Markets Live: Thursday, 15th November, 2012 This is the transcript of the Markets Live session ending at 12:04 on 15 Nov 2012. Sorry we're late Block Fire alarm this morning at FTAV HQ Block So we are behind the curve Block Not so far behind tho Block He's so important he gets a second outing on ML Block A portrait for today Block Actually, this is the real pic to have Block captured a new era there i think Block Last one is vaguely Resevoir Dogs. Block First one's slightly Carmen Miranda, except on the trouser region rather than the head. So, what are we talking about today? Let's run thru headline prices Block FTSE down another 19 points Block 0.3% in percentage terms. But again, this fall is muted given WallSt overnight Block Dow was off 1.45% Block Yeah, that's true. And, for a Thursday, volume looks rather low. Allowing for results slew etc. News wise, though, we have some happenings. Yes, latest there? Notice theyve put out another statement that essentially says nothing. Nothing to say i guess until they actually do the settlement in the US Block Price slightly weaker, peculiarly. Down 2.1p at 423.8p Block Not autopricing either. So the reports suggest it'll plead guilty to criminal misconduct Block In order to get a settlement with the DOJ Block And avoid getting stuck in a court until 2015 thrashing out the details of a potential gross negligence charge. BP's statement today confirms they're in "advanced talks," but not much else. Now, I guess some of this is baked into the price already. You'll remember that BP lifted its divi by 12.5% recently Block That was probably an indication management saw a deal coming. In terms of amounts ......... Block $20bn seems to be the figure mentioned most. oilwatcher makes this point that the statement draws attention to the fact that this is only a "partial" settlement of course Block But it's the bulk Block Yes, yes, indeed. Let me cut to Liberum for what it includes and what it doesn't. The proposed resolutions are not expected to cover federal civil claims, including Clean Water Act claims, federal and state Natural Resource Damages claims; private civil claims in MDL 2179 that were not covered by the PSC settlement, private securities claims pending in MDL 2185 or state economic loss claims. This signals some progress regarding the critical issue of whether BP can avoid a trial for gross negligence relating to the Deepwater Horizon incident. Clearly there will be a series of other potentially significant claims to be dealt with. We believe the market is already looking through the Deepwater Horizon trials and assuming BP gets back to business as normal in the US. The share price discounts a hefty settlement but is mainly driven view on future delivery of growth and dividends. Today's update should be seen as a (small) positive but the shares stand on similar EV/EBITDA multiples to other Big Oil shares and, we believe, already (appropriately) discount a compromise solution. Reinvestment performance will drive the shares and, simplistically, management needs to improve F&D costs and reserves replacement to convince investors that the dividend progression can be sustained. Free access to the Gulf of Mexico is a necessary, but not sufficient, first step. (@LordSponge: MSCI rejig. We'll get to that.) And here's Merrill's thoughts. We would say that even if the settlement figure is slightly higher than $20bn this could still be taken positively because it would remove a significant uncertainty around the stock. In our recent meetings, investors have been interested in the BP story and valuation but are happy to sit oin the sidelines until there is more clarity around the outstanding legal liabilities. We would highlight that BP is set to host an investor day on December 3rd which we believe is a great opportuinity to refocus attention on the underlying business. We expect more detail around BP's 15 new projects that have doubled the margin of its current portfolio. BP trades on 6.5x 2013E earnings with a dividend yield of over 5%. We are Buyers with a price objective of 540p, implying almost 25% upside. How long have we been waiting to "refocus attention on the underlying business"? Seems like forever. Quick bit of macro Block Cos stuff flooding in now on Eurozone still being in recession Block You'll get the full official version here Block Despite France surprising on the upside Block And Germany confirming a bit of growth Block the over all picture in the euro area is minus 0.2 pc Block Here it is in chart form from Credit Suisse Block And the breakdown Block The euro area slightly contracted by 0.1%qoq in Q3 after a 0.2%qoq fall in Q2 (-0.6%yoy after -0.4%yoy). Although the data marginally surprised market expectations of -0.2%qoq, Q3 data means the euro area remains in recession. The small fall in the euro area Q3 GDP came mid-way between positive hard data (which pointed to a bigger upswing) and negative business and consumer confidence surveys (which pointed to a larger contraction). The difference between hard data and surveys remain large which leaves uncertainty around the Q4 GDP print elevated. Having said that, September hard data were weak across the board and suggest that they will converge to some extent towards the more pessimistic surveys. We think Q4 GDP will contract by 0.2%qoq. Risks are tilted to the downside, in our view. At the country level (see table below), the Nertherlands was a big negative surprise while Italy posted a relatively stronger number than expected (although still negative). France came in slightly above expectations and Germany came in line with consensus. Here's Jennifer McKeown from Cap Economics Block Q3"s GDP data confirmed that, despite continued growth in Germany and France, the euro-zone as a whole is now officially in recession. We expect the recession to deepen markedly in the coming quarters.  The 0.1% fall in GDP followed a 0.2% contraction in the second quarter and left the annual growth rate at -0.6%. The latter was considerably weaker than the equivalent rates of +2.3% recorded in the US and zero in the UK in Q3.  Note that the outturn was not as bad as the consensus forecast, which had been for a 0.2% quarterly fall. The main surprises were that France posted a 0.2% quarterly expansion and Italian GDP contracted by a smaller than expected 0.2%. With German GDP rising by 0.2% as expected, the region's core economies seem relatively resilient.  But the modest expansions in Germany and France were not enough to offset weakness elsewhere. GDP in the Netherlands dropped by a quarterly 1.1% and that in Spain fell by 0.3%. Meanwhile, Portugal and Greece remained in very deep recessions. Unfortunately, the business surveys point to far worse to come throughout the region in Q4 (see Chart), with even the German and French PMIs well below the "nochange" level of 50. Admittedly, the surveys were too pessimistic about Q3 and global demand so far seems fairly robust. But as austerity starts to hit French households and German unemployment rises further, domestic spending will weaken even in the core.  With other data this morning confirming that euro-zone inflation edged down to 2.5% in October and the core rate held at just 1.5%, the ECB might consider more policies to boost euro-zone demand. But the Bank so far seems unwilling to implement full-blown quantitative easing and the tight fiscal squeeze in the region is set to continue.  The upshot is that euro-zone GDP might fall by a touch less than our -0.7% forecast in 2012 as a whole, but we still expect a contraction of around 2.5% next year as the peripheral debt crisis drags on. There must be something upbeat we can discuss instead. Ive got recession fatigue Block We should look at Glenstrata Block But Anousha was going to come round and talk us thru the numbers Block So, while we wait for her Block Can I fill the time with a mention of Shell? Post the investor meeting yesterday. Shares down 14.5p at 2149.5p or thereabouts. Some interesting stuff from the meeting, albeit at the margin. We are not an oil company. We are a gas-energy company That was the CFO. Gas is now 53% of its production. And that, needless to say, puts the focus on M&A Block Getting into East Africa Block We all know they're keen on Moz. With inflated expectations, even on increased gearing [we] might not be able to do the deal Bullet points via RBC. Mozambique: highlight cost and complexity  Exploration success and Cove acquisition has set "unrealistic expectations"  Economic terms not even started to be defined  Heavy competition, "on everyone's radar"  Emphasize benefit of the "right players" for development  (Win / win for Shell ? If costs too high, improves relative economics for Australian projects) AS: So what do you want to know Block Does the deal pass? Okay - so the Qataris have said yet to Glenstrata Block But they are not going to vote on the pay deal Block So Sheikh Hamad bin Khalifa Al Thani, he say: "Yes! (Yes! Abstain!)  AS: Good news is that the deal almost certainly goes thru Block AS: Fear was that Qatar might have voted yes/no Block AS: ie voted against the pay deal Block AS: Still v hard to call whether the pay vote will actually pass Block AS: essentially three votes Block And Qatar's said it "strongly believes retaining Xstrata's operational management if of critical importance to the successful and stable integration of the two companies" though it is "conscious of the sensitivities concerning corporate governance issues in the UK." Resolution 1 to approve the deal subject to the pay deal being approved - needs 75% vote Block Resolution 2 - approving the deal subject to the pay deal not being approved - needs 75% Block 3rd vote - needs 50% simply on the pay Block AS: ISS have recommended voting for the deal and against the pay package Block AS: So we'll just have to see. Anousha - maybe we should get you a log in Block AS: Rather than switching keyboards Block We're always welcoming inter-office contributors here, particularly if they know what they're talking about. So Court meeting on November 20. And ahead of that, SocGen turns positive on XTA. Xstrata PLC (XTA:LSE): Last: 961.50, up 13.8 (+1.46%), High: 967.10, Low: 945.10, Volume: 4.86m Block In our view the deal has greater chance to succeed as Qatar is pivotal in the voting process, given that investors holding just 16.48% of Xstrata could block the transaction. We also believe that other investors are now more aware that voting (turnout counts, not yes vs no) is vital to ensuring the deal succeeds. The merger still requires antitrust approval from the European Commission (decision expected on 22 November) and China. We expect these approvals to be secured albeit probably with more remedies than anticipated by Glencore (we think potential disposal of zinc smelting operations and/or end to zinc off take agreement with Nyrstar). We have made housekeeping changes to our forecasts with FY12-14e EPS now coming $1.09 ($1.11), $1.41 ($1.42) and $1.88 ($1.83). We upgrade our rating to Buy from Hold with a TP increased to 1,190p (vs 1,130p TP) based on our TP for Glencore (Buy, TP 390p) to which we apply the 3.05x proposed merger ratio. This gives a XX 12m projected TSR (26.5p 12m DPS). Note that Xstrata is still trading at a 6% discount to the proposed terms at 2.86x. We expect this discount to be closed in the coming days. Risks to Xstrata TP: Investors holding 16.48% of Xstrata could still block the proposed merger with Glencore. Regulatory uncertainty regarding the final form of the new company. Integration risk. Mining risks (safety, project costs and challenges, ore grades). And UBS is saying something similar. With the shares trading at 2.86x, we believe it is now more attractive to buy into combined group with XTA given the 6% relative upside to the agreed 3.05x ratio. Our tgt of 1300p is based on the combined NPV using a 10% discount rate, $800m synergies and 12x multiple for marketing; we estimate standalone NPV of XTA at £10.0/sh. We see Glencore Xstrata combined as attractive on valuation, EPS momentum (commodity mix, self-help, op leverage), and growth (organic, M&A). And thanks Anousha. You can go back to being Paul now, Paul. We should mention this co co stuff at Barclays briefly Block Seems to have gone down well Block The bonds pay a coupon of 7.625% Block Gets converted to equity if and when corer capital falls to 7% Block I think that's how it works Block Barc stock up 4p on that at 241 Block Barclays PLC (BARC:LSE): Last: 240.90, up 3.25 (+1.37%), High: 242.00, Low: 233.55, Volume: 19.95m Block here's some Ian Gordon on the matter Block Barclays" decision to issue $3bn of CoCos has understandably been taken well. The fact that we didn't share the concerns of others in relation to Barclays" existing "rock solid" capital position may render us somewhat less ecstatic relative to any fully paid-up capital bear, but we do recognise that scaremongering over a perceived capital shortfall has been an important weapon in the armoury of Barclays" more determined detractors. A £140m pa cost may be a small (tax-deductible) price to pay to extinguish such noise. Barclays" existing Basel 2.5 core tier 1 ratio was 10.9% at 30 September 2012, with a well signposted path to a transitional Basel 3 core tier 1 ratio of 10.4% at 31 December 2013. Barclays has now priced an oversubscribed $3bn 10-year "CoCo" @ 7.625%, which gives a c.£140m NII deduction. The tier 2 instrument has a 7% core tier 1 conversion trigger, and qualifies as incremental loss-absorbing capital in a post-Vickers ring-fenced world. The costs of compliance with the evolving requirements of the Independent Commission on Banking remain unwelcome, but do appear increasingly manageable. In our view, the fact remains that Barclays already held ample core capital to support its defensively positioned and solidly profitable portfolio of businesses. However, the ICB proposed a less sophisticated approach to assessing capital requirements, hence the journey to satisfy Vickers" 17-20% loss-absorbing capital threshold by 2019, in which CoCos will clearly now play a key part. The market was (initially) underwhelmed on 31 October when Barclays delivered a "low quality" 3% beat with its Q3 2012 IMS. Thereafter, grudging recognition that no downgrades to consensus forecasts were required, and the stock's relative and absolute cheapness have sustained its strong relative performance. Despite ongoing litigation and regulatory distractions, on 0.6x tNAV, (vs Lloyds (Sell) 0.8x, RBS (Sell) 0.6x) Barclays remains our preferred UK domestic play. Buy rec and RoE-g/CoE-g-derived 255p TP reaffirmed. So that's supportive of my historical long term deep value call, back in September Block Thanks for the IFR link XYZ Block Actually, you reminded me Block The mention of Barclays has reminded me Block (tk cheers for the clarification) Block That Bernstein has one of its epic "death of the industry" type pieces out. This one about investment banking. Brad Hintz is the analyst. That will cheer us up Block Global trading businesses - a dash for the exits? Following near death experiences in the financial crisis and four years of sluggish returns, the competitive landscape for global investment banking is rapidly shifting. Recently, several firms have decided to scale back or quit capital intensive trading activities. The moves reflect clarity that profitability has been indelibly impaired by new regulation and capital rules, and the realization that being an also-ran in trading is no longer a tenable strategy. Trading is dead, long live trading! In years past, FICC trading could earn solid economic profits by leveraging a massive amount of capital that narrowly cleared hurdle rates of return - the image of a sumo wrestler barely clearing a hurdle. But under new capital constraints and trading prohibitions, this strategy is no longer viable. As such, firms hoping to earn acceptable trading returns must implement a combination of cost reduction and balance sheet optimization to address trading unit profit margins. Compensation reductions won't suffice. Tamping down employee compensation seems unavoidable. We expect headcount and comp per seat to fall, with firmwide comp-to-revenue ratios declining toward 40% from 50% today. Yet, a comp reduction of that magnitude will not suffice, and larger reductions seem unlikely since IB employees enjoy ample bargaining power over other stakeholders, as is typical in skilled service industries. Our analysis suggests firms will also need to trim trading book RWA by 33% in the U.S. and 25% in the EU. Even then, the best competitors can expect to just barely attain a cost of capital in trading. Sumo wrestlers must diet. A feasible composition of a trading balance sheet is circumscribed by the intersection of gross leverage constraints, Basel III capital standards, and liquidity requirements. Analysis of this algorithm is presently intractable, as some constraints remain in draft form and lack quantifiable details. Still the need to reduce RWA to achieve acceptable trading returns is obvious enough, and firms committed to trading are already reducing inventories of capital intensive trading assets. What remains to be seen is if firms can achieve higher trading asset yields while deemphasizing riskier products with wider spreads, particularly if less risky (Basel exempt) asset classes become increasingly crowded and overall volumes drop with less liquidity in the market. If these dynamics further depress trading returns in the short-term, we foresee an acceleration of the consolidation already incited by onerous capital rules. Last man standing. Firms possessing superior trading operations (higher revenue yield on trading assets and greater efficiency) are immersed in a game of attrition. While regulation could make it nearly unfeasible for any firm to earn acceptable trading returns, it seems more plausible that trading profitability will be restored for some as competition leaves the industry, volumes consolidate and spreads widen. In the meantime, honing the advantages of scale, technological efficiency, and trading discipline will be critical. Not only do these attributes help firms wait out the environmental challenges and industry shrinkage, they should also help firms emerge better fit to operate within the challenging new regulatory regimes across the globe. Among the competitors in trading: UBS, Credit Suisse, Goldman Sachs, Bank of America and Morgan Stanley have taken action to shrink FICC expenses and automate their trading business models. RBS has sharply reduced equity trading activities and all the top ten FICC trading banks are pursuing initiatives targeting balance sheet improvement and RWA reductions. But if all the leading banks are cutting back, which banks are expanding? The answer is none. This means that as capacity is removed from the business, pricing should slowly improve. Bernstein rates GS, MS, JPM, C, HSBA and RBS Outperform, and BAC and BARC Market-perform. Oh my, ibank salaries to halve Block Go short Mayfair sushi places. We conclude that only the best performing trading firms will be able to meet their cost of capital in trading, and as a result we expect the trading industry to sharply reduce capital employed and consolidate expenses. All City restaurants are half empty already Block Yeah, true, think the market's over-expanded recently. Ramsay at Bread Street may mark the top of City dining. Anyway, we wander. Competition result time? This may be a first. Actually declaring a winner Block This is from the Obama vote Block Actual final result was 332 /206 Block (Well, we've declared winners before. We've just struggled to send out actual prizes.) And our closest rabbler... Block Step forward Dominic Connolly Block Now obviously i may have missed a closer entry - so tell me if that's the case Block But Dominic is going to get the fabulous box in a box Block Well done, Dom. Please claim your wooden-ish box. Possibly an ashtray. We're not sure. From the Party School of the central Committee of the Communist Part of China Block DC - it's in the post Block "The Party School" makes it sound a lot more fun than I imagine it is. So - that's out of the way. Let's return to movers. Okay, Man Group mentioned earlier. Though it's not called that any more. Man Strategic Holdings Block M*A*S*H for short. This is on MSCI's rejig last night. Man's pushed out, unexpectedly. So we're looking at 8 days of average trading for Man as trackers rebalance. This is the MSCI Standard EAFE Index, which is what Yank investors use as the "rest of the world basket" Block EUR260bn of passive funds, but 520bn if you include actives benchmarked against it. Ziggo, Hargreaves Lansdown, and EMS-Chemie are in. Wood Group, Campari and Fuchs Petrolub aren't. Wood down 4.8% on that. 800p in the middle. The expected deletions were Lonmin, Mobistar, Straumann, Wacker Chemie, Modern Times Group B, Acerinox, Mediaset, and SSAB. The unexpected ones were MAN Group, Alcatel-Lucent, Holmen B, SBM Offshore, Autogrill and GAM. MSCI always throws a few curveballs. Unlike the FTSE rejig. Not awfully transparent how they make the changes. Either that or I've never invested the time to actually understand how it works. @Mo: if it's in City AM then of course it's accurate. Strange goings on at Valiant Petroleum. Valiant Petroleum PLC (VPP:LSE): Last: 435.75, down 14.25 (-3.17%), High: 455.00, Low: 435.25, Volume: 206.70k Block What's the story? So CEO Peter Buchanan steps aside to work on an MBO. Having effectively put the company up for sale with a "strategic review" two months ago Block I guess the fact that he's taking the MBO route suggests buyers were thin on the ground. Buchanan's background's financial rather than oily, I think. Somehow doubt investors will see the 750p a share this thing floated for in 2008. We think he has access to funding? Well, he's connected. But it's certainly a different proposal to putting the thing on the block. Not sure anyone follows this closely. Let me check. Just a holder comment from Oriel, which I think is shop.  Valiant Petroleum has announced the appointment of Michael Bonte-Friedheim as Acting CEO in order to allow Peter Buchanan, Valiant's founder and CEO, to focus on a buyout proposal that will be considered alongside other options as part of the ongoing strategic review and formal sale process.  The Board is now considering a number of different proposals, including corporate transactions and standalone organic growth alternatives.  A buyout involving Peter Buchanan is one of the proposals that has emerged for consideration. The Board has agreed with Peter Buchanan that he should focus exclusively on the delivery of this proposal.  As Acting CEO, Mike will lead the evaluation of all of the alternatives being considered in the strategic review and formal sale process.  Mike joined the board of Valiant in 2006 and is currently the senior independent non-executive director. Following a career in investment banking in the energy and power sector, he has spent the last six years in a number of roles including as Chairman and subsequently interim CEO of Mediterranean Oil & Gas. And one sentence from Sector Watcher. The assets certainly look underpriced, our risked NAV is 560p/share (unrisked 950p), 25% above the current price Okay, so that's done. Seen these pics from one of the Candy Brother's flats? One Knightsbridge or whatever the address is Block No! And, yes, I very much want to. These are from Charlie Porter Block fashion hack at the Guardian Block Can't they afford lightbulbs? It seems very gloomy. You can't wear shoes in the flat Block Why do they have Swarovski crystals hanging from the roof where the lights should be? Actually, it reminds me of that weird hotel on the Park Lane end of Oxford Street. Bar called Carbon. Two disappointing restaurants. Cumberland Hotel Block You are dead right Block That's the one! Yes, like living in the Cumberland Hotel. Why would you do that by choice? If anyone wants to come round my place and criticise my poster choices, feel free. Ok! Are we done yet? Yeah, I think we are. Thanks ROTR for all the comments. See you back here tomorrow, I expect.