FT Alphaville " Markets Live transcript 20 Jul 2012 Markets Live chat transcript for the chat ending at 11:06 on 20 Jul 2012. Participants in this chat were: Bryce Elder/FT Izabella Kaminska Fancy seeing you here. Welcome to Markets Live, FT Alphaville's thing with the prices and stuff. So, Paul Murphy's still on New York time. So i'm gonna help out... Yup - that means Iz joins me today. So feel free to lodge questions on the right about the death of money Negative interest rates being the end of the world, gold being an Illuminati conspiracy, etc. oh bryce.. your PR is wonderful All the big picture stuff we usually ignore here, in fact. So ... anyway, should we kick on? @wheniwereyoung - i've been a bit busy last 24 hours so not as well read as i should be. Link? So equities are rather dull and being ignored, because the action's elsewhere. yes, let's look at bonds (@TommyTenToes - where please? We have a spam zapping system, but he may be on holiday.) So the Spain 10yr is a straight line upwards at 10:30. yup no change there then.. Italy 10′s standing at 6.06% This smells rather like panic. and especially exciting is the new sicily methinks but was that yesterday's news? Just the transfer from Italy to save Sicily.. I have some comment from Unicredit Sicily is one of five Italian regions enjoying special statute, enabling it to directly collect all taxes within its own territory. Nevertheless, sources of revenue include transfers from Rome as well as from the EU. According to Bank of Italy, the government of Sicily's outstanding debt stood at EUR 6.9bn at the end of June 2011. The 2011 Sicilian budget deficit increased to around EUR 4.0bn (from EUR 494 million in 2010) on an accrual basis, which was supposedly financed by issuing EUR 1.0bn in new debt and by drawing down EUR 2bn of reserve funds, while the financing of the remaining EUR 1.0bn appears to have been pushed into the 2012 budget. However, it is our understanding that the 2011 budget includes EUR 1.7bn of inflows from different sources, including transfers from the centre, and maybe credits, which have not been collected yet. This comes in addition to EUR 14.1bn of uncollected inflows, including credits, inherited from the past, lifting the total of non-collected receivables to EUR 15.7bn. However, it is not clear whether all of this money is still available. We expect the central government to send fiscal experts to Sicily to help improve transparency and to push for a significant cut in public spending. We note that the consolidated government's Spending Review, approved on 5 July, included spending cuts for the five regions enjoying a special statute of EUR 600mn already this year. And by any comparison, the Sicilian government's payroll seems excessive. Perhaps in order to start these negotiations on a good footing, the central government committed to immediately transfer EUR 400mn to Sicily in order to start paying down any previously undisbursed receivables from Rome. Would it be fair to note that the economy of Sicily hasn't been the most transparent of money transfer mechanisms in the past? Despite its excessive government payroll Bryce - i would imagine so Makes Greece look like .... er ... [insert non corrupt country here] Brown paper not very transparent Wandering a bit here, but what exactly does Sicily's economy run on? Tourism? Wine? Olives? though there is a job issue there Many young Sicilians forced to come to mainland for jobs. Apologies for all these national stereotypes. So anyway, we have the EU finance minister conference call today. Signing off the Spanish bailout. Had been talk that they'd use some of the E100bn to buy Spanish debt. EU sources kyboshed that idea yesterday. Slush fund for banks only. Ok - enough eurogloom? We can revisit the theme later, and almost certainly will. Or, rather, non M&A time. London Stock Exchange Group PLC (LSE:LSE): Last: 1,026, up 3 (+0.29%), High: 1,050, Low: 1,024, Volume: 553.09k I suspect there's only so much we can add here. Perhaps a timeline might help. Rumour whipped round the market yesterday, in suspicious fashion, of an imminent Singapore approach. You can see it in the LSE chart, which spikes at 4pm or thereabouts. Talk was £13.50 per share bid coming tomorrow. Then at 7:45pm or so the Telegraph writes the story surprisingly hard. Various reporters are pulled out of the pub to make the relevant phone calls. And get no encouragement whatsoever. This is awkward, not least because the FT is going to press at that moment with an interview with the Singapore CEO Who says on the record that there are no deals being worked on. So - clearly - someone's being fed a porky here. And, it would appear, it wasn't us. Singapore statement this morning is unequivocal. SGX has not engaged in talks with the LSE on a potential merger So that's that. Apparently. Would have thought that'll lock out SGX for six months under takeover rules. The idea makes too much sense to ignore. @roddy1234: that's ridiculous. I'll cut to some broker comment for the logic. ...... As soon as I can find some. Ah - here's Deutsche Bank. Both SGX and LSE have clearly demonstrated interest in cross border M&A, with recent proposed acquisitions in Australia and Canada failing largely due to nationalistic responses in the target country. But we also believe investors were not convinced of the merits of these deals. When the SGX announced its proposed merger with the ASX, a key selling point to investors was potential EPS accretion. Given partial debt funding and PE multiple arbitrage, we estimate that deal would have delivered SGX shareholders 20% EPS accretion even before potential synergies were taken into account. With the LSE trading at a forward PE of just 10.9x Bloomberg consensus, we estimate EPS accretion could be even greater (57-81% FY13-15e) this time around, albeit offset by material ROE dilution (DBe 21-24% FY13-15e). But we think the key hurdle would be convincing investors of genuine synergies from merging exchange businesses on opposite sides of the world. Not an easy task in our view. Also, this idea that's turned up in a few papers this morning about Dubai etc being displeased by LSE strategy ..... Not sure I'm buying that. Ok, they got in at the wrong price. And they're under water. But the stock's at a three-year high or thereabouts. They don't have that much room to grumble. Anyway, if I may rant a little more .......... I think this is another demonstration of the horrible state M&A finds itself in at the moment. It's become extremely difficult for us to write a story, because everyone we talk to is scared of going to jail for saying the wrong thing. Or "being Hannamed," as it's otherwise known. Which means reporters have to take massive risks of getting it wrong Or they just don't write rumours at all. Which means the holders of said rumours, the real insiders, take all the benefit. Hence the massive premiums you see with M&A at the moment. Previously, premia would be whittled down by grey market noise and rumourtrage. Now the proper insiders take all the benefit. That makes me unhappy. Should we move back to the market now, since I have that out of my system? So can we talk about commodities? Because there are two big commodity stories really The first one is the corn crisis and the second is the sudden pickup in Brent I am available for comment on either Go on. I think I went long Monsanto for Muppet Alpha yesterday, in response to all these corn crisis stories. FT Alpha's fantasy investment portfolio. Employing a modifed version of Scott Adams" "bet on the bad guys" rule for stock selection, we chose only the companies we dislike. It went up. A lot. Corn is now definitely becoming an issue.. (providing Mr. Beeks hasn't been switching reports) @Phіl: we think along similar lines, which is heartening. Huge implications for things like fuel and ethanol prices here's a bit of comment from Standard Chartered who think that the peak of this bubble is coming round any minute Since last week's WASDE report from USDA, corn prices have rallied nearly 5% on lowered yield expectations and a continuation of declining crop conditions. With tight old-crop inventories and prospects for even tighter new-crop supplies, the market is rightly focused on lower estimates, currently suggesting a roughly 140 bu/ac yield, as per our price model. Additionally, since 11 June, when we published our most recent Commodities Review, Dec-12 corn has slightly outperformed Sep-12 as the latter straddles both old- and new-crop years. Despite this rally in prices, caution is warranted. To be clear, we are not yet calling for a top in corn prices. However, demand destruction for the 2011/12 crop year has become apparent in both US ethanol production and exports in recent weeks. and also i lie this was socgen not stanchart Same difference. Paris / Hong Kong. Meanwhile, the weird thing is over in Brazil (huge ethanol producer) Despite a thus far disappointing sugar cane harvesting season in Brazil, prices for ethanol in Brazil's Sao Paulo region, the main area of production, have fallen significantly since reaching a peak in late March. As of yesterday, the price of hydrous ethanol has receded by 13.3%. A combination of weaker than expected prompt demand as well as increased supplies have pressured the market. The bigger picture remains bleak though, with the latest data indicating that at the end of May total ethanol production was down by around 25% from a year ago. In spite of this, the government has announced its intent to raise the mandatory blending ratio back to 25% as soon as possible. Judging by the data and the latest weather reports, it is highly doubtful that such a step can be implemented this year without having to import larger quantities of US ethanol. ¤ That was from last week.. before the crop spike So the FT's take anyway is that the world is now braced for a new food crisis and all because of the drought I think i read somewhere that there were already power constraints because of he air conditioning use as well. yeah. Read more about it here I can get very Guardianista on this subject, but one rant per day's enough. Let's stop in on stocks for a moment shall we? well i think a lot of people are now confused why the US is maintaining its ethanol rules Especially given all the shale gas It seems illogical to turn food into fuel, when shale gas is cheap as chips and bakken crude.. and canadian crude.. and so on (on a relative level of cousrse) Thought shale gas was below marginal cost of production at the moment? shale is so cheap they can't afford to make it. Kemp has been writing about this a lot Ok - told you we'd be doing big picture today. I am definitely a big picture gal... Actually, Weir's leading us up at the moment. Weir Group PLC (WEIR:LSE): Last: 1,596, up 71 (+4.66%), High: 1,598, Low: 1,522, Volume: 673.58k Which is a shale gas play, of course. Trying to find out if there's anything specific here, and not getting much back. Decent numbers from Suzer, which is approximately the same sector. Swiss company. Makes waste water pumps and the like, by memory. Ah - and @JoP notes Baker Hughes numbers as well. Thing is, Weir's short position always makes it volatile. 18% of free float on loan as of yesterday. That's down from nearly 27% at the start of June. Wow - look at the time. Few things to whip through. Resolution mentioned to the left. The company without a purpose, according to occasional contributor Neil Collins. Resolution Ltd (RSL:LSE): Last: 206.90, down 21 (-9.21%), High: 227.00, Low: 205.30, Volume: 8.40m Severe reaction to the axeing of its cash return Even though I thought it was already the consensus expectation. Having followed the very excellent Kevin Ryan at Investec So, anyway, here's Deutsche Bank on today's news. Resolution has announced that it is formally cancelling any plan to return cash in 1H12. To be frank, the decision not to return anything at the 1H should not be a surprise; however, the statement also suggests that there is no prospect of cash return ever. In our previous forecasts we had assumed some limited prospect of cash return late in 2012 or in 2013; stripping this out of our forecasts reduces our target price by 5% to 285p. As a reminder, management originally set the target to return £250m of cash in 1H12 in mid 2011, reconfirmed it in November 2011, and then backed away sharply from it with the FY11 results in March. We believe that the rationale behind this volte face reflects a combination of market weakness in 2H11 (wiping away the benefits of management action to release capital), continuing macro uncertainty and a tightening of the regulatory screw. We note though that the IGD capital surplus announced as at 1H12 is in line with expectations at £1.9bn, equivalent to 210%e coverage ratio. That the shares have fallen back this morning is no surprise, particularly in view of the recently improved share price performance. As a guide, £250m is equivalent to 18p per share, but of course Resolution has not actually lost this money, merely not returned it; so logically a reasonable share price reaction should be less than this. The bigger problem facing the Resolution share price, however, is likely to be a simple lack of energy from potential buyers. There is still a perceived technical overhang from a potential large seller and nervousness over whether the group's premium listing might be affected by CP12/2 (aimed at "externally managed" companies). On top of this, confidence in the company's strategic direction has probably today taken another knock, coming on top of the group's apparently shifting view on M&A. This said, there is a value argument that should support the shares - both from a near 10% dividend yield and a sub-50% price / EV. Excluding all exceptionals, cash flow in FY11 was £291m (vs a dividend cost of £275m). Planned cost savings and reduced new business strain are targeted to improve this by c£100m by end 2013, thus raising dividend cover and underpinning confidence in the dividend, and we look for evidence that progress is being delivered on this front at the 1H results on 15th August. A reminder that Resolution shareholders are upflowing a lot of cash to Cowdery and his management team Who sit outside the group shareholders actually own And charge it for management services. So i've got to go... will leave you to wrap up if that's ok. Sure, Iz. Thanks for joining. Anyway, I'm a little unclear as to how much value CowderyCo's putting into Resolution in return for their fees at the moment. Given, strategically, it looks a mess. Bit more comment, this time Cazenove. This supports our view that Resolution's earnings are insufficient to support both dividends and buyback. In our note "Looking into the earnings power of Resolution dated 13th Dec 2010," we highlighted that the operating earnings at Resolution is not a true reflection of its earnings power. This is because due to acquisition accounting the deferred acquisition cost (DAC) of Friends Provident and AXA is transferred as value of business acquired (VOBA) and is amortised below the line.  We maintain UW recommendation on Resolution as we believe that the stock is trading 13x normalized earnings and we prefer the stories elsewhere. We prefer Standard Life over Resolution. Oh, just a footnote to the LSE story ..... I see Rolet and two others sold a whack of shares yesterday To fund their tax bills. But only took a tenner for them. Could've done 25p better than that if they'd held on to 4pm. Ok - and with that I think we're done for the week. No appetite on the right for Vodafone comment, which is fair enough. Results seem a bit poor but for dull, operational reasons. Oh, and Gulfsands still motoring. Gulfsands Petroleum PLC (GPX:LSE): Last: 125.00, up 11.5 (+10.13%), High: 134.00, Low: 112.00, Volume: 299.60k There was a rather weak bid rumour around yesterday Though who on earth would take a punt on this when Syria's so febrile? Looks questionable at best. Sorry - don't know what's spooked Aberdeen Asset Management .... Has Credit Suisse sold all of its stake yet? It's below the disclosure limit certainly. Aberdeen Asset Management PLC (ADN:LSE): Last: 249.10, down 9.8 (-3.79%), High: 257.90, Low: 248.70, Volume: 2.82m And on that totally worthless note, let's round up. Thanks for joining us today. Paul's back from NYC next week, so join us for some rabble rousing and random spelling attacks on Monday. Have a good one, one and all.