FT Alphaville " Markets Live transcript 20 Jun 2012 Markets Live chat transcript for the chat ending at 11:07 on 20 Jun 2012. Participants in this chat were: Paul Murphy Summer seems to have finally arrived Bryce has swanned off to Ascott Beautiful day for the races But I'm stuck inside, trying to entertain you lot We could have a virtual Bryce We should look at markets BE: Stocks are up, a bit. BE: Sov yields are down, a bit. Either way, you stagger home from Acott Anyway, back to the toxic London market I refer of course to this... US lawmakers and regulators have attacked London as a source of financial crises and promised tougher crossborder rules in the wake of $2bn of trading losses at the UK unit of JPMorgan Chase. Love that story - from Tom Braithwaite in NY They are dead right of course If mr Gensler wants an example, he should look at FX trading I wrote on AV a while back about how a large number of these retail FX operations were actually skinning their clients The CFTC came to the same conclusion In spite of some fierce lobbying they imposed a 50-1 leverage cap on everyone Everyone in the US that is. What happens over here - in the London loophole? Its common to see leverage of 400-1 here now 400-1 - automatic skinning of clients Actually the firms never say "400-1″ leverage now They say "initial margin 0.25%" as tho that's a good thing. I may well do another post on the matter So, after yesterday's fresh air rally In anticipation of free money all round We have the pregnant pause Footsie up 5 points currently Volume thin to say the least Over on the credit side Spain tightened to 6.92 Itally all the way back to 5.84 Waiting for free money Assanka are called FT Labs now Cracking little software shop who built FT Alphaville Like they've been transported back to 1996 or something It was there BBQ last night Lisa and I went along. They've got a new firm they are working with who specialist in streaming data. So we'll get a big updating of the ML tech later this year Anyway, back to market events I want to discuss this Let me put this up in full G20 bid to cut eurozone borrowing costs By Chris Giles and George Parker in Los Cabos and Peter Spiegel in Brussels Have a careful read of that It's written by three of the most senior frontline reporters here at the FT The economics editor, the political editor and the Brussels editor And, in truth, it says precisely nothing. Not the authors fault i hasten to add it's a very professional report of what actually happened/was said at the G20 You can read other reports on this elsewhere which are spun to the Nth degree. But that article there is the report on what actually happened / was said What it comes down to is that the G20 is a political event - and it gets covered by political journalists. Political journalism is completely different from financial journalism. When they cross over, you get some very odd results - on certain papers. So, for example, if you read Patrick Wintour in the Guardian writing about the ESM being used to bailout Spanish property developers... Its not the journos fault - its politicians and the way they brief. I did it once - IMF meeting in Dubai some years ago. Larry Elliott couldn't go, so I had to step in at the last minute. You'd talk to say, Ed Balls, and you'd go to a press conference with , say Gordon Brown, which would be held in secret, so only UK journalists there. And they'd say XXX. And then you had to go and write YYY, cos that was the system, Fitz notes this i see http://ftalphaville.ft.com/blog/2012/06/19/1051241/we-are-certainly-not-coming-here-to-receive-lessons-from-nobody/ Can kinda understand tho let's get to some stocks One of the banditos had this yesterday But you've got your pick of flavours this morning in terms of who might bid Price has ticked up to 76.4p this morning Had a run up to 77.9p, but in the absence of any statement it has come off the boil here's just a snap on the matter from Liberum ITV (BUY, 145p fair value).Lots of takeover spec this morning.. Independent saying a European PE firm may offer 150p a share, Times saying KKR and an established player in media industry may bid with the Telegraph saying that established player is Pro7 but that price may be 130 - 150p a share. There has been plenty of chatter before but interesting (a) 3 stories on the same day, with similar price ranges mentioned (b) KKR (mentioned in the Times) is the co-controller of ProSieben (c) given ITV is heavily cash +ve (c. £280m by YE), this would be attractive to a PE buyer especially given (d) ITV's recent £250m bond buyback, which lessens the bond buyback complications inherent in any takeover. At the least, this will provide short-term support. That's the no-smoke-without-fire take Just having to deal with some stuff in the back ground Re a rather large Brit firm For some reason, senior people at certain companies come to me to complain about stuff in the FT As if i've got any power where do you get these people? Is this meant to be witty or insightful? good grief! Actually, having now looked at the article he's referring i maybe see his point But I'm not getting involved And no i can't share further details. BE: That's particularly lame Murph. Any stock news to share with the Rabble? Let's liven things up. bloody thing not coming up on my Reuters terminal was spelling it incorrectly All the usual RAW caveats apply But have a look at this Price currenly up 4.5p at 116 The tale doing the rounds is that Knoc is having a quiet look Don't knock the Knoc story Knoc is the Korean state oil firm And you will remember that previously they bought Dana And the word now is that they are looking at Ithaca But not entirely random either There's been a bit of directors buying earlier this month But the point here is that if Knoc is looking, it will be an unsolicited approach While were are messing about in small resource companies... BE: you are not going to mention Goo again are you? Busy stock this morning, but the price is off a tad at 4p But what everyone is waiting for is new on the Peru farm out And they are now saying that we will have to wait another 2 months on that. it's an upday for the miners Even Glencore and Xstrata, which is a novelty. Some one on the right mentioned the volatility of XTA of late. it's been "volatile" in the sense of the price going "down." But Xstrata up 25 at 885 this morning And Glencore up by a similar margin to 337 I wonder how many years it will be before it regains the float price. that will never be focused upon in future, cos it will be post the Xstrata merger Right, just catching up on Monty's comments on ITV We will take that as a firm steer ITV focused on building the business - won't be distracted by bid gossip thanks for that Monty. BE: I told you not to over cook the ITV story Here's something to share We've now sourced client letters from Pierre Lagrange Seems that he suggests that it would be possible for the ECB to underwrite all the existing and future debt of the Eurozone sovereigns sorry, grappling with pdf The underwriting MUST be conditional on the country achieving budget deficit and debt targets, within a time horizon of (say) five years. In fact, periods could be framed for each country in accordance with its ability to meet targets; a bit like a debt rescheduling process, based on what people can realistically repay. Lessons from war damage payment and Weimar: give targets which are tight enough to limit moral hazard, but realistic enough that they can be achieved. · Additionally, the ECB could consider guaranteeing new short-term debt issued by the sovereigns unconditionally, with the existing debt remaining conditional upon meeting the deficit criteria. Sovereigns should be asked to pay for the guarantee through (e.g.) a 50 basis points per annum fee. This would create an arms-length transaction, and would be much affordable than the amounts that the sovereigns will continue to pay if we persist in ploughing the current furrow! This inspiration comes from the astute thinking which saw Italian banks pay 80 basis points for sovereign guarantee earlier this year. If the ECB, backed by the governments, announces something similar to the proposals outlined above, I believe the markets will massively correct the current negative stance. Investors will price in what they perceive to be the probability of countries achieving their debt and deficit targets within the five-year protection period provided by the ECB. · This system should be applied to those countries that have strong prospects of returning to solvency, given the time. Greece has probably gone too far, and is unlikely to qualify, so here is another thought; instead of providing futile support to keep Greece inside the Euro, we should keep that money to help them outside the euro, with a flight path to potentially regain access in 5 years. A Marshall (Merkel) plan for Greece? While I have total sympathy for trying to preserve the European construction and limit the humanitarian disaster unfolding within it, I have yet to see anyone making a realistic case as to how Greece can possibly remain within the Eurozone, without the moral hazard of writing off their whole debt. While we are back on Europe I should share the latest from Mr Barr at JPM Reports from the G20 summit in Mexico are dominated by suggestions that the Euro area will use the EFSF/ESM to purchase the debt of stressed peripherals. Mario Monti has apparently raised the possibility that this could be done, and statements from Hollande are supportive of the idea. The G-20 communique's reference to "sustainable borrowing costs" is also cited as evidence for this being in prospect, although when one sees that reference in context it is less than exciting (see below). Unless such purchases are attached to granting the ESM a banking license, it is tough to see this idea being successful if pursued. Indeed, it is rather disappointing that such a limited and unimaginative step should be on the table at this stage. The crisis demands a more profound response. The ability of the EFSF/ESM to purchase bonds in the both the primary and secondary market has been in place for some time. However, that support has to be formally requested by a sovereign and comes with some form of conditionality attached. While decisions on such action require unanimity for the EFSF, they can be taken by qualified majority of 85% of votes cast by the ESM if the Commission and ECB both agree that failure to intervene would threaten financial stability. With the ratification of the ESM not complete yet bond purchases would have to rely on the EFSF if conducted in short order. The EFSF has close to €240bn of notional capacity available, but would need to issue debt into the market to undertake secondary markets in large scale (assuming it can't borrow from the ECB). Once the ESM is ratified, it's capital builds up over time, and the schedule of paying in capital would need to be accelerated to make the full €500bn of "capacity" available. Again, debt has to be issued to fund the bond market interventions above the value of the capital paid in. Remember the sums allocated to Spanish banking support need to be subtracted from the available capacity for bond market interventions. Attempts to "correct" high sovereign debt yields by interventions appear unlikely to succeed beyond very short term effects unless they are conducted in overwhelming scale (and hence with the participation of, or borrowing from, the ECB). The apparent seniority of official holdings of debt demonstrated in the Greek restructuring, and implied subordination of other debt holders, has loomed large in market participants minds, as demonstrated by the reaction to the Spanish banking support. If we put the ability to expand the ECB's balance sheet behind a bond purchase exercise, and there is no sense of reluctance to consider the amounts required to keep yield levels down, the story changes. But in the absence of any reports that resistance from northern Europe and the ECB itself to such a course of action is fading, we doubt that EFSF/ESM bond purchases would do anything other than encourage market participants to watch the intervention capacity tick downward and sell into it. With a crucial EU summit next week we hope the region can come up with something much better. From the G20 Mexico declaration: "The adoption of the Fiscal Compact and its ongoing implementation, together with growth-enhancing policies and structural reform and financial stability measures, are important steps towards greater fiscal and economic integration that lead to sustainable borrowing costs." central msg: come up with something better, can you? breaking from the EU.... There is no formal request to relieve tension in bond markets using bailout funds you probably think I'm making that up But promise you I'm not is it that time already? BE: time for a glass of champagne BE: You should share that Home Retail not before you close up Home looked like going to the moon yesterday Come back a tad this morning wn 3.5p at 88 currently Here's what Paul Rossington at HSBC is saying Considerably better than expected. Flat LFL sales growth at Argos was better than expected, reflecting the first positive growth in low margin consumer electronic sales for some time, new PC / tablets and white goods offsetting declining TV / audio / VGS, and limited seasonal sales. Argos recorded a small sales mix driven reduction in gross margins by default. Regardless, at c70% of group sales, 85% of EBITA (pre-central costs), a positive start helps underpins FY13e consensus earnings (PBT: GBP67m). Homebase LFL sales at -8.3% were in line with consensus (range: -4% to -8%), seasonal sales (c40% in Q1) down 15% accounted for 80% of this reduction, big ticket sales (15% in Q1) the remainder. This has been offset by a 225bp in gross margins, a function of the lower participation of seasonal / promotional lines. This compares well to the recent Q1 trading update from Kingfisher where B&Q LFL sales declined 11.7% on a 30% swing in seasonal sales albeit recognising the later period end and inclusion of a better May. You can feel the "however" coming here... However, one swallow does not make a summer: Positive top line momentum at Argos on the launch of new tablet technologies cannot be guaranteed for the rest of the year; nor can the exceptional gross margin outturn at Homebase, a timing effect that will unwind in Q2. Given indifferent June weather / ongoing pressure on UK household disposable income, the topdown outlook for home related / big ticket spending decisions remains uncertain. Estimates: We cut FY13-15e PBT forecasts by 9-11% impacted by the shortfall in Q1 Homebase revenues, high operational leverage, and unchanged gross margin / cost guidance. Valuation: Our revised SOTP based valuation implies a TP of 100p (previously 110p) and a potential return of 6.4% rising to 11.4% on the inclusion of a forecast 5% dividend yield. With peer group valuation metrics limited given the lack of visibility of an improvement in forward revenues, the shares are likely to continue to trade on the basis of forecast momentum shortterm. Given the significant correction in the share price yesterday's (+25%), we downgrade to Neutral (V) from Overweight (V). Ive got a lunch to get to But I expect the schlepp to Mayfair will be fruitful... So do join Bryce and myself at 11 tomorrow Cardiff and Joseph will be on here this afternoon Thanks for bearing with us today. This entry was posted by Paul Murphy on Wednesday, June 20th, 2012 at 11:01 and is filed under Uncategorized.