FT Alphaville " Markets Live transcript 23 May 2012 Markets Live chat transcript for the chat ending at 11:07 on 23 May 2012. Well then. Hello I guess. FT Alphaville's daily service to tell you whether the market's being marched up or down on any particular day. And I guess the good news today is that we're flat .... FTSE's erased yesterday's nonsense 2% rally with a 2% fall. Now, Murph will be joining me shortly. In the meantime, allow me to summarise where we stand. 10 year gilts at a record low, 1.805 per cent. German 2-year sale averages 0.07% ...... And gets 7.74 billion euros offered for the 4.56 billion euros available. I think it's fair to suggest we're risk off today. Anyway, allow me to skip to the day's main (informal) event. Tonight's meeting of the HoSG At which nothing useful will be said. That seems to be the consensus. Germany's already knocked the idea of stimulus off the table. Eurobonds are verboten. And banks won't get near the ESM. So ... what's left to talk about? Here's Merrill with what they expect. The EU 23 May informal summit was originally set up to discuss growth. Spain and Greece are likely to be on the agenda as well. Overall, we do not expect much decision from the summit. Rather, we expect a communiqué about what was officially discussed, and a date for a later rendezvous (at the next EU summit, events permitting, which is on 28/29 June). There more details on the mechanics of using the ESM for bank recapitalisation could be made available In our view, today's discussions will focus on the use of existing tools for supporting short term growth. These would include better use of structural funds, increase in the capital of the EIB, and project bonds. We explained in yesterday's Daily to what extent these could be used. We also mentioned that some of these tools could be labelled Eurobonds, although they are not euro sovereign bonds. Euro sovereign bonds could be discussed but we would not expect any concrete steps before euro area countries have ratified the fiscal compact (and only a few countries have done so, Greece, Portugal and Slovenia), In our view, the growth agenda will focus on the EIB-structural fund-project bond-financial transaction tax scheme which is no game-changer in the short term (Table 1 for numbers), Just Merrill-ing the summit. Give the tin-rattling a moment or two. Although discussions should focus on the pros and cons of a Greek exit, we believe there will be no communiqué other than to mention Greece should stay in the euro area and implement the programme. However, details about a firewall should this happen will likely be discussed. See our report on Greece exit for details on how to minimize the shock to the euro area (ring fencing the banking sector and bond market; logically, this suggests that a possible involvement of the ECB with large bond market purchases will be discussed, although we do not expect any official mention of this). Discussions will likely focus on the banking sector. The discussion will likely be around using the EFSF (or its successor ESM) directly to fund the banking sector, a step Germany opposed in the past because it is more difficult to see how the funding can be made conditional (whereas when the funds are channelled through the sovereign it is easier to make their use conditional on a programme), and because the EFSF would bear direct losses in the event of banking difficulties (as EFSF funds would be equity). And as for the breakdown ...... Greece Exit - EA firewalls to prevent contagion not necessarily ready, no official communiqué except to say Greece should stay and implement the programme SFSF/ESM for bank recap - Discussion focus on a possible support to Spain bank recapitalisation In our view, there will be no communiqué on Spain today as Spain has not requested help Growth - Increase of €10bn for EIB capital which increases its annual lending capacity by €60bn for all EU27 - possible Structural Funds - Easier use and disbursement for periphery countries. Could add c. €15bn support to Portugal, c. €13bn to Greece and c.€25bn to Spain Financial Transaction tax - Proposal to extend number of products and countries In the past, Germany agreed on conditions that all 27 EU countries agree; looks unlikely Eurobonds - There might be proposals discussed Nothing to be expected as long as no transfer of sovereignty is announced That's a very long way to say "nothing of value or use will be said or will happen." Anything to add to that, Paul? Actually, for all the noise, there's actually nothing happening euro-wise "Contingency"! The clue is in the title. Pants on, pants is very good And yes, we might well nick that Yup - that may become a catchphrase. Pants could be the new tin hat But BE and myself will not be doing photos No we're not, for all our sakes. In the meantime, to demonstrate once more that it's a pants-on day. Germany sold 1.29 billion euros ($1.63 billion) of index-linked bonds maturing in April 2023 with a so-called real yield of minus 0.24 percent, according to data today from the Bundesbank. So people paying Germany to look after their money Jeepers there's only four risers in the footsie Was two, last I checked. We've a bit of a rally on. Pills, telly, electricity and tinned groceries S&N, Sky, Grid and Morrisons Yup - artificial hips, televised football and copper wire. Plus somewhere to buy tinned tuna and candles. Anyway, before we round up on the incoming Eurofudge. Final comment goes to RBS The caricature of German intransigence got another outing at the weekend G8 meeting with Germany clearly isolated in its view that growth measures, while needed, are not to derail the fiscal austerity plans for the region. The position of Germany is not really that hard to see. For instance, the US, UK and many of Germany‟s neighbours want to rebalance the debt adjustment over a longer period and with some growth measures added. We see economic logic here and as we review below, there are some measures that can be adopted. Nonetheless, Germany is playing the long game, and one more sensible than most realise. For instance, if we are to see Eurobonds eventually emerge, then this can only happen in two ways. Option one is a fiscal and political union. This is big stuff - a landmark that would append the importance of the Peace of Westphalia (1648) which saw the birth of nationstate sovereignty based on territory and the absence of external agents in domestic institutions. It would mark a move to a Federal Europe , but more than anything else it would mean the end of the nation state in Europe. This is the dream of the Euro elite but it seems unlikely to pass the various referenda needed to hand over such powers to Brussels. Far more likely in practice is a second route - a common rule-based system of national budgets and laws that de facto would result in a more homogenous EMU. The starting point here is the fiscal compact and the six-pack rules of governance. The issue then is one of compliance. The Dutch government has fallen over a rather irrelevant 3% 2013 budget target (irrelevant given its low debt levels) but as a country there is consensus to balance the books. The same can not be said of most of Germany‟s neighbours, ranging from the Spanish PM reneging on the fiscal compact just 1 day after shaking hands in Brussels, the state dysfunction in Italy and social preferences in France that have not seen a budget surplus since the 1970s. In other words, Germany and other core EMU countries are seeing very little of the commitment that is necessary to enforce an eventual Euro bond. That doesn‟t mean that Germany‟s negotiating position will never shift , but it does play into the idea that the only way the German leadership will take political and economic risks is under high market stress when the issue is the future of the euro itself. It's an excellent note this, from Harvinder Sian. I'll cut to the Target2 stuff. The key risk from a Greek exit is the spillover to other periphery markets and to the deposit base in particular. This has led to some speculation around a "banking union‟ which would be pan EMU regulator and deposit insurance scheme. The problem here is that any effective cross border deposit insurance is, in effect , a fiscal union by the side door. The resources have to come from somewhere and if this is to be a crisis firewall then there is no time to build FDIC type of buffer funds, which in any case, is useful for a few bad banks but is not the solution for country currency risk. Is there a way to have this FDIC approach without having a sizeable upfront buffer? Yes, if there is an agreement to backstop a periphery country deposit system with say EMU support and then a commitment by this periphery country to payback these monies at some point in the future. This was posited by Italy via cross border deposit insurance schemes. Unfortunately, this adds to sovereign risk and is what the EFSF/ESM is meant to do anyway. In all, the FDIC approach and long-term plan to regulate banks across EMU is not likely to be seen as a crisis firewall but a medium-term target. An alternative that has been mentioned in a few meetings is that Greek (periphery) banks would pay a fee to a large/robust core bank to ensure that if there is a currency change that the funds are taken offshore. This is apparently happening for high net worth individuals in Greece. The problem is that any currency switch over will come quickly (unannounced) and with heavy capital controls and so we are not sure that corporates or high net worth retail will fall en masse for this trick - but it may work for the average retail depositor. Ultimately, we expect that the EFSF/ESM, which can already be used for bank rescues via the sovereign, will remain the port of call to protect country bank risk. We do not expect at this stage that the politics of the Euro area are cohesive enough to allow direct loans to banks. On the ECB side there will probably be a rate cut and there will need to be some collateral loosening. Draghi‟s last speech (16 May) said .."the ECB will continue to comply with the mandate of keeping price stability over the medium term in line with treaty provisions and preserving the integrity of our balance sheet.." It is interesting that the integrity of the ECB balance sheet has assumed such prominence which in turn is obviously related to German criticism. As such, the risk is that the ECB collateral expansion happens at a local NCB level - where the risk on the ECB balance sheet stays local. This is a further balkanisation of the ECB balance sheet and as we have been pointing out, is the opposite of solidarity, and has parallels to the Ruble zone breakup. I'll LR the rest, I think. It's well worth reading. Hmm - looks a v good take on situation So it worth bothering with any stocks today? Or should we mention the BOE minutes instead? Lets get the UK stuff out of the way quickly But the language softened, no? A "finely balanced" decision. A finely balanced 8-1 decision, nevertheless. The minutes from the May meeting of the MPC showed that eight members of the committee had voted to maintain asset purchases at £325bn, with only one, David Miles, continuing to vote for a further £25bn expansion. However, the minutes did note that for several members the decision not to expand QE was "finely balanced." The minutes drew attention to the developments in the euro area, stressing that it found extreme possibilities difficult to quantify, though "developments in the euro area continued to pose a significant threat to the outlook." In addition the minutes also mentioned the role that a strengthening sterling could have on price pressures, saying, "Alongside this, sterling had strengthened and it was possible that it would rise further. Together with the recent fall in world oil prices, that would help moderate external price pressures. This train of logic could help to justify further asset purchases in the future. The minutes concluded with the statement that, "The Committee would continue to monitor the outlook each month and further monetary stimulus could be added if the outlook warranted it." Ok - so it's mildly dovish. Though still not fully pants on, which in context of recent eco means it's only a small step in any particular direction. The minutes go a little way towards clarifying what had been a rather muddled message from last week's Inflation Report. The weak inflation projections in the report begged the question of why QE had not been expanded. Not only did the modal forecast undershoot the target, languishing at 1.7% even at the three-year horizon, but the mean forecast was also still below target at that point and the probability of being above target was below 50%. In other times, the MPC would have adjusted policy to eliminate these deviations. However, the text of the report downplayed this fact, stating that the MPC's decisions were "based on the broad shape of the economic outlook rather than the precise numerical projection," and in the press conference Governor King similarly sought to distract attention from the charts - which is odd because the charts have long been a major element of the MPC's communication toolkit. The minutes reinforced the point, however, stating that "the best collective judgment of the Committee was that CPI inflation was about as likely to be above the target as below it in the medium term without further monetary stimulus. That suggested that no further asset purchases were necessary at this point. However, for "several" members (which we take to mean three or four) the decision on QE was said to have been "finely balanced." If as many as four members were wavering, when added to David Miles the chance of there being more QE at some point in the next few months would be non-negligible, consistent with our interpretation of the Inflation Report as dovish. The question then becomes exactly how big is the "finely balanced" camp? According to Barclays, Spencer Dale and Paul Tucker are likely to be the waverers. King: very little chance. Our bottom line forecast is that there will not be more QE if the economy performs as expected, but that it will take relatively little downside news to prompt a further expansion. With the policy decision delicately poised, the evolution of the activity and inflation data over the coming months will be pivotal. So what's the GB franc doing? So cable a tad lower, and steady against the euro. Sorry, should lok at what im typing See the footsie is now finely balanced 100 pints lower finely balanced just above 5300 Though there's not a lot new to say. Vedanta Resources PLC (VED:LSE): Last: 988.50, down 58.5 (-5.59%), High: 1,022, Low: 982.00, Volume: 406.00k Xstrata PLC (XTA:LSE): Last: 923.70, down 49.2 (-5.06%), High: 956.10, Low: 921.20, Volume: 3.25m Glencore International PLC (GLEN:LSE): Last: 344.00, down 17.6 (-4.87%), High: 354.30, Low: 341.90, Volume: 3.54m You'd think smart investors would be averaging down in Glencore. Excellent entry point, surely I offer no comment on this observation. So the only non-miners in the top fallers are barclays and Man down The domestic Spanish lender and the play on non-volatile markets. Barclays PLC (BARC:LSE): Last: 180.90, down 8 (-4.24%), High: 185.85, Low: 180.45, Volume: 11.65m Man Group PLC (EMG:LSE): Last: 73.30, down 4.35 (-5.60%), High: 76.40, Low: 72.35, Volume: 13.18m @Nobby: most of them, arguably. Nothing much new to say on the latter. Ian Gordon keeps the faith Post the Blackrock sale This is Ian Gordon, ex partner of singing analyst James Eden Eden quite famous for being delusional during the Crunch He's saying Barclays will miss guidance and Bob Diamond's empire building's going to crumble. As discussed in our note, Cashing out Blackrock: sensible not transformational, 21 May, one of Barclays" greatest triumphs was the December 2009 disposal of Barclays Global Investors to Blackrock, crystalising a disposal gain of £6.3bn. This substantially adressed a need to accelerate Barclays" capital build as well as representing a near top-of-the-market disposal. In comparision, today's pricing of the disposal of Barclays residual stake is much less material, but satisfactory all the same. We believe that Barclays" motivation for the transaction was to avoid the more aggressive capital allocation which would have attached to its Blackrock stake under Basel 3, as well as candid recognition that the market was giving Barclays" share price absolutely no credit for the "earnings diversification" afforded by its residual Blackrock ownership. As such, an exit at "par" is understandable, even if today's "par" is c.22% below Blackrock's 31 March 2012 share price of US$205. For us, the Barclays story remains largely "as we were" - a bank for which RoE will disappoint against Management's own aspirations, but not the market's more realistic expectations, and where the ongoing drag of specific risk issues (e.g. Spain) is adequately reflected in our (and consensus) expectations. Barclays still trades below 0.5x current tNAV which is, we believe, the wrong price for a defensively positioned, well capitalised and solidly profitable bank. Our unchanged TP of 240p equates to 0.6x tNAV - an appropriate discount for an extended period of subdued RoEs, and suggests 27% absolute share price upside plus dividend support. We remain Buyers. Barclays are always just winging it have been since the onset of the crisis Tearing up the three-year roadmap every other month. Which, arguably, is the way it should be. Ocado Group PLC (OCDO:LSE): Last: 106.00, up 4.2 (+4.13%), High: 109.20, Low: 99.56, Volume: 984.18k To the AGM statement's fine. In the sense that it's not bad. Though you have to see today's advance in the context of Monday's inexplicable drop for Ocado shares. Sun's out. Why go to the supermarket. just get it delivered That was technical selling Course it was. It was people technically selling. Capt B - http://duckduckgo.com/ (Though you won't get a Moog organ on the homepage. So I'm out.) Here's Barclays with the sum. Sales growth in line with expectations should continue to please the market. Ocado's share price is up +87% year to date, but -9% over the last month, so we would expect to see some but perhaps not material outperformance today. Ocado is happy with consensus and we would not expect to see consensus move today. Company-collected consensus is currently at £39mn for FY12 EBITDA (c£15mn for 1H12). Ocado is trading on a 2013E PE of 83x, versus a European food retail sector average of 9.5x. However, perhaps a more relevant peer group is that of online retail players such as Yoox, ASOS and Amazon, which are trading on an average of 65x 2013E PE. Not sure there's a lot more to say than that. Its shares are on 83 times 2013. Ok - we should probably note the Willy Wonka warehouse might be working a bit better now. Ocado commented that CFC1 is operating at record levels of efficiency, helped by a number of improvements. The second Order Storage and Retrieval (OSR2) machine is ramping up, reducing the manual labour from 65 to 6 people and we expect to see further benefits in the second half of the year. Additionally, as the flow control software continues to integrate with the rest of the automated systems, we would again expect to see improved efficiency in 2H12. Improvements in range continue and we would expect c21,500 SKUs today (vs 19,000 at the end of last year). And they're still planning Wonka V2.0. The construction of the second CFC in Dordon is going according to plan. Testing and commissioning will start this summer and the CFC will go live, as expected, in 1Q13. But let's get a broad sweep of opinion on this one. The first one to hand is Shore Cap, who sell. Whilst the modest strengthening of sales growth from Ocado is welcome, and is broadly in line with the profile we expected through the year, Q1 11% building to Q4 c18%, resulting in our forecast of 15% growth for FY2011/12, we believe it remains underwhelming from a sector and segment context; the sales momentum is behind that of Asda.com at a last reported 19.2% (Wal-Mart, WMT, No Recommendation), Sainsbury.co.uk at 20% (SBRY^, Hold at 295p) and Waitrose.com at 26.1% (15 weeks), and we believe broadly in line with the much larger Tesco.com (TSCO#, Hold at 308p) in the UK. In our view, such a relative and absolute performance should be a source of concern to Ocado's management and its investors. In the face of the relatively underwhelming revenue growth, Ocado continues to press on with the development of its second "Customer Fulfilment Centre" in Warwickshire, which is expected to commence trading in Q1 2013. We continue to struggle with this £200m+ development as Ocado has not yet demonstrated, after a decade of trading, that that CFC1 in Hatfield is a worthwhile economic proposition, with concerns that two CFCs are likely to further dilute the group's economic performance. Ocado remains a distinctive and interesting business in our view, though it remains a business model distinctly unproven to our minds. Such uncertainty in a group that is consistently reporting trading momentum below its peers, and with a forecast EBIT margin of just 0.6%, does not justify a premium rating, to our minds. We forecast Ocado to be lossmaking at the pre-tax level for 2012/13, with a modest £2.7m profit expected for the year to November 2012/13F, EPS of 0.5p. As such, the stock is trading on a 2012/13F PER of 199x and an EV/EBITDA of c13.4x, with no expectation of a dividend. With financial leverage now being added to operational leverage we believe Ocado is materially overvalued, whilst we struggle to argue a case for corporate activity with its anaemic financial performance to date, and bespoke technology making it a far from easily digestible entity. We reiterate our long-standing SELL stance on Ocado's shares Clive Black not on message there. Clearly needs an intervention. As does Philip Dorgan at Panmure, who also says sell. Q2 sales were 2% better than we had expected, so credit where credit is due, but Ocado is still losing market share online. With the competitive environment likely to get tougher, we think that it will struggle to demonstrate operational leverage. Next month's interims are unlikely to smash the lights out and we remain sellers, with a target price of 50p. Valuation: We believe that Ocado will continue to struggle to make money, although it is entering a critical phase as its new warehouse is due to open in Q1 of FY2013. We think that Ocado isn't special and that the shares are too high. We therefore reiterate our Sell recommendation and target price of 50p. @City: I think he's a holder of Tesco, not a buyer. So the broad spread of opinion is SELL I could repeat Jefferies or UBS, who say "hold" Because that's quite enough Webvan 2.0. Can i quickly share a link that's Charlie bean speech havent had time to read but its on QE and i suspect the content is "contentious" Contentious as in he's in the "finely balanced" camp? i cant tell immediately There is no doubt that this is a challenging time for pension funds and their sponsors. Low yields reduce the scope for harnessing the magic of compound interest to provide generous future pensions at a moderate current cost. It may be tempting to conclude that the current abnormally low yields are primarily a consequence of QE, and that the right approach is just to look through the associated rise in deficits. But I hope that what I have said today has persuaded you that this may not, in fact, be the most prudent course to take. Pension funds and their sponsors may, I am afraid, have to contend with low yields for some considerable time yet. was speaking to the National Association of Pension Funds Ok - what else to mention. Everything's down, of course. We haven't done an advert for Mozambique for a while Disclaimer: FT Alphaville does not endorse Paul Murphy's idyllic holiday retreat on the secluded, unspoilt Barra beach near Inhambane, Mozambique, where availability is strictly limited so book now to avoid disappointment. http://kayamj.com/ That's true. What's the tenuous news peg today? Ah - the bidding war continues Price getting seriously silly now (in my uneducated opinion) Cove Energy PLC (COV:LSE): Last: 249.50, up 25.5 (+11.38%), High: 249.50, Low: 223.90, Volume: 23.17m Trading well through the raised offer, which tells its own story. So the news, in case anyone missed it, is that PTTEP has offered 240p a share. Dont be miserable Bryce. Shell just have to step up here SE Africa is where its at Actually, that's what Sector Watcher says too. What do Shell do next? Probably increase their offer, given the relatively small size of the deal ($1.9bn), and given the group's clear intent to build a position offshore East Africa. Moreover I'd imagine the group is looking to build a bigger position than the 8.5% that COV holds in the offshore licence. Those warm, resource rich waters of the indian ocean - Shell has to be there Can someone explain to me why a small share of a gas field offshore Mozambique is so prized? Cos the gas field gets bigger and bigger by the day Yeah - yeah - of course. Regional hub, blah blah blah. Look Bryce, get the air fare together and get out there You can stay at my place You could be the first Scot on the beach at Barra Quite sure they've rarely seen anyone who's so white he's transparent. Canaccord pushing BP today. BP PLC (BP.:LSE): Last: 394.95, down 7 (-1.74%), High: 401.30, Low: 394.55, Volume: 8.33m We are raising BP from Hold to Buy, in a sector report published today. We think the shares" weakness - notably a return to near post-Macondo lows vs the US majors - leaves valuations discounting very little upturn in BP fortunes. We are not convinced of the strength of BP's longer-term growth, but see a strong recovery in 2013-14. Meanwhile, we think current sentiment leaves room for good upside in the case of material progress on issues such as a US settlement over fines, or further disposals. We have been cautious on the integrated oils for the past few months, but after the European sector's 7% underperformance YTD we see a much better risk/reward balance. In particular, 1) sector valuations are looking increasingly attractive to us, with 47% average upside to our SoP values, and 2) we are much more comfortable on downside risks with Brent having pulled back below $110/b. Operationally, we expect E&P results to continue to weaken in the short term due to high summer maintenance, but this has now been well flagged and we think 4Q12 could mark the start of a more visible upstream recovery. Meanwhile, near-term results could see solid support from the sharp recovery seen in refining margins, notably in the US where BP has a large proportion of its capacity. After a weak 2012, we see a bounce in E&P volumes of 4-5%pa (ex TNK-BP) in 2013-14, with a significant boost to average margins. Thereafter, we think the longer-term outlook is one of limited volume growth (sub-1% pa) and much higher capex, albeit with good potential for exploration catalysts. While this makes us somewhat cautious on the shares" long-term prospects, we think they could perform well on a 6-12 month view. We see 44% upside to our SoP estimate, which is close to the sector average, and a 2013E EV/DACF multiple only slightly above average. BP still has the uncertainty over Macondo, but we think this is an attractive valuation for a European oil stock with limited Eurozone exposure. We forecast a prospective dividend yield of 5.2% for FY12 and 5.7% for FY13E, with a 2013-14 free cash yield of 7.5-8%. We see main potential catalysts as: 1) any progress on settlement in the US over Macondo fines, 2) material further disposals ($15bn remains vs target) and 3) signs of E&P performance bottoming. TNK-BP remains one of the key risks in our view. Otherwise, in the two minutes we have remaining ....... Facebook is 30.42-49 pre-market You've got to guess it will given overall market We're off 1.8% for XXX sake Note S&P is calling it down to $30, though with a sell recommendation. That's S&P the equities side, for clarity. We acknowledge FB's global brand and large user base, substantial growth, and considerable opportunities. However, we see notable risks related to monetization, expansion, and corporate governance. Also, we think that in the Internet area generally and social-media segment more specifically, technologies and tastes are always changing and posing challenges to incumbent companies and offerings.We are setting EPS estimates of $0.40 for "12, $0.62 for "13 and $0.92 for "14. Based on a blend of peer considerations, we are establishing a 12-month target price of $30. Nobby mentioned that piece by Telis in NY - http://www.ft.com/cms/s/0/c1e84ac6-a2c8-11e1-826a-00144feabdc0.html#axzz1vgo1Miv1 Haven't read yet, I must admit. Getting Facebook fatigue. That Reuters story yesterday about Morgan Stanley etc cutting forecasts during the IPO process. Part of me says, "zowee ... what a story!" But most of me says, "meh." Analyst in Spitzer compliance shock Ok - I think we're all done now. Haven't mentioned LSE .... London Stock Exchange Group PLC (LSE:LSE): Last: 952.50, down 68.5 (-6.71%), High: 956.00, Low: 935.50, Volume: 2.97m Unicredit, Intesa flogging their stakes at 960p to 1,000p. Because there was no chance they'd get anything other than the bottom of that range today. great day to do a placing Not brilliant timing, I agree. And, finally, some two-bit broker called Merrill Lynch has downgraded Pearson. Pearson (PSON:LSE): Last: 1,126, down 22 (-1.92%), High: 1,142, Low: 1,121, Volume: 630.67k That's idiotic as well No point in hearing their argument. It is, by definition, idiotic. Get out and enjoy the sun, because there's very little to enjoy on the price screen today. And we'll see you tomorrow. This entry was posted by support on Wednesday, May 23rd, 2012 at 11:02 and is filed under Uncategorized.