Markets Live: Thursday, 3rd January, 2013 This is the transcript of the Markets Live session ending at 12:04 on 3 Jan 2013. Participants in this session were: Paul Murphy Bryce Elder We're back in familiar territory Prices have found their correct level once more Don't you think that's a lovely picture? Hugo Chavez of course. Who may or may not be on his death bed. Izy reckons there's a Chavez bot ready to be booted up if and when he croaks And that things will just continue as before And she may well be right. I was trying to get some Venezeulan bond prices earlier, but without success. If you spell it "Venezuela" you may have more luck. Found one at Deutsche Borse of all places Okay, so it seems Deutsche Borse have all sort of Venezuelan prices I may still have a prob posting chrome shortened links. Tell me if you can click ok But the alternative was this. Anyway, not really qualified to comment on Venezuela Right then. I guess we have to glance at the screens. Though they merit no more than that really. 7 points lower at 6020 After the now-seemingly-nailed-on start of year surge. yes, what's the record on that? Of about 2% at the first day. Individual and unique reasons given each time, needless to say, but five is quite a trend. (TFT1: probably. It was at a record for most of December.) Want some dull comment from Deutsche Bank? Who didn't get round to putting out a FTSE year-end target until January 3rd, which disqualifies them. This note is designed to help fund managers write their performance reviews by producing timely total return figures and daily index levels for the UK as well as international markets At the time of writing the FTSE 100 has managed to breach the 6000 level. In our view we need to get used to a FTSE above 6000 again and target 6575 for the end of 2013. It performed poorly relative to Europe exc. UK and World exc. UK in 2012 and currently sits on a forward PE of 11.1x. Banks produced another decent return during December and finish the year as the best performing UK sector. Miners saw a turnaround in performance in December and defensives such as beverages, food producers, tobacco and household goods suffered. But the UK equity story has not been about large caps but mid/small companies, and domestically exposed companies. The domestic heavy FTSE 250 significantly outperformed the FTSE 100 in 2012. On our estimates the UK housebuilders put on 58% during 2012. With the UK credit impulse being positive we believe we could continue to see better than expected economic data which should buoy the performance of these companies. The UK manuf PMI for December beat expectations by 1.5 points coming in at 51.4. We could be looking at growth moving back into positive territory in Q1. The 250 performance is something to note here ...... 24% or thereabouts last year, against less than 6% for the blue chips. And it's largely turnaround and refi stories. The likes of Dixons and Enterprise Inns (though it's only just been promoted) This all plays into the theory that risk's been mispriced. Or rather, it was. Now perhaps less so. Because it's not been driven by earnings revisions. I think we said all this yesterday, but it bears repeating. Joseph has come to my rescue on Venezuela he can actually operate the bloomberg machine Next top of the leaders board Footsie leaders that is Well, it's the same old story really. Next PLC (NXT:LSE): Last: 3,856, up 84 (+2.23%), High: 3,935, Low: 3,844, Volume: 483.24k Proving the old addage that you never, ever, ever bet against Next. Even though retail was slightly softer than hoped. Directory is still (mysteriously) going absolutely gangbusters. Actually, there was a really good note a couple of years back on the directories business I forget who from. Perhaps the rabble can help. Pulling it apart as a provider of sub-prime credit rather than an actual retailer. Anyway, that's an aside. As for today, profit guidance edged up. In spite of the usual caution from Wolfson. Wolfson doesnt look as young as he once did Good decision to lose the Madchester hair. He has, let's face it, done a solid job. The story is always about costs, brand management, tight discounting etc. etc. Driving margins in spite of the high street, not because of it. Allow me to cut to some comment to summarise. Merrill can talk us through the figures. Next Brand sales were up +3.9% for Q4 compared to our estimate of +3.2%. Next Retail was softer than expected with sales +0.8% vs our +1.9% estimate while Next Directory achieved better sales than forecast with sales +11.2% vs our estimate of +8.9% for the period. Next has narrowed its previous guidance of PBT for FY13 from £590-620mn to £611-625mn compared to our £616mn forecast. At the midpoint of its range (£618mn) Next's basic EPS would be c.+16% yoy vs our +15% forecast. We expect consensus earnings upgrades of a few per cent. In Retail Next faced fairly undemanding comparatives but we think the strength of Directory had some impact on the Retail business, for which we estimate a LFL of -2% to -3%. We think Next continued to shift some stock out of Retail into the Directory business to be cleared at Sale price, but we think the big shift of stock within the business has run its course, in both directions. In Directory Next faced a very difficult comparable for Q4 (+18%), however we think Next continued to benefit from its strong service offer. This should further improve with new delivery options which will be advertised more in H1 this year (Sunday deliveries, Evening deliveries and ordering by 12 for same day delivery for an extra £3). Next has given a fairly balanced outlook for the UK consumer, as stronger employment is being offset by slightly higher inflation. It has guided to Next Brand sales +1.5% to 4% vs our +3% with PBT broadly in line with sales compared to our +5% forecast. Next has also confirmed that it has exceeded its previous share buyback guidance of £200mn with £241mn this year and now expects c.£250mn for next year, in line with our estimate but slightly above market estimates. Next is also, of course, the exception that proves the rule that share buybacks are generally value destructive. Bit more valuation work, I think. Here's SG Continue to Hold. The combination of a strong focus on product development, supply chain and operating cost control, together with the use of strong healthy generation to fund share buybacks continues to look attractive against a relatively mature and austerity-challenged UK retail backdrop. We see a positive read-across from this trading statement to Debenhams (Buy, TP 133p). Debenhams PLC (DEB:LSE): Last: 118.00, up 2.9 (+2.52%), High: 118.10, Low: 115.72, Volume: 2.11m How we value the stock TP increased from 3544p to 4143p. Our previous target was based on a 10% P/E premium to the UK market (FTSE 350 index) in year 2 (to January 2014e). The new target is based on a 20% P/E premium, with the increase justified by the fact that Next has now successfully lapped its most challenging prior year comparative. In addition, our EPS estimate has risen and the UK market P/E has risen from 10.6x to 11.2x since the TP was last set at end October 2012. TP calculation: 11.2x P/E * 1.2 * 308.2p = 4143p. With the 12m forecast dividend of 107p, we calculate a total shareholder return of 12.7%, insufficient to rate it Buy under our methodology. Peel Hunt also holders. Reiterate Hold recommendation, raise TP to 4,000p. Next remains our top pick of the FTSE 100 Retailers, a core sector holding underpinned by a flexible store base and the benefits of Directory. We raise our 12-month target price to 4,000p, representing Jan 2014E PER of 13x. Our top apparel picks are Debenhams (Buy, TP 130p), Ted Baker (Buy, 1,100p) and N Brown (Buy, 420p) - all candidates for forecast outperformance for peak trading and the year ahead. Ted Baker PLC (TED:LSE): Last: 1,177, up 17 (+1.47%), High: 1,177, Low: 1,160, Volume: 582 N Brown Group PLC (BWNG:LSE): Last: 369.40, down 2.5 (-0.67%), High: 372.90, Low: 358.34, Volume: 42.24k Both of those in quite a few of the 2013 pick lists I've read, as it happens. thanks for all that Bryce Any reaction to this falklands stuff Argies demanding the islands back There was a big ad in the guardian - open letter to Cameron And also Joseph pinged over the facebook link Because if you're wanting to address Cameron directly, chose the Guardian. I'm sure he reads Polly Toynbee and Charlie Brooker over his Shredded Wheat each morning. Falkland Oil and Gas Ltd (FOGL:LSE): Last: 28.25, down 0.25 (-0.88%), High: 28.75, Low: 28.00, Volume: 217.45k Desire Petroleum PLC (DES:LSE): Last: 19.25, no change, High: 19.43, Low: 18.89, Volume: 115.05k Yup. This is meek in the world of smallcap deepwater punts. Could chuck in some sellside to keep us ticking over. Compass Group PLC (CPG:LSE): Last: 729.50, down 8 (-1.08%), High: 733.50, Low: 711.50, Volume: 1.18m And every sub that writes "Compass points lower" in a headline today gets a personal demerit from me, incidentally. Espirito Santo cuts it off its buy list. Largely a valuation vcall but it makes some mildly interesting points Compass shares outperformed in 2012 (+19% vs. FTSE 100 +6%) and we now believe the rating encapsulates the near-term opportunity. Cyclical pressure in Europe will limit organic growth and impede earnings progression through 2013, despite accelerated efficiencies. The scope for using the group's balance sheet to accelerate earnings through share buy-back or acquisitions is also diminished, due to lower cash generation. While we increase our fair value from 700p to 750p, we downgrade our rating from Buy to Neutral. We remain positive on Compass Group's long-term growth potential through the structural shift towards outsourcing of catering services and steady crosssell of soft support services. We also continue to believe that operating margins can eventually surpass the group's prior 7.2% peak, given the opportunity to recover margins in Europe & Japan in line with other group regions and supported by management's confidence of further efficiencies. However, following strong share price performance through 2012 (+19% vs. the FTSE 100 +6%), we now believe the positives are fairly reflected in the valuation, with the shares trading on a cal. 2013E P/E of 15.8x, in line with the group's historical 10-year average 15.5x. While we believe Compass deserves a premium valuation rating, further share price upside through either rating expansion or earnings momentum seems unlikely. In the short term, cyclical pressure in Europe will act as a drag on group organic growth in 2013: we forecast 4.3%, down from 5.4% in 2012. In our view, the balance of risk to this estimate could also be to the downside, given recent signs of weakening spreading to Northern Europe. Accelerated cost efficiencies in Europe (expected by management to deliver £50m and £75m of annualised savings for 2013 and 2014 respectively) should mitigate the adverse profit impact of -2.5% organic revenue declines in Europe & Japan through 2013. However, with accelerated efficiencies being used just to support existing levels of profit the scope for upside seems less likely. We also believe that higher short-term capex (+20-30bps as a proportion of revenue in 2013E), restructuring cost (c.£100m) and pension contributions (£75m one-off in 2013E), allied with some working capital outflow could limit the group's scope to accelerate growth through bolt-on acquisition in 2013. On our estimates the group is now close to its preferred level of balance sheet efficiency, with forecast adjusted gross debt:EBITDA at 2.2x, net debt:EBITDA at 1.0x and adjusted cash flow (CFO) less dividends/adjusted net debt at 22.6%. We continue to view Compass shares as low-risk growth: the group is a market leader in a secular growth market that remains fragmented. However, near-term pressure on the business, allied with the recent share price performance prompts us to downgrade our rating from Buy to Neutral. That's a very long way to say, "it's quite expensive and Europe looks iffy" (@Deep Breath: meteors don't rise either, but that doesn't stop folk writing about meteoric rises. Bloody journalists.) Mention in passing there's a new Bill Gross out Havent had a chance to read Will jsut share his conclusion Investment conclusions Investors should be alert to the longterm inflationary thrust of such check writing. While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the "out" years towards which long-term bond yields are measured. You should avoid them and confine your maturities and bond durations to short/intermediate targets supported by Fed policies. In addition, be aware of PIMCO's continued concerns about the increasing ineffectiveness of quantitative easing with regards to the real economy. Zero-bound interest rates, QE maneuvering, and "essentially costless" check writing destroy financial business models and stunt investment decisions which offer increasingly lower ROIs and ROEs. Purchases of "paper" shares as opposed to investments in tangible productive investment assets become the likely preferred corporate choice. Those purchases may be initially supportive of stock prices but ultimately constraining of true wealth creation and real economic growth. At some future point, risk assets - stocks, corporate and high yield bonds - must recognize the difference. Bernanke's dreams of economic revival, which would then lead to the day that investors can earn higher returns, may be an unattainable theoretical hope, in contrast to a future reality. Japan we are not, nor is Euroland or the U.K. - just yet. But "costless" check writing does indeed have a cost and checks cannot perpetually be written for free. Wow, it's rather dull today. House prices? Nationwide's out. So the average UK home was down 0.1% to £162,262 through December. 1% lower year on year. Robert Gardner, chief economist at Nationwide, says the outlook remains uncertain. "The outlook remains uncertain," said Robert Gardner, chief economist at Nationwide With the economic recovery expected to remain fairly weak, the housing market is likely to be characterized by low levels of activity again in 2013, with prices remaining flat or modestly lower. London, however, was up 0.7% ...... You know London not the best performing city in the UK Its Aberdeen according to Ed Conway Hell's teeth. Have you been to Aberdeen? It's grey. And the seagulls are the size of veloceraptors. And it's full of Aberdonians. Yes, that's about right. And they're not scared to steal your fish supper either. Honestly. One of my worst nights have been in Aberdeen. It's a cold, windy hellhole. While on house prices, should note the knock-on effect on construction. Which came in weaker than hoped this morning. Barclays to summarise, I think. The construction PMI was slightly worse than expected in December and remained consistent with a contraction in activity. The headline activity index fell to 48.7 (Barclays: 49.0, consensus: 49.5) from 49.3 previously. Activity continued to fall in two of the three sub-sectors (Figure 1). The housing activity component fell significantly to 43.1 (from 47.1) and although the commercial activity index edged up, to 47.9 (from 47.3), it remained in contractionary territory. The civil engineering index deteriorated slightly to 52.0 (from 52.9) and could be showing some signs of weakness after months of surprising resilience despite government expenditure cuts. The forward-looking measures painted a mixed picture, with improving business sentiment and weakness in new business flows. The business expectations index rose to 56.1 (from 53.5), after reporting a four-year low the previous month. However, despite the latest improvement, the index remains well below its historical average of over 70 and suggests business sentiment has some way to go before returning to pre-crisis levels. The new orders index on the other hand fell to 44.0 (from 46.5) and was consistent with falling new business for the seventh month running, with firms reporting weak client demand and a shortage of new investment spending. The PMI survey is consistent with subdued construction activity for Q4. This weakness has been concentrated in the housing and commercial building sectors, with the civil engineering sector providing some support. However, after a period of surprising strength in government investment, we expect this source of support to weaken in 2013. The construction PMI has not been a good gauge of the performance of official data in recent months, having been significantly more upbeat than the official data (which have reported sharp falls in output for three consecutive quarters; Figure 2). Based on the monthly construction index, there are early signs that the official data are likely to improve in Q4 from the current low levels, but we do not think this is likely to fully make up for recent losses. We expect construction activity to remain subdued into 2013 as the flow of new work is likely to suffer from the low levels of government and private investment and the depressed housing market. @tk: that tax was entirely window dressing that raised the sum of £0, wasn't it? And so to Titan Cement Titan cement of greece Raised 200m in a bond issue First greek corporate to raise money in the markets since the debt crisis got underway Just mentioning in passing Nighthawk Energy currently the most read statement on the Muppet Detector. A term of endearment used to describe BB share promoters on FT Alphaville. I say most read, but also perhaps least understood. Tell us abotu Nighthawk then Well, shares down 7.8% at 5p in the middle. And there's plenty of what appears to be bad news to pin the move on. Including a temporary shut-in of production of wells until mid-January And another well won't sustain production without additional completion work this year Though folk seem to vary on how much of this is actually new news, and how much of it is significant in the context of a penny punt. Singer insist there's nothing to see here. Key points: 1. Production in December reached record levels at 276bbls/d with average production 4Q12 at 192bbls/d, 2. Its 3rd well (Knoss 6-12) started producing in December, 3. The company is investing in water disposal in Jolly Ranch resulting in a temporary shut in of production on two wells until mid-January, 4.Company highlights the oil-bearing potential of the Chrokee shale formations at all five wells drilled in 2012. Our take: Not a lot of new news but a reminder that Nighthawk had a good year in 2012 taking credible steps to monetise its shale assets in the US at a time when the industry has embraced unconventional oil in a new way. Potential conventional oil at Steamboat Hansen is also an important development. Impact: Positive. Westhouse also remain buyers in spite of what they say are "inconsistent" results from the drillbit. Nighthawk Energy has learnt a great deal from its 2012 drilling programme and has demonstrated in at least three wells that the completion strategy and clean-up techniques deployed are critical to achieving sustainable and commercial flowrates. In order to de-risk the asset further the company needs to demonstrate a repeatable and consistent delivery of its drilling programme in terms of a reliable well completion and clean-up techniques. Evidence from the wells drilled to date suggests that the producibility of the Cherokee and Marmaton shale formations may not be uniform across the acreage - and investors need to bear in mind that a consistent approach to developing shale plays is a function of, and depends upon, homogeneity across the acreage. Based on a WTI price of US$95 per bbl, and a net revenue interest of 80%, we estimate that the current production of 280 bopd generates revenues of US$590,000 per month for Nighthawk and will therefore adequately cover their corporate G&A. We retain our Buy recommendation and target price of 10.7p per share and would look to adjust the "exploration style" discount of 85% that we have applied to yield an NAV of £134 on further evidence of consistent delivery from the wells drilled to date. Though the rabble don't seem even slightly interested in Colorado shale, so let's try something else. footise is more or less unchanged How can we follow a 2.35% move on Wall Street and yesterday's footsie hike with... refuse to believe that Well, it kinda knocks a hole in that "pants on/off" theory you were banging on about yesterday. I'm still seeing a market paralysed, even with this supposedly massive cash switch that's about to land on risk assets. Was good for a new year punt tho And one day's evidence of nothing, I suppose. By the way, we haven't asked about your holiday. it was gorgeous, since you ask Money pouring into Mozambique You can really see the change. People in the cities are quite literally fatter Shop in new supermarkets There seemed to be mining ventures happening everywhere Should note Kenmare while we are on the subject Drifted steadily lower latter part of last year Last two session its been stepping higher tho p another penny and a half at 34.4 this morning Isn't this just "buy the dogs"? Seeing quite a bit of that among the miners. Kenmare Resources PLC (KMR:LSE): Last: 34.40, up 1.4 (+4.24%), High: 34.62, Low: 33.50, Volume: 3.99m Aquarius Platinum Ltd (AQP:LSE): Last: 67.50, up 5.5 (+8.87%), High: 67.95, Low: 63.50, Volume: 3.61m Its a world class titanium sands mine I meant a dog performance wise, of course. It's a lovely titanium sands mine, when it works. Which isn't that often, unfortunately. They have the odd cyclone to deal with And an overstuffed TiO2 and zircon market, with cheap production flooding in from China Though Rio might cut production this year, which'd help. Actually, similar arguments being made for platinum. Hence the Aquarius rally. Production actually coming out in 2013. Possibly. This has been mentioned over on the right Link provide by Nobby earlier Apparently someone bidding above the market for Apple stock just before the close Conspiracy or fat finger? Dunno "Painting the tape," also via Nobby, is a lovely phrase. The regulators tend to call it something else, which is why we stay strictly in the "dunno" camp. Right. Midday already. Thanks for joining us today