FT Alphaville " Markets Live transcript 15 Feb 2012 Markets Live chat transcript for the chat ending at 12:04 on 15 Feb 2012. Participants in this chat were: Paul Murphy Bryce Elder/FT Izabella Kaminska Welcome to Markets LIve The site that sprung Michael Pettis It's not our place to suggest that you nominate us for the Paul Foot award ... But we're not going to brag about that .... others can do so, if they wish, and that's up to them. Let's kick off with Greece Then move to Bank of England cos the inflation report is out Izy's gonna come on a bit later And so I had abrief conversation last night about Greece with a couple of commenters. On Cardiff's post here Nice little debate. But to summarise... I think Powerfrau and Co have decided to cut Greece loose. They are goading them to leave the Euro. And instead all firepower will be directed as saving Portugal. But people were making the point that these are politicians - they just think short term. They won't let Greece go cos it would sink Sarkozy for a start. Which is a fair point. It's interesting that the debate now happens in the idiom of the playground. Except I have this one piece of prime evidence. Portugese three year paper. The yield on this stuff has come in from 24.5% to 15.5% - just as the tail risk of a Greek default has continued to grow. That reflects clairvoyant trading. All the language now is about how Greece leaving doesn't really matter. About how everythings priced in. All the write downs taken etc etc And look at it from the Greek side. If you're this Samaras guy and you are likely to be elected in April. Do you want to be Germany's gimp for a decade? Sit in the GimpZone for ever Yeah, Greece would boil for a few months, leaving the eurozone. They have to put fences on the border. And the army on the streets. But the pain would be taken. The country would be able to re-set itself. Instead of labouring for a decade to feed the German export machine - and eventually failing in any case. Trust me - the clue here is 3y portugese paper. That's where the real work is being done. The firewall is to the west - not the south east. While we are on Greece should mention Joseph's post on haircut creep. It's well worth reading. I know there's still lots of debate to go on Greece. But I'm not the only one thinking this way. Let me get this stuff from Neil Mellor Bit long, but he articulates it better than I am currently. Commentary In yesterday's Briefing we alluded to the possibility that the man most likely to be Greece's next prime minister, Antonis Samaras, might well believe that he has some leverage in renegotiating Greece's deal with the Troika. The basic premise of this view is that Samaras is a man who believes that such is the bleak economic outlook under the terms of the agreement that he and his country may have little to lose in ruffling the Troika's feathers - a strategy that implicitly assumes the Euro-zone's reluctance to test its "firewall." However, the evidence is pointing, increasingly, to the fact that this presumption may no longer be safe. Many economists and market commentators hold the view that a Greek default - although messy and painful in the first instance - would be a better alternative for Greece than many more years of penury within the Euro-zone. Indeed, it has now come to the point where this view has been expressed at the official level. Yesterday, Luxembourg's Finance Minister Luc Frieden said "[A default] might be something which would allow Greece ... at least, to some extent, to get a new start. It would help Greece to create an economy that can create jobs. Although Frieden then went on to couch his view with all too familiar diplomatic language ("I would prefer by far, full compliance by Greece with the conditions by the Troika"), ministers of this rank are only too aware of their musing's resonance. However, as Angela Merkel herself has recently made clear, the primary rationale for the second Greek bailout is not compassion for the country's plight per se, but rather to secure the financial and economic stability of the Euro-zone as a whole; and it is from this perspective that one can appreciate the significance of Germany's perceptible shift in tone. Whereas once, Angela Merkel was (according to several sources) vehemently opposed to a Greek exit for fear of its repercussions, she has since joined her finance minister, Wolfgang Schäuble in turning the screw on Greece's leaders, and in doing so has highlighted the clear feasibility of a Greek exit. Moreover, there can be little doubt that fear over a Greek default has abated elsewhere in the Euro-zone: for example, last week EU commissioner Neelie Kroes told Dutch newspaper De Volkskrant, "It's always said: if you let one nation go, or ask one to leave [the Euro-zone], the entire structure will collapse. But that is just not true. And a report in yesterday's Telegraph suggested that "the Slovakians, Finns, Austrians and Dutch would never have agreed to the deal if they had thought there was any chance of them actually having to pay ... The Slovakians failed even to contribute to that first rescue package, so it was never credible that they had any intention of funding a second." When it comes to the crunch, however, is it actually feasible to suggest that the Eurogroup might actually decline to sanction the Greek package? Whether purported confidence in the Euro-zone firewall is justified or not is impossible to say - there can be little doubt that many lenders" exposure to the Greek sovereign has long since been written off, but the risk of contagion remains nonetheless. However, there is certainly a case to suggest that a stand must be made at some point: after all, there are surely few EU politicians - contagion fearful or otherwise - who can genuinely believe that in approving the second Greek bailout, they will set the country on course for stability, thereby precluding the need for them to ever again petition their respective parliaments for yet more Greek handouts (a scenario that would have far more serious pan-Euro-zone implications). A Greek exit, on the other hand, would free up much needed resources to secure the "firewall" against further attacks along its periphery. In truth, fear of the unknown may be the Eurogroup's abiding directive; but they would support a package in the full knowledge that continued Greek Euro-zone membership is no longer undeniably the least damaging option for the Euro-zone as a whole. Actually just realized a load of short term Portugal paper being auctioned this morning Bid to cover on three month paper That's insider trading. Greece is toast; Portugal will be saved. Always good to start the day with a rant. And a valid one at that. However, let's move on to other matters. We have the Mervyn King show to review. And Izy's threatening to come on here and discuss. Welcome to Macro Live ... Hopefully - Izy - you there? is getting her follow up question in Should explain that the inflation report is out about whether BoE QE should target different assets I haven't had a chance to read but it is here why not get more creative? Izy is watchign the press conference Izy's been watching Merv. She thinks he's having an existential crisis. Meryyn says: "That woudl be like asking us to buy something in economy that nobody else wants to buy, like a subsidy" Mervyn is sooo sensible @Milky: don't lower the tone please. And he adds it's not the role of the central bank Let me give some background at this point Mervyn has spent most of the conference pointing out that there "are limits to monetary policy" and that there is only so much the BoE can do, and the cbank shouldn't impede equilibirium in the real market. A.k.a a bit of an existential crisis. central banking broken Poor Merv. levers bust Any more intervention is actually equivalent of manipulation We need the fundamental adjustments to happen central banks have done all they can do i think this is a very interesting development especially since I got a lot of kickback for pointing out that cbanks have reached their limits has he spelt out what exactly a fundamental adjustment consists of? Basically keeps pointing out this isn't the BoE's mandate But clearly adjustments in employment etc this has been a consistent message from the BoJ btw .. Who came out with their latest QE package yesterday There are limits to what the cbank can do. We need fundamental adjustments to the economy at this point. there's a great little piece that's just been published by Masaaki Shirakawa Since the Lehman crisis in 2008, major central banks have undertaken a variety of policy measures that transcend the conventional boundaries of central banking. In this process, central banks have become more closely involved in capital markets. For example, the Bank of Japan has been buying risk assets such as corporate bonds, exchange-traded funds (ETFs), and domestic real estate investment trusts (J-REITs). These purchase programs are truly extraordinary in central bank history. Given that the global financial landscape, including policy responses, is undergoing profound changes, today I would like to share my views on financial and capital markets in Asia, with a principal focus on the interplay between banking business and capital market development. ooh, does look interesting It's interesting in light of Linda Yueh's question about whether the BoE should be buying different assets.. and what counts as a subsidy anyways... that's the general summary I should quickly share Dylan Grice's latest musings Since he's talking about printing presses No-one hears you scream when the printing presses roll Why do those same economists, whose harebrained ideas on tinkering with money and credit built and detonated this debt bomb, think that more tinkering with money and credit is the way out? I don't get it. I know I'm a "strategist" and it's my job to decipher all this macro mumbo-jumbo and to take it seriously, but I'm beginning to wonder how healthy it is. Honestly. Economists should come with health warnings, like cigarettes. I just read the transcript of Ben Bernanke's January press conference, which reminded me of all the ones I've watched the MPC and ECB do over the years (I don't like to, but I do feel I should try to understand their reasons for doing what they're doing, what they think about the world, how they think it works) ... and each time I do, I find myself wondering the same thing: "What planet are these guys on? How can they possibly think they know all this stuff? But then I look around and see everyone listening to them earnestly, taking notes, frowning, nodding, and it gets worse. They ask questions like "How many roads must a man cross to be wise?" and the economist will say something like "Well that's a very technical question, I'll let our chief economist answer it" and then the chief economist will lean forward and say "our econometric estimate is 18.4" and everyone will furrow their brows and write that down ... 18.4 ... And then the chief economist will lean forward again and peer over the top of his glasses and say "we used to think it was 25.7" and everyone will write that down too ... 25.7 ...and I wonder why these people can't see how crazy these economists are? ... or is everyone insane? ... and then I think, hang on: isn't thinking everyone else is insane the definition of insanity? ... as I said, it's unhealthy But also, i suspect, deadly serious That's enough macro live Would it be unprofessional to admit that I've spent the last 10 minutes reading about Rangers" administration? I guess I'd better not. Instead, let's look at the market. Yes, although there's an excuse today. It's mega divi Wednesday. AstraZeneca, BP, Shell and Glaxo all trading ex. Without those, the FTSE would be .... higher. I haven't got the exact points total to hand, but it's fair to say it'd be higher. As it stands, we're up 15 points at 5914. The reason, if you can stomach it .... Is the regurgitation of the theory that China will backstop Berlin. (I say "reason." Some may prefer "excuse.") Well i saw this stuff last night and it looked no different from what theyve been saying all along It's just polite waffle from the Chinese Another pledge to invest. "China will always adhere to the principle of holding assets of EU sovereign debt," People's Bank of China Governor Zhou Xiaochuan said in a speech in Beijing today. We would participate in resolving the euro-debt crisis. Which means precisely nothing. Nevertheless, we need a reason for the rally and that one will do. Banks leading the way. Royal Bank of Scotland Group PLC (RBS:LSE): Last: 27.57, up 0.92 (+3.45%), High: 27.66, Low: 26.74, Volume: 29.14m leader board packed with banks Because they were down yesterday. And are flat on a two-day view. Miners also mildly supported. Though, frankly, it's not a story driven market. There's barely a story out there. Should you need excuses ..... Barclays, for instance.... Mediobanca is pushing them this morning. But Mediobanca's thoughts on Barclays are always noted Because the analyst, Christopher Christopher Wheeler, is ex Barclays Cap. (I think. That's by memory. I'll check that on the fly.) Anyway, here's the note. Despite the difficult investment banking markets, Barclays" underlying pre-tax profits increased 5% in 2011. The contribution from investment banking fell from 72% in 2010 to 47%, as the retail and commercial banking operations staged a strong recovery. Barclays Capital's Q4 revenues underperformed its peers but cost control was good. The 70.5% cost/income ratio was supported by a 32% decline in variable compensation on the back of a 22% decline in revenues. Given Barclays Capital uses 40% of group equity, it will drive the targeted RoE accretion. On a pro-forma basis we calculate Barclays Capital would have to double earnings to move the 2011 group RoE up from 6.6% to 13%. In addition, we calculate that even a 50% increase in Barclays Capital's revenues and a 60% cost/income ratio would see the 2012e pro-forma RoE come in at just 10.5.%. However, the bank's valuation already reflects this and steady progress towards the RoE target of 13% should support further stock price appreciation. With a 2013e Basel III "all-in" Core tier 1 ratio of 10.3%, Barclays is firmly in the "sooner is better" camp. This has enabled it to be one of only five large banks in our research universe to post a dividend increase in 2011; a very positive sign given the need for the regulator to sign off on the payout. On the back of these results, we are leaving our 2012e EPS forecasts unchanged, but have edged up our 2013e EPS estimate by 4% to GBp39.2. This is on the back of lower expectations for UK RBB, tighter cost control in Barclays Capital and a stronger performance from Barclays Corporate. We are retaining our Target price of GBp305, which is based on our sum-of-theparts valuation methodology. Our Target price implies a 2012e price/tangible equity of o.8x. Based on a 2012e adjusted RoTE of 9.2%, rising to 9.8% in 2013e and a cost of equity of 12.5%. This looks appropriate. Our valuation is provided further support by a solid 2012e dividend yield of 3.1%. What's happening there? Re: Wheeler, I remembered right: http://www.ft.com/cms/s/0/c91c1f9c-8a20-11df-bd30-00144feab49a.html#axzz1mRvFnCzU Lightsquared's now holed below the water line. In a major reversal, the Federal Communications Commission said it planned to "suspend indefinitely" a conditional waiver that would have enabled LightSquared to operate a ground-based broadband network using repurposed satellite spectrum. That's from Paul Taylor Poor old Phil Falcone. But the impact on Inmarsat seems muted so far price is actually up tuppence at 464 The only argument out there seems to be that this is already in the price. It's hardly unexpected news. With the parallel, much flakier theory, that with Lightsquared gone Inmarsat is a cleaner bundle for any acquirer. Which is very flaky, but I note it here in passing. On more tenable ground, here's Merrill with the numbers. Inmarsat: the US FCC has finally decided to block LightSquared from using its spectrum due to GPS interference. This is likely to result in a number of consequences. Firstly LightSquared, which by its own admission has limited resources, is likely to file for bankruptcy in our view. This may be of its own volition or may be through a Material Adverse Clause change in the debt instruments triggered by owners of the debt. The second impact is that Inmarsat will stop receiving cash from LightSquared under its 2007 co-operation agreement. This is likely to cause a negative reaction as analysts remove the LightSquared Revenue/EBITDA and cash from their forecasts causing consensus to change (please note that the accounting impact differs from the cashflow due to accruals principle). For revenue: LightSquared contributes an estimated $270m for 2012, $222m in 2013 and $156m in 2014, $129m in 2015. for EBITDA it contributes $164m in 2012, $147m in 2013, and $133m in 2014, $129m in 2015. Removal of these could therefore cause consensus Net Income to fall 33% in 2012, 26% in 2013, 23% in 2014. However, the CASHFLOW impact is much less as Inmarsat no longer has to pay for the Phase I payments (due to spectrum realloaction). We believe consensus cashflow (gross, ie pre costs) is for $175m in 2012 and $122m in 2013. However the impact of costs means that the NET cashflows (ie what the market cares about rather than the accounting) is more likely to be $69m in 2012 and $42m in 2013. Inmarsat permabulls Liberum work the bull argument. Attention to return to the core business? ISAT newsflow, and share price, have been dominated by LightSquared issues for some time. Yet the core business (prior to the new investments in Ka band services) generates c. US$350m:US$400m p.a. of FCF and in our view is worth c. £7.00 an ISAT share. The core business has not been without its own wobbles - particularly in Maritime - but in our view remains materially undervalued by the current ISAT share price. Which is a silver lining kind of argument if ever I saw one. And Morgan Stanley once again cautions that Inmarsat's Q4s are likely to stink. Cautious into Q4 results on March 6: We expect +0.3% MSS revenue growth in Q4 (vs -2.4% in Q3) and 2.1% growth in the mid-term. We forecast an increase in capex to $700m in 2012 vs $550m in 2011 due to higher spend on Alphasat (L-band satellite). Stock view - stay UW: We remain cautious and would resist the temptation to "buy the news" on LightSquared. Tougher maritime trends, higher capex in 2012 vs 2011 and significant uncertainty over future LightSquared spectrum payments mean valuation looks unconvincing at 14x 2012e P/E ex LightSquared proceeds. Shares may be supported by further M&A speculation in the near term, but we are skeptical whether industrialists would be interested given limited synergies with SES satellites and increased competition from the DoD's new satellite system. Oh, and they also include this par. I don't have a clue what it means, but you folks might. WGS raises a mid-term threat to Global Xpress: The Wideband Global SATCOM (WGS) is the US DoD's high-capacity satellite system. In Sept "11, the US Air Force authorized additional funding for one new WGS satellite, and in Dec "11 / Jan "12 it exercised options to authorise funding for a further two new satellites. Although ISAT may have a headstart with its Global Xpress system, DoD will have its own capacity through WGS in the longer term. Hope that's enlightening to someone. I think we'd better move on You know we can't avoid Sports Direct Trading 21p higher at 284 After this morning's trading statement Group total sales for the 13 weeks ending 22 January 2012 were up 9.1% to £453.8m (2011: £415.9m) and gross profit increased 10.2% to £184.4m (2011: £167.3m). The numbers in this statement do not include the recently acquired premium lifestyle division. Retail sales in the 13 week period increased 10.2% to £408.6m (2011: £370.8m), and retail gross profit increased 10.7% to £165.0m (2011: £149.1m). So how have they managed this? (Technical notice: Sorry, @Itzman and any others suffering technical issues. We have a vast number of intermittent problems that overlap like the world's most complicated and irritating ven diagram, any of which can knock anyone off air randomly. Apologies) We can no longer fight the tide with Sports Direct. It's a steamroller of a business. (Mixing my metaphors. Don't drive steamrollers into the tide. It's not good for them.) Here's the outlook par "Given this resilient performance, the Board is now certain of reaching both the full year underlying EBITDA target of £215m (before the charge for the bonus share scheme) and the "super stretch" scheme target of £225m announced at our Interim Results in December 2011." Oh and it is reviewing its divi policy You can argue with Mike Ashley on many, many, MANY levels ..... But in terms of shareholder value delivery, it's hard to be critical. His methods may be unpalatable, but it works. Though I guess the competition's a shambles, which helps. Though I guess the competition's partly a shambles because of the actions of Mr M Ashley. I'm a tad conflicted on this one, in truth. Let's turn to the sellside for some more sensible comment. Oriel remain extremely keen. Q3 was a very strong one for Sports Direct and the form has continued into Q4. E-commerce and staff morale have been key drivers of this growth, and we see little prospect of the momentum waning. Joining the dividend list would open the shares up to a new group of investors. A very confident BUY. Q3 above expectations: Trading has remained at a similar level to Q2 (10.2% growth in the retail business represents c.7% LFL we think), a fine effort given the toughness of the comparative and the unhelpful weather. E-commerce is clearly showing very strong growth as the e-mails, the TV ads and the strong underlying value appeal to shoppers. We think that c.12% of sales will go through this channel in Q4. Gross margins are slightly up in the period: web sales tend to run a slightly lower gross margin, but this largely played a draw with better markdown management. All in all, this was a very strong showing, and for clarity, it excludes recent acquisitions. What's the secret? Clearly the UK is more minded to think about sport and the Olympics right now, but there are other strong underlying themes here. Web sales growth is key, and management is investing in infrastructure to ensure that demand can be properly serviced going forward. It is very interesting to reflect on Sports Direct's approach to its staff. As our note last week ("Are you being served?") outlined, many retailers are reducing staff levels and harming staff morale. The complete opposite is true here, and the news that the company is "certain to reach" its superstretch EBITDA targets is testament to the way that the employee bonus scheme has succeeded. We think that other customer-facing companies should take note. Joining the dividend list: Sports Direct is not commonly lauded for its cash generative nature but the deleveraging of the balance sheet here has been rapid. Management is sufficiently confident in its cash flows that it will review the payout policy at the year end (presently there's no divi here). The strength of e-commerce sales presumably suggests that new store capex will be less of a drag on the cashflow. We expect further bolt-on acquisitions, both in the UK and overseas, but Sports Direct will generate a c.10% free cashflow yield in 2013 so the balance sheet is looking extremely healthy. 2x dividend cover is common in the general retail sector: matching that would mean a 4.5% yield here. Scratching to find anyone without a buy on this .... Changed times. The lack of transparency once made this thing toxic. So ive gone to their online site I dont know where to click And their TV adverts are ...... well, they emphasise the value proposition, I guess. There's not a penny wasted. Or, arguably, spent. If you want six quid umbro shorts Get you in for the Umbro cheap shorts, then sell you the Lonsdale trainers. That's the model, and a brilliant one it is. Oh! Numis has downgraded! Albeit from buy to add. But it's still a downgrade. That helps add a bit of balance to this. Sports Direct has reported another strong quarter, with Retail sales up +10.2% despite the tougher comps. Reflecting this impressive performance, management has stated its confidence in now reaching the super-stretch Apr-12 EBITDA target of £225m. We continue to believe that Sports Direct will be a winner in its market, taking significant share in both the UK and Europe. However, after a near 50% rise in the shares since we upgraded to Buy, we move to Add. It's gone up a lot. That's the bear argument. Fair enough. Ok - we're entirely corporate newsless today. Blinkx has finally decided that its deal with AOL is price sensitive. After the price went up 20% yesterday. Done another 16% today. Though I can understand their uncertainty. SAN FRANCISCO, CALIF.-February 15, 2012- blinkx, the world's largest and most advanced video search engine, today announced that it will power video search for AOL. The partnership expands the quantity and quality of AOL's video search results and also delivers integrated Safe Search tools that block adult oriented content from minors. In addition, blinkx will incorporate AOL's premium video assets into its current index of over 35 million hours of content, making them easily searchable and accessible to users around the world. Should that move the price? I've no idea. Whatsoever. Though, to have been safe, it may have been better to tell investors on the same day they told TechCrunch. And has been, officially, since January. Now, the raw story goes .... That the auction remains contested .... Management have batted away 200p as too low And are trying to get Anadarko, the current partner in Mozambique, to make an offer sufficiently high to scare off everyone else. er, thank you Head of IT That, as I say, is the story. I've no idea if it's true. Moz generally such a growth story Did you see the news from Eni this morning? Upgraded again have they? Second "giant" natural gas find Ah, I just hope they are careful with the beaches It's gas. No worries there. And the wildlife in the water And I'm sure your beach hut would be a convenient base for any roughneck. Investec, I think, are pushing Cove on the Eni news this morning. Mozambique find firms up but does not add to our NAV. In Mozambique, the Mamba North well encountered a potential of 212.5 billion cubic meters (7.5 Tcf) of natural gas in place. The well encountered a total of 186 meters of gas pay in multiple high-quality Oligocene and paleocene sands. During the production test, the well produced high quality gas with flow rates of about 1 million cubic meters a day. Following this discovery, the total natural gas in place in Mamba complex increased as we had expected to 30 Tcf, but this is already reflected in our SoTP and we would sell into any excessive "Mo-mo." Cove Energy (Buy, TP 144p) is a better way to play the Mozambique gas story in our view. And we're at midday already. Thanks for all taht Bryce See you tomorrow, folks, and thanks for your comments. This entry was posted by Paul Murphy on Wednesday, February 15th, 2012 at 11:00 and is filed under Uncategorized.