Markets Live: Tuesday, 22nd January, 2013 This is the transcript of the Markets Live session ending at 12:07 on 22 Jan 2013. Had to stand for an hour on a train platform at Greenwich That's Mr. Masaaki Shirakawa of course 30th governor of the Bank of Japan First joined the BoJ in April 1972 Now doing what he's told by Abe What's the impact over here Bryce? You want the obvious? Equities are dead. FTSE down 0.5 points. Rallied off a 30 point loss or thereabouts. Actually, since you begin here ..... With Japan and the UK ..... Can I share some Garthwaite at Credit Suisse? (I'm sharing it in part because I've been chasing this FSA thing for the past half hour so am woefully underprepared ..... But, nevertheless, it's interesting.) So Credit Suisse turns a bit more cautious on the UK, but staying positive-ish Japan offers more punch, but the UK's still good because sterling will weaken. Output gap is gaping, current account balance is around a record low and households remain too indebted. That kind of thing. Which means about 10% downside on cable. Which is good news for the Footsie, i guess Sterling weakness has been counterintiutively good for the FTSE in the past ..... Bulk of earnings come from overseas They put figures on it too. only 79% of FTSE 100 earnings come from outside the UK. And "55% of the FTSE 100 companies report in US dollars." So, if you want to short the UK economy, go for the FTSE 100. So we must all celebrate the soon-to-return GBK GBK currenlty 1.5852 against the dollar And allow me to post up the cover page. We trim our overweight in UK equities to pay for our recent upgrade to Japan. The FTSE 100 is a defensive market (by sector composition) and thus tends to underperform when economic lead indicators and global equity markets rise (we remain positive on equities and the global economy on a 3- to 6-month view). The UK has slipped on our composite regional scorecard. However, we remain overweight the UK for the following reasons: ■ We expect sterling to weaken, given a near-record current account deficit, a sharp slowdown in relative economic momentum (with the relative service PMI close to an all-time low) and more excess consumer leverage than in the US, while the MPC is already more dovish than the Fed (in terms of its balance sheet expansion and adherence to its inflation target). Weaker sterling supports the UK's relative performance, as 79% of earnings come from outside the UK. ■ 90% of sectors trade below their global peers on 12-month forward P/E. ■ The new Bank of England governor, Mark Carney, will take up his post on July 1 and could impose a nominal GDP target. With real GDP growth at 0% yoy, this could mean that the MPC de facto targets 4%+ inflation (assuming a nominal GDP growth target is above the post-2009 CAGR of 3.5%). Over the past five years, the BoE has missed its inflation target by 65%. ■ We would not be surprised if a funding-for-lending scheme was extended further (with a possible mortgage-guarantee scheme) - or even a funding for infrastructure scheme was introduced later this year. This would likely drive up inflation expectations significantly. With nominal yields effectively capped, real yields would fall, leading to an asset allocation shift in favour of equities. That's a bit punch on Carney De facto inflation target of 4% Yeah, there's a lot of trust that the Hoosier will deliver. Not quite sure what it's based on other than hope. Anyway, if you want to follow Credit Suisse's call, here's what Garthwaite recommends. What to buy? We like cheap international earners (Shire, Smiths). Cheap real asset plays benefit as inflation expectations rise: REITs, homebuilders, life companies (yield curve, higher gilt yields and AuM plays) and asset managers as equity allocations rise (Aberdeen). Sterling weakness and Carney look negative for defensives, especially expensive domestics (Sainsbury's, UU). Credit Suisse's Delta One basket CSERUKRE includes our preferred plays. (@Mo again: when you put a word in quotes it suggests you're quoting. In this case you're not, which is a tad confusing over here.) We should FSA thing quickly The Financial Services Authority (FSA) with the assistance of the Police Forces, in the City of London, the East Midlands and the North of England have this morning executed four search warrants in the City of London, Lincolnshire, Leicestershire and North Yorkshire. Five individuals including two men aged 37 and 62 and three women aged 39, 51 and 63 have been arrested and are currently in custody to be questioned in connection with an investigation in to Insider Dealing and Market Abuse. No further details can be confirmed at this time and no individuals have been charged. The arrests are not linked to any other ongoing insider dealing investigation. And we still don't have a name. We have an institution though, and just checking if we can name it. But cant see Alice immediately Alice Ross, FX corr Shall we just put it up? They've made it very difficult to cut and paste, so let's not. No, best email her. So an xxx employee's been arrested and suspended with immediate effect. The allegations relate entirely to this individual's personal actions and xxxx is not subject to any investigation. And that'll do for now. Stay tuned for the definition of xxxx. It's quite a big name, FWIW. Ocado Group plc ("the Company") announces that the Board has today appointed Sir Stuart Rose as an independent Non-Executive Director and Chairman Designate with effect from 11 March 2013. Sir Stuart will become Chairman following the Company's Annual General Meeting on 10 May 2013. Lord Grade will retire as a Non-Executive Director and as Chairman on that day. Yeah, so Chinese whispers in full effect yesterday. The story by the time it reached me was that Marks & Spencer has looked at a bid for Ocado ...... Which would seem to be nearly entirely wrong, probably. Ocado Group PLC (OCDO:LSE): Last: 100.30, up 5.25 (+5.52%), High: 102.90, Low: 96.44, Volume: 2.19mBlock So it's swapping one Sir for another. Ah, but Rose is a retailer! Substituting a cigar tooting grandee for a wine hoarding gent. And, yes, he's a retailer. But he's denied the existence of the internet all through his tenure at M&S. Which makes this all seem slightly leftfield. Question 1, I guess, is "will this change anything?" Well it's changed the share price this morning Bryce But Ocado's got 30% of its free float hanging out with shorters. They sneeze and it moves 200bp. Here's how Sir Stuart explains himself. ..."very impressed at the impact and progress Ocado has made to date. As retail goes through a fundamental shift into the digital world, I believe Ocado's model and the high standards of customer service it provides will see it emerge as a powerful online player"" Which sounds so New Paradigm it sounds nearly Goldmanite. Clive Black (perhaps predictably) isn't entirely plussed. Whilst it is to be expected that Sir Stuart will speak positively about his forthcoming position we are somewhat surprised that he has been "impressed" by Ocado's progress to date because we believe it has been pretty disastrous for shareholders. Lord knows how he would be feeling if the company had met what we deem to be fanciful the forecasts set out by the many on the ticket at the time of the flotation! We also question the assertion that the business will "emerge as a powerful online player" in a very tough and competitive market; Ocado's rate of sales growth is sound but behind that of all of its UK competitors (see attached PDF on the 15th January 2013 trading statement). That said, Sir Stuart is nothing but a man who enjoys a challenge and he is someone we hold in high regard. He is also great fun, colourful, opinionated and experienced and he has the potential to bring much needed esteem to Ocado, a company that had a tarnished flotation to our minds and has a fundamentally flawed business model in our view. We are delighted to see Sir Stuart back in the sector, the banter should be good. However, the evidence tends to suggest that bad companies will always beat good management. To use a footballing analogy, this appointment has the feel of Harry Redknapp joining QPR from Tottenham Hotspurs; where would one rather be? Tottenham Hotspurs That's really cruel Not sure who is being libeled here As for the bid angle .......... Lastly, we would not read into this announcement that Sir Stuart's previous employers, Marks & Spencer^ (MKS, Buy at 365p) (nor Booker^ [BOK, Sell at 101p] for that matter) are about to bid for Ocado. We see Messrs. Bolland & Wilson respectively as far to wise to do such a thing; whilst under pressure it is not our expectation that Morrison^ (MRW, Sell at 255p) would countenance such a move either. So, great news for the sector to some degree, good news for Ocado given that we like Sir Stuart but no change to our SELL recommendation, which requires structural upgrades to the business" earnings, not EBITDA, before we can more positively appraise matters, noting an endless cycle of downgrades to date. Anything positive on Ocado to share on this? I don't. Guess the positives are just taking longer to write. I have Philip Dorgan at Panmure though. Sir Stuart Rose's appointment as Chairman of Ocado is a good move and should improve upon the company's previous Pravda-like external communication. It should also add to the bid chatter that has surrounded the shares in recent months. That said, Ocado is gobbling up cash and is underperforming its multichannel competitors. We don't see this changing. Pravda-like external communication ..... #1 will appreciate that. Be fair, external comms has improved It hasn't become worse, yes. The IPO was terrible. It's improved since then. Undeniably. Some more from Panmure I guess. Im pact upon Ocado: Generally, appointing an "outsider" is a good thing in a troubled company. However, Ocado has had no shortage of external voices on the Board and had six non-executives (plus the Chairman) as of the last Report and Accounts. Sir Stuart was obviously Chief Executive of M&S when Ocado was for sale before it went public, but clearly the price has moved on and time has also marched on, given that it is just about to double capacity. We think that criticism of Sir Stuart at M&S went too far, that he is a good team player and external communicator, which should therefore be of great assistance in sorting out Ocado's Pravda-like approach. F undamental view unchanged: There has been a fair amount of bid chatter surrounding Ocado shares of late, with Morrison's gaping gap online in food seen by many as an obvious home. We think that a deal at current prices is very unlikely. Also, Ocado needed last year's funding for a very good reason, namely, it gobbles up cash. Its multichannel competitors are growing faster and profitability seems to be nowhere in sight. As it is just about to double its capacity, the next six months are crucial. There's a fresh Lombard note just pubbed Jonathan Guthrie, who is a lovely writers Before you share owned contend, interesting line from Caroline Gulliver at Espirito. No recommendation. In our view this is an interesting development because we understand Rose has looked at Ocado in the past with regards to a possible tie up with M&S to sell food online. It also comes at a time when M&S is investing heavily in its own online infrastructure, though this is predominantly for general merchandise. Both Ocado and M&S face the same challenge that most retailers are grappling with - that is how to make selling online (more) profitable whilst at the same time protecting return on capital and leveraging existing assets. That fleshes out the bid rumour a little, perhaps. Hang on, before that We get a chance to use this new emoticon By Brooke Masters and Alice Ross A trader at Schroders and four other people were arrested this morning as part of a new insider dealing probe launched by the UK Financial Services Authority. They were all still being questioned this morning but were expected to be released later on Tuesday. Yes, the institution we didnt mention earlier is Schroders Here's their full statement Sorry, formatting is borked Can't share the actual statment but you get the gist So I've already been through the Bloomberg red dots to see who's not at their desk in Schroders this morning. You are NOT going to name him/her ... Inconclusive. Shared logins muddy the picture. But if anyone wishes to help, my email is as you'd expect. Back to Ocado briefly Laydeeeez "n" Gennlemen! Let's hear it for the man they call The Sultan of Swoon, Mr Entertainment and The Chairman of the Board! Not Frank Sinatra, but Sir Stuart Rose, another charismatic performer with just a whiff of controversy about him. The former Marks and Spencer boss is making his comeback to high-visibility retailing as non-executive chairman at Ocado. This is a coup for the online grocer. Pre-tax losses are forecast to widen to about £12m this year. The ex-Goldman Sachs bankers who set it up face multiple challenges. These include capacity constraints, a hostile press and weak consumer demand. Verizon numbers pouring out across the pond Vodafone off 1.5p at 160.7 currently (@TFT1: Short-form Avocado. Toughest thing to put through the logistics process, apparently.) We seem to have hit stall speed. Genuinely not sure what to talk about next. Bumi PLC (BUMI:LSE): Last: 321.70, down 9.7 (-2.93%), High: 329.60, Low: 316.90, Volume: 40.98kBlock Quite an amazing statement this morning. I do question how long this thing can stay listed. And you do have to read deep into that statement Good question, re listing So they've pretty much identified what might be wholesale fraud, maybe, but they can't say anything, because to distribute details would be a breach of the law itself in Indonesia And they can't name Kroll either For the avoidance of doubt. Other unnamed corporate investigators are available. So Bumi's resolved to go after missing funds identified by the report That's the report they can't show you because it may be written using snide material And the SFO's investigating, and continuing to investigate. Bloomberg citing an email from Rothschild saying the report uses stuff that "is admissible in the U.K. and it is admissible in Indonesia" It is extraordinary that a report on the misappropriation of up to a billion dollars is more focused on settling scores with Nat Rothschild, than on following the money. (Talking about himself in the third person. Never a good sign.) Rothschild told the company "he considers himself bound by a duty of confidentiality to whomever provided him with the materials and that he cannot, therefore, reveal the source's identity," Bumi said, describing the situation as "deeply unsatisfactory." Honestly - what's the endgame here? Bumi's still valued at £598m as of today. If you own BUMI, you really should un-own it as quickly as possible Precisely. I understand the embedded value argument, but I also think people may be misjudging the tail risk argument. Something else will come out and then it WILL get suspended, and you'll just be stuck in umpteen years of litigation We havent discussed Germany Nope, I guess we haven't. Impressive ZEW reading And the Bundesbank stuff Utter rubbish twatter about Oh, the story that Weidmann hasn't resigned. He is, however, talking about a currency war. Hold on there Twitter Chap in charge of an export economy talks tough on FX devaluations. Anyway, you mentioned ZEW. Details? Let me go to Jennifer McKeown January's sharp rise in German ZEW investor sentiment suggests that activity may have improved at the start of 2013 following a very weak end to last year.  The headline index, which measures investors" expectations for the economy in six months" time, rose from +6.9 to a two-and-a-half year high of +31.5. This was much stronger than the consensus forecast of a rise to +12.0.  The fact that the index is now strongly in positive territory means that a significant majority of investors sees conditions improving after Q4"s estimated 0.5% quarterly fall in German GDP. The index is now also above its long-run average.  Broadly speaking, the ZEW now seems consistent with a rise in German annual GDP growth from Q4"s 0.5% to a healthy 2% or so. See Chart. But the Chart also shows that, while the ZEW has been a pretty good indicator of turning points in the economic cycle in the past, it has often failed to predict the strength of recoveries or severity of downturns.  This might be because investors are asked a vague question about whether the "macroeconomic situation" will improve or worsen rather than being asked for a specific forecast of GDP growth. The ZEW current conditions index registered a much smaller rise, from +5.7 to a still low level of +7.1. See Table. Note, too, that as the ZEW is a survey of financial market investors rather than businesses themselves, it contains less information than surveys like the PMI and the Ifo. While both of those surveys improved in December, they paint a mixed picture of the economic situation at best, with the PMI pointing to broad stagnation in German GDP and the Ifo consistent with modest annual growth of about 1%. And, for the time being at least, less timely hard data on trade and industrial production are still weakening rather than strengthening.  In all, then, while January's rise in sentiment is encouraging, it is too soon to conclude that the worst is over for Germany. If you want the chart and table you will have to wait a mo I can wait. I'm thrilled by this theme. Encouraging for Germany But the worst might not be over Dragging a bit, this. Anything among the smalls? Bahamas Petroleum's said it's been rising on nothing other than bulletin board hype. outlaw - apols, but we are a bit rubbish on Japan Bahamas Petroleum Company PLC (BPC:LSE): Last: 5.42, down 0.26 (-4.58%), High: 5.85, Low: 5.15, Volume: 5.94mBlock Huge muppet following in that one. Several billion barrels off the coast of the Bahamas, maybe, just no ability to actually drill for any of it. It's been raining in Africa. Just as Toto warned. Which is bad news for Coal of Africa. Vele Colliery closed. Coal of Africa Ltd (CZA:LSE): Last: 22.00, no change, High: 22.25, Low: 20.95, Volume: 887.96kBlock Merrill pushing, for some reason. The Vele Colliery is still in ramp-up phase; first phase expected 1Mtpa of semisoft coking coal. We see today's news as marginally negative. Maintain Buy rating, PO GBP50. We think that the market continues to ascribe almost no value for the Makhado project, trading on 0.4x P/NPV. CZA has recently secured funding (through a Chinese partner) and an off-take agreement (with Vitol) which we think helps to de-risk the Makhado project. Oh, more interesting from Merrill's morning note is this pickup on Intercontinental. A small negative news story this morning - Felcor (one of their real estate partners) is switching 2500 rooms from the Holiday Inn flag in the US to Wyndham (competitor). IHG will receive $31m in liquidated damages in 1Q13 but lose $8.5m of ongoing man/franch fees. The loss of 2500 rooms = 0.5% of IHGs global room count but the loss of $8.5m of annual fees = c1% of PBT. This is small but, it will be interpreted as disappointing; it appears from the company's statement that Wyndham offered a deal to Felcor that IHG would not match in terms of the royalty rate PLUS IHG will not offer performance guarantees; Wyndham did. Positive that IHG are not afraid to walk away from a deal when the economics do not work, but, this will impact annualised PBT negatively by c1%. InterContinental Hotels Group PLC (IHG:LSE): Last: 1,813, down 1 (-0.06%), High: 1,822, Low: 1,806, Volume: 166.86kBlock Albeit not terribly price sensitive, by the looks of things. @taxloss: don't stir. But let me just share some Neil Mellor on currency wars We have argued that the notion of "currency wars" will no doubt get some attention at the forthcoming meeting of the G20 finance minister and central bankers in Moscow on February 14/15th, but in in fact it might well get an airing somewhat sooner judging by the Japanese economy minister Amari's comment today (see Headlines). However, even so, can we really expect this to temper the brewing battles? We have arrived at a juncture where "mercantilism" may have become an attractive option for a number of states (Mervyn King thinks so); and certainly, recent comments from French, South Korean and other officials rather suggest that perceived currency manipulation is indeed on the rise. The last time that the world's policy makers felt the need to seriously address these issues was in 2010 and all eyes were trained on the G20 meeting in Seoul on November 11th of that year. A few weeks earlier, Brazilian finance minister Guido Mantega had coined his famous neologism: "We're in the midst of an international currency war ... The advanced countries are seeking to devalue their currencies" and recriminations were flying: German Finance Minister Wolfgang Schäuble told Der Spiegel, "It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the USD exchange rate artificially lower with the help of their printing press." There was defiance: then Japanese Finance Minister Yoshihiko Noda said, "I'll make a decision (to curb excessive moves in the in the JPY) when necessary, regardless of the G7 or G20." And there was scepticism: China's Commerce Ministry said, "The currency war is intensifying ... In the mid-term, the USD will continue to weaken and gaming between major currencies will escalate." With relations fraught, expectations of the G20 were high; but then, what followed in the Group's communique and in its wake, typified what many have come to see as the gulf between the G20"s aspirations and capacity to achieve. The G20 communique said that "what we promise, we will deliver" but laid out what Reuters described as vague "indicative guidelines" measuring economic imbalances. The group vowed that member states would adopt policies to limit external imbalances to "sustainable levels" and would be vigilant against "excessive currency volatility" and "disorderly moves." Most notably, the communique then asserted boldly that G20 members would refrain from "competitive devaluation" of their currencies" and to move towards market determined exchange rates. All noble objectives certainly but here we are, more than two years on and the impasse has cultivated a renewed era of mistrust and doubt. But does this really come as a surprise? The fundamental problem the G20 faces is a sort of fallacy of composition, a Game where no optimal solution is plausible: it stands to reason that in the face of appreciable global imbalances, domestic policy settings cannot necessarily promote outcomes that are consistent with a mutually acceptable steady state. The latter would require self-sacrifice, and sacrifice on an uneven scale that from the standpoint of domestic economic prioritisation would be simply unfeasible. Hence, in 2013, Japan's latest administration has decided that after almost two decades of deflation it is time to get truly radical; and although its economy minister may have proffered some contrition (by touting a USD/JPY 110 "limit" possibly to temper on-going criticism), the fact remains that one of the G20"s members is being guided entirely by self-interest and this is all that is required to scupper plausible agreement at the aggregate level. In the first instance, therefore, the fact that the EUR has been the prime mover following the BOJ's radical policy easing today may not be lost on the European contingent at Davos. This year's annual gathering in Switzerland might well prove to be very interesting. Sign of there is a reminder to follow If you like that kind of thing. Personally, I think it cheapens the Davos experience. Okay - let's end this. Afternoon everyone. And you're still failing me on that Shroders" trader thing, incidentally. Right, back tomorrow as usual This Apple / Tomtom thing mentioned on the right is fantasy M&A. a number of good reasons for Apple to consider an acquisition of TomTom, with management under strong pressure to deliver a quick fix for its mapping software issues ... By which I think they mean it might happen but probably won't. Done.