Markets Live: Thursday, 27th November, 2014 This is the transcript of the Markets Live session ending at 13:07 on 27 Nov 2014. Richard the techie was busy much of yesterday trying to solve this comment streaming problem So we'll see how we go Happy Holidays everyone As they say other side of the pond The billionaire founder of Foxtons estate agents is suing a top garage which serviced his £1million Lamborghini - after the car blew up while his son was at the wheel. Property tycoon, Jon Hunt, says his son had driven less than a mile from the garage in his Lamborghini Miura SV after picking it up from a routine service in April 2013 when it exploded in flames. Mr Hunt's son was not hurt, but the rare 1971 supercar, which was worth almost £1m and was the world's fastest road car when it was first built, was reduced to a fire-blackened wreck on the A40 in Acton. Now Mr Hunt, whose wealth was rated at £1.07bn by the Times Rich List this year, is suing luxury car specialists, H.R Owen Dealerships Ltd, trading as Lamborghini London. He is claiming £700k compensation for the wrecked car, plus additional damages for storage and "loss of enjoyment" of the vehicle - one of only 764 ever built. Kinda serves him right for buying a yellow car Lambos are meant to be yellow, I guess. Though what the founder of a soon-to-be smallcap is doing with a Lamborghini Miura SV, I dunno. Good story from the Standard's Paul Cheston No worries, Foxtons can still sell it. Needs some attention. Excellent fixer-upper. We could keep going all day on this theme, I suspect. Tech update - im still getting the comment problem, do notify us briefly if you are also getting this issue Tech team are on it - but it's proving hard to fix And so to the oil price How low can crude go? Well, i was around when it went below $10 Venezuela saying they'll approve a cut. Calls shale oil "a disaster" And Lord Browne took the opportunity to buy up much of the US oil sector Well its a disaster for venezuela Neil's livetweeting from Vienna I won't give you highlights, just follow if you're interested. Natixis to summarise where we stand. Market fundamentals are weak. Supply growth is outpacing demand growth by over 600 thousand bpd currently, bringing call-on-OPEC close to 29.4m bpd in 2014 and 29.2m bpd in 2015. OPEC is currently producing over 30.2m bpd, which is almost 1m bpd above the required oil in the market. The possibility of OPEC scaling back its quotas appears to have lessened following yesterday's meeting between Saudi Arabia, Russia, Venezuela and Mexico, as the two OPEC and two non-OPEC producers did not appear willing to scale back production to support prices. Al-Naimi's comments yesterday morning, on letting the market stabilise by itself, was definitely the second such indication that chances of "no production cuts" are higher now. If OPEC cuts back: If OPEC announces meaningful production cuts of at least 0.8m-1m bpd, then we can see markets once again balanced, and oil prices supported. But this will very much depend on OPEC adhering to the cuts that they announce. If production is scaled back, crude prices would rebound quite sharply taking WTI to USD 86/bbl and Brent to USD 91/bbl. If OPEC does not cut production, then Brent would come under further pressure, possibly falling closer to USD 65-USD 70/bbl if not lower. Low oil prices are not beneficial for any of the OPEC producers currently. Even the stronger of the OPEC producers such as Saudi Arabia and UAE are banking on the cash reserves that they generated in the last few years, thanks to above USD 100/bbl oil prices and higher than expected exports. Low oil prices are definitely putting a lot of pressure on the weak OPEC countries such as Venezuela, Libya, Algeria and even Iraq which voiced concerns over low oil prices. Some of these OPEC producers have also indicated that they might be willing to consider production cuts as their government finances are highly dependent on oil revenues. OPEC's key producers have a difficult decision to make this time around. Supporting oil prices might help some of the non-OPEC producers to continue producing oil, it might also be the only silver bullet to OPEC's woes if they want to maintain stability in the region or avoid producers such as Venezuela going bankrupt and not sell their crude at lower prices now when in the long term prices could rise as the effect of shale oil will subside. However Saudi Arabia does not want to do this unilaterally any more as excess non-OPEC supply is a medium term story and it wants all other OPEC producers to take their fair/unfair share of cuts and it surely wields more power now as Iranian sanction were not lifted on Monday. Hence for now there is still a bearish sentiment in the markets. Besides which, low oil prices in the near term might help spur demand in the emerging markets and globally, and might also take marginal producers with high breakevens out of the equation. Even if no cuts are announced, what is clear from the statements out of the meeting between the four countries is that they will be monitoring oil prices regularly. And that means also that they could intervene if oil prices drop significantly in the near term and may not wait until the next OPEC meeting. Other factors might influence oil prices performance in the nearest future Although geopolitical risks in the MENA region continue to impact oil supplies, such as the outages at the Elsharara and Elfeel fields in Libya, the excess oil has almost dampened any geopolitical risk premium for now. Any risks around Russia cannot be ignored either, but all these risks have to impact oil supplies significantly to see any spike in oil prices in the near term. The deal between Kurds and Iraq could release more oil into the markets, weakening further the fundamentals. Increased US oil production will put further pressure on oil prices in the future. Forecasts for oil prices at the beginning of 2015 Based on the assumption that OPEC will scale back production and there is no Iranian nuclear deal, we expect Brent to average USD 85/bbl in Q4 2014 and USD 90/bbl in Q1 2015. We would have to revise our forecasts for Dec 2014 and 2015 downwards in case of no-cuts. Implied volatility, indicative of option values, is above 30% lately, at its highest since July 2012. Prices will continue to remain volatile in the near term. If OPEC doesn't cut back production, you could see investors reducing their net long positions further which could further accelerate the decline in oil prices. That's Abhishek Deshpande. Gary Paulin had an interesting take on this And an interesting cahrt Aviate Global of course Have you run the scenario of oil at $50? If not, we probably should. Consider, 14% of distressed credit is in energy and related. It was 5% year ago. The credit markets are starting to punish highly levered oil-service stocks (why Seadrill cut their dividend). Seadrill, SBMOffshore, Saipem, Prosafe, Fugro are the most levered all over 3x. CGG is just under 3x. AMEC Foster Wheeler is 1.6x....of-course these multiples all assume stable ebitda, which is unlikely. he notes, on the flip side, this is good news for large energy consumers How many days in a row down now? Petrofac Ltd (PFC:LSE): Last: 866.50, down 33 (-3.67%), High: 898.50, Low: 864.00, Volume: 1.07mBlock Ever since the profit warning, really. I wonder if, were this to continue, management might see a bit of pressure to cancel its investment in deep well drilling. You'll remember they ordered a big ship a while back. For delivery around the end of the decade. While you can't make long-term decisions based on a spot price, the economics of that play plus the company's woeful record of execution with non-core projects makes it a bit unpopular. The chart is certainly vivid enough Whole sector's getting thumped though, post Seadrill's divi cut yesterday. Amec Foster Wheeler PLC (AMFW:LSE): Last: 1,025, down 34 (-3.21%), High: 1,045, Low: 1,021, Volume: 903.37kBlock Hunting PLC (HTG:LSE): Last: 657.00, down 16.5 (-2.45%), High: 670.00, Low: 650.50, Volume: 83.01kBlock yes, we'e seen the Mail story Which just says, bid is supposedly on, but the share price says differently We have no new information Mail saying 150p cash. Yeah well, we said 145p But need to explain something for impatient readers When we get a raw story And we share it here And the company concerned responds with a statement Largely confirming that a takeover may be in train it is then very difficult to go back to the original source and check for new information Do people realise that? You can't just get more info - simply because of the threat of regulatory action if we get new info, we will share We went through this all with Informa, which used to have an autotext to that effect. The gist being, "if you're worried, sell the shares and stop worrying." That's a good rule! If your heart can't take trading M&A raw, I can direct you to some nice cheap FTSE tracker funds that might be more up your street. Barclays PLC (BARC:LSE): Last: 242.20, up 4.2 (+1.76%), High: 243.05, Low: 239.35, Volume: 10.14mBlock What are they saying? I lost faith in Barc long ago Benign FPC ruling on capital gives them breathing room to close down BarCap. The FPC recently published its final leverage proposal, which in our view was more benign than expected. Most banks, including Barclays, will be constrained by risk-based capital rules, with the leverage ratio being more of a "backstop." This has important implications for Barclays in our view: (1) the probability of capital measures has decreased, and (2) it will have more flexibility in restructuring its IB, as there is now reduced pressure on shrinking low risk-weight positions, such as rates, one of Barclays" key franchises. Valuation screens attractive, with a 2015E P/TBV of 0.85x and a 7.4x P/E. We upgrade Barclays to Buy from Neutral. Okay, not quite close it down. Just close down most of it. We see 3 main catalysts for the stock: (1) improving IB revenues: Following a period of declining IB revenues, we believe the near-to-medium term outlook is improving driven by increased volatility in rates and FX and the prospects for growth in European ABS. (2) Run-down of non-core exposures: Barclays has made good progress so far and we believe the low rate environment is supportive for exiting legacy IB assets. (3) Progress on settlement of outstanding litigation issues: Resolution of the regulatory overhang relating to FX started this month with some regulators coordinating settlement announcements on FX with a number of banks, acting more quickly than expected to remove the final outstanding conduct/litigation issues. For Barclays, which was not a party to announced settlements, we assume total fines and litigation charges to be ~£4 bn - which compares to total industry LIBOR fines issued to date of c.£4 bn. (taxgift45 - apologies for the patronising tone. Feel free to log off in disgust) We value BARC using a 12m ROTE/COE method, adjusted for excess capital. We increase our 12m price target by 10% to 300p (from 272p), driven largely by a lower capital threshold and lower assumed cost of equity. Key risks to our price target and rating are regulatory changes, timing and quantum of litigation charges and weaker capital markets revenues. Should also mention HSBC, which makes way for Barclays on Goldman's list. HSBC Holdings PLC (HSBA:LSE): Last: 628.80, down 5.2 (-0.82%), High: 633.70, Low: 626.20, Volume: 4.78mBlock Though only the UK line. The HK one remains a buy. And, brilliantly, I only saved the HK note. Wait a second ..... HSBC's 3Q14 results showed: (1) improving revenue trends, led by better revenues in GBM and commercial banking; (2) a decrease in provisions, with only Asia seeing a slight deterioration. This was overshadowed by higher costs (+7% yoy), with HSBC no longer expecting to reach its mid- 50s cost-income ratio targets. We lower our 2015-18 EPS forecasts by 1-3% and downgrade HSBC to Neutral. Since being added to the Buy List on August 17, 2009, the shares are down 0.6% vs. +38% for the FTSE World Europe and +6.9% for our Europe banks coverage; we attribute the underperformance to diminishing prospects for additional capital return. HSBC expects ongoing cost headwinds, such as investments in regulatory compliance and wage inflation - which affected 3Q14 results - to persist. It now expects the group's adjusted cost-income ratio to be in the high 50s for a couple of years. We lower our 2015-18E GS EPS by 1%-3% to reflect higher costs, and we expect HSBC to make a ~10% ROE in 2015/16E. We forecast comparatively modest capital formation; this is due to solid loan growth, which on our numbers will lead to a 6% increase in RWAs in 2014, substantial dividends, and the impact of regulatory fines/conduct charges. We now expect HSBC's CET1 ratio to reach 11.0% by year-end. Our valuation (ROE/COE for group ex BoCom, SOTP for BoCom) increases by 1%, as lower earnings are offset by a stronger $/£ FX-rate and passage of time effects. The new 750p 12-month price target implies c.20% upside, in line with the average for our European Banks coverage, and makes our investment case less compelling, leading us to downgrade the shares. Among UK banks, we prefer Barclays (Buy; last close 238p), which looks set to benefit from less stringent leverage requirements, the prospect of improving IB revenues and progress on its legacy issues (run down/FX). Key risks to our view include better/worse-than-expected macro, capital markets trends, regulatory change and potential TLAC requirements. This Myriada taht Roddy and others have happened across We are going to unveil this properly on Monday It's a rather nifty crowd forecasting tool Yup, an experiment in the wisdom of you lot. A start-up run by a young guy called Arjun His team are doing some last minute tweaking The idea if for you lot - The Rabble - to demonstrate your special wisdom as a smart crowd Full details on Monday, hopefully. Tech permitting Brief pause as we look around .... Monitise, I guess, needs a mention. Monitise PLC (MONI:LSE): Last: 34.00, up 3.5 (+11.48%), High: 35.75, Low: 32.00, Volume: 24.74mBlock Expanding commercial agreements with Santander, Telefónica and MasterCard. Who throw in £49m and expand the share capital by 7.6% Oh, and the company says it's still okay to meet the 2018 targets set at the last profit warning. I'm not sure what I can add to this beyond three charts. First, here's a decade of Monitise's revenue (top) and pretax (bottom) So, £350m of reported pretax losses from flotation to the current year. And forecast to lose another £130m over the next two years. But those loses are shrinking... They're forecast to shrink. Which brings me to the next chart .... Here's the last five years of EBIT expectations. Yellow's the 2015 consensus, so work back from there. Shares in issue (top) versus actual retained earnings (bottom). It's just data. I make no editorial comment. For that, I turn to Canaccord. Strategic investments and commercial agreements from blue chip players in the banking, telecommunications and payments sectors should boost investors" confidence in Monitise's market position and technology. Commitments to the relationships are from the CEOs and boards of the partners. Partnerships with tier one companies with global scale and reach give us confidence in Monitise's ability to reach FY18 end user (200m) and ARPU (£2.5) targets. Santander has 107m checking accounts and Telefónica has 252m mobile subs, with roll-outs planned in Brazil and one other Latam country in 2015. Monitise expects to derive transaction and subscription revenue from these partnerships. The use of IBM's Watson demonstrates to us the richness of data that Monitise has access to and the value it can potentially derive from it. Watson is a leading edge technology that we believe should bring differentiated value. Shares trade at 7x FY17 EV/EBITDA, failing to value Monitise's growth potential. We base our target price on a DCF analysis, using a 10% discount rate and 3% perpetual growth rate. Righty ho. Good luck, holders. Richard Griffiths still averaging down in Blinkx I know, am obsessed Blinkx PLC (BLNX:LSE): Last: 25.25, down 1 (-3.81%), High: 27.75, Low: 25.25, Volume: 4.37mBlock Moving away from London for a moment can't help but notice Rocket Internet, the former Stick Internet And this is just on it's way to circa 400 euros But here's a different view From an unnamed hedgie... Market Cap of Rocket Internet: EUR 6.8bln Amount invested in actual companies at the time of the IPO: EUR 175m Amount invested in actual companies since the time of the IPO: EUR 12m Total capital invested: EUR 187m Trading at 36x Invested Capital This suggests that every company they have invested in will be a 36-bagger They recently upgraded a company from their "Emerging Winners" group to the "Proven Winners" category. This company, in H1 2014 had sales of 1m EUR. And EBITDA losses of EUR 14m on that EUR 1m of sales. Call me old-fashioned but that does not seem like a 36 bagger. And yet it is apparently a "Proven Winner" Also note that in true Quindell style, the company claimed all the shares being sold would be PRIMARY. It transpires that, having paid themselves EUR 300m pre-IPO, the founders also found it in their hearts to sell a further EUR 200m via the greenshoe. So they have bagged EUR 500m out of all this already. Nice work and rather suggests they will not be too fussed if this does not go so well for shareholders despite all the hyperbole. (@Stringer, Loafer: your corporate firewall will be blocking Imgur, which I use as a host to get stuff up as quickly as possible. Apologies, but perhaps it's best to complain to your IT department for their lack of trust in you not to spend all day browsing cat gifs.) Anyone remember Europ@web? No? That's because it went from 4bln to 0. Long story but there are similarities. But i can't help but agree We can't let the entire session slip by without mentioning supermarkets. Which are being led down by Sainsbury at the moment. J Sainsbury PLC (SBRY:LSE): Last: 235.73, down 3.27 (-1.37%), High: 239.90, Low: 235.00, Volume: 2.30mBlock Darren Shirley at Shore downgrades. Sainsbury's interim results were better than feared, though as the outcome of the strategic review was revealed there was a major sting in the tail as management lowered medium term guidance for LFL sales, new space and margins, whilst taking action to protect the balance sheet through lower capital expenditure and dividend payments. As a result, Sainsbury's confirmed our fears that it is set for a period of sustained EPS decline, as management transfers value from shareholders to customers to protect its medium to long-term prospects. We forecast a 30% EPS reset, a deteriorating income stream (dividend will be 2x covered by EPS) and await with uncertainty the impact of Tesco UK's strategy. Shore Capital downgrades its recommendation on Sainsbury's stock to SELL (from Hold). Notice things are getting quite aggressive again, incidentally. Morrison doing another "£5 of veg for free" thing in the Sun this morning. WM Morrison Supermarkets PLC (MRW:LSE): Last: 179.20, down 1.7 (-0.94%), High: 180.70, Low: 178.60, Volume: 1.70mBlock One of the other red tops - I forget which - doing an Aldi promotion. While on the theme, Cazenove doing a quite interesting "Tesco is not Carrefour" argument today. It has been argued that Tesco is a Buy because Carrefour's share price trough took place a few months after Mr Plassat joined and before the company started selling assets. This would indicate that with Dave Lewis on board and ahead of upcoming asset disposals to deleverage the balance sheet, it is now the right time to buy Tesco. Whilst we acknowledge the risk that Tesco might sell international assets for more than what we believe they are actually worth, there are important differences between Carrefour in 2012 and Tesco in 2014: This is Jaime Vazquez, who I reckon is top of the tree among the big-house supermarket analysts.  1) Starting point: Carrefour France was delivering -2.7% LFL when Mr Plassat joined in 2Q12. By 3Q12, LFLs were flat. Noel Prioux moved from Spain to become head of France 10 months before Mr Plassat joined. During this time, Prioux did all the right things including cutting promotions and loyalty card spending and put it all into shelf pricing. Plassat therefore had a lot done by the time he joined. Tesco is currently delivering -5.5% in the UK.  2) Management: Mr Plassat is an experienced retailer, possibly the best candidate there was for the job. He had worked at Carrefour and at Casino and also had non-food retail experience. Dave Lewis is highly regarded and has clear leadership skills but has no retail experience and has no UK team in place following the accounting scandal. He is still to prove himself, in our view.  3) Domestic market: France accounts for c.40pct of Carrefour's sales while the UK is c.70pct of Tesco's. The negative LFLs in Spain were entirely driven by the economic cycle, not by poor execution. Tesco's sales decline in Ireland, Central Europe and Asia is a combination of macro but also structural and execution-related factors.  4) Price: Carrefour did not have a big price problem in France - it had mainly a price perception problem because it was not deploying its commercial efforts effectively. Proof of it is that its sales and price perception started to improve in 3Q12 without any gross margin hit in France. Carrefour was the second cheapest player in France at a c3pct premium to Leclerc, compared to Tesco being 6pct more expensive than Asda, is above Morrison and even above Sainsbury on branded products. With this price gap, Leclerc was the biggest winner of market share in France while Asda is, at best, just maintaining market share in the UK.  5) Brand: Carrefour's brand was not as damaged as we believe Tesco's brand is in the UK. I'll skip a couple, if only to avoid annoying Cazenove too much. 7) The problem in the UK is a lot more structural. The top 80pct of the market is losing market share. We had never seen this before in any market in the world. Hard discounters have a much smaller market share in the UK than in France, which will likely double in the next five years, in our view. In addition, there is a major shift into convenience and online. There has been a 40pct increase in the sector's selling area in the past seven years (at inflated property valuations) with the consequent pressure on sales densities. Even next year, we expect space growth of c2.5pct in the UK. The main players have been raising their gross margins to offset this operational deleverage. In France, the convenience segment was always developed and exploited through franchising by the majors (it is not incrementally cannibalizing the large stores), and online is less of a drag because it has developed mainly in the form of click and collect with no delivery cost. 9) Margins. Tesco's UK margin was a lot higher in the first place and remains a lot higher, pre-rents and excluding fuel, than Carrefour's. The 2.2% EBIT margin we expect for Tesco UK in 2014/15 is not comparable to the 2.6% that Carrefour France reported in 2012. Tesco UK has £900mn of net rents, or 220bp of its UK sales vs 70bp we estimate for Carrefour France (excluding the shopping mall rental income to be consolidated under associates from now on). In fact, we estimate a higher EBITDAR margin ex-fuel at Tesco UK in 2014/15 (7.2%) than at Carrefour France in 2014 (6.2% excluding financial services). Tesco PLC (TSCO:LSE): Last: 184.95, down 2.25 (-1.20%), High: 187.45, Low: 184.90, Volume: 5.19mBlock Really good note, this. Recommend shaking down JP Morgan for a copy, if you're interested. SABMiller PLC (SAB:LSE): Last: 3,520, down 8 (-0.23%), High: 3,530, Low: 3,507, Volume: 323.45kBlock No particular market response, as the Coke JV has very well flagged beforehand. Looks sensible rather than interesting. I guess we could go into what it means for AB Inbev, which needs to rejig its relationship with PepsiCo ..... ... But won't, as that line of speculation has been done to death and I've no desire to add to it. SABMiller has announced the formation of "Coca-Cola beverages Africa" in conjunction with The Coca-Cola Company. Soft drinks are becoming an increasingly important element of SABMiller's growth strategy: at 3-4% pa soft drinks have been growing faster than the beer operations with soft drinks accounting for c.20% of group volumes. The transaction increases SABMIller's exposure to the total beverage market in Africa which has attractive medium-tolong-term growth potential with favourable demographics and economic prospect). We believe that this is a sound strategic move but the deal is not expected to be EPS enhancing until financial year three, according to the company. We havent mentioned Draghi But that's because he's been speaking while we were on air So havent been able to read You can read it here ECB President Mario Draghi outlined the minimum requirements needed to complete monetary union in a way that offers stability and prosperity for all its members in a speech to students of the University of Helsinki. Acknowledging that, "for all its resilience, our union is still incomplete," Mr Draghi argued that, ultimately, Member States "have to be better off inside than they would be outside." If there are parts of the euro area that are worse off inside the Union, doubts may grow about whether they might ultimately have to leave. "The euro is - and has to be - irrevocable in all its member states, not just because the Treaties say so, but because without this there cannot be a truly single money," he said. In the absence of permanent fiscal transfers among Member States, there are two minimum requirements to achieve these objectives: the first is that all euro area countries need to be able to thrive independently, the second is that euro area countries need to invest more in other mechanisms to share the cost of shocks. In a monetary union, the economic performance of any single country cannot be seen as a purely national concern. There is a strong case for sovereignty over relevant economic policies to be exercised jointly. That means above all structural reforms," the President remarked. But even so, economic adjustments can have short term costs. To ensure that countries are better off being in the Union when a shock hits than they would be outside, "we need other ways to help spread those costs...there is a particular onus on private risk-sharing to play this role." In this context Mr Draghi said barriers to capital markets integration needed to be addressed with urgency. Sovereign debt needs also to act as a safe haven in times of economic stress. It can do so first of all through a strong fiscal governance framework. Secondly, by having some form of backstop for sovereign debt in place. "Over the longer-term," the President concluded, "it would be natural to reflect further on whether we have done enough in the euro area to preserve at all times the ability to use fiscal policy counter-cyclically. But it is also clear that... this could only take place in the context of a decisive step towards closer Fiscal Union. There's a sense there i think that he is raising the spectre of a eurozone break up once more It's got to be full blown QE some time soon Yeah, I think we're done. And thank you Bryce Just so you know, I'm leaving this session open for a bit so the techies can run some tests