fancy with the IMF (hopefully) involved. There will never be infinite amounts of money available, and while I would favour the illusion of infinite money (i.e. ECB access), an EFSF of EUR750bn and the IMF, even with present resources, get us to about a trillion, which is not a trivial amount of money. Indeed, its enough to take Italy and Spain out of the market for two years, if needed, with money left for other good things.

Ok. Cheers for that.

the counter view i thought was really excellent col today in the paper by Oliver Sarkozy

yes he is related to that Sarkozy…but dont hold that against him

his half-brother it seems

Really?

absolutely mind boggling numbers

At issue is the overall size of Europe’s banking system and its reliance on the wholesale funding markets. With $55,000bn in assets, the sector is more than four times the size of its US counterpart. As a result, Europe’s banks are primarily funded by the wholesale markets, a much less stable source of financing than deposits. At roughly $30,000bn, the sector’s reliance on wholesale financing markets is roughly ten times that of the US.

Europe’s impending liquidity crisis requires urgent action to avoid the consequences of a collapse in the European and global financial systems. The parallels to 2008 when governmental inaction brought us close to a system-wide collapse are too stark to be ignored.

Europe’s unsecured bond market was closed in the third quarter to all but a few issuers, demonstrating the unreliability of such sources of funding. Limited access to wholesale markets requires European banks to repay these debts as they come due from internally-generated sources of cash (as opposed to issuing new debt as prior borrowings mature). Assuming a three-year average life to the $30,000bn in wholesale funding outstanding, the European banking system needs to generate over $800bn in cash per month to fund maturing obligations. This is unsustainable.

so its basically credit crunch redux

He’s an absolute spit of his brother.

http://money.cnn.com/galleries/2009/fortune/0910/gallery.just_missed_40.fortune/5.html

The European banking system needs to generate over $800bn in cash per month to fund maturing obligations.

but the market has been closed for the Q3

how long can that continue

so the risk is that the big bazooka tomorrow will not be enough to instill confidence enough for banks to start lending to each other

and for compliance officers in financial institutions to start allowing more counterparty risk

and the credit crunch continues

…. Actually, he’s three parts Nicolas Sarkozy to one part Alec Baldwin.

(Can you tell I’m bored with eurochat? Sorry, rabble.)

the genes must run deep

Right. Let’s push on.

lets do..apologies for the euro ramble

It’s all just waiting for the anvil to fall, frankly.

We all know the anvil’s going to fall, and we’re quite sure who it’s going to land on.

I’m just getting a bit fatigued by speculating what kind of mess it’ll make.

11:34AM

there must be some comic material in the big bazooka meme…at least a name for a burlesque dancer

Hm. I’ll let ROTR run with that idea.

In the meantime, banks?

sure..i am always good to talk banks….have been building up steam on this

So, UBS.

another turning point?

or a turn in the road?

the market seems to like the results..or it might just be the broader market

Well, they’re better by a tad than forecasts.

UBS reported better than expected third quarter net profits of more than SFr1bn ($1.13bn), in spite of a massive unauthorised trading loss that cost the group SFr1.85bn. The Swiss banking group’s earnings compared with analysts’ estimates of around SFr300m, but were distorted by a large number of one-off items, complicating comparisons with previous periods.
The results were also better than the bank’s own indication earlier this month, issued in response to the discovery of a $2.3bn unauthorised trading loss at its London equity derivatives operation, that it would make a “modest” profit in the period.
Third-quarter earnings were flattered by a higher-than-expected SFr1.77bn gain booked on changes to the value of the bank’s own debt, as well as a slightly lower-than-expected SFr387m in restructuring charges.
Group pre-tax profits of SFr980m compared favourably to the SFr818m made in the same period last year. At the net level, the year earlier results had been boosted by a surprise SFr825m tax gain. By contrast, UBS paid SFr40m in tax in the third quarter of this year.
Shares in UBS rose 2.15 per cent to SFr11.38 in early Zurich trading.

http://www.ft.com/cms/s/0/af6f8064-fecf-11e0-9b2f-00144feabdc0.html

But it’s still a broken brand an investement bank that’s demonstrated it’s not fit for purpose.

So, if you want to buy into that story, that’s your call.

Shares are …. up 2.2% at pixel

11.39sfr in the middle.

they seem to have identified what went wrong in their trading scandal losses

had their best people on it…

and this is what they have come up with

BS updates its 2010 financial controls assessment

Following the discovery of the unauthorized trading activities that UBS announced in September, management has determined that certain internal controls were not effective on December 31, 2010, but at the same time has reconfirmed the reliability of the financial statements included in UBS’s 2010 annual report. The financial effect of the unauthorized trading activity is fully reflected in UBS’s third quarter 2011 financial report.

As a US-listed company, UBS is required under the Sarbanes-Oxley Act to evaluate the effectiveness of its “internal control over financial reporting” and “disclosure controls and procedures” on an annual basis. Following the discovery of the unauthorized trading activities, management has determined that these controls were not effective on December 31, 2010. In a document submitted to the US Securities and Exchange Commission (SEC), we have identified two control deficiencies: (i) the control requiring bilateral confirmation with counterparties of trades within our Investment Bank’s equities business with settlement dates of greater than 15 days after trade date was not operating, and, when such trades were cancelled, re-booked or amended, the related monitoring control to ensure the validity of these changes had ceased to operate effectively, and (ii) the controls in the inter-desk reconciliation process within the Investment Bank’s equities and fixed income, currencies and commodities businesses to ensure that internal transactions are valid and accurately recorded in our books and records, including controls over cancellations and amendments of internal trades that require supervisor review, intervention and resolution, did not operate effectively. We have taken and are taking measures to address these control deficiencies.

Investigations are ongoing, and management may become aware of facts relating to the Investment Bank that cause it to broaden the scope of the findings described above and to take additional remedial measures.

freudian slip..i left the u of the ubs and it came out as bs

…. “certain internal controls were not effective on December 31, 2010″

Oh. Right. Fair enough then.

genius piece of investigation

but what really is striking is the comp ratio

up to 90 per cent as my colleague Megan Murphy points out

UBS trotting out the “competitive market for talent” line to justify a 90 percent comp ratio in the IB this quarter.

Sigh.

so if pay and bonuses have gone up..who bears the brunt of the failings in internal controls

have a guess bryce

Let’s take a wild guess. The shareholders?

a big bazooka for the scotsman

and you wonder why people are camping out in st pauls and off wall street

(Hm.)

http://www.telegraph.co.uk/finance/financialcrisis/8847357/Telegraph-evicted-from-St-Pauls-Occupy-London-camp-as-the-mood-turns.html

even if you do find them more of a rabble than the ROTR

(“The site was quiet at around 12.30am with the faint smell of marijuana smoke in the air”)

(I do like the Telegraph’s old-world phrasing sometimes.)

(i should get down there then bryce)

Passed through the other day. Looked kinda fun.

but i can add one more ranty-related point on the banks here?

Please.

Peston was filming last night outside Deutsche Bank on the sidewalk and was told he had to move as it was private property

these things really annoy me

there seems to be a rising number of areas around London where you cant film because it might disturb the bankers

canary wharf, paternoster square…you are not even allowed to take photos

Public/private grey areas annoy me generally.

given the billions that went into subsiding canary whart from the public purse to build, it is outrageous that it is not considered a public area

and is there any defence for it apart from not wanting the locals to be photographed occaisionally

Yes. It’s scandalous. The stealth privatisation of public spaces.

and it is mostly areas where there are financial institutions

Some librarians protesting cuts at the door of my local library were manhandled by private security guards.

Because the street’s now owned by Westfield.

We own the library, they own the street to it.

whenever we run those exciting photos of bank exteriors on our pages we often have to do it on the sly

I know. It’s insane, and worthy of loud protest.

anyway rant over…

And a good rant. Thanks.

didn’t deutsche have numbers out today as well?

Yeah – a shade ahead of forecasts.

(monkey – fair counterpoint)

And generally reassuring, given the climate.

Shares flat to 1% up at the mo.

e28.725 on the bid.

Here’s a bit of comment.

Pre-tax profit = € 942m vs. consensus of € 843m (+11.7%). CIB reported a pre-tax
profit of € 70m (-93% between Q3 2011 and Q2 2011): FICC revenues were down 37%
Q3/Q2, hit by weak client volumes, and equity revenues fell by 41% Q3/Q2, in line with forecasts for the sector. The group is not set to meet its 2011 target of € 10bn following the deterioration in CIB, which should be partially offset by other franchises (retail, etc.). Basel II CT1 ratio of 10.1%. At end-2012, the estimated “full Basel III” CT1 will struggle to top 8% without more radical measures. Neutral recommendation confirmed with a target price of € 32.5.

That’s from Oddo.

And here’s Merrill

Which is more interesting

Slide 22 of Deutsche’s Q3 results presentation shows the bank’s estimate of how
the EBA recapitalisation exercise will be carried out. Under this methodology,
Deutsche emerges with a 9.1% H1 2012 core tier 1 ratio and therefore won’t need
capital under the mandatory recapitalisation plan. This is in line with our belief
that Deutsche won’t be forced to raise capital (see 10 October note “Share count
in question again”). However, we continue to believe Deutsche’s capital position
is weak compared to peers. Using Deutsche’s Basel III methodology (slide 23)
and adding €8 bn of capital deductions required under the fully phased in Basel
III, Deutsche has a YE 2012 fully phased in Basel III core tier 1 ratio of 7.0%. Our
fully phased in Basel III core tier 1 ratio forecast of 6.8% allows for RWA growth.

it has to be said on UBS that if any euro bank has the capital to exploit in this environment it is them

The group’s capital position continued to improve. UBS’s BIS tier one capital ratio – a measure of financial strength – rose to 18.4 per cent from 18.1 per cent at the end of June, while the core tier one ratio – a more stringent measure – improved to 16.3 per cent from 16.1 per cent.

that is pretty stonking really

True. Just a shame that they can’t keep track of how much money they’re betting.

very true

so anyway where shall we turn to now

11:54AM

Hm. Nearly midday already.

We should just whip through a few things.

Firstly, the spanner that’s just been chucked into Polyus’s plans.

or a hammer and sickle

Quite so. The Russian government has said it needs more info ….

On its plans to move from Jersey to the UK mainland

Because, apparently, Polyus hasn’t provided any yet.

Which seems a bit slack.

a slight problem

not insurmountable

Guess so.

but the free float issue is a bigger deal wtih them

True. Though without the redomicile, this thing gets nowhere near the FTSE.

ie they were looking to get a waiver on the free float issue

maybe Moscow did not want the reputational blowback of an ENRC style episode

If you’re Jersey listed you need 50% free float for FTSE inclusion, apparently.

Here’s a line from Troika.

The commission’s announcement is unexpected and we hope it is only related to simple technical problems (that will eventually be resolved) rather than any change of heart from the state on the idea of redomiciliation. The lack of approval has the potential to delay the entire transaction and consequently FTSE 100 inclusion. As a reminder, the company has to sell around 13.5% of equity on the market to satisfy the criteria for a premium listing and FTSE inclusion.

Stating much as we just said. Still, one to watch I guess.

by the way, there was a v ery interesting aside in Jonathan Guthrie’s Lombard col this morning

Go on.

it was on how Polymetal, the Russian gold and silver producer, is set to join te FTSE 100 with a free float of more than 50 per cent

but added that

Bumi, the Indonesian coal business brought to London by financier Nat Rothschild, has, we understand, missed out on FTSE 100 inclusion because its shares have fallen in line with other resources stocks. Bumi also failed a liquidity test for admission to the FTSE 250 on technical grounds, though it is likely to get in at the next review.

Aha. The liquidity test thing.

That was changed about three years ago.

Jonathan also mentioned Glencore

Glencore needs to achieve a free float of 50 per cent by next May to stay in the index, whose tracker fund following makes it the investment equivalent of a Wonderbra: a guaranteed provider of uplift.

but Javier Blas points out that the Glencore should get to the 50 per cent pretty much automatically

after tjhe year long lockin on employee and ex-employees from selling expires, the free float expands

and suddenly trackers have to buy a lot more stock as the weighting in the ftse also rises

anyway here is the col

http://www.ft.com/cms/s/0/8349647a-fe32-11e0-a1eb-00144feabdc0.html#axzz1bn19KWlW

Ta.

12:02PM

Ok – said we’d note BG earlier …

So here’s the top line

Via BarCap

BG reported 3Q numbers 5% above consensus expectations at $1.021bn, up 4%
y/y. Whilst headline volumes were up 1% in line with expectations, this
reflected some unplanned downtime in the UK. With underlying growth of 6%
and the UK problems now resolved, investors should feel reassured that
the group is on track to deliver double digit growth in 2012. Investors
should also feel reassured on LNG profitability with the group lifting
its full year guidance to $2.4bn albeit we would see this as mostly
discounted in sell-side estimates. The one note of caution struck by the
group was Australian dollar pressure on company capex. Whilst cost
pressures are clearly an issue for a group set to deliver 15% pa growth
out to 2015 we also expect to get a reminder of the value dynamic for the
group. GALP’s Brazil sell-down – anticipated late October/early November
- is expected to demonstrate the value the industry may attach to barrels
relative to current depressed equity valuations. We rate BG 1-OW with a
price target of 1700p.

BG Group PLC (BG.:LSE): Last: 1,399, up 72 (+5.43%), High: 1,401, Low: 1,339, Volume: 3.28m

Been trying to get hold of some feedback from the management meetings this morning

To see if they’ve said anything interesting about Santos

It’s unclear whether talks to potential buyers are live, dead, or just hibernating

And, I’m afraid, that remains the case.

If any of our friends who read this have seen BG folks this morning, please give us a shout.

In the meantime, here’s some more comment. SocGen this time.

BG surprised positively on Q3 adjusted divisional EBIT and net income
and raised its FY 11 LNG profit guidance from $2.2bn to $2.4bn. Q3 group adjusted EBIT at $1,943m (inc. affiliates) was up 17% year on year, beating consensus by 2.7% on the back of improved performances in both E&P and LNG. Upstream EBIT at $1,183m was up 55% year on year, benefiting from 0.7% higher production and higher realised prices (gas realisations +20%) and somewhat lower exploration charges. UK output was nevertheless 39% below BG’s own plan, partly due to slow commissioning of the Buzzard field, and also integrity-related field shutdowns. Unit opex of $8.96/boe was in line with SGe, reflecting the cost of maintenance. Q3 LNG EBIT of $620m was 11% better than SGe but 14% below year earlier levels due to lower LNG Shipping/marketing profit. Note though that the Q3 LNG result was sufficiently ahead of BG’s internal expectations, prompting the group to raise guidance for full year EBIT from $2.2bn to $2.4bn. We note that BG diverted 89% of its cargoes (vs 78% in 2010) to non US markets.

We reiterate our Buy rating with a £17 TP (average of a SOP and a DCF (WACC 10.6%)). BG offers a low cost entry into a sizeable and growing resource opportunity; if access to resources is the industry’s key challenge, then BG is in our view a near perfect vehicle to gain entry into a 20bnboe resource base. If LNG is going to be a market in which growth is supply, rather than demand, constrained, then again BG is the way to gain exposure.

Elsewhere …..

BMAlpha wants to know about Reckitt

Results just out. Look unsurprising.

*RECKITT BENCKISER 3Q ADJ. NET 470 MLN PNDS; EST. 462.64 MLN PND

Shares idling. Down 1.3% at pixel. £33.99

Guidance looks unchanged.

Not much more to say about that one.

shall we turn to F&C…a company i used to cover as a reporter a long time ago

F&C Asset Management PLC (FCAM:LSE): Last: 67.45, up 5.1 (+8.18%), High: 69.25, Low: 66.00, Volume: 560.51k

it was several reincarnations ago in its corporate life

And Bramson’s strat review is much as speculated.

Cost cuts.

No radical changes.

but more might be coming in terms of strategic review

F&C targets institutions with new strategy

By Jonathan Moules

F&C Asset Management is to make additional £21.2m cuts to its operational costs by 2013 and strengthen its institutional business by focusing on “core” product areas where it feels it can gain a significant market share.

The first phase of the long-awaited strategy review, outlined by Edward Bramson, the new executive chairman, will be mostly implemented by the end of the year, primarily through cuts to back office and corporate staff functions with a limited impact on investment teams and client facing personnel, the company said.

The total cost reduction, including £12m in cuts announced in January, will be £33.2m, or 4.7p per share.

The growth strategy for the institutional business is aimed at capitalising on the convergence of the needs of insurance companies seeking to address solvency issues and those of defined benefit pension schemes seeking to immunise their liabilities.

The company defined the “core” products in its institutional business as those that are strongly aligned to current client needs, have a good investment performance record for at least three years and are areas in which F&C already has significant scale.

Right.

So why did Bramson take this over?

This is the same as the old strategy.

There’s no reinvention.

you would have thought a lot of the hackwork in costs had already been done

but they might be looking harder at its retail operations

here is some reaction from Numis

Q3 IMS and Strategic Review
AuM was in line at £103.2bn vs. our est. £103.7bn, albeit perf./FX was better than
expected (-£2.5bn our est. -£4.1bn) and flows were weaker (-£2.3bn vs. our est.
-£0.2bn). Flows were mainly weaker in the low margin insurance area (-£2.3bn vs.
our -£0.6bn) and high margin Thames River/SICAV area (-£0.6bn vs. our est.
£0.1bn), reflecting weaker retail investor sentiment in the period (in both EU/UK).

The initial outcomes of the long awaited strategic review were also announced. In
the short term, the company is cutting an extra £21.2m costs (above those already
announced), of which £16.7m will be achieved through staff redundancies (mainly
back office/corporate office, no real impact on front office/compliance/risk
functions) and £4.5m other costs. The statement implies these savings will largely
be in place by the end of 2011. These savings will be used to pay down the debt
more quickly and rather than a short term dividend increase. These incremental
cost savings, if achieved, are equal to c.2p/share post-tax, which would be equal to
c.20p of value on 10x P/E. We believe the market will welcome the fact that the
board has delivered something in the short term and we would therefore expect the
shares to be stronger today, albeit the company has already outperformed the
sector on a TSR basis by c.20%/c.10p per share since Sherborne came in.

The main longer term strategic objective will be to re-focus on the institutional
business (c.80% of AuM) and de-prioritize the retail businesses. The company will
invest more in marketing of the institutional strengths and better link staff pay to
individual and corporate outcomes, presumably with the aim of improving both
gross and net flows in the institutional business. The company will announce a
“strategic review” of the retail operations (including investment trusts, Thames
River, REIT) in H112. We believe at this stage, the jury is still out as to whether the
company can achieve long term value creation through this better focus, however
the strategy at a first glance looks sensible, if not revolutionary and light on detail.

so how has Bramsom’s big play worked out for him so far

what has the share price done Bryce

By memory, I think he executed a Change of Control Without Premium at about 74p

And has been the main buyer in the market ever since

that is a good memory…you obviously have not been spending too much time at the occupy st pauls camp

taking in the atomsphere as it were

It comes with the caveat that I may well be wrong, as this transcript always does.

Actually, here’s KBW to agree with me

There’s no change of strategy

Only change of control.

FCAM has revealed details of its long awaited Strategic Review and released its
3Q11 AUM update for the 3 months ended September. This follows the
announced “retirement” of CEO Alain Grisay, and the appointment of Edward
Bramson as Executive Chairman for an interim period. Investors looking for
Bramson to deliver a strategic master plan may feel somewhat disappointed. In
fact we see no material departure from the strategic direction that was so
severely criticised by Sherborne during the bruising battle for control of the
group earlier this year, and which claimed the group’s long standing chairman
and, seemingly, its well respected CEO.

Nevertheless the statement itself seems
sensible enough. The cost reduction programme has been increased to £33.2mn
from £12mn previously announced in January. The additional £21.2mn includes
£16.7mn in staff reductions (mostly back office) and the balance of £4.5mn in
“various non-staff reductions”. Our forecast for costs stands at £239mn for 2012
and £249mn for 2013. Overall post-tax impact to adjusted net earnings could be
meaningful. The uplift to earnings could be in the region of £13-15mn against our
adjusted PAT forecast of £44mn in 2012 (Eps 8.2p) and £51mn in 2013 (Eps
9.6p).

The strategy has three main objectives 1) Generate above-average shareholder returns
with below average volatility; 2) Achieve competitive scale in areas of strategic focus;
3) Create a stable environment for long-term growth Accordingly F&C will focus on
products such as LDI, seeking to exploit the increasing demand from insurance
companies managing solvency requirements and other defined benefit pension
schemes.

Wow. Improve returns, gain scale and sell the right products.

(enjoying the bonus debate on the right)

well the business side of asset management is not rocket science..investment performance is trickier

“Generate above-average shareholder returns with below average volatility” ….

I’m surprised no-one’s tried that before.

Anyway, that’ll do.

Ok – I think we’re done for the day.

Unless there’s anything else you think is worth sharing, Tony.

i have some good earnings stuff from BarCap

which seems to be main bull case for equity amrkets – earnings

that and the power of the central banks to intervene

anyway here is the note

Equity earnings: Would surprises suggest a change in the trend?
Edmund Shing, Dennis Jose, Yu-chieh Chiang
As we enter the Q3 earnings season on both sides of the pond, an obvious question
springs to mind given the fragile macroeconomic backdrop, especially the sharp drop in
consumer and business confidence indices of late. Are earnings expectations for both
the remainder of this year and next now down to realistic levels?

A healthy dose of realism for earnings estimates
European and US analysts have been far quicker to cut their 2011e and 2012e earnings
estimates over the past month than prior to the 2001 and 2008 recessions, with a net
upgrade to downgrade balance of -33% at last count in Europe. However, the depth of
these revisions has not been anything like as severe, thus far. Based on the latest data from
IBES, European earnings forecasts for this year have fallen over 7% since the beginning of
January, while 2012e estimates have fallen slightly more.
Q3 earnings season in Europe seems likely to deliver positive overall EPS surprises, similar to
the emerging US Q3 earnings trend. Lower commodity prices and a weaker trade-weighted
euro are becoming positive tailwinds. ECB balance sheet expansion (Figure 1) is
underpinning bank liquidity and, thus, credit availability for European corporates, in turn
supporting corporate earnings levels.

What is notable in the case of earnings forecasts for the STOXX Europe components is that
in spite of cuts to forecasts totalling 7-8% since the new year, 2012e EPS growth is still
estimated on a bottom-up aggregated basis at some 11%, similar to that expected for the
S&P 500 by US analysts.

2012: At risk of further downgrades
So while this year’s estimates have been suitably rebased, we continue to believe that further
downgrades to 2012e forecasts are to be expected, given the 11% EPS growth that is still
forecast in aggregate. On the basis that our economists forecast euro area real GDP growth of
under 1% for next year, with only a little more for the UK and Switzerland, on a top-down
basis, we see earnings growth for European non-financials running at about 7% (see
European Strategy Essay: Filling in the earnings Sudoku, 19 August 2011 for details of our topdown
earnings model and assumptions used).
Bulls can point to the fact that there have not been widespread cuts to company sales and
profit guidance thus far, in spite of the sharp drop in euro area lead indicators (Figure 2).
However, what is perhaps more evidence that earnings forecasts still have room for
adjustment for next year is the catch-up by the coincident indicator on the downside (with
the last data point being for September). This suggests that cuts to company guidance for
next year may not be far away, at least for more domestically oriented European corporates.

one last para…

Sector-wise, we see Banks, Construction and Travel & Leisure as particularly vulnerable,
given double-digit 2012e EPS growth rate forecasts, effectively expecting a pickup in
growth rates versus 2011e despite the morose macro backdrop.
In contrast, one sector that perhaps stands out from other consumer cyclicals is Media. This
should not come as a surprise, but most investors probably do not realise that the sector is
dominated in terms of market capitalisation by defensive business models. Media 2012e
consensus EPS forecasts have dropped a modest 3.4% over the past three months,
compared with an average drop in STOXX non-financials sector EPS forecasts of 5.7% over
this same period. Given an EV/EBITDA valuation of 5.6x for 2012e, in line with the STOXX
Telecoms, combined with a 5.3% dividend yield for this year, the Media sector appears to
offer relative earnings resilience, modest expectations plus low relative valuation compared
with other cyclical sectors and Non-Financials overall

Thank you.

Oh, and IPhone5 has been badgering us for some Carpetright comment.

Which is up after a profit warning

(senior muppet..there was a little bit on div yields in that note)

A term of endearment used to describe BB share promoters on FT Alphaville.

…….. Because that’s the kind of stock it is.

any sign of an impact from the Croydon fire

you have to have sympathy for Lord Harris of Carpetright

To find that out I’d have to read the statement, which I can’t be bothered doing.

It’s traded 65,000 shares this morning.

spends a squillion developing academies for inner city areas – to help give kids a chance

and his shop gets burnt down by thugs

Oh well.

(A Reader…no idea really but the operation twist, as feeble as it was, has help provide a boost for equity markets..which in turn might have an impact on confidence.. and maybe the ECB will be bullied to intervene more in europe)

(argylerich..thanks ..will check it out after)

Ok, so anyway, IPhone5 would appear to be long Carpetright and needing reassurance.

So here’s Panmure’s Philip Gordon, not to provide it.

This statement will lead to more downgrades to consensus earnings. We
don’t expect Carpetright’s profits to return to peak and believe that it will
take a very long time for its core market to recover. We are reducing our
target price from 575p to 400p and our recommendation to Sell (from Hold).
At these levels, we are acknowledging that previous ROCE levels are
unattainable and it needs a more normal valuation to reflect this.

Hope that’s brightened your morning.

And, with that, we should sign off.

has he set a floor price for the stock?

yes better go after that

Market’s going against, certainly.

Shares up 2.8% at 512p in the middle

But it’s a phantom up.

No volume, no liquidity, entrenched short.

anyway..thak you for all the debate on the right..have enjoyed reading it

time to return to the main news desk

there is a small matter of trying to work out what we are going to run on the front and second front tonight

Yes. Well done, Rabble. You’ve compensated for the lack of material on the left today.

Thanks for all your comments.

And do join us tomorrow.

This entry was posted by support on Tuesday, October 25th, 2011 at 11:03 and is filed under Uncategorized. Edit this entry.

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Markets Live transcript 25 Oct 2011

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