FT Alphaville " Markets Live transcript 6 Jul 2012 Markets Live chat transcript for the chat ending at 11:07 on 6 Jul 2012. We've got a few things to share with you Tape bombs hitting on the strength of the glorious German economy But we will come back to that The economist has decided bankers are actually gangsters Comparing the finance world with the tobacco industry in terms of the likely litigation from the libor scandal. Easy analogy, but possibly apt. So that's the banks done. Then we've got the policymakers. Yesterday's intercontentinental action did just about nothing for markets. The EU summit now looks like a complete failure. Spanish 10 yr back up near 7% Actually at 7 now on Trade web Equities: not bothered. It's a hard fact - Spain can't continue to fund itself at circa 6.5 / 7% . At these rates it becomes a certainty that the sovereign needs a bailout. And that means the Spanish bank bailout was just marking time. And if Spain needs bailing, then the bailout funds run dry. And do read this from Philip Stevens, assuming you haven't already I'd say he's only half right on the art front I rather like Emin's stuff And Hirst was okay before he became rubbish. Which is faint praise, I accept. Reviews of his latest show were just toe curling Yeah - Guardian one particularly aggressive. Basically demanding a guarantee that he stops going what he's doing. Anyway, we're not here to talk about aesthetics (again) we have something to pierce the gloom. And we are going to treat those dedicated members of the ROTR. we had a good hit last week with Lincare. That was confirmed on Monday I think. This deal is not american It's french as it happens The company concerned has said nothing despite me lodging various calls and pinging emails off to every email address I could find at the firm. So in the absense of that we will give you the name. We are told that this company is considering a number of bid approaches. Yes, multiple approaches Trouble is, we are not precisely sure who those approaches have come from. But we are told - by usually knowledgeable sournces - that Arkema is very much in play. Im told we should think in terms of 90 euros a share. That's a big step up on the current market price i think But this thing is v v cheap market price is currently 55 euros think it was 53.5 "undisturbed" 90 That would value the business at circa 5.5bn euros. Which is quite a lot for a business we hadn't heard of before. Let me just go and print a story on the main blog about this. It's just left for me to underline that RAW warning above. We don't want you lot getting select information now, do we? Don't gamble money you cant afford to lose Tho im cautious of higher bandit ratings nowadays But this is right up in that area Here's what I'm posting over on the main blog And to be clear, the "bandit rating" system is all pooled banditry, not specific individuals. Rather like a story CDO. So thanks for all that. We'll bring you news as it happens. Shall we get back to the gloom and doom now? FTSE reading at pixel time Is down 9.7 points-ish at 5682 In terms of doom and gloom ......... Some interest in Icap today. Or ICAP, as we've been ordered to call it. ICAP PLC (IAP:LSE): Last: 317.30, down 8.6 (-2.64%), High: 324.43, Low: 317.20, Volume: 606.20k Suffering from poor market volume i guess That's certainly a concern, yes. Equities volume's been pitiful this week. Not helped by Independence Day, of course, but still .... The easy excuse for today's move is Numis turning cautious. Analyst is James Hamilton, who's very good and very opinionated generally. June electronic volumes were down 22% following the 21% fall in May and 13% fall in April. The LIBOR scandal can only be unhelpful even if the suspension of a trader relating to this does not lead to any action against the group as more regulation is inevitable. We have increased our COE from 14% to 15% to reflect this, the negative earnings volatility and the other regularity uncertainty. Through the summer the comps for the electronic business are very tough with last years August volumes being $904bn vs. the $708bn just reported for June this year. Our target price falls to 344p from 412p and consequently our recommendation moves from Buy to Hold. The numbers: We have downgraded our forecasts by 4% this year (EPS 37.7p from 39.2p) and 5% next (EPS 41.5p from 43.8p). We continue to expect good cost control but the expected additional volume lost is not expected to be compensated for. Poor operating environment: We continue to see revenue pressure with the regulatory environment expected to negatively impact revenues for years. We do however believe ICAP to be a core part of the global financial landscape. In addition, the now likely exit of Greece (and potentially a number of the countries from the bonkers idea of the Euro) will deliver a substantial spike short term revenues and permanently create additional currency trading pairs. Valuation: Our valuation is DCF based and consequently falls from 412p to 344p. While a multiple of 8.7x prospective (depressed) earnings is not expensive but the LSE on 9.6x offers more growth and less risk. London Stock Exchange Group PLC (LSE:LSE): Last: 1,004, down 3 (-0.30%), High: 1,010, Low: 999.00, Volume: 53.80k bonkers idea of the Euro As I say, James is a good scratcher and very entertaining. And I do wonder if the IDBs can stay out of the limelight with regards Libor. And they are very much brokers in this regard True enough. But churning a lot of paper. Tullett Prebon PLC (TLPR:LSE): Last: 288.40, down 2.8 (-0.96%), High: 290.40, Low: 286.30, Volume: 62.91k Best not speculate on this theme too much though. Ok - should do a nonfarm preview .... consensus crica 100k or so it think Thereabouts, yes. And feel free to enter your bids on the right. The closest guess gets a gold star in Monday's session. Solid virtual gold star So it's quite a tight spread this time With 90k as the median Versus 69k last month. Let me see if I can find an actual preview. Actually, let's hit two common requests with one grey cut-and-paste stone Here's Deutsche's forex people on payrolls. Nailing the idea that we don't do forex. The EUR is not the USD's natural anti-pole on non-farm payroll release days. Typically the EUR is not on the list of strongest or weakest currencies on payroll release days this year. The May NFP day was the exception, when the EUR made it onto the top of the strongest major currencies on the day. The EUR's strength after the May data was because of a marked rise in talk about Fed QE. Only the kind of report that raises QE3 expectations meaningfully (e.g. an undistorted NFP number below 50K), is likely to get any EUR positive reception and even then the JPY would be preferred. In contrast, if the EUR is becoming even more of a favorite funding currency now that the ECB has joined the "zero bound club," we should see the EUR as one of the weakest currencies on "risk on" days. Yesterday the ECB managed to reduce front-end yields for quality core paper, and raise back-end yields for the periphery. shows that the EUR does not do well in yield curve (twist) steepening environments. The market response appears to reflect a view that the ECB either lacks the ability, or more likely the willingness, to provide path breaking support for the union, without an even more elevated sense of crisis. In contrast to the EUR's reaction to recent employment reports, the most responsive currency (of 16 most actively traded currencies) has been the MXN that in the last 6 employment release days has been in the top 3 strongest currencies on 4 occasions, and the weakest 3 currencies twice. ZAR is next up on the list, not surprisingly usually positively correlated with the MXN. For a relatively low volatility major, the JPY makes it on to the 3 strongest/weakest currency list, an impressive four out of 6 times, usually as an anti-pole to the high beta MXN and ZAR trades. The JPY and the MXN have both had largely consistent responses to the reports. On 5 of 6 occasions the yen has been up on weak US data and down on surprising strength, and the MXN has been weak on weak US data and stronger on strong data on 5 of 6 releases. Expect MXN/JPY will again be a favorite way of playing NFP data surprises for the June report. USD/MXN still has scope to push to near 13 on any meaningful improvement in US data surprise indices. For this release, the TRY will likely be preferred to ZAR for "risk on" trades. Email Alan Ruskin at DB for the rest. Ok ... The rabble seem interested in the continuing descent of Man. Man Group PLC (EMG:LSE): Last: 62.10, down 1.15 (-1.82%), High: 62.90, Low: 61.10, Volume: 7.09m Halved this year, after halving last year. Gann theory in practice A victory for the chartists. Oh, and speaking of ... (Just something I was mucking around with. A work in progress.) squarepeg - you don't know how nerve racking stories like this are... As for today's Man fall ... Performance has sucked. Funds walking out the door. Forecasts down 50% for the current year. All of which, I reiterate, makes me ponder why Man doesn't have to warn. If everyone else can see performance fees evaporating.. Surely, even in a mark-to-market exercise, it's worth giving the market a bit of formal guidance the market if your earnings will be half what was previously thought. Allowing the sellside to shift down unaided seems .... Not cricket, frankly. Update Further AHL weakness in Q2, the associated structured product de-gearing and ongoing subdued appetite for hedge fund products lead us to reduce our 2012 and 2013 underlying EPS forecasts by 40% and 55% to US$6.0c and US$5.8c, respectively (total diluted EPS forecasts -49% and -48% to US$6.3c and US$9.3c, respectively). We reduce our 12-month target price from 115p to 60p to reflect the lower near-term profitability of the business and the prolonged period over which it will take for this profitability to recover markedly. We have written consistently about the opportunity for Man to reduce its cost base (see notes of 20 February 2012 and 27 April 2012), highlighting at least a further US$75m that could be taken out of the business. The recent change in Man's Finance Director we believe increases the likelihood of further cost cutting in 2012. However, such reductions are not certain and we do not include them in our forecasts. A cost reduction of US$75m would not likely be realised fully in profits, but if 66% were realised, this would increase underlying EPS by in excess of 25% in 2012 and 2013. We move our recommendation from Buy to Hold. Despite c.10% downside to our new target price, we believe Man continues to offer a positive 12-month TSR due to its committed 2012 DPS of US$0.22c. While we retain our long-held view that both AHL performance will recover and that demand for hedge fund products will improve, the timing of these improvements continue to be pushed back. As a result, the reduced near-term profitability means we reduce our forecasts and valuation. joachim - stand corrected How we value the stock: Our TP of 60p (vs 115p) is DCF derived (DCF details: CoE mgt fees 9.2%, CoE perf fees 19.6%, terminal growth: 4%). Adjusted for excess capital, Man trades on 13.4x and 9.1x 2012e and 2013e total EPS, respectively (13.9x and 14.4x underlying EPS). That's the thing with Man ..... Earnings seem so geared that it's impossible to stick a PE valuation on it. Still doesn't look cheap even at this level. No idea what happens next, but surely something has to. (TFT1: far too many. That much we can say for certain.) You mentioned Germany at the top of the page. on the back of the weak euro Actually BNY were talking abotu this this morning Comparing Germany to a Potemkin Village Which i thought was rather creative Germany is the Euro-area's healthy façade concealing a far from impressive interior; but this façade could well begin to look rather shabby if the status quo of crisis persists Just as Mario Monti was announcing an expected rise in Italy's 2012 deficit this week (to 2% of GDP, up from 1.3%), we learnt from the German finance ministry that its own shortfall would decline to 0.5% from 1% "thanks to the favourable overall economic development." Indeed, whilst Germany has been ringmaster in enforcing EU mandated deficits across the Euro-area, it has seen its own deficit fall largely as a result of a substantial trade surplus - a surplus bolstered by a favourable exchange rate virtue of the country's association with weaker neighbours. But this may be about as good as it gets for Germany as recent forecast downgrades from the country's research institutes might suggest. When it is understood that the net financial position of an economy's sectors must net to zero in aggregate, then it is understood that Germany's coruscating public finances have arisen almost entirely as a result of particularly impressive trade volumes in the face of domestic economic weakness. And there are two foreseeable problems on the horizon. Firstly, Germany's domestic economy may soon be toying with recession: domestic demand lopped 0.3% points of first quarter GDP growth and data have hardly impressed in the interim. Retail sales fell for the second consecutive month in May whilst the composite PMI slumped to its lowest level since the height of the global financial crisis in June 2009, weighed down by the country's manufacturing sector (which shrank at its fastest rate since that same month), and near zero growth in the services sector. However, it is the second issue, Germany's reliance on exports, that is more troubling. When German GDP collapsed by 5% in 2009, exports were at the forefront of blame, and not surprisingly: German exports constituted more than 40% of GDP, and they contributed a whopping 0.9% points to Q1 GDP growth this year. Around 40% of these exports leave Europe's borders and there can be little question that the Asian nations have been a big driver of overall growth. However, with each and every data release from China, we feel emboldened in our view that the country's GDP growth this year is at risk of falling well below the lower end of market expectations earlier in the year. Worse than this, however, is the grim growth outlook in Europe - a region that constitutes 60% of demand for German exports. The continued focus on government austerity in the Euro-area is hindering private sector deleveraging, thereby postponing recovery and resulting in continued fiscal target slippage, as we have seen in France, Spain etc. Whilst this situation exists, then the Euro-area faces minimal, if any, growth in the years ahead, thereby undermining a German export machine no longer able to readily call upon its markets to the East. With its private sector stagnant and at risk of recession, sliding trade revenues may therefore put greater demands upon Germany's automatic-fiscal stabilisers and imperil existing government targets, and whilst the government's running deficit is minimal, recall that its gross debt is still a whopping 81% of GDP (and hence similar to that of the UK). Yet, as far as Germany's fiscal position is concerned, weakening export volumes are one thing, but the EU's failure to bring the crisis to an end quite another. We have argued previously that Germany has been subsumed by the Euro-area project, and can no longer remove its "dead flesh" without serious self-harm. Germany's exposure to the Target II system is in excess of EUR 700 Bn and growing, whilst its dues to the bailout funds have increased virtue of Spain's application for a banking bailout - and will continue to increase should the likes of Italy apply for assistance. Indeed, Germany's liabilities on this front are already around 33% of the total fund, and there is then the prospect, at least, of an expensive recapitalisation of the ECB were the Greeks to "decide" to leave the single currency. The point, in essence, is simple therefore: Germany's public finances are impressive to say the least, but this may be about as good as it gets in view of deteriorating private and export sector finances; and there is then the small matter of balance sheet risk owing to its commitments to its neighbours. Ironically, a loosening in German public finances would go a long way to helping the Euro-area on to a path of short-term recovery (if not long-term stability); but it would be better if this stimulus were initiated from a position of strength rather than a reaction to renewed crisis. Basically saying the Germans shouldnt get cocky Right .... I'll trust your summary and read the rest later. All this is prompted by German industrial production data Market was expecting plus 0.2%. As you say, euro strength the most likely explanation. Oh, and German 2-year was less than zero this morning. And Spain's through 7% on Bloomberg now. Playing catch-up with Tradeweb. Northern and southern Europe drift ever further apart. Latest price on Arkema? makes me sick watching threatening to go thru 60 euros I cant watch it anymore Getting into the "needs a statement" territory .... Even in France. Though, after Lincare, who knows what requires a statement any more? I don't know if there's anything in the Bowleven story. Bowleven PLC (BLVN:LSE): Last: 70.00, up 11.5 (+19.66%), High: 73.35, Low: 58.83, Volume: 13.54m Oh yeah, getting calls on that yesterday Similarly. And it's a buyer beware stock at the best of times. Singed more fingers than Aga. What we can say is that it had come off by 50% or so since Dragon Oil had had a look. The usual names are flying around today ... Tullow (which sounds like bobbins) KNOC (which is plausible, in comparison.) But - to reiterate - we don't know. If we did we'd tell you, but we don't, so stop phoning. This selling is picking up speed 10yr at 70.4 on trade web figs Not censored. Portugal just shut up. Greece is going to try and sell 1.25bn of 6m paper on July 10 Portugal's strategy is fascinating. Better to be thought a bankrupt nation than to open your mouth and remove all doubt. And while we are doing the bust bits of Europe Now classed as an "exotic" Here's Exotix sovereign research Cyprus has numerous positives, as we discovered on our investor trip last month. In May Cyprus had a debt-to-GDP ratio lower than Germany's; it has a highly educated and productive workforce, good institutions; a favourable tax regime, and strong and lucrative economic ties with Russia. Furthermore, recent natural gas discoveries could, we think, ultimately have a huge impact on government finances. The long term future for Cyprus remains positive, but substantial help is needed to get there. Cyprus is threatened with fiscal costs (relative to domestic GDP) larger than any banking crisis in global history. According to a recent IMF study, the most costly banking crisis to date was Indonesia, where fiscal costs reached 57% of GDP. In Cyprus, the first 60% of GDP (EUR11bn) of costs may not even relate to lending to its own citizens, but rather from lending to the Greek private sector and GGBs. Such costs would arise if Greece deteriorates, and if Cypriot banks and its government accept legal liability that comes with their branch's exposures to the Greek private sector. No olive branches were these! And if the Cypriot economy then nosedives as a result of a vicious circle of credit crunch and austerity, recapitalisation costs from domestic lending could add to woes, implying total fiscal costs ultimately rise to over 100% of Cypriot GDP (EUR18bn). So the huge issue for Cyprus and holders of its government's bonds (CGBs) is who will foot the bill for bank recapitalisation. In spite of Cyprus" legal responsibility for its Greek branch's liabilities, it seems to us implausible, preposterous, unlikely, but not impossible that the great majority of costs fall on the Cypriot government. We estimate there to be around a 15% likelihood, based on a detailed assessment of the origins and outlook for Cypriot banks branches in Greece. The most promising "get out" came with news that the Spanish crisis may have brought out the EU fire engines. The 29 June Eurogroup agreement affirmed the need to "break the vicious circle between banks and sovereigns" and to establish a single European supervisor for all eurozone banks. If implemented as suggested, it would largely relieve the fiscal burden of banking crises from national treasuries, and would be extraordinarily good news for Cyprus and CGB prices. What about prospects for PSI? The IMF's DSA - currently under construction in anticipation of an EU/IMF programme - will be crucial. If it factors in very high recapitalisation costs adding to Cypriot government debt then the likelihood of PSI increases. A short-run risk for CGB holders is that the debt composition is currently amenable to restructuring as the only official lending is currently from Russia. The situation changes quickly once the EU/IMF funding requested by Cyprus starts to bailout some large CGB maturities from November. By the end of 2013 we expect the share of CGBs (not owned by Cypriot banks) in total government debt will have declined from 41% to 12%, too small to make PSI worthwhile. On balance, we think arguments against PSI will win the day. First, we find it unlikely that the IMF will, at the outset, project the debt-to-GDP ratio as high as 120% of GDP by 2020 (the IMF sustainability threshold for Greece). Second, the EU/IMF team would have justified concerns that a haircut would have very damaging implications for Cypriot banks and broader economy. We find prices as low as 53 (2020s), and yields as high as 19.5 (2013s) tempting, though we prefer longer dated bonds, whose low price better insulates against the tail risk of early PSI. We initiate with a BUY recommendation on the Feb 2020 CGBs, with a target price of 60 (7% higher than the current mid-price). We initiate with a BUY on the November 2015 CGBs, with a target price of 70 (6% higher than the current mid-price). We initiate with a HOLD on the June 2013, with a target price of 88.5. So Exotix are buyes of longer dated Cyprus paper An email drops through from Morgan Stanley .... Who seem to be apeing Izy's approach to headline writing. The Paradox of Liquidity It'll be a compulsory undergrad module at LSE by the time we're pensioned. Anyway, I'll just share this in the hope that it might be interesting. Though I've no idea if it is. The positive impact of conservative behaviour among banks, corporates and investors should outweigh the negative impact of a weaker macro and trading environment that such conservatism creates - at least from a credit investment point of view. Everyone - banks, corporates, investors - is trying to stay liquid and "flexible": A desire to defensively increase liquidity has been a remarkably consistent theme across multiple sectors. European banks now have historically high ratios of short-term assets to short-term liabilities. Corporates have historically high levels of cash to debt. Investor positioning remains unusually light, and US dealer bond inventory is unusually low. And all this is before any discussion of central bank policy This conservatism, en masse, has been selfdefeating: Its result, ironically, has been less liquidity in multiple areas that matter to credit markets. Banks are making fewer loans, corporates are making fewer investments, and investors are seeing less liquidity in bond markets. The positives (conservatism) should outweigh the negatives (liquidity) for credit investors: The handling of liquidity by banks, corporates, and investors suggests a great deal of caution still exists in all three segments. From an investment standpoint, we see this as a clear positive, which more than outweighs the negatives of a weaker liquidity environment. Sadly lacking in fuzzy felt illustrations. Ok - back to stocks for the remaining five minutes. We have the slightly confusing circumstance of Aviva at the top of the FTSE 100 and Aveva at the top of the 250. The latter's probably the more interesting one. AVEVA Group PLC (AVV:LSE): Last: 1,752, up 55 (+3.24%), High: 1,758, Low: 1,707, Volume: 89.86k Berenberg turning positive as part of a software sector review. The primary concern for investors running into this earnings season is the impact of recent negative macro data and negative data points from companies that have already reported. Our reading of the situation is that the end of June was difficult for software companies. We expect that companies will report incidents of delayed decisionmaking. While we do not expect a blood bath in Q2, the prospects for guidance downgrades for the full year are likely. In response to the prevailing macro scenario, we are changing some of our recommendations to reflect our bias towards companies that are weighted either towards value (on a FCF basis), resilience in a downturn (e.g. experience in the last downturn) or counter-cyclicality (where we expect strong growth despite macro headwinds). Where we feel there is an incremental risk to a cut in annual guidance, we have taken a more cautious view. We are upgrading AVEVA and Sage to Buy and downgrading Cognizant and VMware to Hold. Oh, and here's an interesting line. M&A activity has accelerated during the quarter and the perceived take-out multiples are high. The categories of greatest focus have been cloud, big data and social enterprise. There is a risk that we are entering into a phase of frenzied M&A activity. frenzied M&A activity .... Though I think the two or three tech bids in the UK this year don't quite constitute a frenzy yet. Our particular study focuses on organic cash generation versus acquisitive growth. Established companies seem to have spent a number of years growing organically before hitting a period of sustained M&A activity. Newer companies such as Salesforce.com have started the M&A phase much faster. This could be due to the competitive advantage periods in technology being shortened (due to more open technologies) or that the pace of innovation has accelerated. Either way, we prefer companies with deeper pockets. Where he was among the fiercest critics of Autonomy's .... interesting ... methods ... of ... revenue .... recognition. Yes, and ive got to shoot off Is it like sports day? Do they all have to go to the gym hall in inclemency? I know nothing of tennis, and don't really want to learn. Anyway, thanks all for joining us this week. arkema stabilised at circa 60 at pixel See waht happens there Knew there was something I wanted to mention. This strange story in China Daily. The China Southern Locomotive and Rolling Stock Industry Group Chairman in contact with a British railway signaling company and several others about possible acquisitions Yes, that's an interesting line isn't it. The crisis has created good possibilities for mergers and acquisitions in that current prices are attractive, Though "the best time has yet to come as the current crisis has not bottomed out," In response to a Sunday Times stab story regarding Invensys and CSR .... Ian McCafferty to replace Adam Posen on the MPC ... Invensys was widely quoted as saying that the June 21 statement still held true. In the sense that is was once in "highly preliminary discussions with third parties," but none was ongoing. Invensys PLC (ISYS:LSE): Last: 234.70, down 0.7 (-0.30%), High: 237.00, Low: 230.20, Volume: 443.44k Ok - that's that noted. Let's close this now. And thanks again for all your comments. This entry was posted by Paul Murphy on Friday, July 6th, 2012 at 11:01 and is filed under Uncategorized.