Markets Live chat transcript for the chat ending at 15:58 on 24 Feb 2012. Participants in this chat were: Joseph Cotterill, FT Cardiff Garcia
JC
Hola rabble
CG
Hello!
JC
Welcome to US Markets Live
JC
SNAFU
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CG
Who’s here?
CG
Hi Paver
CG
Big day here at US ML
CG
Hi Phil, Jarvis
CG
The end of Joseph’s first week in New York, and he’s now sitting next to me. So we can snark in person for the first time
CG
A Reader, simon, yankee, hiya
JC
Yep, big day, big tech problems. Apols if you’re having to refresh, rabble
CG
(Jarvis, good thing, as I haven’t checked up on them in a while)
CG
lots to talk about today though
CG
let’s start with some quick late-breaking news
CG
PROPOSED CASH OFFER FOR COVE ENERGY PLC (“Cove”) by PTT Exploration and Production Public Company Limited (“PTTEP”)
JC
Dun dun dun, merger arb
CG
Shares on the move
CG
yep, here’s some background on Shell’s offer yesterday: http://bit.ly/zIjoVD
JC
Cove up 20 per cent at pixel time in London
CG
Royal Dutch Shell Plc’s $1.6 billion bid for Cove Energy Plc starts a race to develop natural-gas fields off Mozambique’s Indian Ocean coast that may hold more than Norway’s entire reserves.
Winning Cove would give Shell an 8.5 percent stake in a block where Anadarko Petroleum Corp. has found 30 trillion cubic feet of gas. Italy’s Eni SpA has discovered even more in a neighboring area. Together, there’s sufficient fuel for the development of two $20 billion liquefied natural gas plants to supply customers in Asia, according to Deutsche Bank AG.
JC
Hehe, that triggered Paul’s Mozambique autotext
JC
Can’t bring it back now
CG
Ah well
JC
Plug anyway: http://kayamj.com/
JC
But yeah, will just grab PTTEP’s release…
CG
yep, some terms please
JC
· Proposed Offer of 220 pence in cash for each Cove share.*
· The Proposed Offer values the entire issued and to be issued share capital of Cove at approximately £1,119.6 million and would represent a premium of:
o 134.0 per cent. to the closing price of 94.0 pence per Cove share as of 12 December 2011, the last business day prior to Cove’s announcement of the opening of the data room to certain parties who expressed an interest in Cove’s participation in the Mozambique Rovuma Offshore Area 1 Block; and
o 95.6 per cent. to the closing price of 112.5 pence per Cove share as of 4 January 2012, the last business day prior to Cove’s announcement of the sale process for the company; and
o 29.6 per cent. to the average closing price of 169.8 pence per Cove share over the five business days ending on 23 February 2012, the last business day prior to the date of this announcement; and
o 12.8 per cent. to the possible offer of 195 pence per Cove share announced by Shell Exploration and Production (XL) B.V. on 22 February 2012 (the “Possible Shell Offer”).
JC
Anyway, we’d best crack on to US stuff.
CG
Sure thing — first off, good new home sales number today
CG
Sales of new single-family houses in January 2012 were at a seasonally adjusted annual rate of 321,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.9 percent (±16.6%)* below the revised December rate of 324,000, but is 3.5 percent (±17.6%)* above the January 2011 estimate of 310,000.
CG
Well, “good” I suppose — better than the expected 315k
CG
(Jarvis, might do a quick bit on Sears at the end)
CG
But the big story right now is gas prices
CG
And I’m positively swimming in analysts a) trying to figure out where they’re going, and b) if they matter
CG
Usually in that order, strangely
JC
Yeah. It’s reached Timmy on CNBC proportions
CG
Anyways, first up are the mellow-harshers at RBC
CG
Just when gasoline prices are already beginning to bite (did anyone see that news story about $6/gal in areas of Florida) we have another dynamic that could help drive pump prices even higher near-term. The supply/demand ratio that had remained well above the seasonal norm since September – and had likely been keeping pump prices lower than they otherwise would have been – has turned sharply lower. Relative to last year, when prices were averaging $3.14/gal YTD at this point, the current squeeze higher is equivalent to a 0.4% hit to consumer pocketbooks. This is a big deal when you are talking about a 2% real consumption backdrop.
CG
But they seem to be in the minority *for now*
CG
So now something from CFR pretty much throwing up its hands
CG
but in an interesting way, like some kind of chicken dance
CG
Here’s a quick back-of-the-envelope calculation. If recent seasonal trends hold, prices would rise by around $0.50 per gallon between January and June. That would mean average U.S. gas prices of just over $4 per gallon this summer. So if history is any guide, $4 gasoline is not only possible this year, it’s probable.
CG
When it comes to gas prices, though, national averages don’t tell the whole story. Prices at the pump vary hugely depending on where you are in the country, for various reasons. Figure 2 shows retail gasoline prices in four U.S. cities: Los Angeles, New York, Denver, and Cleveland. The difference between what you pay in Los Angeles and Denver is staggering. The disparity has only gotten more pronounced the last few months. Kobe Bryant and the Lakers are dropping more than $4 per gallon to fill their tank, while the Birdman and the Denver Nuggets are paying just $3 or so. No wonder things are so bad in Lakerland right now.
CG
So a lot of regional disparity. Also
CG
the risks both up and down are unknown
CG
they write
CG
For average U.S. prices to reach $5 per gallon, let alone $6 or more, it would take a pretty serious disruption to the global oil market. Further supply losses in the Middle East could certainly take prices that high, but for now, I’d call that a tail risk: the chances it’ll happen are low, but there’s still a material chance. Tail risks in the oil market are exactly what Wall Street oil traders are bracing themselves for. In the words of a Citi energy strategist, “We face a bifurcated market: a crisis in the Middle East could send prices through the roof; the eurozone debt problems could trigger a collapse.” The odds favor no major change one way or the other, but traders are assigning a higher-than-usual probability that prices could swing much higher or much lower in 2012.
CG
Middle East vs Europe for the heart of America. Or something
CG
Barcap writes also that it’s the pace of the rise that matters, not how high it gets
CG
if households have time to do some consumption smoothing, the impact isn’t that severe
CG
and I’ll finish with Credit Suisse econs before JC posts from that Citi note that Jarvis just mentioned
CG
Next we take a closer look at the impact of gasoline prices on the consumer. Here we find reason to think prices have not yet reached a tipping point for activity.
A move above $4 gasoline would certainly have an important psychological effect but it likely will take even more to derail recovery given the ongoing strength in labor income. Again we think that absent some sort of geopolitical shock – real action in the Middle East – oil is unlikely to destabilize the economy although it clearly becomes more of a drag at higher levels and biases the Fed towards more easing.
CG
So a more optimistic take. And yes, Jarvis, domestic production activity
CG
matters too, as does the US trade in petroleum products and the like
CG
JC, take it away
JC
Yep, twas a good note from Citi earlier in the week
JC
Or at least it lays out the bull case
JC
We see the ongoing domestic energy production boom as having slightly reduced U.S. growth sensitivity to a change in energy costs – in both directions. Like the benefits it bestows on domestic manufacturing, the production boom is not likely to make the U.S. entirely immune to an external growth slowdown, which can occur rapidly (please see “Improved U.S. Competitiveness vs. Fiscal and External Threats,” December 19, 2011).” Capacity building in the sector is a long-term process compared to the frequent swings in energy costs. But the trend rise in employment and investment in the sector should be counted as an internal benefit when considering the net impact of a price spike.
JC
Emphasis on ‘trend rise’
JC
Some numbers…
JC
Capital spending data for the energy sector are wider than just petroleum-related investment. But if one excludes total energy and mining equipment and structures, nominal U.S. non-residential capital investment would have risen 8.2% in 2011 instead of 10.0%. The increase in the broad energy sector’s capital outlays was $34 billion in 2011, a useful figure to keep in mind when considering the scale of nominal price increases for consumers.
JC
You get the point, anyway.
CG
Yep
CG
point made by CS today as well — more domestic production means higher prices an internal transfer rather than meaningful threat to growth
CG
okay then
CG
the other big thing happening today
CG
this week
CG
this month
JC
Oh Cardiff, no….
JC
This is why I left Europe
CG
yes
CG
We have to
JC
It won’t end
CG
here it comes
JC
OK then
CG
rhymes with peace
CG
GREECE
CG
let’s go
CG
here’s the latest from this morning’s FT
JC
GREECE
JC
(Also, REFRESH)
CG
Greek private sector involvement is expected to be launched on Friday as the hunt for holders of Athens’ debt officially begins.
CG
so JC, does this mean we finally have a formal offer?
JC
I think… it’s in the process of being mailed out
CG
(The Hunt for Holders sounds like a Clancy novel)
JC
I haven’t got mine yet
CG
ah
JC
Though if anyone rabble-side does… 
CG
So how should we proceed in discussing this? So much to consider at once
JC
May as well start with the bond prices.
JC
They’re all repricing/tanking to the general estimate of what they’ll be worth post-PSI
JC
Which is around… 20-25.
JC
THAT March 2012 bond…
JC
28 cents in the euro or so. Plummeted this week
JC
You were asking Cardiff about timelines here
CG
yep
JC
And what happens to the EUR14.5bn March 12 bond
JC
Well, it ain’t getting paid on March 20. Nor on grace period seven days later
JC
CACs should be voted and enforced by then
JC
So there you go, death to that particular holdout trade
CG
right, the draft of the CAC law was released earlier this week
JC
Remind me to pop round Cleary Gottlieb downtown now that I’m in NY…
CG
so JC, what can holders of the 20 March 12 bond expect to get
CG
I know it’s not so straightforward; break it down for us
JC
Er, in face value terms
JC
31.5 cents in the euro in the actual new 30-yr Greek bonds
CG
(mutant, LOL)
JC
15 cents in magic EFSF bonds
JC
Pocket money / not very much AT ALL in these Greek GDP warrants
JC
Which deserve a post to themselves
JC
Which I’m writing for later
JC
And I’m sure this weekend
JC
You’ll all be stressing yield assumptions, discount rates etc on the new bonds
CG
excellent — the unpriceable GDP warrants. Looking forward to reading more about those
JC
They are priceable, to an extent. It just depends on growth assumptions
JC
Which for Greece, er…
JC
praxis – the CACS passed in Greek parl this week don’t apply to foreign law, no.
JC
But… the existing foreign law debt already has CACs
JC
Which have a higher vote threshold (66% to 50%), but also a longer notice period
JC
Hence they’re being swapped later.
JC
Is *that* the remaining respectable holdout trade? Seems desperate, but I wonder
JC
We aren’t getting through the biggest sovereign default in history without a few legal challenges
JC
Even though Cleary has really earned its $$$
JC
CG
I’m putting this on desk wall
CG
We aren’t getting through the biggest sovereign default in history without a few legal challenges
JC
Hehe
JC
It all seems so far away from Midtown
JC
Right, can we move on from Greece? (Unless rabble have more qs)
CG
We probably should — not much more we can do without going down into the Rabbit hole
CG
where we’ll be going anyways
CG
Okay, so
CG
(Hi Greenbuck)
CG
some stuff on US banks this week
JC
Mutant – Rabelaisians
JC
I suppose…
JC
…we should dispense with the BAC/Fannie love story quickly
CG
10ks and the like
JC
Yes. This caused heads to be scratched on news desks last night
CG
yes, the spat du semaine
JC
Is this a)
JC
BofA bringing out the big guns in the repurchase dispute, all’s fair etc
JC
Or b)
JC
Fannie being rescued from BofA’s… delectable collateral
JC
Or c)
CG
even BofA’s explanation seemed oddly churlish… the “other contexts” line
JC
Not that big a deal
JC
Have a bit from SocGen’s US bank credit watcher
CG
haha, if it’s b, then it really says something about the state of American finance that a GSE is being rescued from a bank’s crap loan pool
JC
Bank of America — BAC released its FY2011 10K last night. From our perspective, a cursory review of the filing didn’t reveal anything significant that we didn’t already know about the company. However, the media seems to be focused on the ongoing dispute that BAC is having with Fannie Mae regarding its potential mortgage repurchase liabilities, which in turn has resulted in BAC temporarily stopping the routing of new mortgage originations to FNMA. Instead BAC has stated that it will either route new mortgage to Freddie Mac, Ginnie Mae, or retain them on balance sheet. At this point, we tend to think the media attention to this issue is overdone and we believe there is limited
fundamental impact to BAC
fundamental impact to BAC
JC
As mutant says, this is by no means a complete BAC boycott
CG
well, probably right
JC
Yeah. ‘BofA’s already a litigation pinata. And?’
JC
Kind of thing
JC
Meanwhile in US banks and mortgages…
CG
okay, we’ve gotta run early, but one more thing — go for it. Lemme guess, this is about JPM?
JC
Yep, interesting JPM story
JC
Foreign, UK/Dutch, and not US mortgages being loaded up on by JPMorgan
JC
But interesting that they’re holding it on balance sheet in the first place
JC
Trend to watch? I leave it with you.
JC
Unfortunately I also have to bail outright…
CG
Okay guys, JC has to go enter the swamp of NY apartment hunting
CG
sorry we didn’t get a chance to talk Sears
CG
but short version — they’re still up some 19% since yesterday’s news that it would be spinning off some business and selling real estate
CG
after another crap quarter
CG
Anyways, Rabble, we have to ditch you early this week
CG
Jarvis, I think he’s casting his net widely over the city
CG
Cheers yankee
CG
mutant, will be curious to see if this week’s corp governance change will make a difference
CG
can’t imagine something like this happening while Jobs was still in charge, even with Calpers on their back. Still, probably a good thing
CG
Anyways everyone
CG
we’re signing off
CG
Full hour show next week, we promise
CG
(safe trip Praxis)
CG
Have a great weekend all; bye!