US Markets Live transcript 17 Jun 2011

Posted by Cardiff Garcia on Jun 17 15:02. 102 comments | Share

Markets Live chat transcript for the chat ending at 15:14 on 17 Jun 2011. Participants in this chat were: John McDermott Cardiff Garcia Joseph Cotterill, FT Izabella Kaminska

JM

Top of the morning
CG

Morning/afternoon everyone
JM

Testing
JM

Testing
JM

Testing
JM

Aha!
JM

Top of the morning everyone
CG

starting at 10:02 is some kind of punctuality record for us
JM

Pats on the back all round
JM

Happy Greek Friday
CG

let’s not make a habit of it
JM

Cardiff
CG

yes, who’s got Greece jokes?
JM

Not me
CG

save’em, there’ll be time today
JM

Not yet
CG

exactly
JM

And it’s not that funny, really
JM

But can I ask you something
CG

of course
JM

What are you wearing?
JM

Neil tells me I’ve made a grave sartorial error
CG

why, jeans and T — it’s Friday!
JM

Apparently in London
JM

Unlike New York
JM

It’s unacceptable to wear jeans and a shirt
JM

Even on a Friday
CG

say what?
JM

In fact, apparently the Times has insisted on shirt and tie every day
JM

So don’t go work there
CG

is this that British elegance I keep hearing about?
JM

It’s FT’s style guide
CG

thought never cross my mind, if only because the offer never crossed my desk
CG

(joking!)
CG

thanks: @z1p
JM

To make up for it
JM

I’m introducing Black Tie Mondays
JM

Anyways
JM

What’s shaking
CG

lots on the menu today
CG

and we suspect Greece really is on everyone’s mind
JM

yes
CG

thanks Bull — and everyone please subscribe!!!
JM

even the great one’s
JM

Greenspan Says Greece Default ‘Almost Certain,’ May Trigger U.S. Recession
CG

oh boy, uncle alan opening his mouth again
JM

“The chances of Greece not defaulting are very small.”
CG

not helping
JM

And then the BBG piece
JM

Takes another quote
JM

On a different topic
JM

“There’s no momentum in the system that suggests to me that we are about to go into a double-dip
JM

(lots of love for the podcast CG)
CG

the man. just. won’t. retire.
CG

we need it; make your voices known
CG

right then
CG

hould we invite joseph on here?
JM

Yup, in a sec
JM

I’ll try and get up what we know
JM

And he can tell us what it all means
CG

yep, let’s do that
JM

FT has just filed from Berlin
JM

Looks like there’s a deal of sorts
JM

The leaders of Germany and France have agreed that private creditors should participate in a new rescue programme for Greece by voluntarily agreeing to roll over their holdings of Greek government bonds.Details of such an arrangement still have to be finalised by eurozone finance ministers, but the agreement in principle on a rollover – rather than a fully fledged bond exchange including longer maturities, favoured by Germany – was announced in Berlin on Friday by Angela Merkel, German chancellor, and President Nicolas Sarkozy of France.

JM

“voluntary rollover”
JM

gotta love it
JC

Hello, here
JM

as a reminder
JM

hey JC
CG

JC, greetings
JM

here were the figures getting passed around earlier
JM

MKt/€ spiking on spec new aid package for Greece will be €150b, €80b new cash, €40-50b from privitasations with €30-40b from rollover of Greek bonds… And its expiry!
CG

(i’ll duck out through this underground escape tunnel now that JC is here, and maybe join the ROTR for a bit)
JM

So, joseph, lots of questions
JM

take your pick
JM

a victory for the ECB?
JM

what will the deal look like?
JM

is this Vienna Plus?
JM

etc
JM

etc
CG

(@Old hand, we’re probably better off now knowing the answer to that question :))
JM

we can do a bit about US exposire later
JC

Starting with the Vienna question
JM

to keep it real
JC

I think this is quite interesting
JC

Vienna Mk 1 – a few banks (Greek banks actually) bailing out subsidiaries in emerging Europe in the cold dark days of 2009
JC

a prisoner’s dilemma with few participants, lots of upside from resolution
JC

Vienna Mk 2 – lots and lots of bondholders (including er Greek banks actually) bailing out a sovereign who is going to burn them a second time later on
JC

a volunteer’s dilemma
JC

And sure, of course Merkel is going to agree to private volunteering of short-dated debt for a rollover
JC

Most German banks have long-dated debt, so they get to free-ride
JM

Ah, interesting.
JM

Who has the short-rated debt?
JM

*dated
JC

(In fact I saw a Citi note last week which said that Commerzbank – one of the biggest German exposures to Greece – has 90% of its Greek debt in 10-year maturities or greater)
JC

Well, French banks, Greek banks
JC

(Jarvis – yep. But not exactly loyal depositors)
JC

So maybe French banks will volunteer (I’ve heard amounts of short-dated GGBs vary from institution to institution)
JC

But the onus is on Greek banks
JC

They have the most short-dated debt, probably
JM

So Merkel and Sarkozy have agreed to what sacrifice, exactly?
JC

And are exactly the ones who will suffer most in a second haircut
JM

That the Greeks can carry on screwing themselves?
JC

There’s no sacrifice.
JC

It’s kicking the can down the road
JC

Kicking it so hard, it’s really going to hurt when the can comes flying back
JM

A can
JM

Shaped like a boomerang
JM

With a dagger strapped to the end
JM

Any other thoughts JC?
JM

I just got a note through on US exposure
JC

Appropriately surreal for the Greek crisis
JM

Which has been getting some people excited
JM

And nervous
JM

In the good old U S of A
JC

Well, I’ve had lots of people get in contact today with Argentina parallels
JC

Some charts I wish I could show you
JC

But can’t on here
JC

So let’s move on to US exposure.
JM

_________________________________
CG

someday, JC, some day
JM

many Argentina parallels
JM

anything else
JM

DB have just emailed with some thoughts on US exposure
JM

which has been getting a few people worried
JC

Aha, go on
JM

correct me if i’m wrong
JM

but the BIS
JC

Yeah – go read Tracy’s post on the CDS angle btw
JM

came out with some data
JM

suggesting total exposure
JM

was something in the $40bn ballpark
JM

but that was misleading
JM

for reasons DB touch onhere
JC

Well, BIS have a funny old way of calculating the risk basis, don’t they
JM

BIS data overstates US exposure to Greece as it’s on a gross basisConcern over US financials exposure to Greece has increased since the latest Bank for International Settlements (BIS) data was released. This data showed the US having $7.3b of direct exposure to Greece and $34.1b of indirect exposure (which is mostly credit protection). However, when we spoke to BIS earlier today we confirmed that this $34.1b is likely overstated given it represents gross exposure (i.e., doesn’t take into account collateral, hedges, and 3rd party guarantees).

JM

And here’s a bit on specific banks
JM

BAC:
In its 1Q/10Q (pg 97), BAC showed $17b of total exposure to Greece, Ireland, Italy, Portugal, and Spain—and that it was a $1.7b net buyer of credit default protection for these countries (including net buyers of $31m for Greece).
JM

C:In its 1Q/10Q (pg 73), C indicated that its exposure to the European peripherals was less than 0.75% of total assets for each country (implying less than $15b for each country). However, we believe exposures are meaningfully less than this.

JM

JPM:At a recent conference, JPM noted it has less than $15b of total exposure to Greece, Ireland, Italy, Portugal, and Spain (after taking into account collateral, hedges, and 3rd party guarantees). And in its 2010 annual report (pg. 6), mgmt noted that the bear-case losses for these countries could total $3b after-tax.

JM

GS/MS(covered by Mike Carrier): Based on disclosure and mgmt comments, there is no meaningful direct exposure in either cash or derivatives to Greece. That said, to the extent the Greek issue continues to weigh on the market, activity levels in the capital markets will likely be negatively impacted.

JC

Cool, thanks
CG

More than I thought in each case, JM
JM

They take a look at CDS as well
CG

especially BAC
JM

CDS
JM

Greek gross CDS of $79b, but net of just $5b per DTCCThe Depository Trust & Clearing Corporation (DTCC) tracks global credit default swap transactions and discloses both gross and estimated net exposures. Gross exposure to Greece/Hellenic Republic is $79b but just $5b on a net basis. Applying a similar netting ratio to the $34b cited above would imply just $2-3b of net exposure to US-based financials. Of course, counterparty risk can’t be ruled out—so the true risk may be higher than the $2-3b (but still meaningfully below $34b). Also, companies have likely been taking losses/posting collateral as CDS positions have deteriorated—implying some losses have likely already been absorbed.

JM

Markit telling us that remaining CDS trades are “legacy” trades, btw
JM

But about that counterparty risk
JM

I would have loved to been on this call
JM

When the DB analyst
JM

Phoned up AIG to ask them
JM

Whether they had been selling Greek CDS
JM

Minimal P&C and life insurance exposureP&C (covered by Josh Shanker) has been emphatic that exposure is negligible. We reconfirmed with AIG that its CDS book did not wrap sovereigns and any sovereign exposure embedded within its multi-sector CDO wraps is minimal. Life insurers (covered by Darin Arita) have not provided CDS protection on European peripheral credits. While they own some bonds, risk is minimal in our view.

JM

“reconfirmed”
JC

‘Oh no, we only do subprime’
JM

Always have to check with them chaps
JC

Sorry, out of date joke
JM

Now, it’s notoriously difficult
JM

To get a clear picture on who is on the other side of the CDS trades
JC

About these legacy trades btw…
JM

But US banks talking a good game
JM

Ah, yes
JC

Well, Tracy did a post way back in 2009 I think about Greek banks were selling CDS
JC

I remember a lot in the Greek press about it at the time
JM

@Old hand — there are some AV posts on that
JC

So, er, aren’t these legacy trades likely to be theirs?
JC

Just a thought
JM

Jesus
JM

@milky — same every week, 10am new york time
CG

(@Milky, 10am NY time every Friday)
JC

Oh, and other thing on US bank ‘exposure’
JC

Sure, no direct or indirect Greek exposure
JM

(@Milky, very good)
JC

But if a medium-sized European bank tanks
JC

Or Spain gets in trouble
JM

You’ve cursed it now
JC

It changes, no?
JM

Surely
JC

Which is a bit like saying ‘but if an asteroid falls…’
JM

On that bombshell
JC

but
JC

eg. money funds owning short-term euro bank debt
JC

anyway, I’m sure we’ve had enough on Greece.
JM

and we have a liquidity problem all over again
JM

yes, thanks as ever JC
JM

new topic
JM

cardiff
JM

the IMF
CG

thanks JC
JM

loves
JM

the UK
JM

loves
JM

loves
CG

Yep, so the IMF
JM

George’s plan A
CG

oh I’ll bet
JM

but they don’t like the US as much, it seems
JM

despite all you’ve done for them
CG

anyways, a quick roundup
CG

haha
CG

damned if you do, etc..
CG

anyways, quick summary
CG

of the new forecasts for the year
CG

The U.S. economy will grow 2.5 percent this year and 2.7 percent in 2012, down from the 2.8 percent and 2.9 percent projected in April, the IMF said today, citing higher commodity prices and bad weather in the first quarter and a weak housing market. The Washington-based IMF now sees the world economy expanding 4.3 percent this year, down from 4.4 percent two months ago. It left a 4.5 percent forecast for next year unchanged.
CG

(courtesy of BBerg, which does a better job summarising than IMF itself)
CG

Risks from higher commodity prices have eased compared with April, according to the agency. It now assumes oil at $106.30 a barrel in 2001, based on the average prices of U.K. Brent, Dubai and West Texas Intermediate crudes, compared with $107.16 in April.
CG

Within Group of Seven countries, the IMF cut its 2011 forecast for Japan after the March earthquake and tsunami, now expecting a contraction of 0.7 percent this year and growth of 2.9 percent next year. That compares with predictions of expansion of 1.4 percent and 2.1 percent two months ago.
CG

It now also expects 1 percent growth in Italy this year, 0.1 percentage point less than in April. Still, expansion in the 17-nation euro area is expected to reach 2 percent, 0.4 percentage point more than two months ago thanks to higher-than- expected growth in Germany and France.
JM

@Jarvis2009 — good point.
JM

@NuBlood — don’t be cruel, careful.
CG

@Milky, believe so, yes
CG

Among major emerging markets, the fastest growth will be in China, which will expand 9.6 percent in 2011 and 9.5 percent next year, unchanged from April projections. The IMF cut growth forecast for Brazil to 4.1 percent this year, 0.4 percentage points less than before, and 3.6 percent in 2012. Forecasts for India were unchanged at 8.2 percent and 7.8 percent respectively.
JM

I’d take 2.5% for the US
CG

re China, we’ll see about that
JM

Still seems a little optimistic
CG

yes
JM

Given
JM

Well
CG

i’m taking the under (slight)
JM

take your pick
CG

though US a bit mysterious at the mo
CG

you guys wanna talk some stocks?
CG

praxis! you’re late
JM

Let’s do RIM
JM

Cardiff
CG

@A Reader, speak of the devil
CG

yes
CG

RIM
JM

What a disaster
CG

HUGE guidance disappointment
CG

and now Citi out with a listicle of why things will get worse
CG

here it comes
JM

(my blackberry is still broken btw)
CG

10 Reasons Why We Feel Things Can Get Worse —
CG

1) RIMM is missing the back to school season in North America, setting up risk of loss of consumer mindshare in North America.
CG

2) RIMM is missing much of the Nokia share opportunity while Apple and Android are grabbing this share.
CG

3) New iPhone 5 slated to come out in 2H 2011 to pressure RIMM’s North America business as Verizon’s CDMA iPhone 4 was not suited for traveling business users,
CG

4) RIMM is losing carrier support in shelf space, promotion, eagerness for product certification,
CG

5) Highly profitable monthly carrier subscriber fees to go lower as North America for RIMM continues to go lower.
CG

6) RIMM is going through a business realignment (restructuring) and will reduce employee count at a time when we believe the company should be hiring to get product out on time versus delays.
CG

7) EPS growth will decline year over year.
CG

8) RIMM’s sales growth will be less than half of the industry’s smart phone growth.
CG

9) No guarantees that RIMM has compelling products on time for holiday season.
CG

10) We’ve seen this move before (Motorola, Nokia, Sony-Ericsson, LG, Palm) history of wireless is littered w/OEMs that had significant product cycle/share gains, but then missed structural market shifts. Bottom line, we believe RIMM has no short-term fixes to improve product portfolio, brand perception, to reinvigorate share gains, revenue growth and profitability.
CG

yikes
JM

That’s a “hold”, then?
CG

nope
CG

citi downgraded to sell
JM

Must be serious
CG

Event – Stock Call: Downgrade to Sell — RIMM shares declined 14% post- close following tepid results & weak guidance. We materially lower our estimates across the board & downgrade RIMM to Sell/Speculative. We previously had thought RIMM could benefit on some of the share loss from Nokia but RIMM is missing its timeline for new product launches. However, results/guide indicate potential structural problem for RIMM & inability thus far to capitalize on what we believed was a unique opportunity. Our target price of $25 is ~18% below the after-hours price of $30.26. RIMM is now our Least-Preferred large cap stock.
JM

RIM RIP, etc
CG

textbook case of the barron’s curse
CG

hugely bullish article earlier this year
CG

and for balance
CG

we’ll provide the link
CG

maybe some of it still applies, but for now, might want to be careful
CG

curiously, nomura also have a pessimistic note out, but they’re holding a neutral
JM

Izzy telling me there is some Nasdaq issue
CG

let’s get her on here
JM

Are you quoting yourself?
CG

(praxis, will check that out)
JM

Nice
CG

oops
CG

Izzy!
JM

She’s in hiding
CG

your presence is requested by some bugger who goes by CG
JM

Working on a monster post
CG

ah
IK

hiya
JM

Aha
CG

there she is
IK

Hiya
CG

(tech issues, everyone, bear with us.)
IK

yes, just got a message that supposedly the nasdaq and bats have declared self-help against the NYSE
JM

self-help?
IK

Not sure what that means really though
IK

JM – i see a paperback opportunity in that 🙂
JM

They’ve declared a love of Thoreau
JM

And are off to Walden Pond
JM

(I digress)
JC

BATS BYX Exchange has declared self-help against New York Stock Exchange per Rule 611 of Regulation NMS. Routing to New York Stock Exchange has been suspended as of 10:34:39 ET.All BATS BYX Exchange systems are operating normally.

JM

I will readily admit I have no idea what that means.
JM

So no-one else has to
JM

Is this a big deal? (doesn’t seem so)
JC

just checking
CG

the self-help rule: anybody in the ROTR know what this is?
JM

A self-help alert is a notification issued by a trading exchange, such as the NYSE or Nasdaq, that a glitch has occurred on one of the exchanges and that exchange, therefore, should be temporarily bypassed to permit the regular flow of orders.
JC

The Order Protection Rule (Rule 611 under Regulation NMS) establishes intermarket protection against trade-throughs for all NMS stocks. A trade-through occurs when one trading center executes an order at a price that is inferior to the price of a protected quotation, often representing an investor limit order, displayed by another trading center.
JC

(That’s from a SEC document on Reg NMS)
JM

Someone pulled out the plug.
IK

But it’s all ok now
CG

ah
CG

we’re back
JM

I often institute similar orders against Cardiff
IK

It’s like what happens to the FT Av site sometimes Emoticon
CG

for my own good, I know
JM

Whenever he needs to be temporarily bypassed
JM

Shall we move on
IK

I think it’s best really
IK

Emoticon
JM

Okay
CG

i’d answer, but you’ll just work around me anyway
JM

Hehe
CG

right then
CG

john
JM

We could do some banks stuff
CG

yep
JM

Get our SIFI on
CG

yes,what’s going on here
JM

News from the FT
CG

hard to keep track of all the capital req stuff
CG

flying around
CG

what’s the latest, JM?
JM

Getting everyone
JM

Excited
JM

(sorry, someone from maintanance)
JM

(asking me a question)
JM

(about whether katy is getting air blown over her)
JM

(back)
JM

(mysterious)
CG

there’s hot air blowing all over this office (BA-DUM-CHAT). be here all week, folks
JM

Global regulators are poised to set a new tiered regime of additional capital requirements for about 30 of the world’s biggest banks, in the latest effort to ensure the next financial crisis can be contained.

The regulators plan to place each institution into a “bucket” carrying a particular surcharge based on bank size, global reach, structural complexity and whether other banks could absorb its business. Banks could move between categories as their size, structure and risk appetite change.

JM

Which we’ve been expecting
CG

(praxis, wow)
CG

yep
CG

and among those 30 there are various categories, right?
JM

yup sifi tranches
JM

Citigroup, JPMorgan, Bank of America, Deutsche Bank, HSBC, BNP Paribas, Royal Bank of Scotland
CG

i’ll bet Captain Jamie must love this
CG

@NuBlood, hah!
JM

Are apparently all going to be in the top club
JM

i.e. 2.5% about Basel III 7% (tier one capital)
JM

*above, i beg your pardon
CG

close to 10% core tier 1 for the biggest, then
JM

GS, MS in the next category
JM

+2%
CG

@Bull, good question, and he’s having a crap time of it right now
JM

GS have just emailed this note
JM

Seeming quite chipper
JM

About it all
JM

Despite financials being a disaster zone
JM

apital confusion narrowing
Confusion over capital standards has been a key driver of bank underperformance this year. Uncertainty remains, but the most likely outcome appears to be a buffer in the range of 200-300 bp vs the 400 bp currently being priced in to bank equities. We expect the upcoming Basel meeting at the end of June to reduce uncertainty.Higher capital charges could lead to structural changes
At the high end of the potential SIFI range, we estimate large bank ROEs fall 250 bp to 9%, which is below the cost of capital for some. However, additional buffers for liquidity, counter cyclicality and AOCI could call into question the value of the universal banking model, as scale benefits would largely be eliminated by higher capital requirements. Pressure would likely mount for universal banks to consider: (1) exiting certain business lines that could become uneconomical or (2) rationalize operations to shift down the capital curve.

Longer timeline = capital return potential
Importantly, we expect an extended timeline for SIFI implementation (up to 10 years), and 100 bp of Tier 1 common capital generation per year at most banks. This, combined with continued RWA mitigation, would allow banks to increase their capital returns even if not compliant with the SIFI buffer, provided there is a clear path to capital compliance.

CG

looking forward to hearing this
CG

woa
JM

Confusion over capital standards has been a key driver of bank underperformance this year.
JM

That and your balance sheets
JM

Best way to play the SIFI theme:
1. Market implied beneficiaries: We recommend buying banks where the market is implying the biggest excess SIFI buffer relative to our expectation – JPM, AXP, USB, STT, PNC, and COF appear best positioned.
JM

2. Emerging competitive advantage: We believe mid-sized banks that are required to hold less capital and compete in the same markets as the bigger, more systemically important banks could be structurally well positioned. HBAN, ZION, and EWBC screen well given their potential to price loans at a lower yield and generate the same risk-adjusted returns.
CG

love the way these guys write: “confusion narrowing”
CG

translation: “we still don’t know what the hell’s gonna happen, but soon we can start pretending we do”
JM

ascribing interesting characteristics to abstract nouns
JM

not something we ever do
JM

@praxis22 — thanks, i’m sitting in the land of no terminals back here
JM

anyway
CG

okay everyone
JM

joking aside
JM

i think that’s a good deal for financials
JM

they’ll kick and scream
JM

but given the extended timelines
CG

(joking is never aside here, though — gotta laugh not to cry)
JM

and GS, MS
JM

and the rest
JM

must have been assuming
JM

this being on the low side
JM

*this = +2% / 2.5%
JM

it’s a good deal
CG

that sounds right to me
JM

for them
JM

anyway
CG

but speaking of extended timelines
CG

it’s about time to roll
JM

wait
JM

can we do our weekly groupon offer of the week
CG

because my energy is flagging like pandora stock
CG

oh, right
CG

almost forgot
CG

what is it this week?
JM

gets more stupid
JM

guardian
JM

times
JM

all did splashes last weekend
CG

the stoopider the better
JM

that’s when you know it’s a buble
JM

when your company is profiled in the Guardian magazine
JM

This is not from groupon
JM

But a rival
JM

Toss your antiquated lash curler and get longer, sexier lashes that last with the Japanese “eyelash perm” at Eyelash Parlor LAVILASH in Midtown West. Non-damaging and completely painless, this quick treatment eliminates the need for time-consuming curling and mascara applications while enhancing the beauty of your natural lashes
JM

What
JM

is an eyelash perm?
JM

Actually
JM

“Non-damaging and completely painless,”
JM

That could be the new Sifi requirements
JM

On that note….
CG

(mouth agape, speechless)
CG

let’s jam
JM

I’m off to midtown west
JM

Listen to the podcast
JM

Please
JM

Subscribe
CG

yes, please subscribe. pretty pretty please
JM

(CG — a link?)
JM

Excellent
CG

check it out. the more people subscribe, the better chance we’l have at doing a whole series of these
CG

okay everyone
JM

Indeed
JM

And then you can find
JM

our what we all sound like
JM

and maybe some interesting analysis
JM

maybe
JM

Have a great weekend everyone
JM

Oops
JM

Cardiff forgot to mention
CG

@A Reader, not in the store, but you can subscribe by clicking on it from the post itself
JM

That, above
JM

OK
JM

Bye all
CG

have a great weekend, everyone
CG

thanks for participating
CG

bye!
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