Markets Live: Thursday, 25th July, 2013 This is the transcript of the Markets Live session ending at 12:04 on 25 Jul 2013. Welcome to Markets Live, which nearly wasn't. Because here's a picture of the FT newsroom ten minutes ago. You'll note a conspicuous absence of bodies. They were all standing outside in the car park. Fire alarms need testing, apparently. And 10:40am on a Thursday is an ideal time to test them in a 24-hour newsroom. Anyway, we're here now. "We" being Iz and myself, as Paul remains at a reader's wedding. (Special service for premium subscribers. Paul comes to your nuptuals, whether you want him to or not.) We're selling off a bit. FTSE down 1.1 per cent at pixel. Down 71 points at 6549. And there's an absolute fest of results. As well as the UK GDP. But let's ignore all that and go straight to Arm, since it's been mentioned on the right. ARM Holdings PLC (ARM:LSE): Last: 826.00, down 62.5 (-7.03%), High: 868.50, Low: 826.00, Volume: 3.37mBlock We can point to a load of sellside research saying it's expensive. But we could do that yesterday as well. What we can say is that the selling started yesterday afternoon, some time after the conference call wrapped up. Now, the most convincing theory for this selloff is that it was Broadcom that spooked the sector. If you just hold on, I'll just grab a chart. @yogabba: we can limit the number of comments posters are allowed, and talking your own book to excess is a reason we'd do that. So - Broadcom, key Arm licencee, talks about weakness in wireless. Ah, hi Iz. Thought" you'd gone MIA. Sorry was just on the phone And I was just waffling about Arm as usual. I do, I have to admit. And TMT sector watcher says the Broadcom-Arm readthrough misses the point. Yes, there is a huge global mix shift from DM demand to EM demand. The great thing about ARM is that it's architecture is used everywhere. As the volume ramps, ARM continues to clip a coupon through royalties. The other bear argument raised again in the US last night was lingering concerns of Intel catching up on the technology path. We saw no evidence of this yesterday from ARM data. And, besides, as this mix shift to EM occurs Arm's advantage over Intel increases. You can't stuff an expensive piece of Intel silicon in a low priced smartphone. (S) he also notes that Qualcomm beat overnight, and talked down this idea that Intel's matching Arm. In terms of performance, power usage etc. As we've said on here, benchmarks are only benchmarks when they're benchmarks, and these aren't. What is the etymology of benchmark? I'll ponder it. In the meantime, it's worth noting what else is eating Arm. We have this article from the WSJ ..... posted a drop in first-half profit It did, on IFRS, which bundles in a bunch of charges that happen once a decade. Nevertheless, apparently the bots feed on this stuff. And underlines the dangers of machine-read and machine-generated journalism, incidentally. Finally, there's a brilliantly contrived conspiracy theory ..... .... well, it involved the good old Intel takeover rumour, and a certain amount of monkeying around by brokers. But, really, I'm quite sure it's fantasy. So I'll not give it airtime. (@Mo: out of the entire internet, we're the Apple fanclub? Your firewall must be very strict.) Blimey, that was a long waffle. Up from 0.3% in Q1. FYI - John Kemp probably wins our Carney caption competition Hotels and restaurant growth at 1.5% qoq, I note. Which is quite something. Construction also okay. 0.9% qoq Does it change the rates outlook? Not really. Growth of 0.6% is in line with the BoE's expectation. At the time of its May forecast, the MPC expected 0.5% growth but revised this up by 0.1pp in light of stronger data since then. So today's figures should not contain much news for monetary policy. We still expect the BoE to announce more explicit forward policy guidance when it publishes its next forecast on 7 August. This will probably be accompanied by some form of threshold set on a macroeconomic variable that must be reached before the MPC will contemplate any form of tightening. We think a threshold based on nominal incomes (ie nominal GDP growth) makes most sense (see "Awaiting Guidance," 12 June). However, the 0.6% growth rate is well above the OBR's March forecast of 0.2% growth in Q2 (and 0.6% growth for the whole year). So if the pick-up in growth is sustained, we can expect some better public finance forecasts from the OBR in its Autumn forecast. More generally, sentiment is improving and the sharper-than-expected rise in growth rates over the past few months is consistent with an improvement in the labour market, strong business surveys and improving consumer confidence. But it is puzzling when set against other economic data that shows falling real wages, a reluctance among firms to invest and the UK's largest trading partner (the eurozone) probably only just emerging from recession. It is difficult to see where all the output growth is going. And Deutsche, which I'll quote at length. At 1.4% the annual rate of GDP growth was the strongest since early 2011, though this was partly the result of there being an extra working day in Q2 this year compared to last. In fact if GDP were to grow at the same quarterly rate in Q3 as that of Q2 the annual rate would fall thanks to base effects - recall that Q3 last year saw a large bounce thanks to the Queen's Jubilee and the Olympics. That said, we could yet see a further acceleration in the quarterly rate of growth in Q3 relative to Q2 if the PMIs prove an accurate gauge and remain at their current levels throughout the third quarter. As Figure 2 right suggests, at 56.5 the UK's composite PMI is consistent with growth of around 0.8% qoq. The PMI surveys for July are due on 1/2/5 (manufacturing/ construction/services) of August. Such growth may be difficult to sustain, but barring a sharp fall in these surveys we expect continued growth in H2. As a result, both the Office for Budget Responsibility (OBR) and the Bank of England may be surprised to the upside by economic growth in the second half of the year relative to their latest forecasts. The BoE's May Inflation Report view saw growth of sub-0.5% qoq in the final two quarters of this year, as did the OBR (whose forecast back in March for Q2 GDP was just 0.2% qoq). So we can expect upward revisions to both sets of forecasts in the August Inflation Report and the Autumn Statement respectively. In fact were growth to remain at 0.6% qoq during the remainder of the year then the full-year rate would be 1.2%, slightly higher than our current view of 1.1%. Despite these more positive figures published this morning, UK GDP remains well below its peak - by some 3.3%. This compares poorly to other G7 economies, as our final chart right shows. Only Italy among the G7 is further below its peak than the UK. And US GDP in Q1 (the latest figures we have - the Q2 report is due in just under a week's time) is about the same above its peak as the UK's is below. The recovery since the middle of 2009 has been weaker than normal recoveries - over the past four years since the UK emerged from the Great Recession of 2008-09 the average annualised pace of GDP growth has been just 1%, compared to a normal "recovery rate" of more than 3% since the early 1800s. What are the implications of today's figures for the Bank of England's announcements on rates, QE and guidance over the next two weeks? While today's figures were in line with our expectations we had thought that there may be some upside risks to the quarterly rate of growth. As a result, today's report does not make it any less likely that the Bank delivers on expectations for guidance alongside its Inflation Report on 7 August. Indeed, we have seen such a recovery before, back at the end of 2009 and into 2010, which of course ended up fizzling out before it had chance to gain any serious traction. Still, despite the weakness of the recovery we continue to believe that the Bank will provide only loose-form guidance given the potential issues surrounding both time- and state-dependent pre-commitments. Here's a good chart. We're better than Italy! GKN PLC (GKN:LSE): Last: 322.70, down 18.4 (-5.39%), High: 338.20, Low: 321.00, Volume: 2.92mBlock It's a Geoff special. GKN has been the topic of conversation in City watering holes for weeks with rumours persisting that the former Guest Keen Nettlefolds automotive and aerospace components group is about to spend big in the US. Speculation intensified on Wednesday with dealers hearing it is on the verge of launching a $5billion cash and shares bid, worth around $35 a share, for Spirit AeroSystems, the Wichita, Kansas-based aerostructures manufacturer, which was spun out of Boeing. Spirit traded around $24 in New York early on Wednesday . Bank of America/Merrill Lynch is said to be advising GKN on the deal and has raised funds to enable chief executive Nigel Stein to take GKN to another level. With its share price 1.8p dearer at 341.1p and trading within spitting distance of its 52 week high, dealers said it gives GKN's financial advisers plenty of elbow room to complete a deal. GKN's net debt at the end of March was £940million. Now, company's not commenting. And I can't say I'd heard the story so can't gauge its quality. Weird thing to make up. Though, of course, GKN's already on net debt to EBITDA of 1.2x. If it's buying anything, it's paying with paper. I'd also note that Sprint Aero has results due 29 July. For what it's worth, Merrill thinks it makes sense. And, yes, they've published sellside on it this morning, which puts the claim that they're advising GKN on the deal into a curious light. SPR management mentioned in their 1Q13 results that they were conducting a "comprehensive strategic and financial review of the company's development programs." Boeing represents 84% of SPR revenues (Airbus 8%) while Boeing represents 11% of GKN sales and Airbus 20%. Spirit sales FY13E of $5.938bn are currently broken down into 22% for wing systems, 25% Propulsion systems and 50% fuselage systems. We would argue that GKN may consider only some parts of the SPR business, as Boeing and Airbus may not be inclined to create an Aerostructure supplier that is too large. Furthermore, antitrust authorities could limit the overlap. The wing systems business is currently under delivering (c.c.$1.3bn revenues in 2013 BofAMLest with 4.5% margins). Profitability is well below the other two Spirit activities with margins closer to 14%. GKN's profitability is in the range of 11-12% in their aeroctructures business, suggesting that there should be room to improve SPR's wing business. We believe the A350XWB nose/fuselage activity could also be of interest to GKN - SPR revenues are currently limited but the activity has substantial growth prospects. GKN has mentioned in the past and at its recent investor day in April its intention to increase the group's Aerospace exposure. All in all, we consider GKN could be eyeing activities worth $2bn of sales (the wing systems + the A350XWB sales). Assuming a 0.8-1x EV/Sales multiple, this would imply a £1-1.5bn value. We reiterate our Buy rating on the stock. ... which looks sensible, and quite well informed. RBC's rather more circumspect. If this report turns out to be true then we think that it offers an excellent deal for Spirit's shareholders. Given the lack of profitability on its development programs, and a lack of cash generation, a bid at the reported level would seem extremely generous given the current situation. It would also come before new CEO Larry Lawson's strategic prognosis on what he intends to do with Spirit in his new role. We would also note that although the Daily Mail is not world reknowned for its coverage of the financial world, it did recently make the correct call on Schneider bidding for Invensys. Spirit has yet to announce a date for its 2Q13 results, and we expect that to be an opportunity to discuss this issue. although the Daily Mail is not world reknowned for its coverage of the financial world ... ..." it did recently make the correct call on Schneider bidding for Invensys." Unless you have anything more urgent, I just wanted to flag a post I'm working on. @kickinhorse: then go elsewhere. It's related to the fact that there is a stupid rumour in the realms of the goldbugverse that the Comex is about to fail on delivery. Kid Dynamite already did a very good job of debunking this He's not a fan of a number of gold bloggers says they are charlatans who don't understand delivery I also don't understand delivery, though try to avoid being a charlatan. So what's the bottom line here? Anyway I spent some time speaking to the CME to make sure I understood it And as I thought there is no basis for fearing a delivery problem. As I suspected how much inventory the Comex holds is based on externalities to do with curve structure, and warehousing incentive. Also, the banks are custodians. Not the owners of the gold People stick stuff in their warehouses, and tehn take punts on the futures. only a tiny amount of futures ever goes to delivery And futures are a zerosum game. Most important, it's the liability of the counterparty who is short to deliver If someone's gone short, and not settled ahead of delivery and finds they don't have comex inventory, that's not JPM's problem. The fact that inventories are going down just means there is more incentive to keep inventory out of the comex system. Probably because the curve doesn't pay to cash and carry anymore. That's all. Anyway, I will explain all in a post. But I just wanted to flag it up. Okay, that makes sense. Though I suspect I'll have to read the post to understand this, and perhaps not even then. I could use scripture again not sure which story works in this case Did the Three Wise Men have intermediary warehousing in place? Anyway, let's get back to safer ground. Invensys PLC (ISYS:LSE): Last: 493.00, down 5 (-1.00%), High: 498.00, Low: 480.70, Volume: 3.02mBlock Dunno .... looks like a borky trade earlier Of course there's very little chance of a counter. We've been saying that for weeks. Valueact still selling. ABB on the tape this morning making unpromising noises. Along with very poor results, as it happens. All I can say is that we feel good about Power One and Thomas & Betts. We feel good about investments we've made recently improving returns on our capital investments in both organic and inorganic growth. That's CEO Hogan. Which doesn't sound like they're poised to counter, really. But we didn't expect them to, as this thing's been auctioned and it's done. Oh, Lonmin mentioned on the right I think. Lonmin PLC (LMI:LSE): Last: 309.20, down 3.2 (-1.02%), High: 320.00, Low: 308.50, Volume: 933.55kBlock Haven't read the numbers, as I spend this morning in a car park. So I'll cut to someone who has. Panmure, for instance. Lonmin's Q3 production results today reflect a very solid result despite challenges during the quarter. Metal in concentrate production was up 3% QoQ to 186.5koz - an annualised rate of 746koz. Clearly the smelter outages heavily impacted refined production and sales (which were 111koz and 81koz respectively) but with the smelters back on line in Q4 much of that loss can be made up. Today's results potentially support the case for an increase in our FY2013E metal-in-concentrate forecast of 700koz whilst we remain comfortable with our (slightly above guidance) 670koz sales forecast. @yogabba: I believe they're sellers, and I expect that sale to come relatively soon. And I think Investec downgraded, though I can't find that in my email immediately. Sorry - we're a tad disorganised today. fraid i've not been too insightful either Oh, forgot to note this Barclays cash call rumour. Barclays PLC (BARC:LSE): Last: 318.24, down 2.31 (-0.72%), High: 324.30, Low: 316.90, Volume: 10.36mBlock Talk of them raising £7bn at interim results, which seems to have been sparked by a Redburn note. Interims due July 30. Which, once again, I don't have to hand. Instead, here's JPM on the FT story overnight. The FT reported overnight that Barclays is close to agreement with regulators which would see it comply with the new leverage ratio requirement by December 2014. In our view, such a timeline is unlikely to result in material EPS dilution given Barclays reaches 2.8% by FY14E through organic capital generation and limited further asset reduction would likely allow the group to close the gap. We believe that a reduction in leverage at Barclays is likely to drive a re-rating of the shares towards TNAV (currently valued at 0.7x P/TNAV "15E) and would reinforce the stock's attractive valuation at 6.1x 2015 P/E, we remain OW with PT 375p. End 2014 for Barclays implies similar treatment as Nationwide: In our view, an end 2014 deadline would imply a similar treatment to Nationwide, which has been given till end 2015 to improve its PRA leverage ratio from 2% (end "13) to 3%. Barclays is at 2.5% on the PRA measure end "13. Barclays reaches 2.8% organically by end 2014: On our estimates, Barclays" leverage ratio improves to 2.8% with organic capital generation by end 2014, without asset deleveraging. A reduction of c£100bn on its Basel 3 grossed up balance sheet £1413bn (7%) would take the leverage ratio to 3%. Given Barclays has £141bn of assets held in its liquidity portfolio and £235bn in short term repo, we see the incremental asset reduction as manageable and unlikely to lead to material earnings dilution. FT Alphaville summer drinks request on the right If possible, yes, though Paul signs such things off. I started having trouble focusing on barclays, as soon as someone mentioned Pimms Is it still hot in London? Presume it would have to self-financed. Better today. Somewhat overcast. And, yes, self financed. The readers are considerably wealthier than us, as we made some awful life decisions. Yeah, we decided to be journalists So we'll keep you updated on summer drinks. If it's possible, it'll happen. And, with that, let's knock off. Thanks for your comments. Again, too many for me to read so apologies if you were ignored. Until tomorrow. Afternoon all.