Markets live transcript 2 Sep 2009

Markets live chat transcript for the chat ending at 12:09 on 2 Sep 2009. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder (BE) Miles Johnson, FT (MJ)   NH:Good morning and welcome to Markets LiveNH:FT Alphaville’s daily markets chatNH:our attempt at trying to understand what is...

Deep expectations

BP shares have popped higher on the news of the oil major's  'giant' find in the Gulf of Mexico on Wednesday. As analysts have already begun to note, the use of the word 'giant' to describe the well is almost unprecedented. But the indication is clear: BP thinks this will be a massive production asset,...

Premature conclusion, British bank edition

Lloyds' APS saga appears to have become preferred fodder for Britain's business sheets. We've no doubt that Lloyds is looking at extricating itself from, or reducing its exposure to, the scheme. However, doing so will be a lengthy and drawn-out process, involving investors as well as the government,...

Prepare for shipping wars

AP Moller Maersk, the world's largest container shipping firm, surprised the market on Wednesday with the announcement of a DKK9.2bn ($1.77bn) share placing. The move was unexpected since Danish firm had pretty much ruled-out the prospect of any fund-raising on August 21, the day it also announced a loss - its first ever - of $540m....

BP announces giant oil discovery

Now when was the last time BP had the chance to say something quite of this magnitude? 10:00 02Sep09 RTRS-BP PLC - BP ANNOUNCED TODAY A GIANT OIL DISCOVERY AT ITS TIBER PROSPECT IN THE DEEPWATER GULF OF MEXICO 10:00 02Sep09 RTRS-BP PLC - TIBER REPRESENTS BP'S SECOND MATERIAL DISCOVERY IN THE...

Snapshots From Global Economy

Snapshots from the global economy, which now appears to be recovering faster than expected:

Senior International Monetary Fund and World Bank economists at a Washington panel discussion on Tuesday said the world recovery was starting to gain momentum, though a number of challenges remain. The IMF now expected the global economy to expand at slightly less than 3% in 2010, said Jörg Decressin, an IMF forecaster, a upward revision from the IMF’s July estimate of 2.5%. “The recovery is for real but it is very heavily policy dependent,” he said at a session at the Carnegie Endowment for International Peace. At some point, he said, private demand would have to replace the boost to the global economy from government monetary and fiscal expansion.

Hans Timmer, a World Bank forecaster, didn’t give an estimate, but said the strength of the recovery depends “on how sustainable the rebound in developing countries is.” He especially cited the role of China in boosting global demand.

Philip Suttle, head of global macroeconomic analyst at the Institute of International Finance, a trade group of large global banks, said “the recovery is for real and it has a good six to nine months to it.” The big question haunting the global economy, he said, was whether inflation would unexpectedly climb and push the world again into recession.

Another issue, he said, was whether investors would pour money into developing countries, which are paying higher interest rates on bonds than wealthy nations, potentially creating another asset bubble.

–Bob Davis

* * *

Some economists say the best news from Europe is yet to come, because companies were still reducing their inventories sharply in the second quarter. “We still have the rebuilding of stocks ahead of us, which makes the case for strong growth in the third and fourth quarters,” says Christel Aranda-Hassel, senior European economist at Credit Suisse in London.

Alfred H. Schuette GmbH, a German machine-tool maker, illustrates Germany’s potential to bounce back in coming quarters. The firm saw its orders collapse in the past year, but the financially conservative company has no bank debt and large cash reserves.
Chief Executive Martin Welcker says he’s aiming to keep all of his staff on board, even though they’re under-occupied at present. He’s making use of government subsidies for employees who are working short shifts — a measure that has greatly slowed the pace of job losses in Germany. That, in turn, has boosted consumer confidence.

Mr. Welcker expects his sales to start recovering this fall along with global corporate investment, reflecting pent-up demand for improved living standards around the world, particularly in emerging economies.

“I believe the recovery will be stronger than many expect, because the underlying demand for goods and services in the world hasn’t gone away. We will need more washing machines, cars and trains worldwide than in the past,” Mr. Welcker says.

However, skeptics doubt the sustainability of Europe’s German-led recovery, pointing to three weaknesses. The cash-for-clunkers schemes that have propped up the auto sector are due to run out in Germany and elsewhere next year. Banks in the euro zone have done less than in the U.S. to write down their losses in the credit crisis, and are cutting back their lending to businesses to repair their capital ratios.

And unemployment in Germany, Italy and some other countries is set to rise further this year and next. Government measures such as short-shift subsidies have delayed layoffs so far, but many firms are likely to cut jobs over the coming year because the downturn has left them with significant overcapacity. That in turn is expected to dent consumer confidence and household spending.

-–Marcus Walker

* * *

Like the U.S. and Europe, Britain appears to be healing from the recession faster than some expected a few months ago. Economists now expect the U.K. to return to economic growth in the third quarter, while recent data have pointed to recoveries in house prices, manufacturing and services.

But economists and policymakers worry that Britain’s recovery could significantly lag behind other regions given the U.K.’s heavy debts and reliance on the financial-services industry to fuel economic growth.

British consumers are among the most heavily indebted in the developed world, and their downsizing efforts may put a lid on consumer spending, the largest driver of demand in the U.K. economy. British politicians, meanwhile, are under pressure to fix the government’s heavy national debt, expected by some to reach nearly 100% of annual economic ouput by 2013. Any moves to tighten the U.K.’s fiscal belt in the form of higher taxes will hurt the same consumers Britain is banking on to fuel the recovery.

“Things are looking a lot better than they did just a few weeks ago,” says Howard Archer, chief U.K. and European economist at Global Insight in London. “But significant doubts remain further out. I certainly think the U.K. will lag other economies like Germany.”

In a sign of the U.K.’s bumpy road to recovery, data on Tuesday showed that Britain’s manufacturing sector unexpectedly contracted in August, though Mr. Archer says this data appears to be stabilizing. Last month, the Bank of England raised doubts about the sustainability of the recovery by boosting the size of a bond-buying program aimed at fighting the recession.

Another major concern among economists: Britain’s massive banking industry may be less able to turbocharge the nation’s recovery than in the past given a rising mountain of bad loans and tighter regulatory environment. That means lower tax revenues from banks entering U.K. government coffers and less flexibility in dealing with its debt load.

–Neil Shah

* * *

China’s economy still has momentum, after its gross domestic product surged an annualized 14.9% in the second quarter, according to a central bank estimate. Chinese demand has boosted machinery exports from Germany and Korea, and has been a particular boon to commodity producers like Brazil and Australia.

“With considerable economic policy stimulus in train around the world, the global economy is resuming growth,” Australia’s central bank governor, Glenn Stevens, said in a statement Tuesday. “The major economies appear to be approaching a turning point,” he said, crediting “very strong” growth in China for aiding an expansion throughout Asia. The large economies of India and Indonesia have maintained relatively steady growth this year, but even export-dependent Hong Kong and Singapore rebounded in the second quarter.

China’s growth came close to a standstill in the fourth quarter of 2008, but the manufacturing sector has come well back from those depths. Activity has been boosted by a nearly unprecedented wave of lending from state banks coupled with a rapid public-investment program. A government survey of industrial firms last December found 15% had wholly or partially stopped producing; the latest official update, which looked at 170,000 factories, found that proportion had shrunk to 7.2% in June.

Hon Hai Precision Industry Co., the electronics-manufacturing giant that employs hundreds of thousands of workers in China and is one of the nation’s biggest exporters, on Monday reported a 26% gain in its net profit for the second quarter. That beat widespread expectations of a loss, though the gain mostly reflected cost-cutting as revenues were up just 0.2%.

Many of the migrant workers laid off during the worst of the slowdown have been able to find new work. Help-wanted signs have gone up around Beijing, and even factories in the coastal provinces hard-hit by the collapse in exports are hiring again. The employment center in Wenzhou, a light-manufacturing center in the eastern province of Zhejiang, says it now has 12,925 job openings available. In the export powerhouse of Guangdong, employers’ demand for workers has exceeded supply since March, according to the provincial labor bureau.

Government spending has led the way this year, but there are signs corporate investment is picking up as well. BOE Technology Group Co. and a consortium of other Chinese state-owned enterprises said last week they will spend $4.1 billion to build a major new liquid-crystal-display factory in Beijing. Yet investments from non-state companies have lagged, and the government admits the recovery won’t be on solid ground until private-sector spending takes over the lead.

Confidence remains fragile, and some of the initial euphoria over the stimulus has already evaporated. Despite continued reassurances from the government, the Shanghai stock market declined 23% in August as investors fretted over a slowdown in the pace of bank lending. Premier Wen Jiabao on Tuesday again reiterated, in a meeting with World Bank President Robert Zoellick, that the government’s economic policies won’t change direction. “Beijing still faces the difficult task of managing liquidity conditions to avoid a bubble — or a bust,” said Brian Jackson, an economist for Royal Bank of Canada.

While China has not raised its regulated interest rates, and isn’t expected to anytime soon, the government has already started to ease back from the all-out stimulus effort earlier this year. That highlights how emerging markets, having led the global rebound, are already taking early steps to exit from their extraordinary stimulus policies. Israel’s central bank, facing uncomfortably high inflation, last week became the first to raise interest rates since the collapse of Lehman Brothers last year.

China’s central bank has only modestly tightened liquidity: the one-month Shanghai interbank offered rate, or Shibor, after being held at just over 1% for several months, has now moved up to about 1.6%. Regulators have tightened scrutiny of banks, asking them to ensure their loans are supporting the real economy and not being used to play the stock market. The result: while the amount of longer-term lending to companies has not changed much, short-term loans and bill financing actually declined in July.

The biggest boost from the government’s massive fiscal and monetary stimulus is probably over: most economists expect China’s GDP growth to slow to an annualized pace of 9% to 10% in the second half of this year. Chinese firms appear to have started restocking inventories earlier than companies elsewhere in the world, economists say. So while inventory building will likely help growth in the U.S. and Europe in the rest of 2009, it’s unlikely to do much more to boost China’s figures.

Still, China’s stimulus now seems to be more than strong enough to meet the official target of an 8% expansion for 2009. Officials are still publicly cautious about the world economy, with exports still down 22% from last year, and have repeatedly said the policy to support growth hasn’t changed. But government statements in recent weeks have focused more on longer-term issues like funding for small businesses and controlling excess capacity. That’s where economists are looking for new measures that would help keep the recovery going into 2010.

-–Andrew Batson

* * *

France was one of the first European countries to escape from recession with its economy expanding at an annualized rate of 1.4% in the second quarter.

Economists, however, fear that France’s main growth engine — consumption — will run out of steam in the coming months because the country keeps shedding jobs. France lost 2.5% of all private-sector jobs in the twelve months to June 30, including 74,100 jobs in the second quarter of 2009.

Industrial companies are also worried that the economic rebound will be short-lived.

Etablissement Gaston Perrollaz SAS, which makes precision metal parts, was open for business during the traditional August holiday to meet demand, notably from car makers. “We are bottoming out,” says company director Jean-Luc Moenne-Loccoz.

But Mr. Moenne-Loccoz cautioned that part of the growing demand does not stem from an overall pick up in orders but from the fact that some of his competitors have closed. “It’s sad, but we’re getting the workload of our neighbors,” he said. His company had to cut 5 jobs – it now has 30 employees – and will lose money in 2009, he said.

–David Gauthier-Villars


The adventures in banks' hybrid Tier 1 debt continue apace this Wednesday morning, via Belgium's KBC. From a Tuesday press release issued by the partially state-owned bancassurer: 1 September, 2009 - 5.45 p.m. Having issued core capital securities to the State in order to strengthen its solvency level,...

Three deals doth a revival make?

BusinessWeek hailed the return of "merger Mondays" and the Wall Street Journal argued the  flurry of deal announcements and financings during the dying days of August suggested the M&A market -  moribund for 12 months -  "may finally be bottoming". Could it be? Before the last week of August, the month was shaping up to be the worst for deal making since 1995,...

Getting beta

From JP Morgan's latest fund manager monthly, which notes that it's been a stellar year for beta -- so far. Related link: From beta to alpha -- playing the summer rally - FT Alphaville

Old power player tops the New Establishment

We've barely worked out who's who - and who's still standing - in the `old' establishment, and Vanity Fair magazine is already telling us about the movers and shakers in the `new establishment'. And, surprise surprise, the    most influential person in the magazine's second annual ranking of the top 100 power players in the    information age -- published this week -- is none other than Goldman Sachs chief,...

links for 2009-09-02

Ten Points on Commercial Real Estate Lending

Before I begin this evening, I would like to give a big praise to Calculated Risk.  CR and his readers do a great job of highlighting stories in economics and real estate; I get a lot of data from that blog.  Some articles cited this evening have sprung from links on a CR post; my non-citing of CR is not a lack of respect for what CR does.

1)  We are at the beginning of seeing large commercial properties slide into default where equity sponsors have concluded that there is no use throwing good money after bad.  Recourse typically does not exist on commercial loans, aside from the smallest loans.

The last article is interesting to me, in that the ability of the US Postal Service to walk away from leases is greater than I previously thought.  It is also interesting to contemplate the economics of a collapsing postal service.  Will the postal service charge a differential rate to serve rural areas?  It would align revenues with costs, but politically I can’t imagine it is feasible given the US Senate.

2)  Of course, those defaults have large negative implications for large and small banks, as well as CMBS and Commercial REITs.

The difficulty for banks is different because they do not hold their Commercial Real Estate [CRE] loans at fair value.  So long as the loan is performing, it can be held at par.  The accounting does not require anticipating failure, no matter how likely on average that failure would be.

The banks have writeoffs to take which the CMBS market is already anticipating.  Absent a larger rally in CMBS, there will be significant writeoffs at the banks eventually.

For a broader look at the troubles the banks face, look at this article: Q2 2009 Bank Stress Test Results: The Zombie Dance Party Rocks On.

3)  When the price of properties are down 36% from the peak, it implies that most recent lending, 2006 and beyond, is under water, and 2005 is iffy.

4) $165 Billion in Commercial Loans are Due in ‘09.  Banks will extend the loans, whereas CMBS special servicers will foreclose on some and extend others — the balance sheet of a CMB Securitization is not as flexible as that of a bank.

5) “What evil lurks in the heart of Commercial Real Estate loans?  The Shadow Supply knows.”  Whether it is condos in Manhattan, or apartments in the same, the problem of underemployed real estate weighs on the market, waiting for a moment to sell, and making the recovery that much longer.

6)  Goldman Sachs is the key component of the oligarchy that controls the US Government and sucks the blood of the American taxpayer for profit. ;)   Now they are planning to repeat their clever pillage of residential housing in the commercial sector.

Look, GS is clever, and they will make money they can.  I never supported any of the bailouts, but if the government sets the rules inadequately, and GS finds holes to profit off of, where does the blame go, but to the government who set loose rules.

7)  Goldman also sees hard times ahead for Commercial REITs, as I do.  Prices are too high relative to NAVs.  There will be significant loan defaults.  Shall I mention that Deutsche Bank agrees?

8) At such a time, as is normal, underwriting standards rise, and loan volumes decline.  It adds insult to injury, but banks have to protect their balance sheets.

9) This is also affecting pension plans, which are large investors in commercial real estate, both equity and mortgages.

10)  And looking at the architectural billings index, any turn in commercial real estate will not be soon.

I will be considerably more bullish when these problems are half solved.  Until then, I am still a bear on financials.

THE FINTAG NEWSLETTER @ 02 September 2009



The VIX is my guide to the future and rough seas are ahead. Which is good as being pushed along by a strong wind on calm seas is a tad boring. It is obvious this bull market, driven by government subsidies has gone a bit too far but as usual no one is calling the shots.

My poll on whether we are in a W, V, U, up, down market is suggesting you all think we are in a W. Given most bear markets start in the Fall, my Sept 16th isn’t that wild a scientific punt.

Of course not all countries will suffer and Canada, Australia and Columbia are those who will grow stronger, not weaker. Alas the UK will not be rejoicing for many reasons. It has lost its special relationship following its shocking terrorists-for-trade behavior and I apologize to those who are offended. It was out of my control. However, following this trade for oil, BP could be a long term buy unless you are a #climatecamp fiend in which case there are a number of stations that sell super glue and are open 24 hours a day for being stuck to.



U.S. stocks fell for a third day, the longest losing streak for the Standard & Poor’s 500 Index since June, as concern banks will post more losses overshadowed manufacturing and housing data that topped economist estimates.

Wells Fargo & Co. slid the most in two weeks even after saying it will pay back government bailout funds without selling stock. Bank of America Corp. declined 6.4 percent to lead the Dow Jones Industrial Average lower.

Fintag says
So the likes of Wells Fargo and Bank of America are ready to hand back their TARP but the markets now believe this is too early for really they are in as bad shape as ever. If Paul Tudor Jones is correct, and the man has a track record, then the banks are getting out while they can to ensure bonuses can be paid later this year before having to declare more losses and balance sheet woes.

Investment Banks are the scum of the earth. Always have been and always will be. These cut and paste outfits are great for providing the middle classes with decent income and providing shelter for dysfunctional people like myself and keeping us off the streets, but apart from that are a complete waste of space. But you know that already.


business week

According to the Stock Trader’s Almanac, the S&P 500 index drops an average of 1.1% in September, making it the worst month of the year. That history weighs on the minds of traders and investors as we enter September 2009.

“There is a high level of caution among professional traders,” says Nick Kalivas, senior equity analyst at MF Global (MF). Other than the calendar, there are plenty of good reasons to be wary, Kalivas says. He cites skepticism about the economy, the expiration of stimulus to auto sales and the housing market, and worries about corporate results and policy proposals in Washington.

Fintag says
Debt got us into this problem and debt will get us into the next problem. Unless you are shorting financials like those in the know.



Cerberus Capital Management, the investment firm run by Stephen A. Feinberg, on Tuesday dismissed market speculation that some of its hedge funds, which have suffered losses and heavy investor withdrawals, are in danger of default, Reuters reported.

Traders in London and Frankfurt were buzzing with talk that a major hedge fund was headed for default. Much of the talk was directed at Cerberus, a private equity and hedge fund firm hit hard by losses on investments in Chrysler and GMAC.

Fintag says
Well, investors are obviously angry and want out. It is sad news seeing an old dinosaur get hit by a large block of ice.


chicago tribune

So why should Freddie Mac’s stock price have risen 269 percent in August? The short answer is, because speculators have turned it into a “momentum” play that is feeding on itself.

Wall Street bears point to the massive August trading volume in these four stocks as the kind of silliness that always accompanies a market peak.

Fintag says
Follow the volume and then jump off the wave. [Editor: Lame]


ft alphaville

HSBC’s Geneva-based private bank suffered more than $4bn of withdrawals from its hedge fund portfolios in the 2009 first half. The bank said investors had pulled about SFr4.2bn ($3.9bn) from hedge funds in net terms in the six months to June 30. The outflow will have exacerbated problems at HSBC Alternative Investments, the fund of funds business that is now estimated to have about $22.27bn in assets under management. In absolute terms, the 52% decline makes it the single largest casualty of the redemptions crisis in the hedge fund industry.

Fintag says
For the world’s largest private bank to suffer this sort of draw down indicates all is not well in the world of private banking. [Editor: And?]



Unemployment levels across the 16 countries that use the euro hit a 10-year high in July, as the impact of the recession continued to be felt.

The number of people unemployed across the eurozone region totalled 15.1 million people in July, a seasonally-adjusted rate of 9.5%.

Fintag says
That is a lot of unproductive people being looked after by the rest of us.



Our comments on Risk Without Reward have frequently touched on the role, responsibilities, advantages and disadvantages of third party fund administration. As a starting point, all of Castle Hall’s partners have experience in the offshore hedge fund community, the traditional “home” of administration servicing ever since the days of the 10 commandments. Given our backgrounds, we have always been very strong proponents of the value of third party oversight over hedge fund accounting and NAV calculation. We continue to believe that effective administration servicing is universally the hedge fund investor’s best protection against loss caused by operational failure, from honest mistakes to the worst case of dishonest fraud.

Fintag says
Insurance premiums will go up along with admin fees so this is not good news at all.

Wintel threads and braids woven for Windows 7

The Wintel machine, which suffered a serious breakdown with Vista, is purring through synchromeshed multi-threaded gears as the release of Windows 7 approaches on October 22. Intel and Microsoft held a San Francisco briefing on Tuesday to detail how the two were in perfect sync in improving PC performance by matching up Windows 7 development with [...]

Wells Fargo leads slump in financials

Wells Fargo led US financial shares in their biggest fall since late June on Tuesday amid renewed concerns about bank earnings, reports the FT. Shares in the San Francisco-based bank dropped 4.8% amid speculation that it might be preparing a share sale to raise capital. Wells Fargo reiterated it does not need to raise external funds to repay $25bn in bail-out money and plug a capital shortfall identified by government “stress tests”….

BofA falls on Tarp repayment talk

Bank of America shares fell 6.4% to $16.46 on Tuesday after it emerged it was in talks with the government to repay $20bn of a total $45bn injection of Tarp capital into the lender by the year’s end.  The repayment would enable BofA to escape constraints imposed on recipients of Tarp funds, especially on bankers’ pay....

Brussels could delay Oracle-Sun deal

The European Commission could decide to delay Oracle Corp's $7.4bn acquisition of Sun Microsystems ahead of the deal’s Thursday deadline, reports Reuters. The commission’s antitrust authority is debating whether to approve the deal by Thursday, amid concerns about Oracle getting its hands on Sun's MySQL database....

Global rebound gathers momentum

The global manufacturing rebound gathered pace in August, a string of closely watched surveys in the US, Asia and Europe showed on Tuesday, raising hopes of a sustainable global economic recovery. The US, China, Germany and France reported further improvements in industrial activity, adding to evidence of a V-shaped recovery in economic growth in the third quarter....

Ebay calls time on Skype venture

Ebay on Tuesday agreed to unload a 65% stake in its Skype internet calling service, exiting a deal that came to be seen as the online auction company’s biggest strategic mistake. The sale to a group of private investors - led by Silicon Valley buyout firm Silver Lake - for $1.9bn in cash and a $125m debt instrument,...

Clients pull $4bn from HSBC arm

HSBC’s Geneva-based private bank suffered more than $4bn of withdrawals from its hedge fund portfolios in the 2009 first half. The bank said investors had pulled about SFr4.2bn ($3.9bn) from hedge funds in net terms in the six months to June 30. The outflow will have exacerbated problems at HSBC Alternative Investments,...