Markets Live: Monday, 20th January, 2014 This is the transcript of the Markets Live session ending at 12:13 on 20 Jan 2014. But before we unleash him he's the commissioner for transport for London Told he's not as nice as he looks. Trousered a 650k bonus for the hard work of his staff during the Olympics. You'd think that with a bonus like that he'd be able to afford a decent suit Won't mention the tie. Anyway, why is he portrait of the day on ML? We've got evidence today as to how Sir Peter is very much part of the expanding surveillance operation in London. What Transport for London have done today is generally make it completely uneconomic to buy a daily National Rail travelcard and use it across the tube network. At the extreme end, off-peak 1-2 zone tickets have been hiked from £7.30 to £8.90 Yes, that's a rise of 22% Tfl say fairs across the network have gone up by an average of 2.7%. That statement probably warrants some analysis, which I'm not going to give you. But this is not about money, that's clear. When you do something like hiking Zone 1-2 on the day paper tickets by 22% what you are trying to do is stop people buying them. You are trying to force everyone to use pay-as-you go Oyster cards, which allow the authorities to track you all over London, in real time. Sir Peter is watching you. Relatedly, I can't work out why Londoners are so relaxed about Tube pricing, which is a regressive tax. It costs more to commute to work from a poor area than a rich one. No one's ever explained why. Anyway, that's the Monday moan done. Nobby - yes, need a tip like that Seriously - I don't want the FCA knowing when I travel to Mayfair and back Suggest taking the battery out of your phone then. (Or meeting underground. And, no, I'm not kidding.) And so to Deutsche bank People v hot under the collar about this But didnt we know FICC generally FICC-ed Well, we did. What we needed clarified was that Deutsche was the worst of a bad lot. Partly, perhaps, because it's restructuring. And partly because it's firefighting. € 528m charge booked for disputes. That's the € 2.3bn reserve used up, pretty much. E1.4bn gone on US mortgage fixing. Another € 0.7bn gone on rate rigging. On top of that we have € 509m on restructuring charges. yogabba - seriously - 500 compoiance peole? And € 623m on writing down paper. In short, it's a mess. In some ways, FICC-involved banks now resemble tobacco companies of the 1980s. Every statement is just awash with liabilities and litigation. Anyway, here's some comment. Deutsche Bank released its Q4 13 results (previously expected 29 January 2014) on Sunday evening. DBK has reported a Q4 13 pre-tax loss of EUR1,153m for Q4 13. This includes a number of one-off items (litigation, costs to achieve, CVA/DVA/FVA). Excluding these items adjusted pre-tax profit was EUR587m in Q4 13. This compares to EUR1.4bn pre-tax profit on the same basis in Q3 13. The only available consensus was from Bloomberg and a Q4 13 pre-tax profit of EUR628m but this would have included costs to achieve and some litigation charges. We were on EUR1bn pre-tax underlying for Q4 13. The issue in the Q4 results is the continued weakness in fixed income revenues, which look weak relative to peers who have reported so far. The extent to which this is explained by market share loss, the impact of the continued balance sheet reduction or a combination remains unclear. Given the importance of fixed income revenues at some 22% of underlying 2013 revenues this remains a key area of uncertainty. Deutsche Bank has offset revenue weakness to a large extent with progress on costs, which is welcome, but it is having to work very hard to stand still. The same is also true of the balance sheet with further progress to reduce CRD4 leverage exposure in Q4 but with an unchanged ratio at 3.1% (Tier 1 basis) relative to Q3 and 2.4% using CET1. There is also no update on how this could look under the new Basel framework and we expect the ratio to be lower. The shares are trading on 0.97x Q4 13 estimated TBV for an adjusted ROTE of 11% (ex litigation, CTA and other) in 2013. However, this is also explained by higher leverage than peers with a return on total CRD4 exposure of 32bp underlying in 2013. As a result it remains our least preferred of the European Investment Banks. Our rating is Sector Perform and our price target EUR36. Deutsche Bank is currently at the start of the road on de-leveraging and de-risking compared to its sector peers. Our previous note on the company highlighted the lack of management efforts in de-risking the investment case for the stock. Management has since settled with regulators for LIBOR manipulation, and mortgage mis-selling with FHFA (US body responsible for Fannie Mae and Freddie Mac). Deutsche still has some way to go before litigation and non core drag abates. Adjusted cost levels remain elevated compared to the current sustainable levels of earnings that are lower than previous averages. We expect the cost saving impacts will only be visible in 2016 and beyond as CtA (cost to achieve) abates. Deutsche Bank trades at a discount to peers in the sector and remains cheap on a pure valuation perspective. We think management needs to accelerate the process in respect of restructuring and de-rising to boost investor confidence and thus valuation. We retain our HOLD and TP at €40 (derived using our ROE/PBV analysis). A positive re-rate catalyst looks unlikely in the near to medium term. There was talk around of a DB profit warning last week, it seems, which may have forced the awkward Sunday statement. WSJ reported it on Friday afternoon. can't have a false market, can we Anything else to share? Looking at the sector, perhaps? Barclays PLC (BARC:LSE): Last: 284.80, down 3.8 (-1.32%), High: 286.05, Low: 282.40, Volume: 16.45mBlock much better to have mindless, daily volatility Yeah, Sandy Chin has been trying to drag barc into this Barclays (BARC LN, mkt cap £47bn, 289p, Sell) - Deutsche's rushed 4Q13 profit warning has a few key reads across to BARC: we assume that continued weakness in FICC revenues was expected, but not -31% yoy in DBK's case. The DVA (debt valuation adjustment) and CVA (credit valuation adjustment) charges only added up to EUR259m of a c. EUR2bn pbt miss - and the new FVA (funding valuation adjustment, on changes in funding costs for collateral posted against derivatives positions) was actually positive in Q4. DBK's miss reinforces our view that the FICC business is undergoing a structural decline, driven by the move to central counterparty clearing (CCP) in fixed-income derivatives. The economics of FICC trading have deteriorated substantially because of higher collateral posting requirements, and thus FICC trading volumes have dwindled; we can't see how BARC, with its reliance on FICC, can escape this trend. he's just setting up a buy-in oportunity, to my mind Deep value, look past FICC We've been looking past FICC since Jenkins took over If you remember, when he addrssed the trading floor he had to admit he didn't know what FICC stood for Thanks for that Montesquieu, btw Elsewhere on the banks ......... Royal Bank of Scotland Group PLC (RBS:LSE): Last: 355.55, down 8.15 (-2.24%), High: 360.60, Low: 354.40, Volume: 4.59mBlock This is Cazenove's Raul Sinha turning negative ..... And echoing Monte's beautifully-phrased observation on the right regarding the fog of regulation. Uncertain regulatory environment remains key overhang: Capital requirements are likely to remain unclear to the market at least until Q4"14 and the UK stress test is likely to be more strict within the EU. Definition changes to capital measures also pose risk: Leverage ratio has eased, but there is still risk from model changes, potential move towards standardized CT1, Resolution regime, Ring-fencing and a potential full scale competition review with market share caps. We believe that UK bank shares will continue to face opposing forces in 2014: improving domestic earnings but an uncertain regulatory environment. We believe that capital requirements will be unclear until Q4"14 for the sector and given the regulatory/political backdrop, visibility over normalized earnings may be lower for UK banks relative to the EU sector. Hence, we remain selective, maintaining our preference for Barclays (OW; PT 315p) which has the highest implied Cost of Equity at 13.6% ("15E) within the UK and downgrade RBS to UW (PT 350p) given increasing risks to normalized EPS. Positive earnings outlook for domestic UK banks: We are positive on the prospects of domestic UK bank earnings in 2014, driven by the UK economic recovery, improving NIM and loan demand, recovering CRE sector, lower loan losses, and benefit from cost reduction plans still to come through. However, we also see reasons to be cautious on the pace of the EPS recovery, with legacy issues still likely to weigh. We remain concerned about PPI, IRHP related redress and FHFA. EM valuations discounting the slowdown, but outlook uncertain: With the domestic UK banks having substantially increased capital in 2013, we believe that the traditional balance sheet and dividend arguments in favor of HSBC and STAN have faded, given a more challenging EM environment for revenue growth. While StanChart's valuation at 1.1x "15E P/TNAV now largely reflects the revenue slowdown, we believe that the outlook for EM earnings is likely to remain under pressure from normalizing asset quality. Barclays offers best value at 0.9x 2015E P/NAV: We remain selective in our stock selection with a preference for Barclays (OW) and Lloyds (N) over HSBC (N) and STAN (N) where capital is increasingly likely to be a focus given the UK stress tests in mid 2014. With 4% downside to our increased Dec-14 PT of 350p (320p), we downgrade RBS to UW (from N) due to the risk that normalization of earnings will take longer than the market anticipates with significant litigation risk overhang. Lloyds Banking Group plc (LLOY:LSE): Last: 83.35, down 0.174 (-0.21%), High: 84.00, Low: 82.95, Volume: 26.13mBlock And so to the clairvoyant Morrisons treasurer Good story from the telegraph, this one Wm Morrison has suspended its treasurer after he was arrested on suspicion of insider trading before the supermarket chain's tie-up with Ocado, online grocer. Now, we're limited in what we can say. What we can do is ask a few hypotheticals. Such as, "is it price sensitive information when the guy who signs off your RNSes is arrested on suspicion of insider trading?" In those circumstances, is it the company's duty to inform the market, or is it cool to wait a month and hold tight until someone at the Telegraph sniffs out the name? harsh but fair questions Bryce Cos there might be an innocent explanation And we know this is how the FCA works, giving a few clues on arrests and letting the press corps do the running, in a kind of elaborate game of Cluedo. (tk - come on! Surely you can spot journalistic waffle by now???) But for Morrisons, I'd suggest anyone knowing the detail about this arrest would be in possession of potentially price sensitive information. As it turns out, it doesn't look terribly price sensitive. WM Morrison Supermarkets PLC (MRW:LSE): Last: 254.00, up 1.6 (+0.63%), High: 254.90, Low: 252.20, Volume: 2.19mBlock Oh, they a fresh idea Been inside on the insider Yup, like a mandelbrot set of insider trading. Sorry/ Alleged insider trading. But, as warned, we're limited in what we can say. Still on retail Mothercare PLC (MTC:LSE): Last: 285.00, up 13 (+4.78%), High: 293.00, Low: 281.25, Volume: 528.53kBlock Meek rally, in context. Look at the chart. It's been mullered. The idea, courtesy of the Sunday Times, is that Tesco had a look six months ago and might again. Instinctive reaction is "yeah, right" Maybe, just maybe the sort of distraction that tesco might reach out for Couldnt they put some of the Mothercare's / early learnign centres in their big stores? And use the high street shops as Tesco locals And generally run a few rings round the CoCom Or am i talking rubbish? Well, yes and no. That's all moderately plausible. Tesco Extras need something to fill the space, and there's probably some scope to use Mothercare's store fleet Not least internationally Let's remember that six months ago was around the time Tesco was buying Giraffe and looking at Nandos and that kind of thing. Tesco's in a different place now. A rather more uncomfortable place. Management still needs - desperately - to reset the margin target that's bleeding its market share. Personally, I'd see this story in the context of how low Mothercare's been drilled And how concentrated its shareholder base is. As in, FIL with nearly 24% Prudential with more than 16% DC Thomson - DC Thomson! - with more than 10% Shareholders unlikely to be happy if Mothercare management hasn't been welcoming offers post the last profit warning, from PE rather than Tesco I'd have thought. Clive Black of Shore's always worth listening to on Tesco. A surprise to our minds We are surprised by this story as Tesco has spent much time recently talking about sweating its existing assets, improved capital discipline and seeking stronger solvency ratios. Spending c£300-350m on Mothercare, assuming a c30% premium to its current market capitalisation of £250m, would to our minds not be wholly consistent with such a plan, but it is difficult to dismiss speculation outright until confirmed or otherwise. What of Mothercare taking space in Extra stores? Where there may be more substance to the story, in our view, is that Tesco may be speaking to Mothercare about the baby goods retailer taking space in what are now a number of over-spaced Extra hypermarkets in the UK. Tesco has an active programme of appropriately down-sizing a number of outlets, stores mainly over 80k sq ft, work that already embraces Sports Direct^ (SPI, NR CNP at 712p) units in the UK and Central Europe, leisure facilities and catering outlets e.g. Decks in Coventry and Giraffe in Watford. Multi-channel conundrum In light of this story we would not be surprised to see Tesco associated with other potential tie-ups with additional retailers in the future as the retailer goes through the gears of making its large store estate more interesting as destination centres. However, it remains our view that a spree of acquisitions of general retailers, particularly store based ones, in a multi-channel age, is unlikely. In addition to capital discipline, Tesco's management has also spoke about a higher priority for online activity in the future. Seeking more confidence in financial forecasts... As for Tesco's investment case, we continue to believe that this is a company that is seeking to change for the better. However, it is evident that there is no quick fix and pressures persist in stimulating positive trading momentum at home and abroad. Whilst the company remains highly profitable (c£3bn+ in the current year), the stock is relatively lowly rated (c11 times 2013/14F PER) and offers an attractive yield (c5%), we need to see an end to what has been, disappointingly, a sustained downgrade cycle and until we have more conviction in the future trajectory of numbers. Time for some Phorm You can get our backstory stuff on Phorm here But just wanted to note that they've changed adviser today Dropped Liberum in favour of Strand hanson Not much thanks for Liberum helping them get the latest cash call away This happened in november after we did those earlier AV posts But look at this - that came out on Friday and we missed it... Phorm (AIM: PHRM), a leading internet personalisation technology company, announces, in accordance with Rule 17 and Schedule Two (g) sub-paragraph (v) of the AIM Rules for Companies, that it has been notified of the following information by Lord Norman Lamont, Non-Executive Director of Phorm: Lord Lamont was, until 19 October 2012, a director of Balli Group Plc ("Balli"), a private company incorporated in the UK. Balli was placed into administration on 20 March 2013 and Deloitte LLP were appointed as administrators. In addition, Lord Lamont was, until 30 March 2009, a director of Pantin Hotels (Management) Limited, a private company incorporated in the UK, subsequently renamed Hallco 1063 Limited ("Hallco") on 7 May 2009. Hallco entered into a creditors" voluntary liquidation on 24 July 2009 with an estimated total deficit as regards creditors on that date of £116,438. Hallco was dissolved on 14 January 2011. Seems careless of a former chancellor to accidentally forget his directors" disclosures... Maybe we should forgive him Interesting looking company. Seems it was knocked out by trade sanctions against Iran. http://www.pantingroup.com/ also interesting - went bust, but seems to have risen from the ashes as a US residential vulture fund Pantin Group is an hotel management and real estate advisory company operating in UK,North America and the Caribbean.We have experience world wide in the development, pre-opening and management of luxury hotels as well as extensive acquisition and asset management of over two hundred foreclosed single and multi family residential and commercial properties in North America since 2010. Assuming that is the related operation have no idea whether Lord Lamont is still involved All we can say is that he isnt a director or it would have been disclosed Anyway, Phorm has lacked Phorm since that latest call call - about the 30th so for Against cash burn of about $2.5m a quarter, by memory. So they are fine for 12 months or so Let's hope for a break thru! Everyone wants tracking on line, don't they? Last idea was that folk would go for it in China, though I got very confused reading their press releases Turkey - dont forget Turkey Everyone in Turkey wants tracking on line China and Turkey. Telecoms quasi monopoly operators, with which Phorm doesn't appeared to have signed any deals. But perhaps I'm misreading the press releases. And, still on hobby horses .... Blinkx PLC (BLNX:LSE): Last: 173.75, down 13.25 (-7.09%), High: 188.00, Low: 172.25, Volume: 3.76mBlock London, England and San Francisco, CA. 20 January 2014 - blinkx plc ("blinkx" or the "Company"), today announces that Suranga Chandratillake, Founder of blinkx plc, is becoming a General Partner at Balderton Capital. Mr. Chandratillake will remain Chief Strategy Officer of blinkx, a role he assumed in 2012, and executive director of the Company. Why oh why would Mr Chandratillake upsticks in California and move back to rainy old England, and go part time at Blinkx, just when its heading to the moon?????? His new gig is here And it looks like a proper gig Not that the last one wasnt of course Lord, look at the portfolio .... London, 20 January 2014 - Balderton Capital, one of Europe's largest venture capital firms, has appointed Suranga Chandratillake, founder of internet media company blinkx, as a General Partner. After 10 years based in Silicon Valley, UK-raised Suranga, aged 36, will return to London to take up his role at Balderton and will help lead early-stage investments in the online media and technology sectors. Bernard Liautaud, general partner of Balderton Capital, said: "We are delighted to welcome Suranga to Balderton Capital as a General Partner. As the architect of one of the UK's most successful internet technology companies, Suranga will be a great addition to our team as well as an invaluable mentor to the companies in our portfolio. He understands what it takes to create global and long-lasting businesses and can draw from his own experiences to support the founders we back. At Balderton we are inspired and invigorated by the quality of top technology talent originating from Europe right now. Suranga's commitment to returning to London after a decade in Silicon Valley signals how closely he shares our confidence and enthusiasm to identify and back the next generation of European entrepreneurs. Suranga founded blinkx, the intelligent search engine for video and audio content in San Francisco and Cambridge in 2004. The company grew quickly and was taken public on the London Stock Exchange by Suranga and his management team in 2007 valued at $250 million (£125m). blinkx, which generates revenue from online advertisers and whose technology is used by more than 171 million people every month globally, was one of the best performing companies on the FTSE AIM 100 in 2013. Today, blinkx is valued at over $1.3 billion (£855m) and is one of only a handful of home-grown UK technology companies to have exceeded the $1 billion market capitalisation. Wooga .... Rentify ..... Codemasters! It seems to be using the old AIM mining model of "back 100 random punts and you might break even if one turns good." Yet Blinkx still isn't on that list. @John Bull: the same, it appears. Anyway, good luck to Mr Chandratillake in his retirement. Mde deVille has been dispatched to the slopes Do follow here and her son, who is also a Dvos this year There's been an unhelpful mention here Davos - Unofficial A few accounts will portray for you what happens in Davos - with an unofficial voice. Take their findings with a grain a salt, they tend to be provocative ... DavosDeville: Socialite, charity patron and non-executive director, Dynamic Emerging Strategic Opportunities (Guam) LLP Libelous to my mind Right, that's done. Any other housekeeping of which to take care? Your bloody lunch, for example? There's the link you need Now I'm up to a decent level (albeit still cheap, given quality of the special guest coming along to our table) ... We need bids for John Authers And Gillian de Bono Some of you may not know Gillian de B She founded How to Spend it She's our version of Anna Wintour So this is quiet an opportunity And you can also have dinner with Lionel Get yer bids in , NOW! Also, if you bid for another table, you can also come over to the AV table for a bit and we will ply you with wine Right, is that you finished yet? senior muppet - dare I say this...a tad more glam This has caused us to over run, cos bryce has more things he wants to mention Yeah, I did have a couple of things on the notepad. Before you wasted all our time rattling the stick in the swill bucket. You'll have read this over the weekend. Prequin data, all about CVC having $20bn to spend and suchlike. So, Jefferies has put together an M&A / Activist list Though they reckon you buy stock exchanges to play into the theme. Which is ..... a thought. I guess. No sooner had the New Year began than a deluge of M&A deals were announced. A boom in M&A was a key theme for our 2014 Japan and US outlooks as we felt that as global growth firmed, companies would expand either through increased enterprise spending or through M&A. A lateral way to play the M&A theme is through investment banks or listed exchanges. Advisory fees and increased secondary turnover ought to lift revenues for investment banks while increased IPO activity and higher equity turnover has direct implications for listed exchanges. We believe that as global growth matures in many developed economies, corporates will seek to consolidate industry market share so as to protect market share rather than invest. With real short rates negative, companies running huge cash surpluses as well as rich balance sheets, the M&A cycle is just unfolding. Our US 2014 outlook analysis suggested that banks and insurance would be targets for M&A given their fragmented industries. However, US technology companies also offer cheap valuation, strong cash flow and surplus cash. In Japan, companies are likely to seek overseas opportunities to consolidate market share as the yen weakens. Globally, the defense sector is facing structural headwinds but individual companies are in rude health. Watch this space. So, here's the big number par .... Companies have plenty of cash-on-hand to buy targets while financing rates are the lowest in a decade. US S&P 500 companies have over US$2 trillion in cash sitting on their balance sheets while Japanese companies have also around US$2 trillion. UK companies have approximately US$825bn. Furthermore, Private Equity companies have over US$800bn available for deals according to surveys. Interestingly, the trend in UK activity seems to reflect changes in the performance of the UK equity market. And here's the list, with the explainer first .... We examined US, European and Japanese equity markets and firstly, based on the last report data, we screened candidates for high free cashflow yield (above 5%), low net debt to equity and a high free-float. We also considered companies that had low capex to net profit and a low standard deviation in free cash flow yield in recent years. In essence, target companies would need to exhibit strong cash-flow but also have a history of low spending. As a secondary condition we also examined a company's cash to market capitalization, dividend yield and profit margins. A company that may have poor margins and need some operational restructuring but has strong cash backing and above average dividend yield might prove to also be a good target candidate. There's a US top 100, of which this is 50. (Yes, Apple. Yes, Microsoft. Apparently.) And the European one (no financials) Ok, that's that done. Oh, and finally, just wanted to mention Bahamas Petroleum. Bahamas Petroleum Company PLC (BPC:LSE): Last: 4.20, down 0.1 (-2.33%), High: 4.25, Low: 3.70, Volume: 4.54mBlock Which every single trader in the City has on PA, it appears. Doesn't fancy this lots-of-acreage-without-any-viable-development-plan punt any more. Which, I'd suggest, might be an indication that Statoil isn't quite as keen on undeveloped exploration prospects as some people hope. Tullow Oil PLC (TLW:LSE): Last: 901.74, down 4.76 (-0.53%), High: 904.50, Low: 896.50, Volume: 767.31kBlock Malcolm Graham-Wood remains a cautious Bahamas bull though. The company announced this morning that Statoil has withdrawn from the JLDA for the new licences they were applying for namely, Zapata, Falcones and Islamorada. Whilst this is hardly news to cheer from the rafters it is paid up and they might have been in with Shell. It means that the company can, with 100% of the vehicle, maybe tempt one of the many people in the "busy" data room with additional exposure in the area. There are a lot of people invested in BPC who thought that something might have happened by now, possibly even some drilling perhaps, but like a lot of things in the industry the pace can sometimes be slower than you expect. For Bahamas there are two hurdles, the farm-out must happen before too long and of course the commitment well has a deadline of April 2015. I am waiting to speak to Simon but actions speak louder than words and news of an industry deal is crucial and will lead to the promised land so many shareholders keep telling me about! One day, Rodney ..... We're done and then some. @Outlaw: think it's more activist potential than buyout hope. Well, now you've dug so deep into lunch And i have to get to Franco's Let me share this with you It's a new item about newspaper trying out this thing called the internet