Markets Live: Thursday, 27th June, 2013 This is the transcript of the Markets Live session ending at 12:04 on 27 Jun 2013. And have a serious system issue With my Reuters terminal This can't be right It's saying Pearson is the top Footsie faller Nothing works round here Actually, it's half fixed itself Pearson now second top faller Pearson (PSON:LSE): Last: 1,135, down 21 (-1.82%), High: 1,158, Low: 1,133, Volume: 932.81kBlock Anyway, we'll put that down to a technical glitch Bull market still on Bryce? Third day up, but we'll be struggling to make it to midday on news. We're 23 points better at 6188 though volume - even by recent woeful standards - is woeful. And there's precious little news, is that right? For a Thursday, we're very light indeed. Other than the BIG news taht we didnt have a double dip recession Just one big single-dip recession instead. And the 2008 recession has been revised deeper It's basically a massive rewriting of history. Statistical history, which isn't real history, but you know what I mean. In terms of Q1, unchanged at 0.3%. Though there's a load of revisions below the headline. Consumption growth was revised up by 0.2 percentage points, to show growth of 0.3%. Export growth was revised higher too, by 0.7pp, while import growth was revised lower, to 1.5pp. So, net trade now makes a 0.6 percentage point contribution to growth in Q1, compared to the earlier estimate of a 0.1pp detraction from growth. On the downside, business investment was revised lower, while the previous positive contribution to GDP from inventories is now a negative one. In terms of output, revisions are smaller. Services output is now estimated to have grown by 0.5% instead of 0.6%, while manufacturing is revised up to show a fall of 0.2%. This is via BNP Paribas. The income side of the accounts reveals some worrying trends. We have been noting weak pay growth and the risks it poses for real disposable income and consumption in the second half of this year. These concerns are not lessened by a 0.6% drop in wages and salaries in Q1, taking the year-on-year growth rate to 1.2%. Household real disposable income fell a whopping 1.7% in the first quarter, with the year-on-year rate of growth at -0.3%. To keep spending as they did consumers had to reduce their savings rate to 4.2%, down from 5.9% and an average of 6.7% in 2012. Pay growth stalled, disposable income grinding lower .... I wonder how we're all going to pay our mortgages when interest rates move up 50 bips? As for the longer view .... Amongst many changes in detail the headline grabbing one is that the double-dip recession has been revised away. We have previously highlighted the likelihood of this. But in reality this matters more for politics than economics. 2012 Q1 is now estimated as flat rather than showing a fall of 0.1%. The much bigger revisions come further back. Growth in 2009 is now estimated at -5.2% compared to -4.0%. The peak to trough fall in GDP is now estimated at 7.2%, revised from 6.3%. As a result and with smaller revisions more recently, output is now estimated at 3.9% below the pre-crisis peak, compared to 2.6%. This is a much poorer performance than other G7 countries aside from Italy. When taken with a still large current account deficit in today's data, at 3.6% of GDP, the data today highlight both the damage done to the economy following the crisis and the size of the challenge still facing it to rebalance. Real income growth is doubtless weak due in part to shifting ahead of the tax changes in April. But unless it bounces considerably it raises serious concerns that after a solid Q2 growth will at best be weak. These are good arguments for new Governor Mark Carney to consider a significant easing in policy as early as next week. While we're on the macro picture I should mention that a fresh Albert has just landed havent had a chance to read, but i suspect this is a good un Yeah, I still had a fleck of optimism left this morning so please, crush away. The financial wreckage left in the wake of Bernanke's taper talk has generated a lot of interesting commentary. I read, for example, that this marks the beginning of a lost decade for bonds. But what if tapering has nothing to do with the US economy having reached a sustainable take-off velocity? And where does that leave the Ice Age? I can't summarise this in a flash So let me just cut to the final par Which gives the right sort of flabour flabour as well perhaps But I meant flavour These numbers are eye-popping. The three standout countries, Japan, the US and the UK, top the problem list by a long long way, requiring over 13% of fiscal tightening in all cases. But in the unlikely event that age related spending is held constant as a share of GDP, the fiscal restraint in the UK and US at least is a more manageable 7.5% and 5.0% respectively. The problem, as we have said before, is that governments are beholden to their voters and so will not hold age-related spending constant. They will take the path of least resistance, which is to print their way out of this looming fiscal catastrophe. Marc Faber is right. QE99 here we come. I will do a post on that note later. promise What can cheer us up Bryce It's nice out you know And best mention the only source of volume this morning. Which is The International Consolidated Airlines Dirigibles and Steampowered Flying Apparatus Publicly Listed Company. International Consolidated Airlines Group SA (IAG:LSE): Last: 261.20, down 3 (-1.14%), High: 263.50, Low: 256.50, Volume: 34.52mBlock What's happening there This is Bankia selling right? Bankia finally slotted its stake, giving up on the possibility of flogging it to a Middle East airline. All done this morning at 256p. Qatar sounded them out on this last month ...... Emirates strongly rumoured to have tapped them on it last year. Nobby's right - they got a good price, given the chunky stake Well, in terms of passive impact ..... IAG's free float in the FTSE rises to 100% so you have nearly 7m needing to be hoovered up by passive trackers. Actually, more than that for the FTSE all share. 18m for all funds. So you're looking at about two days average volume of support from the passives. And, frankly, we knew it would happen. It should be baked into the price to some extent. Merrill pushing this morning .... Coincidentally, Merrill also did the placing. But let's not get too cynical about details like that. Post the sale of Bankia's stake, we feel that one of the overhangs on IAG's shares has been cleared and that investors can refocus more on the improving fundamentals. We are reiterating our Buy on IAG with a 310p price objective. We believe the best time to build a position in any airline is when:  There are capacity reductions, which provides sustenance for consensus upgrades.  The bears have a short-term red herring over which to be concerned.  A valuation is discounting value destruction, with an uptick in CROCE. IAG qualifies strongly under all three banners  At IAG group-wide capacity will likely be down c.1.5% this year. Consensus upgrades are being driven by strong revenue momentum across the North Atlantic (we estimate RASK has been at c.+10% YoY in H1"13). Our group-wide FY13E EBIT forecast of €833mn is c.€200mn above consensus, driven by a c.100bp differential on yields (vs. consensus; BofAMLe +5% YoY).  In terms of red herrings, we regard the Iberia issues as a distraction, with little value being given to the Iberia asset in the share price.  We estimate an FY13 EV/CE multiple of 0.40x, with the business covering its cost of capital in FY15. Our 310p PO is based on an EV/CE multiple of 0.45x, which is similar to where BA traded in 2007. So Merrill reckon one of the overhangs has been cleared here? They might be right on that Given they have just cleared it? Yes, it's inspired analysis. What's behind the WPP move? Well, I think that may be Merrill again. Oh Have they identified growth in the digital era or similar? Yeah, apparently the overhang of it exiting the wire coat hanger business has now passed. Shopping trollies, wasnt it? And hello to all our friends in Ropemaker Place, incidentally. So, anyway, Merrill has a very small media stock rejig out And WPP's added to one of the lists. Catalyst - WPP offers an attractive combination of value & growth and therefore should perform well under the boom phase of the style cycle ... Investment summary - WPP trades on 11x 2014 EPS and 12x NOPAT, a discount to Publicis & US peers. We believe this is unjustified given WPP is overweight EM and digital, and that WPP is attractive versus quality consumer staples trading on close to 20x. It then refers you to their "boom boom" thesis of a few days ago. Which says, in short, that the "Style Cycle" entered the "recovery" phase in April 2012, and shifted into "boom" in June. The "Style Cycle" is this .... Or, if you prefer .... 1) Pan EU Bond Yields (12m chg) rising, 2) German IFO rising, 3) Europe's OECD Leading indicator rising 4) European consensus GDP forecasts risng 5) Producer Price Inflation falling. 6) Global sell-side EPS revisions flat. So you should go neutral on value versus growth .... Overweight rising vs. falling momentum (whatever that means) Favour small over large. And - I quote - buy high risk and low quality. You are not making this up, are you? I wish I were. I really do. Anyway, usual place for the full thing, should you want to judge it yourself. Can we run thru some of these results? Betfair for instance Still in "we were right to reject the bid" mode, so if they sound even slightly negative not they'll be toast. Betfair Group PLC (BET:LSE): Last: 830.00, no change, High: 840.50, Low: 805.00, Volume: 56.90kBlock It's a "no surprises" type results statement really. What's this a ref to? cultural change underway We floated with the wrong management We now have the right management. See also Supergroup. Though not, notably, Glencore. I'll let Goodbody summarise from here. Management re-iterated that its new strategy will lead to an acceleration of revenue growth in UK business and expects to grow in line with market in the medium term. Revenues in markets with uncertain regulatory visibility are continuing to be more resilient than expected. We do not envisage making any material changes to our FY14 forecasts at this early stage in the year (Revenue £386m and EBITDA £85m), but the risk is to the upside. We remain positive on the Betfair turnaround story and re-iterate our BUY recommendation and 1010p price target. Exchange revenues were £248m, -1% yoy and in line with forecasts. H2 revenues were -8% due to market exits. Football revenues were flat yoy, while horseracing was down slightly due to cancellations (151 v 49). 90% of football markets on the exchange now have "Cash-Out" and it is now available on all major mobile platforms, with 38% of football customers using cash out. 50% of exchange customers placed a bet via mobile during the year. An improved API has been developed for more sophisticated exchange users. The Sportsbook had revenue of £24.1m (Goodbody £23.9m), +33% yoy. Cash-out on the sports book has recently been released. Volumes in March and April were +150% yoy in the UK & Ireland market. Mobile accounted for 31% of sports book revenues in Q4. ... I have issues with that "Cash-Out" feature, incidentally. It often seems to pick a rather inefficient way of cashing you out, with a rather long delay even when the market's not suspended. Which forces you to do actual maths, rather than just press buttons. I much prefer the latter. Back to Goodbody ..... In May, the group announced it was testing pricing changes in 5 different geographical markets, with a 5% commission rate changed to 4% to 7.5%. This has now been extended to 18 countries to provide a better understanding of the impact of pricing changes to the exchange ecosystem and liquidity. Gaming revenue was -6% in FY13 to £75.9m (Goodbody £74.5m) with -26% in unregulated markets and sustainable markets +10%. This was helped by marketing focus (TV campaign); new content deals during the year and better cross sell. In fact, cross sell across all products (exchange, sports and gaming) improved with average core products per active of 1.58 in Q413 v 1.50 in Q412. And Barclays with a push ..... We continue to believe Betfair has a unique and market leading position, with the Exchange remaining the company's USP. Furthermore, the shift towards regulated markets should help drive a re-rating of the shares, with 75% of revenues now coming from sustainable jurisdictions. Following the FY13 results we retain our OW rating and 950p price target. The stock is currently trading on 18.8x FY14 P/E (falling to 15.2 ex cash) and 8.0x EV/EBITDA. Management saying the usual stuff about acquisitions or return cash within 12 months. Sitting on net cash of £168m. Can't think what they might buy though. Have the capacity for fixed odds and casino already. Otherwise on results ...... Debenhams doesn't disappoint, in the sense that it only disappoints as much as we were expecting. Debenhams PLC (DEB:LSE): Last: 94.30, up 3.5 (+3.85%), High: 94.55, Low: 89.10, Volume: 4.64mBlock FY earnings guidance unchanged. That's the good news. So they are "transforming" their Oxford st store Into what I wonder? What's the bad news? LFL's slightly light. Margins stable - which surprises me a bit. Stopped in to buy some glasses the other day. I got 20% off a box that was already 20% off, plus a £10 off voucher plus a further 10% off if I signed up there and then to a store card. Pretty sure if I hung around for long enough, they'd end up paying me to take their stock away. Oh, we get the usual weather stuff this time around. Here's Cazenove's summary. LFL sales miss driven by the weather. LFL sales were flat in the 16 weeks to 22 June, below consensus for +1.5% (source BBG) and our expectations for a rise of 0.8%. It represents a c.30bps deterioration in the underlying run-rate versus the first half. However, the performance has been volatile and closely correlated with the poor and unseasonal weather in the UK. In the context of the poor weather, as well as disruption from the Oxford Street refurbishment (c.10% of group sales) this is not a bad performance in our view, despite being below expectations. Encouragingly market share gains continued (fashion +20bps), premium beauty +50bps) and home +20bps. Online sales rose by 40% in the period. FY flat gross margin guidance reiterated; should reassure. Management has reiterated guidance for a flat FY gross margin (JPMe flat). Given the decline of c.20bps yoy in the first half, and the highly promotional environment on the high street in recent months (due in part to the unseasonal weather) this should reassure and suggests that management have had very strong control on this metric over a volatile trading period (we estimate gross margin rose in the region of +20bps in the quarter). We also note that the group had a higher open-to-buy going into the quarter highlighting managements control over the metric. Going forward management is comfortable with current stock levels. Opex guidance reduced; mgmt confident on FY profit range. Management has reduced opex guidance for FY13E. Store cost inflation now expected to be no more than 2% (JPMe +2%), online costs as a percentage of sales to fall 225bps (prv guidance -200bps) and other costs (c.25% of UK opex) to rise by c.+1% rather than +5-7% as previously guided. These savings broadly offset the softer LFL in the quarter and management remains comfortable with the FY13E PBT range (£150m to £157m, JPMe £155m). We do not expect consensus to move this morning. Overall, in our view, the LFL performance is not bad in the context of the unseasonal UK weather and the flat gross margin guidance is very reassuring (implying a positive performance in Q3). The stock has performed broadly in line with the sector over the last 3 months (rising by +8.8%), however, is trading on a CY13E PER of 9.2x. This represents around a 38% discount to the sector average (14.8x), the magnitude of which is undeserved in our view, particularly in light of a more consistent delivery on guidance. @Nobby: I value a pub that won't throw me out. Rabble are talking shale ...... And i just don't know anything about shale You need to read John Kemp over a Reuters Snap on Reuters just now Britain to offer 100k benefits to local communities that host fas fracking is that 100k for the whole community? Which would be pants Or 100k per household? Which would be QE for the common man It's just a reuters snap at the moment, so i just don't know IGas Energy PLC (IGAS:LSE): Last: 124.00, up 6.25 (+5.31%), High: 128.00, Low: 118.50, Volume: 1.34mBlock Centrica PLC (CNA:LSE): Last: 356.00, up 1.4 (+0.39%), High: 358.90, Low: 353.90, Volume: 3.32mBlock Those are your UK shale gas plays. Let me share some Kemp on the general subject By John Kemp GENEVA, June 26 (Reuters) - Shale has revolutionised oil and gas supply and the global political balance in less than five years, transforming the narrative from one about "peak energy" into a story about managing abundance. The revolution stems from the application of two mature technologies (horizontal drilling and hydraulic fracturing) in a new context to unlock oil and gas from well known rock formations that were previously impossible to tap because of their low permeability. Horizontal drilling and fracking have dramatically expanded the range of potential rock formations that can be targeted for oil and gas production. Shale resources are vast and much more widely distributed than conventional oil and gas fields. If the industry's full potential is realised, the centre of gravity in the global oil and gas markets will shift away from dependence on the Middle East, North Africa and Russia (for gas). But while the potential is global, the only significant quantities of shale oil and gas that have been produced so far have been in the United States. Elsewhere the industry's potential remains theoretical. Shale is a profoundly disruptive technology that touches all aspects of the oil and gas markets from production, costs, refining and transport routes to the balance of power. It is disruptive because it has emerged in the middle of the cost curve and threatens to displace higher-cost oil and gas production. It is also complicating policy on climate change by threatening to provide a practically unlimited source of fossil energy at relatively low prices. Shale is turning the United States from the world's largest energy importer into a significant exporter, at least in some areas, conferring a competitive advantage on U.S. manufacturers in energy-intensive industries such as iron, steel and chemicals. Shale is already altering the political balance, and the revolution is still in its infancy. The central question now is how far the industry can be scaled up and spread beyond the shores of North America. Most of the obstacles are above ground in the form of politics, regulation and environmental acceptability, rather than geological or technical. Market analyst John Kemp gave a presentation exploring the implications for Reuters" clients in Geneva on Tuesday. A copy is available on the internet at http://link.reuters.com/cyd29t That's a general wrap from Kemp But he's done lots of more detailed stuff He needs a new byline pic tho What was that famous 1960s documentary about how rich Scotland would be from the North Sea oil boom? I'm looking on Youtube now, but can't find. It's a rather downbeat watch. Back to the movers. Quick mention of Smiths ..... Smiths Group PLC (SMIN:LSE): Last: 1,297, up 27 (+2.13%), High: 1,310, Low: 1,287, Volume: 485.77kBlock Come back a long way, which is the gist of a UBS upgrade They reckon the £2.8bn CareFusion might be offering for its medical division looks quite attractive now. Heard a price range the other day incidentally, of which that's approximately the middle, but there's also a lot of nervousness about how developed talks are. On which I have no view. UBS CFN analyst estimates significant (greater than 15%) accretion to CFN FY15 EPS at a c£2.8bn price tag. We believe a sale of Medical will be positive for Smiths as: (1) it will realise the fundamental value of Medical; (2) it is likely to attract bidders for the other Smiths businesses and (3) will reduce the conglomerate discount some investors apply to Smiths SOTP driving a rerating of the share price. The recent increase in interest rates are positive for Smiths Group as they are likely to increase the pension discount rate and reduce Smiths pension liability and net pension deficit, making the sale of a business and distribution of cash to shareholders easier than before. If a deal is done, we would expect the discussion on Smiths to move to potential uses of cash, which we believe is a better than a hypothetical one on potential value of a division in a possible divestment scenario. We upgrade to Buy after c7% decline in share price since initial media reports of a potential sale. We believe there is sufficient upside to our 1,400p PT to justify a Buy rating. We forecast an improvement in FY14 vs FY13 driven by revenue growth at John Crane & Medical and restructuring at Interconnect and Detection. 1,400p PT based on SOTP. Upcoming catalysts: Potential sale of Smiths Medical, FY13 results in September and John Crane investor day in December. (@anthrax: predates McCrone, I think. Seem to remember a Dimblebot presented it.) The dear old Crock is going to administer the Help to Buy house price inflator scheme Well, that makes sense. If you want a 95% mortgage, you go to the experts. UK Asset Resolution (UKAR), the holding company of Bradford & Bingley and Northern Rock Asset Management, today confirms that it has been appointed by the Government to administer the new Help to Buy: mortgage guarantee scheme. Under the terms of agreement, UKAR will be responsible for the day to day administration of the scheme on behalf of HM Treasury. The Chancellor will retain overall responsibility for the Help to Buy scheme. The administration of the Help to Buy: mortgage guarantee scheme by UKAR will have no impact on the financial position of Bradford & Bingley and Northern Rock Asset Management (NRAM). Just too perfect. The Treasury is writing its own satire now. @mrsldishman: sorry, no thoughts on Ashtead at the minute. Hey, Darcy's got the PR job Sorry - inside FT news Darcy Keller's taking over as our global comms director Darcy is a "friend of AV" Sorry, back to the market What have we got to finish on? Well, should note Perform. PERFORM Group PLC (PER:LSE): Last: 509.50, down 72.5 (-12.46%), High: 550.00, Low: 487.00, Volume: 297.27kBlock It's a rather opaque statement from a rather opaque company .... pressure on short term margins due to mix effects Which will "will modestly impact the rate of 2013 EBITDA growth" What does this mean? Well, I'm still not entirely clear. They can be lethal i reckon It looks to me like they've bought a bunch of stuff and invested in a bunch of places that will be rather less profitable than expected. Which they take to mean "less profitable in the short term while things bed down" And I'd take to mean "less profitable." Which seems to be how the market's reading it too, because the downgrades aren't that sharp. Cazenove's new figures are ..... Mgmt specifically said EBITDA FY13 estimates (BBG consensus is £56m) could suffer a reduction of £2m or more.... Mechanically, this could imply a mid single-digit % decrease in consensus FY13 EPS expectations. On FY14, mgmt has guided to the lower end of current FY14 EBITDA £70m-80m consensus range out of conservatism given it is hard to tell before licence renewals/ FY14 World Cup deals are signed. EBITDA margin greater than 30% is still very much feasible within the next 3-4 years. There's also a lack of solid news .... No detail yet on the much-anticipated licence renewals for Watch & Bet (as expected): "positive progress so far." Mgmt will give an update at full H113 results (expected 30 August), when it expects to have a number of deals agreed, if not necessarily contracted. iii) No comment on a potential acquisition of Opta Sports Data (reported on June 16 in The Telegraph, which quoted an asking price of £40m vs. year-to-July 2012 revenues of £10.8m and PBT of £0.3m). Net debt: as indicated at Q1 results, Perform paid €50m for the RunningBall acquisition earn-out. As a result, Perform had a net debt (rather than net cash) position for first time at end H1. The company would be comfortable with up to 2-2.5x ND/EBITDA but is still below that. Credit Suisse still seems keen ..... Although any downgrade on such a highly rated stock is negative, with the stock down this morning we see this as a buying opportunity for longer term investors. Management have made it clear that they are willing to invest in order to produce sustainable long term growth for shareholders. 1) We believe the group will likely be able to exert pricing power when renegotiating the group's Watch & Bet licenses. 2) We believe the group is well placed to benefit from structural tailwinds in media: increasing digital sports media consumption, broadband penetration, online video advertising, in-play betting, new digital platforms and devices. 3) We believe several of Perform's businesses offer significant "blue sky" upside potential not reflected in our forecasts or valuation. Note this bit though .... Perform on open this morning traded on 37x "13E P/E falling to 27x for "14E. Those structural tailwinds better arrive For a company people struggle to explain, that's a lot. (Or perhaps it's a lot because people struggle to explain it. That's how it worked in 1999.) Anyway, that's that. Can we wind up now? (@Tortoise1000: that may well be right. But I just wanted to advertise Joseph's stunning stuff on the Pari Passu saga He produced another three posts on this overnight The post series runs to 40 it's a serious body of work! You'll have to get your wonk on tho, reading it Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville.Block (@Nobby: idea on Kaz seems to be that shareholders can block the ENRC take-private. I've yet to grasp why that would be a positive for any of the parties.)