FT Alphaville " Markets Live transcript 23 Jul 2012 Markets Live chat transcript for the chat ending at 11:04 on 23 Jul 2012. Participants in this chat were: Bryce Elder/FT DuncanR So farewell then, Spain. You gave us Julio Iglesias, paella and the Molotov Cocktail. We gave you 10-year paper at 7.57 per cent. And now, we're going to have to give you a massive bailout. Which means you'll have to give us several decades of brutal austerity. We await with interest your follow-up to the Molotov Cocktail. FT Alphaville's daily crisis watch. Joining me today is Duncan Robinson From the companies side. Which is handy, as there's no companies news whatsoever today. And we should start with the scores. Off nearly a tonne and touching the resistance level of 5555. Psychologically important I'm sure. Chartists sweating across the river. Th real fun is in Italy and Spain. Both a sea of red and suspended stocks. Lowest levels since 2003. Milan also on fire, falling 4.9%. Which is the lowest level since...my Reuters doesn't go back that far. And it's a flight to what we'll euphemistically call quality in FI. And ... well, Spain's out. 7.565% is the high on my screen. How's Italy for comparison? Not much better, though my Reuters seems not to be giving me a price. Perhaps in solidarity. Anyway, the trigger here .......... Is a little unclear. Seems a bit like panic on a dozen different headlines. So we have reports that another six Spanish regions after Valencia are close to asking for help. And Spanish growth downgrade. Do we have anyone to make sense of it all for us? Yes, the messiah to lead us through this risk-off mess is: Gary Jenkins from Swordfish. On Friday it appeared that the market gave up on Spain. Now that might be a hasty comment and I don't normally like to take one day's trading and extrapolate from that but following a trend of upward pressure on Spanish bond yields we pretty much saw them break on Friday. The 2 year was 61bps higher at 5.69% whilst the 10 year was 26bps higher at 7.23%. Those levels indicate that Spain may soon struggle to fund itself in the market and therefore unless some positive action is taken the country will need a full bailout. Now it is possible that they continue to muddle along because they don't actually need massive amounts (in the context of recent bailouts) to get through this year but we might now be in a situation where any secondary market buying by the ECB would be taken as a negative rather than as a positive by the market. The more likely outcome is that either the Spanish government manages to persuade their banks to continue to support for the time being or that the EFSF / ESM is utilised in order to buy bonds in the primary market. What was quite extraordinary considering the market moves was that there was little new negative news regarding Spain on Friday. Basically, markets just seem to have got fed up. Actually, that's a good point. If this is a news trigger, then it should have already happened. The "more regions to follow Valencia" thing was widely rumoured in Friday's session. Frankly, all this makes me question efficient markets. FT calls it "A resurgence of eurozone angst," which I quite like. Spain is the acne-ridden teenager, refusing to tidy his room. Anyway, here's Credit Agricole for a bit more context. Slightly backward looking, but it seems markets today are backward looking so I make no apology for that. The government now looks for Spain's GDP to contract by 1.5% y-o-y in 2012E (-1.7% before), by 0.5% in 2013 (+0.2% before), and to grow by 1.2% y-o-y in 2014E and by 1.9% in 2015E (+1.4% and +1.8%, respectively, before). Private consumption is expected to decline by 1.5% y-o-y in 2012E and by 1.4% in 2013E, to then start growing as from 2014 (+1%). Public consumption will come down as much as 4.8% this year, 8.2% next year, and by between 4% and 6% p.a. in both 2014E and 2015E. In total domestic demand will not start showing annual growth until 2015E. Net foreign balance should contribute to GDP growth on the contrary by 2.5% in 2012E (c.a. 4% before), 2.3% in 2013E, 1.5% in 2014 and 1.1% in 2015: Finally, unemployment rate is now expected to do worse, and reach 24.6% this year, stand at 24.3% in 2013E, 23.3% in 2014E and 21.8% in 2015. Why is the market reacting so negatively to these new estimates? In our view due to the following reasons: 1) a lack of confidence, since the official forecasts for 2012E (and to a lesser extent for 2013E) still seem too optimistic. We look for a 2.4% contraction in GDP, and new austerity measures are likely to take a harder hit on private consumption this year than what the government suggests (we see the 1.5% drop in private consumption as unrealistic). Yes, they have revised downwards the net foreign balance contribution, and now look for more realistic figures in terms of exports, even though the estimates for 2013E and beyond still appear slightly optimistic; 2) even under these still "optimistic" figures for 2012/13E, GDP in real terms will not grow above 2% until 2016E. Most economists agree that real GDP needs to grow by at least 2% for net employment growth; 3) deficit targets still aggressive in the short term, especially at the regional/municipal and Social Security levels: the government looks for a total budget deficit of 4.5% of GDP in 2012E, which breaks down into 3.8% for the central administration (more or less realistic), 0.7% for the regions (sounds out of reach), 0.0% for municipalities and 0% for the Social Security system (out of reach, unless bigger transfers from the central administration take place, which would put at risk the latter's deficit target); 4) regardless of the reading we want to make, Spain's GDP will only start growing by 2014E at the earliest; 5) the vicious circle of sovereign yields going up, leading to higher net interest costs, making new cuts useless. Spain will pay c.a. EUR40bn in cost of debt next year, making up 67% of the new EUR65bn austerity package announced recently for 2012-14E. Otherwise, Valencia asked last Friday to join the regional financing fund (FLA) in order to receive aid to meet its debt maturities and payments to vendors. This fund has EUR18bn liquidity to aid regions, and Valencia was possibly the region first expected to ask for this help. Hence, this should come as no surprise, whilst the money needed to fund this aid had been already raised. In any case, this raises fears on other regions to follow, increases risks of regions being again unable to meet deficit targets, whilst possibly it will lead to more protests and social unrest (since this bailout needs to come in exchange for more austerity). Here's where it gets less wonky. It seems that now is the time for the ECB to take action. Spain appears to have followed all the recommendations in exchange for a rescue package (though the government could have been more aggressive in terms of cutting public spending). Leaving aside discussions on the semantics, there have been some concessions on sovereignty in return for the help (which we do not see as necessarily negative news). Nevertheless, as evidence of things being worse than "officially" expected (as most anticipated, including us, nobody blindly trusted government macro forecasts) keeps on materialising, and the government insists on deserving its lack of credibility, coupled with social unrest mounting, pressure on the markets surges. Yes, there are fears of a default under this sovereign environment (Spain's Treasury can just afford debt maturities for the next two months...) and we do not have time to wait until Germany's Constitutional Court decides and the EFSF aid materialises after the summer. Still, Spain is too big to fail in our view, and ultimately Europe should come to the rescue, as they have hinted with the most recent measures. We recently said Europe cannot risk the Spanish government losing its mandate, and it seems we are not far from there. Too big to fail. Something has to give. Centre cannot hold. Etc. Anyway, let's ignore the eurogloom just for a moment and try to pick out a few movers. Banks getting whacked across the board. Pretty much sums up the morning. Auto triggers getting triggered. Royal Bank of Scotland Group PLC (RBS:LSE): Last: 196.00, down 8.7 (-4.25%), High: 201.90, Low: 195.00, Volume: 4.20m Triggers gon" trigger. Lloyds Banking Group plc (LLOY:LSE): Last: 29.04, down 0.9 (-3.01%), High: 29.72, Low: 28.78, Volume: 62.52m HSBC Holdings PLC (HSBA:LSE): Last: 516.00, down 17.2 (-3.23%), High: 527.50, Low: 515.00, Volume: 11.05m Barclays PLC (BARC:LSE): Last: 153.75, down 5.5 (-3.45%), High: 157.34, Low: 151.85, Volume: 18.46m Sir Michael Rake would rather deal with Stelios than touch it. easyJet confirms that Sir Mike Rake has informed the easyJet Board that he has formally informed the Chairman of Barclays that he does not wish to be a candidate for the Chairmanship of Barclays. He should have just mucked up the interview on purpose to be polite. These things usually happen in private. I guess lancing the boil of speculation is good. Clarity is good. Leads to efficient markets... And this precedes Barclays numbers on Friday. Which can't really be positive Given the vacuum at the top. And the pressure on them to find a fix for IB. Well, it's not doing anyone any good inside the group. There may be value there, but I'm not sure Barclays functions as a structure any more. But, with no CEO, who's going to say that? Oh, and Nomura thinks the divi might be cut. There is a high likelihood that there will be restructuring of some sort at BarCap, with the risk of a more RBS-like restructuring. With a new CEO there are always risks of potential clean-up costs as well. Furthermore, the capital markets environment remains challenging for revenues and profitability. US investment banking results so far have highlighted lacklustre performance, with the H2 12 outlook challenging. The dividend could also be at risk. Under such circumstances, we think Barclays faces potential downside risk and believe it will test the lows from last year. Potential risks to our position would be the appointment of a respected CEO; however, this would present an opportunity to sell the stock in our view, given the headwinds we mentioned. Barclays is trading on 47% of current adj. TBVPS, which is marginally better than other domestic UK banks. In terms of numbers ........... We estimate Barclays H1 12 PBT at GBP 3754m, of which BarCap is GBP 1849m and traditional banking is GBP 1977m. We have not adjusted our numbers for own debt gains, which we expect to be GBP c600m. Our estimates are below company compiled consensus. However, consensus expectations are bound to have been affected by the lacklustre performance in capital markets so it is hard to gauge where current expectations lie. We expect traditional banking to deliver revenues of GBP c9.4bn for H1 12 and a PBT of GBP c2bn. We expect PBT to drop sequentially, driven by non-recurring income in Q1 12 and increased provisions. We would expect UK Retail banking to show continued 4 improvements, and Corporate and European banking to show some deterioration from the macro-political outlook. We expect BarCap revenues for Q2 12 to be GBP 2.35bn, down c19% y-o-y and c32% q-o-q. For H112, we expect revenues to be GBP c5.8bn. See what I mean? What point is there having these two banks within the same pale blue umbrella? Anyway, that's enough banks. Oh - actually, there is one more very small bear story around in the banks today. Spike in May PPI misselling claims. Well, the big gour has taken £6.9bn in PPI provisions as of the first quarter. Of which, Cazenove reckons £4.5bn has been paid out. But in May, again according to Cazenove, the PPI claims have been 60% higher than the Q1 run rate. So where does that leave us? In our view, the FSA and the industry's estimates of potential PPI costs are highly subjective with an unhelpful level of disclosure given that these depend on significant undisclosed assumptions. We believe that PPI is likely to remain an overhang on the domestic UK banks in the absence of further action. So - not out of the woods, basically. We *really* need a squeeky bum time emoticon. It's just yet another question mark in the bank valuation models. As if there weren't enough of those. ROTR noting this big oil deal in Canada. Cnooc to Acquire Nexen for $15.1 Billion China buys yet more production. Nexen's in the North Sea, West Africa, Canada, Colombia ..... Changed CEO quite recently too I think. Trying to find out if there's any read-through over here. I'd imagine it knocks CNOOC out of the rumour mill for a while, if nothing else. Used to live in Alberta. Oil is doing funny things to local economy. Everyone drives massive trucks and is addicted to crystal meth. Except without the trucks. Anyway, we'll cut back to this when we get comment. Think Nexen's a partner with Soco International ...... SOCO International PLC (SIA:LSE): Last: 314.30, down 10.7 (-3.29%), High: 322.20, Low: 312.93, Volume: 66.07k Though that's by memory and may be wrong, so please don't trust me waffling. Well, DR, we sould have at least a cursory glance at the movers. Leading us down at the minute are miners in general Lots of red everywhere though. Three blue-chip risers at the moment. Serco Group PLC (SRP:LSE): Last: 571.50, up 6 (+1.06%), High: 571.50, Low: 559.50, Volume: 341.01k Capita PLC (CPI:LSE): Last: 693.00, up 4 (+0.58%), High: 693.00, Low: 680.50, Volume: 202.26k Feasting on G4S's corpse? I don't think they're in Sports Day 2012 yet, though I guess the assumption is public spending is resilient. @SOS: The mighty Pearson always holds. DISCLAIMER: Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville. On the other side of the board, Evraz leading us down. It is largely, I suspect, on China. China's economic expansion may cool for a seventh straight quarter to 7.4 percent in the three months to September, said Song Guoqing, a member of the People's Bank of China monetary policy committee. There's also an odd note out from Morgan Stanley Which is Evraz's house broker. And seems very cautiously written. Which it has every right to be when you're cutting forecasts for a company controlled by Abramovich. EVRAZ's plan to generate $5bn of EBITDA in 2016 (our bull case) looks ambitious versus our estimate of $3.1bn (base case). EVRAZ assumes higher steel and raw material prices than we do as well as additional improvements in EBITDA from projects where we think it too soon to put in our base case. EBITDA of $5bn in 2016 looks too ambitious... EVRAZ recently presented its plan to deliver $5bn of EBITDA in 2016 (vs. $2.9bn in 2011), which we find too ambitious. In our base case forecast, the company will deliver 38% less, or $3.1bn in 2016. ...mainly due to aggressive steel and raw material price assumptions. These explain $1.3bn of the difference between our base case 2016 EBITDA of $3.1bn and EVRAZ's target of $5bn. EVRAZ assumes 2016 steel prices to be 10% above the 2011 level, on average, versus our estimate of a 10-20% decline. EVRAZ's coking coal and iron ore prices in 2016 are 18% and 25% above our estimates, respectively. We do not reflect contribution from all projects in our model given poor visibility for some of them. We estimate $0.6bn of the difference in targets comes from EVRAZ's expectations of the impact from PCI ($0.2bn), Mezhegey Phase 1 ($0.1bn), increase in rail capacity in the US and de-bottlenecking in Ukraine ($0.1bn) as well as changes in product mix ($0.1bn); (Exhibits 2 and 5). New bull case PT of 844p. If EVRAZ generates $5bn of EBITDA in 2016, our PT will go up 1.5x. We estimate that two new projects, Mezhegey and Timir, could also add 7% to our PT. This small contribution is due to high capex and distant launch. Are we introducing the Raw warning for sell-side analysis now, too? As regular readers know, we only use the RAW warning now when reporting Libor. So here's MOST's conclusion, which is "keep buying" even though we think they'll miss guidance We leave our base case PT unchanged and reiterate OW. Even if EVRAZ does not deliver $5bn of EBITDA in 2016, we continue to like the story due to a number of catalysts next year: PCI, product mix improvement and rising coking coal output. As a result, we expect EVRAZ's 2013 EBITDA to increase 57% YoY vs. a 19% rise for other Russian peers under our coverage. "Buy stocks," says broker. Been a terrible performer, Evraz. Lots of stuff around about Russian steel capacity mushrooming next year. And, as it takes a long time to get a foundry running, all that capacity will either sit idle or push prices down to marginal. So Evraz's long, graceful slide of a chart set to continue... And Evraz is rather heavily geared too. It can't go bust, of course, because it's a quasi governmental entity. But, still, risky. Otherwise in the miners, all down. Vedanta Resources PLC (VED:LSE): Last: 840.00, down 40.5 (-4.60%), High: 871.00, Low: 834.50, Volume: 341.32k Eurasian Natural Resources Corp PLC (ENRC:LSE): Last: 362.80, down 18.5 (-4.85%), High: 377.30, Low: 362.40, Volume: 898.00k Kazakhmys PLC (KAZ:LSE): Last: 671.00, down 32.5 (-4.62%), High: 693.30, Low: 668.00, Volume: 620.22k Anglo American PLC (AAL:LSE): Last: 1,957, down 71.5 (-3.52%), High: 1,995, Low: 1,944, Volume: 1.33m Antofagasta PLC (ANTO:LSE): Last: 1,029, down 35 (-3.29%), High: 1,063, Low: 1,020, Volume: 555.64k The horror, the horror Glencore International PLC (GLEN:LSE): Last: 308.70, down 8.75 (-2.76%), High: 314.90, Low: 305.50, Volume: 3.59m Xstrata PLC (XTA:LSE): Last: 817.27, down 23.43 (-2.79%), High: 834.80, Low: 807.50, Volume: 1.89m All gone a bit quiet there. Like watching a fat bloke on a treadmill after his wife has just left him for the personal trainer. Are you still long on Nokia, Bryce? It's a long term holding in Muppet Alpha and I'm sure it'll come good eventually. The rabble seem to be concerned about Apple numbers incoming. Frankly, I think expectations have been walked down. We all know about the product cycles. We all know sales are likely to be a bit weak and guidance won't be blistering. But, on the other hand, it's Apple. Just looked at chart and had mild strike of vertigo. Yeah, as I say, it's been walked down. But if they don't manufacture an EPS beat out of somewhere, I'll eat my $20 data cable. Will grab some proper preview. Sterne Agee is usually good. AAPL will report its June quarter this Tuesday, July 24, after the close. Based on our supplier checks, we anticipate light revenue, an EPS beat, and conservative guidance. Talking to investors, there appears to be understanding that the next two quarters will be "choppy" ahead of the 6th gen. iPhone, the big picture being that this will likely be the most powerful mobile phone upgrade cycle ever. iPhone Likely Light Ahead of Refresh. As we have mentioned before (see our 05/15/12 and 06/21/12 notes), we believe that iPhone upside in the June and September quarters is less likely due to lower supplier build plans. While we are pleased to see consensus estimates being cut over the last few weeks as analysts aim to be more responsible, we believe they may still be too high at 29 million units, compared to what our checks indicate will more likely be in the 26-28 million range (we are at 27 million). As we have said before, this appears to be more of a function of the transition ahead of the upcoming 6th generation iPhone refresh likely in the October time frame as opposed to weak demand. ■ iPad and Mac Momentum; Gross Margin Upside. For iPad, we continue to believe there is room for upside due to improved availability of retina displays (see our 05/15/12 note). We are modeling 15 million units, at the upper end of 14-15 million expectations. For the Mac, we remain comfortable with our forecast looking for 4.3 million units, at the upper end of 4.0-4.3 million expectations, helped by its recent MacBook Air and MacBook Pro refreshes. For gross margin, we believe it will likely be better than expectations due to favorable component pricing, particularly in NAND, displays, and memory. Revenue Guidance Likely Conservative. For its outlook, we believe AAPL will revert to its vintage conservative guidance due to supplier checks indicating lower build plans. For the September quarter, we are modeling $37.2 billion in revenue and $10.49 in EPS vs. consensus at $38 billion and $10.22 in EPS. ■ Details. We are raising our gross margin assumption to 44.5% (from 43.5%) vs. guidance of 41.5% and leaving revenue unchanged. For the June quarter, we are now at $36.1 billion in revenue and $10.45 in EPS (from $36.1 billion and $10.16 in EPS) vs. consensus at $37.2 billion and $10.35 in EPS. This compares to guidance of $34 billion and $8.68 in EPS. For FY12, we estimate $158.9 billion and $47.10 in EPS (from $158.9 billion and $46.75 in EPS) vs. consensus at $161.1 billion and $46.79 in EPS and for FY13, $188.9 billion and $53.85 in EPS (from $188.9 billion and $53.50 in EPS) vs. consensus at $196.2 billion and $54.39 in EPS. We are leaving our price target at $780 based on what we believe is a reasonable and conservative 11.7x multiple on our CY13 EPS plus net cash. I'm thinking of buying an iPhone, which means that market must be more or less saturated. I use a 3GS, bought from eBay and heavily modified / de-Appled. It's a rather good phone, providing you hack it. "Rather good" is a ringing endorsement in Bryce-speak. Mention LSE in passing. London Stock Exchange Group PLC (LSE:LSE): Last: 983.00, down 24 (-2.38%), High: 1,011, Low: 976.00, Volume: 130.68k Point the rabble to this column by James Quinn. Make no comment on it whatsoever. Ok - nearly done I think. Aberdeen results look quite poor. Aberdeen Asset Management PLC (ADN:LSE): Last: 245.90, down 5.3 (-2.11%), High: 253.30, Low: 245.30, Volume: 1.82m Though - as has been the theme recently - expectations were tempered ahead of time. As it turned out, AUM was £182.1bn Forecasts seemed to be around £185ish. Main problem was market performance. Though fund flows were actually slightly better, in spite of the capacity restraints for Asia and Asia-Pac equities. People saying consensus forecasts should hold, more or less. Your enthusiasm is heartening. ITV, ahead of numbers .... ITV PLC (ITV:LSE): Last: 73.15, down 2.15 (-2.86%), High: 74.65, Low: 72.90, Volume: 4.76m Story in the Sunday Telegraph that they're buying Hat Trick. That's a quiz-comedy, for the avoidance of doubt. Expect bumped numbers following ITV4 Tour De France viewer spike.* Definitely do not expect this. Hat Trick would be a small deal, £36m ish. Which looks okay in the wacky world of content valuation. EBITDA for FY12E is reported to be £4.5m and sales FY10 £33m. This implies an EV/EBITDA multiple of 8.0x pre-debt and c.1x sales. Hat Trick does not appear to have material borrowings. The company was reported to have c.£20m debt under August Equity ownership period from 2003-2009 , but the MBO led by founder Jimmy Mulville, involved a payback of this debt. Even including some small residual borrowings should not imply >9x. This looks a sensible multiple for a production entity with a proven track record (Have I Got News for You, Room 101, Father Ted). If secured, ITV, will have avoided the inflated multiples which have been paid in the UK production sector. Benchmark multiples incl: 15.0x for the consortium buyout of Endemol in 2007, 12.5x EV/EBITDA for Zodiak buying RDF Media in Jun 2010, 14x for News Corp buying Shine in Feb 2011 and 7.5x for Entertainment One in Dec 2011. Any deal for a profitable group should be accretive. ITV has significant surplus cash expected at end FY12E - £640m gross/£158m net cash (generating minimal returns). However, the small price tag of Hat Trick implies c.1% accretion. It also implies no material impact for div ests. The bigger issue here is progress on ITV's Strategy Plan for which. a reinvigoration of ITV Studios is central. Is this implicit acknowledgement of the limits of what can be achieved internally? Frankly, no: opportunistic bolt-ons do not contradict a better use of ITV's existing £1bn prog budget. If the multiple was rich, it would reek of needing acquisitions, but this is not the case. Our greater concern is that evidence from the internal changes in Studios remains a way off and initial progress has been disappointing. The real test is success in returning series. New programming needs to attract sustained audience ratings and be re-commissioned before it comes attractive to other broadcasters (both from "proof of concept" but also sufficient episodes) and the impact is seen in Studios EBITA. The first new content is on-screen in FY12E, so external sales of such returning series will not impact until FY13E at the very earliest and not until FY14 fully. Initial programming successes in FY12E have been limited (see 10 July report) and ITV Pay Player is still not launched, 6 months behind schedule. Expect more comment at 1H results on 26 July - see 10 July report for ests. @Lefevre etc: http://en.wikipedia.org/wiki/Cydia A proven track record in 90s comedy. Cruel, but probably accurate. And ITV has a proven track record for awful comedy. It's an interesting pair-up. Right - I that's midday. Need to go out into the corporate desert and find some news. Any scoops to duncan.robinson@ft.com. Kthxbye @TTT: not true on firmware, though you have to be a bit haxx0r. Yep - thanks for joining, Duncan. Very welcome. Thanks for having me. And thanks for your comments, rabble. Do join us tomorrow for more of the same.