TODAY’S FAYRE – Tuesday, 28th October 2014

“My heart is like a singing bird
Whose nest is in a water’d shoot;
My heart is like an apple-tree
Whose boughs are bent with thick-set fruit;
My heart is like a rainbow shell
That paddles in a halcyon sea;
My heart is gladder than all these,
Because my love is come to me.

Raise me a daïs of silk and down;
Hang it with vair and purple dyes;
Carve it in doves and pomegranates,
And peacocks with a hundred eyes;
Work it in gold and silver grapes,
In leaves and silver fleurs-de-lys;
Because the birthday of my life
Is come, my love is come to me.”

Christina Rossetti – poet – 1830-1894

The UK’s former heavyweight boxing champion and world heavyweight aspirant, David Haye, was taking in the rays at the Hotel Principe Felipe in La Manga last week. He looked well but was carrying a bit of condition and I thought I saw the semblance of a ‘Derby!’

When I have been away for a week, I feel like a lamb to the slaughter, when it comes to getting a grip with markets. I have little ‘feel’ for market sentiment and more often than not I get lulled in to a sense of false security. Last week’s rally was made understandable with Ebola looking as if it might have come back on the bridle and with 3rd quarter earnings looking not too bad with 79% of those who have reported beating expectation and 61% of them beating sales forecasts, contributed to market momentum. Finally, with the EU threatening to put in some stimulus packages, even if there is little likelihood of any agreement on full blown QE, investors were happy to latch on to the perception that the ECB was attempting to get its act together for the good of the EU economy.

However, today supposedly signals the end of QE in the US with the final $15 billion facility being withdrawn tomorrow at the FOMC meeting. Since 9th March 2009 the S&P has rallied by an average of 4.7% per quarter – way in excess of GDP. Also that is an increase of about 180% since that fateful day when QE was introduced. The FTSE 100 has only rallied by about 65%. Could the withdrawal of QE trigger a major pull back? Let’s face it the recovery is hardly breath-taking, in its magnitude.

It strikes me that the EU’s timing in demanding a E1.9 billion surcharge from the UK looks like political suicide from all quarters, particularly as the request had hardly been made when the rather nebulous EBA banking stress tests were posted. Initially there were 25 out of 130 failed to pass muster. After some capital raising exercises there just 13 banks looking a little light and they have 9 months to get their act together. To cynics like me the whole exercise looks like a bit of charade. The perception the market has held for some time now is that the banks in Europe were about E200 billion light of capital. Efforts have been made to sort this shortfall out, but one gets the impression it is just semantics. There is a long way to go with the unemployment rate stuck at least 11%, with every likelihood that it will rise further.

Of the 25 banks that failed the EBA test, there were 9 Italian banks with Monte Dei Paschi di Siena, the oldest bank in the world, looking as though it was E2.1 billion light of the capital requirement criteria, despite having been bailed out for E5 billion a couple of years ago. Monte Dei Paschi lost nearly 20% of its equity value on that news. There was talk of either UniCredit or Intesa stepping up to the plate as the white knight in shining armour, but I don’t expect them to fall over each other in excitement. The market’s mood yesterday was negative in response with banks leading the way south – UniCredit -3.4%, Intesa -2.5%, Societe Generale both -1% and RBS and Lloyds both -2% at the close. The FTSE 100 ended the session down 25 points at 6363.

There was also a compendium of interesting titbits of news yesterday. Chiquita showed intention to be bought for $682 million by Brazil’s Grupa Cutrale. Partnership Insurance’s CEO Steve Groves was told that the FCA’s investigation had been called off. Denis Holt former executive director of Lloyds Bank and former deputy chairman of Bank of Ireland has been made chairman of Cooperative Bank. Salamander Energy has been talking to Spain’s CEP and Jynwel Capital and will consider a 103p bid. Salamander’s shares were up 16.5% yesterday.

Yesterday markets closed quite flat on the Street of Dreams. Merck posted numbers better than expectation thanks to cost cutting. Amgen also beat expectations. These results were nullified by disappointing US housing and manufacturing data. After hours Twitter fell by 11% to $43.22. Tweeters were up 23% to 284 million but tweeting was down – 181 billion tweets. The outlook was not considered to be that buoyant. Allergan’s results may well force Valeant to increase its $40 billion bid for the Botox titan.

This morning BG Group posted numbers in line. Standard Chartered Bank posted a 16% drop in profits, with a cost in closing its presence in Korea and impairment charges taking their toll. How long can CEO Peter Sands hang on? BP posted a drop in profits from $4.4 billion to $3.9 billion on the same quarter. Oil prices falling 20% will have contributed. Also BP’s 20% stake in Rosneft was less profitable with profits down from $808 million to $110m for the same quarter last year. The dividend was increased by 5.3%. The Gulf disaster’s cumulative cost remains unchanged at $43 billion. UBS’s numbers were disappointing – third quarter profits coming in at CHF 762 million with litigation provisions of CHF1.8 billion. These provisions are expected to improve.

Finally Lloyds posted a 35% increase in profits for 9 months to £5.9 billion and for the last quarter profits came in at £1.614 billion. There was another £900 million PPI charge bringing the total to £8.9 billion! Though Lloyds was close to not meeting the criteria for the EBA stress testy, it is fair to say that Tier One Capital came in at 11.1%. However 9,000 redundancies over the next 3 years will not be popular; nor will the closure of 150 branches. Yes we live in a digital age where internet banking rules OK. However banking is a service industry and until such time as bank managers get to know their clients well, how can they be expected to make rational and measured judgement to loan requests. This policy is insane. Also older people have an innate fear of the internet. Why can they not be accommodated? This morning markets were quite upbeat on reasonable results and a lack of adverse data.

Next week the following UK companies post results – Wednesday – STANDARD LIFE, NEXT, Thursday – AVIVA, BARCLAYS, ROYAL DUTCH SHELL, ST JAMES’S PLACE, CAIRN ENERGY, KAZAKHMYS, SMITH & NEPHEW, Friday – DIRECT LINE, RBS.


These are David Buik personal views

Twitter – @truemagic68

David Buik

Market Commentator

D +44 (0)20 7886 2775
Panmure Gordon & Co
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