FT Alphaville " Markets Live transcript 18 Jun 2012 Markets Live chat transcript for the chat ending at 11:08 on 18 Jun 2012. Too busy trying to work out what we're going to say on here. All the quiz places are gone. If you want to be social And just come along for adrink Then you are most welcome The quiz is in an upstairs room at the Rose and Crown (map in a mo) But there's the bar downstairs for everyone else It's a nice pub with a bit of outside space and a telly for the football, so there are worse ways to spend a Thursday evening. The downside is that we'll be there, but ... So that's the formalities done. Should we try and find something to say about the market now? Paul Mason - widely distributed cos it sums things up... Many political commentators here (in Athens), and much of the wisdom in taxis and coffee bars, says we get an ND-led coalition tonight, which collapses six months later, and is replaced by a strengthened Syriza, which leads to the final showdown Can't stand another six months. Think that's the problem, really. What was that children's book "I can't stand this" ? Of all the possible outcomes, the one we've got delivered the least possible progress in either direction. Peace at last http://www.amazon.co.uk/Peace-at-Last-Jill-Murphy/dp/0333631986 Which is how it's been happening for three years, pretty much. Of mono-markets and fretting about 0.0001% moves in yields. It's amazing we've not lost the plot. Another tweet to share.. Gustavo Baratta ‏@gusbaratta +1000 RT @duncanrobinson: RT @sturdyAlex Markets should really switch to decaf. Can we look at the damage? I've got the CDS snaps (@sturdyAlex #FF. He's excellent.) Markit iTraxx Europe S17 174.5bp (-0.5), Markit iTraxx Crossover S17 674bp (-2) • Markit iTraxx SovX Western Europe S7 317bp (+0.5) • Markit iTraxx Senior Financials S17 279bp (-6.5) • Markit iTraxx Subordinated Financials S17 454bp (+0.5) • Markit iTraxx Japan S17 173.5bp (+0.5), Markit iTraxx Australia S17 184bp (-4), Markit iTraxx Asia ex-Japan S17 177bp (+0.5) • Sovereigns - Spain 611bp (+16), Portugal 31 points upfront (0), Italy 548bp (+9), Ireland 685bp (+12) • France 196bp (-1), Germany 104bp (0), Belgium 264bp (0), Austria 178bp (-1) This time last week the credit markets were in the midst of a rally that had faded by the end of the day. It soon became apparent that the Spanish bank bailout had left lots of unanswered questions. The same could be said of Sunday's Greek elections. The initial rally triggered by the pro-bailout New Democracy party winning the most seats has already lost momentum, and the Markit iTraxx Europe is only marginally tighter compared with Friday's close. Even if New Democracy is able to form a government in coalition with Pasok and the Democratic Left - the most likely scenario - the administration will be fragile and passing austerity legislation will be a difficult proposition. The day of reckoning may have been delayed, but the rest of the periphery still finds itself in the same predicament. Spain's CDS have hit another record wide of 612bps and Italy is also losing ground. The relatively favourable Greek result - Syriza not being the largest party - has taken the pressure off the authorities to intervene, as had been indicated last week. The G20 meeting starts Monday and the rising Spanish bond yields may concentrate the minds of world leaders. That's Gavin Nolan from Markit Sweep thru key markets? So the FTSE's been up and down and now it's up again. Up 22 points at 5502 at thy moment. Been as high as 5555 and as low as 5478. So, no-one has a Scoob, it appears. Over amongst fixed income Spain currently at 7.13 for the 10 eyar Point of most stress this morning But it has stablised at 7.13 or thereabouts UK paper at or near records 10-year gilts at 1.64%. Euro bounced a bit from lowers UK thirty at a few twitches above 3% How on earth are we to sum this up? Any comment around worth repeating? Let's just bang some up Long form grey - and people can read at leisure Optimistic view - Morgan Stanley Pro-bailout camp winning ND and PASOK have the numbers: With the vote counting virtually over, preliminary data indicate that the two main centrist parties supporting the bailout have sufficient support (162 MPs) in the 300-seat parliament to form a government, at least in principle. Based on more than 99% of the votes, the leading party ND won 129 MPs, the second, SYRIZA - which opposes the bailout - 71 MPs, and the third, PASOK, 33 MPs. What happens now: ND - which won the election - will also get a 50-seat bonus, which stays with the leading party even if it doesn't succeed in forming a government. Today the president of the Greek republic will give ND a three-day mandate to form a majority supported cabinet. If unsuccessful, then the second party also has three days. Then the third party. Failing that, the president has a last chance to attempt to form a coalition government, or he will have to call a new election, which can only take place after about one month. What it all means for the probability of a eurozone exit: To the extent that a government willing to cooperate with Europe emerges, the probability of a near-term eurozone exit, which we put at 35% over 12-18 months, will diminish - regardless of whether this government can comply with the conditions (seeHeaded for a Euro Divorce? This is because Europe could at least say that Greece is "back on track," perhaps with a slightly different programme given a deeper recession than expected; and the Greek politicians can present a somewhat milder adjustment path to the Greek people. OSI on its way... We think that the interest rate charged on the European loans is likely to be decreased further and the repayment period probably extended.We estimate that yearly interest payments on the bailout loans to the eurozone countries could be reduced by up to €5bn on average in the following years. In a sense, this is a mild form of official sector involvement and is likely to giveGreece some respite by improving debt service and, to some degree, sustainability prospects. Similar adjustments have already happened with both the first and second bailout packages. ...and some pro-growth measures... According to a press report in theFinancial Times (June 15), the chances are that EIB financing to fund Greek public investment might also be provided. Under this scheme, Greek SMEs might benefit from EU development money to back EIB loans to Greece. The EU might take the first loss in any failed loans, thus allowing the EIB to increase the scale of its lending. ...but fiscal path unlikely to change radically: Yet we believe that only a slightly smoother fiscal adjustment will be offered - if at all. The chances are that even though there might be some rethinking of the deficit-reduction targets, or the timeframe to achieve them, the major building blocks to fix Greece's public finances and structural problems will stay. Risk I: Even though the election outcome appears to be such that there are the numbers to form a pro-bailout government, whether this happens in practice remains to be seen. One risk is that PASOK leader Venizelos, according to a press report by Bloomberg (June 17), seems keen to see a broad national-unity government, encompassing not only pro-bailout ND, PASOK and perhaps the smaller Democratic Left, but also anti-bailout SYRIZA. Thus, the risk that such negotiations fail and lead to an inconclusive outcome remains high. Should this happen, markets might perhaps price in a higher probability of a near-term eurozone exit. Risk II: The list of prior actions that Greece needs to comply with is long and substantial. The IMF Memorandum of Understanding published on March 9, 2012, says that "prior to the first disbursement of the new programme, the Government adopts the following measures, through a supplementary budget" (see here). These measures amount to about €3bn, or 1.5% of GDP. And "some 7% of GDP in additional measures will be needed to attain the 2014 fiscal target." Even though the Troika might make some small concessions, there's a high risk that the loan tranche is disbursed with some delay, given that we are running at least six weeks behind schedule for Greece's ability to make all domestic payments. All good then? Solvency far from assured: The new bailout plan would put Greece on a more sustainable debt path in the medium term, we think. However, apart from several structural deficiencies yet to be addressed, even if the challenging goal of roughly 120% debt/GDP in 2020 were eventually met (we expect 140%), this would still be far from the 90% threshold that we deem to be sustainable for a country with a twin deficit yet to correct in full (see On the Greek Debt Restructuring (Part I), February 22, 2012). The inescapable reality is that Greece needs funding... With interests of (foreign, mainly official) creditors and (domestic) voters not that aligned, one might wonder whether the incentive to attempt meeting the Troika's demands depends on the fact that Greece, having a primary budget deficit for at least one more year, needs funding. Since funding doesn't come from the market, it has to come from the official lenders. ...things might change when Greece comes close to make ends meet: As long as the primary budget balance is in deficit, the incentive to, say, restructure is not really there because, with the government now unable to fund the primary budget deficit, the savings required to balance the books will be substantial anyway. However, when the primary budget is back in surplus, Greece might be tempted to seek further renegotiation, threaten default, or even ask the question of eurozone membership, especially if it becomes too evident that the future pace of expansion of the economy is too low to sustain the debt-servicing costs. Balancing the books further down the line could change the incentives: The cost of austerity is a deep recession. This affects the domestic population, which has a saying in the political process. The cost of pursuing other policies, from attempting to renegotiate the terms of the adjustment programme to defaulting or even asking the question of eurozone membership, has an impact on the creditors (and the future borrowing costs), which are mainly outside ofGreece. They don't vote. What's the key trade-off: In essence, a country would choose to, say, default on its domestic debt, instead of enduring a painful domestic adjustment, if the cost of the latter exceeds the cost of the former. The same applies to milder (renegotiation of the terms) or harsher (attempting an exit) options. Basically, if a large share of government debt is held by foreigners (as is the case for Greece), a default might seem more palatable, as the cost on the domestic population would be smaller. So while the "Drachmageddon" might have been avoided for now, there's still a latent risk that it might happen in the future. Because of this latent risk, some damage to the Euro, we think, might even be permanent. So that's the relatively warm view of eventws Pessimistic view - Citi Initial reactions from European officials welcome the outcome of the election, but made very clear that the there is little room for the new government to change the existing bailout programme. In a statement, EU Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy said: "The second economic adjustment programme agreed between Greece and the Eurogroup is the basis upon which to build growth, prosperity and jobs for the Greek people," adding that "We stand ready to continue assisting Greece in achieving these goals." The Eurogroup also issued a statement saying that they look forward for a "swift formation of a new Greek government that will take ownership of the adjustment programme to which Greece and the Eurogroup earlier this year committed themselves." The statement added: "The Eurogroup reiterates its commitment to assist Greece in its adjustment effort in order to address the many challenges the economy is facing."  Earlier this evening, German Foreign Minister Guido Westerwelle said that there "can't be substantial changes to the agreements, but I can imagine that we would talk about the time axes once again, given that in reality there was political standstill in Greece because of the elections, which the normal citizens shouldn't have to suffer from." And the Belgium Foreign Minister, Didier Reynders, also said that the EU would be ready to talk about the austerity timetable with the new Greek Government.  However, significant challenges remain: the relatively low turnout of approximately 62% underscores continuing political apathy, while the fact that the second-largest party by share of the vote, SYRIZA, has already stated its unwillingness to join a coalition. These, plus the continued pressures of austerity signal major challenges ahead for a new government. While a government of "National Salvation," as New Democracy's Antonis Samaras has called for, seems likely to be formed and with a sufficient number of seats to approve legislation in the days ahead, ND and PASOK remain uneasy coalition partners, austerity deeply unpopular with the Greek people, and easily available alternatives in short supply Further, while the Troika has already suggested willingness to extend the timeline for fiscal consolidation, we do not expect to see a softening in the terms that would meaningfully alter the difficulties the new government will have in implementing the measures. This suggests that Greece might get some more time to agree on the implementation of the required structural and budget reforms (including the identification of extra fiscal tightening worth 7% of GDP from coming years) and probably also some more assistance from EU or EIB funding. But this might also go together with a stretched payout of the programme funding. With the Troika just going back to Athens after a new government will be formed, a payout of the next tranche of the programme of €31.2bn at the end of June (IMF: €1.6bn; EFSF: €29.6bn) which includes €23bn for bank recapitalization will be almost certainly postponed. In addition, to us, it looks likely that the EFSF will split the targeted €23bn for the bank recapitalization in additional tranches depending on the upcoming assessment of the progress in the programme implementation.  With this in mind, our probabilities for Grexit remain unchanged in the range between 50% and 75% over the next 12 to 18 months. While the outcome of the election, and the likely agreement on an ND-led government has reduced the risk of an exit in the very near term, with the large role of SYRIZA in Parliament and its power to organize protest against further austerity measures and far-reaching structural reforms on the streets, it looks to us unlikely that Greece will be able to fulfill only slightly amended conditions of the MoU. Ok, think that's enugh of that Grexit at 50-75% ... Looks about right. Looks about consensus, actually. Here's Jefferies with yet another summary saying "this changes little" Following the Greek election result, Jefferies hosted a conference call with Professor Kevin Featherstone, Eleftherios Venizelos Professor of Contemporary Greek Studies and Director of the Hellenic Observatory within the European Institute at the London School of Economics & Political Science. The election came at a critical time for the EU following the recent bank bailout for Spain and also as the viability of the euro has come under question. With no clear party winning, a new three party coalition is expected to be led by the New Democracy party within the next three days. The anti-bail out opposition party, Syrzia which came second, is likely to continue to voice disapproval over the EU bailout programme as well engaging in rhetorical support for the strikes. The election should usher in a new era for Greek politics given that past coalition governments have not lasted very long. While the new Prime Minister, Antonis Samaras has been in the past an unpredictable, populist leader, he has commented recently that "we will not have any new adventures." The markets will need to be assured that a coalition government can be formed quickly given the strong showing by the anti-bailout Syriza party. A close eye will be kept on the appointment of a Finance Minister and whether they are a technocrat or not. It will also be interesting to monitor the signals emanating from the G20 meeting following the election. Question marks still hang over reform capacity in Greece and the governability of the new coalition. The two main worries for investors will be the main opposition's backing for strikes and its populist agenda and secondly the difficulty past governments have had in being able to deliver on public administration goals such as tax reform. While equity markets may experience a short-term relief rally, the bailout programme is still off track with austerity measures delayed and government revenues running 15-20% below last year's level. Jefferies Bache FX team believes that a Greek euro exit will still be on the agenda come the autumn even if the pro-bailout parties win the election. Furthermore there is still an absence of pro-growth EU policies to ensure that other economies don't face increased banking and financial pressures. There is still skepticism over the ND party's expectations on privatization. It will be interesting to see how the new coalition government deals with the Troika since that will determine any economic success for Greece following the elections. Optimism surrounds Greece's sources of comparative advantage such as its position as a cargo logistics hub and location for medical tourism rather than its ability to deliver on its reform agenda. Following the Greek elections, the equity markets will focus on the G20 meeting being held in Mexico over the next two days and the US Fed Reserve meeting this week. For more significant developments post the Greek election, the EU summit commences on 28-29 June where there are hopes for a future blueprint of the EMU to be published. Last week, the Bank of England surprised the markets when it announced additional liquidity support for banks and put in play measures to try and directly help the flow of credit to the wider UK economy. There are growing expectations that the Federal Reserve will also announce further monetary easing measures following weaker employment data. The most depressing sentence I've read this morning .... The EU summit commences on 28-29 June where there are hopes for a future blueprint of the EMU to be published. Yes - we're pinning our hopes on another summit. Keep watching the horizon. They'll fix this thing eventually, somehow. I really can't turn the sound up (Sorry folks. Tech difficulties.) Murph swearing a lot. I'll grab something else to fill the dead air. Gary Jenkins of Swordfish Has just sent through the following, which is interesting. Subordination - The radical way forward But not the way the EU thinks... With carnage in the Spanish bond market the big question is what can the EU do now to stop the bleeding. I have long advocated a temporary fiscal union in which common euro bonds are issued for 3/5 years instead of all individual sovereign debt with the idea that they would be gradually phased out. Obviously strict budget deficit parameters would have to be drawn up but that is happening under the bailouts anyway. In all likelihood that might be a step too far for the EU but there is an alternative to a full bail out of Spain which resembles those of Greece , Portugal and Ireland. They could use the ESM to buy some of the Spanish debt due to come this year, but do so at a target spread over bunds. They could also buy at that target in the secondary market a couple of times to warn off the shorts and try to stabilise the market. Obviously it would be helpful if the size of the ESM was increased and they did a similar targeted spread bond buying policy for Italy. This does not solve the underlying problems but there is no magic bullet and to generate investor confidence in these countries is going to take time, which the EU does not have. If they wanted to be really radical they would also subordinate themselves to anyone buying primary debt from this juncture onwards for a couple of years. That might actually encourage investors to buy alongside them which is what they need to do if the Eurozone is going to continue. Lending money is all about confidence and that is shot to bits right now. Confidence will only come back very slowly unless the authorities take action to artificially improve bond investors position. Accepting subordination might at least buy the EU a little bit of time whilst it decides if it wants to move towards a full political and fiscal union. Well the Germans still saying they are not having any of that German Foreign Minister Guido Westerwelle Last night saying Greece could get more time etc Got shot down immediately this morning And you could translate yesterday's comments from Hollande as, "ok, I've won now, so we don't have to pretend that we have any say over Germany's policy any more." Though my French ain't brilliant, so that's up for argument. Ok - should we move on? I've had quite enough of Neverending Eurofudge for today. Why is the Footsie up?!?!? Cable& wireless bid finally come good? But not Xstrata Glencore Prices are actually all over the shop It's a ragbag on the leaderboard Not following any real pattern. Number1 - we will come to that There is very little news and no sellside whatsoever Which is for obvious reasons. Who'd try to broker a story on what looked last week like it was Grexit day? We really are held hostage by Europe. Anyway, let's cut to what news there is. Man Group mentioned on the right. Its first day outside the FTSE 100, and it parts company with its FD. Man Group PLC (EMG:LSE): Last: 73.70, up 0.9 (+1.24%), High: 75.10, Low: 71.80, Volume: 5.20m off to pursue professional and personal interests Do you think he might turn up here: http://www.isam.com/index.php ? This is where the previous guy who left last week has gone to ISAM Which, in case you don't kow the newish black box firm set up by Stanley Fink No evidence that i can see that it's any smarter than AHL Cheaper though, right? Ah right, well that's important You don't want to be charged too much to flatline, investment wise So as for the Finance Direxit ..... His replacement is Jonathan Sorrell .... He was head of strategy and corporate finance Now the odd thing here is that Man doesn't seem to be replacing him in that role. I guess they no longer need strategy and corporate finance. Anyway, never seen a great news to lose your FD with immediate effect Particularly after shares have halved in a very short time. Though Man is a special case, arguably. Here's Merrill to insist that nothing's wrong, probably. Given Man's recent share price performance, we suspect that some will tend to try and read too much into this. However, Mr Hayes has always struck us as an effective steward of Man's infrastructure, accounting and balance sheet. We see Man's current issues as being a combination of sluggish demand industry-wide and soft AHL. It is hard to lay either of these at Mr Hayes" door. We would also point out the obvious, that if there were any bad news lurking which has caused this move, the company would have had to disclose it. Instead, Man has reiterated that the next update will be on the 24th July, as previously planned. Mr Sorrell is, judging from our encounters with him, an extremely knowledgeable and effective hedge fund business person. Man's recently announced acquisition of FRM, which he was heavily involved in, seems a shrewd deal. We think there is nothing about Man which a period of good AHL performance would not fix. That said, we suspect that Mr. Sorrell, as a relative outsider, will be able to look at the company's overall cost structure with a fresh pair of eyes. Also, Mr. Hayes always struck us as perhaps keener on Man having an investment bank-like balance sheet than we would have been. Maybe aspects of the balance sheet, in particular its layers of bank-like capital, will also be looked at. Overall, though, we would see this as simply a natural evolution of Man's management team. Shares not changed much. Started weak, I think, but have rallied. Man Group PLC (EMG:LSE): Last: 73.65, up 0.85 (+1.17%), High: 75.10, Low: 71.80, Volume: 5.21m And once again, if you haven't watched this, watch this The 25 year anniversary video of AHL Showing the quite incredible amount of brainpower that's required to lose money. How about something more positive Since it's a slow session Can I do a bit of crowdsourcing? Er, sure - if you trust em over there Oh, it's nothing important. Having lunch with Sainsbury next week, and they've just sent over the selection of mains. So - rabble. Take your pick. Roast Cod, Summer Vegetable Broth, Gremelata Rump of Lamb, Pea Puree, Thyme Roasted Potatoes Asparagus & Broad Bean Risotto, Truffle Oil, Pecorino they do a good taste the difference lamb I assume they're not "pierce film lid" cuisine. So keep the votes coming in as we move on to something more important. Well, Orbis has said it ain't going to fight no more. Because it wasn't going to win. Based on the information announced by CWW today which was shared with us on Saturday and following discussions with CWW, we now believe that the CWW Scheme of Arrangement will eventually succeed, even if Orbis were to vote against it today. In these circumstances, our opposition would only serve to prolong the process because the Company would likely adjourn today's meetings to secure the necessary votes. Orbis biggest shareholder in C&WW So Vodafone can now get the 75% it was after Doesnt hae to restructure the bid In fact they're nearly certain to get 100% vote. We are up, 7.9% at 37.8p in the middle. Against a 38p price, due by mid-August. Which I guess shows two things .... First, it's no risk whatsoever any more. And second, there's an army out there who'll pay 37.9p at the start of summer to receive 38p by the end of summer. Mark that one up to the desperation for any kind of risk-free trade, I guess. (Could someone total up the votes on my lunch, please? I'm losing track.) What's tghis Melrose deal? A Sunday newspaper story, amazingly. Just when you thought they didn't exist any more. Well it is Melrose - born in the hayday of Sunday newspaper stories Melrose set up by Ex Hanson people of course Gary Barlow stood in for AA Gill this weekend. That's all I need to know about Sunday newspapers .... This, though, is a strike for the Telegraph. Saying Melrose was considering a $2bn-plus bid for Elster Group A very good strike for Ben Harrington and Helia Ebrahimi German company, US listed. Melrose offering $20.50, Elster said to want $22 Against a $16.00 close on Friday Potential finance in the usual Melrose way - lots of debt and a bit of equity. £1.5bn of debt and an equity issue that would raise between £600m and £700m , to be exact. Now, this follows reports in the WSJ and elsewhere that CVC Elster's 60%-ish shareholder, was auctioning the company. Siemens, ABB and private equity all mentioned Will cut to some Barclays for the potential deal mechanics. At $20.5 and using Bloomberg estimates Elster would be valued at CY12E 1.43x EV/sales, 9.9x EV/EBITDA and a PER of 17.8x. Using Bloomberg estimates the suggested price and deal structure in the Telegraph article would mean a combined Melrose and Elster would have net debt/EBITDA of c. 3.5x, which while similar to the structure of Melrose's acquisition of FKI in 2006 is higher than management's more recent deal structure commentary (c. 2x net debt/EBITDA). Amir stated in his note that he would not be surprised if Elster is up for sale given ongoing metering consolidation and thinks the company would make an attractive asset due to 1) its share position which should rise in the coming years 2) longer-term cash flow dynamics 3) its potential opportunity ahead of a meaningful international upgrade cycle. Sorry - Amir is Barclays" US industrials analyst. Positives: 1) this would be Melrose's ideal size (at $20.50 per share it would equate to an EV of c. £1.7bn) 2) Elster has a strong market position which we expect to rise (the top four vendors in this market Elster, Itron, Landis+Gyr and Sensus) represent 60+% of the global market 3) Elster is positioned in an energy market which is expected to show good growth over the next few years There are four areas which we would like to investigate further: 1) Is Elster really a management turnaround opportunity? - which is Melrose's speciality 2) Suggested price and takeout multiples do not appear fundamentally cheap at first glance 3) Suggested deal structure would impose more debt on the combined entity than we would have originally expected 4) Potential for competition. Market's not that spooked at the prospect of an equity issue. As that's the nature of Melrose, really, and we all knew a bid for something was on its way. Just having a scratch through to see what we've not covered. RCP mentioned by someone ... Is that RIT Capital Partners? Sorry, not a clue. Someone was pushing luxury today. Deutsche Bank I think. Burberry Group PLC (BRBY:LSE): Last: 1,350, up 42 (+3.21%), High: 1,354, Low: 1,318, Volume: 556.65k I'll just dig that out. Actually, note's unreadable so I'll just use Bloomber's summary of it. June 18 (Bloomberg) - Despite some signs of slowing, the global luxury goods sector has "never had it so good," Deutsche Bank says. Absolute levels of profitability, margins are at all-time highs for most brands/companies, EM consumers offer potential growth opportunities for the next decade: Deutsche Bank Despite 27% valuation premium of luxury to retail/department stores, more opportunities within luxury, especially as move towards greater control offers further upside: Deutsche Bank And that, I think, is that. Euro testing fresh lows for the day ES ticking higher again 7.145 on trade web numbers That's on the move again So can we go do something else now? I started with very little to say and I think I've now said it. Sorry if a bit of a scrappy session It's difficult with this news flow (@Taxloss. Take a hint.) Right - thanks all for your comments. Some reading material - Buffett on the bright future for newspapers - http://www.nytimes.com/2012/06/18/business/media/newspaper-work-with-warren-buffett-as-the-boss.html?_r=1&ref=media&pagewanted=all Buffett talking his book as usual. Thursday - pub drinks near pub quiz This entry was posted by Paul Murphy on Monday, June 18th, 2012 at 11:03 and is filed under Uncategorized.