Archive for November, 2008

Unsynchronized recovery (Reuters)

Sunday, November 30th, 2008 | Finance News

LONDON (Reuters) –
If markets are forward looking, investors might find themselves tempted to buy stocks and other risky assets just as major economies, most of them already in recession, deteriorate further.

The euro zone, Japan, Singapore and Sweden are already confirmed in recession and the United States, Britain and other countries are half way into recession as the credit crunch since August 2007 bites into consumption and corporate profits.

However, markets and real economies are not synchronized.

According to Barclays, in the early 1990s, when Sweden struggled with its banking crisis, the stock market rallied the month after the government intervened in banks, while the economy worsened and was in recession for another three quarters.

Credit Suisse estimates that equities reach a bottom up to five quarters before the trough in earnings and three months before troughs in earnings momentum -- which currently is close to an all-time low in Europe.

World stocks, measured by MSCI, have risen every single day after hitting a 5-1/2 year low on November 21, helped by a round of interest rate cuts and fiscal stimulus packages worldwide.

"Generally speaking, markets have a pretty good track record of seeing the end of recession before the real economy started picking up," said Rob Hepworth, senior fund manager at insurance firm Ecclesiastical.

"They are forward looking but they don't always get it right... My yardsticks would be that things get so bad, news seems so bad and it doesn't make stock prices go down. For me, then, all the bad news is in price." Hepworth said an example of this could be found in the triple-B corporate bond market, where spreads have blown out to 700 basis points above UK government bonds to yield around 11 percent, compared with historical spreads of around 50-80 bps. "It's assuming an absolute Armageddon - one in every 15 companies go bust with no recovery. Even with this, you are still better off buying triple-B bonds than gilts," Hepworth said, adding that bond holders typically recover 40 percent of money in the event that a company goes bankrupt.

This week's data could add to the gloom on the economic front. Friday's data is expected to show the U.S. economy has lost another 300,000 non-farm payroll jobs in November.

Both the European Central Bank and Bank of England are set to lower the cost of borrowing again on Thursday, which could make the climate more friendly for risk seeking investors.


Barclays analysis on U.S. assets since 1929 shows that equities, bonds, Treasury bills gave the highest yearly real returns of 14 percent, 9.3 percent and 2.9 percent respectively when growth and inflation was low.

The second best return across three assets was achieved when growth was high and inflation was low, at 10.6 percent, 5.2 percent and 1.3 percent respectively.

Credit Suisse's analysis going back to the 1870s shows that on the eight occasions equities have fallen by more than 20 percent in a calendar year, six of the following years have produced positive returns -- but some of the rise proves to be a bear market rally.

"In downturns, the earnings multiples of cyclical stocks, after initially falling steeply, have a tendency, once the downgrades cycle is past and the earnings outlook stabilizes, to then expand," said Raj Shant, director at investment management firm Newton.

He said European stocks are trading on an underlying multiple for 2009 of 13 to 14 times earnings, assuming a severe earnings recession next year.

"So the time to buy in recoveries can be when multiples look high, and by the middle of 2009 multiples on some European cyclicals could look very high," he said.


A mix of a slowing economy and an eventual recovery points to higher inflation in the medium to long term.

Inflation-linked bonds offer protection against inflation as payments to investors adjust automatically to compensate for rising prices. Even when inflation is low, these bonds give stable real returns.

For UK index-linked bonds maturing in 2030, the real yield would be 1.7 percent if inflation stood at 1-3 percent, according to AXA Investment Managers.

With inflation of 10 percent, real yields would dip only to 1.5 percent.

The redemption price would be 301.3 when inflation is 3 percent, compared with 231.318 currently.

"I don't want to predict an economic disaster but every time there is one there is buoyancy in inflation-linked bonds," said Jim Stride, managing director and head of UK equities at AXA.

Performance data of UK inflation-linked bonds while the economy had deflation is scarce. However, Stride said: "Investors might be pleasantly surprised by what would happen to linkers in a period of genuine deflation."

(Editing by Anthony Barker)


Bidders circle troubled Woolworths (Reuters)

Sunday, November 30th, 2008 | Finance News

LONDON (Reuters) –
Deloitte LLP, the administrator of the retail and distribution businesses of British retailer Woolworths Group Plc (WLW.L), has received dozens of inquiries from companies and individuals for parts of the business, according to newspaper reports on Sunday.

Property magnate Ardeshir Naghshineh, who owns 10 percent of the retailer, is understood to be one of those interested in the whole group. He plans to turn it into an employee-owned business, according to the Sunday Times.

Naghshineh said on Wednesday he was "deeply disappointed" that the company had gone into administration. He had outlined a plan which would see Woolworths sell leases to bring in cash.

Entrepreneur Theo Paphitis, best known for turning around faltering retailers and for his role on BBC TV show 'Dragon's Den' is also understood to be considering a bid.

A spokesperson for Deloitte, part of Deloitte Touche Tohmatsu (DLTE.UL), confirmed that face to face talks with parties interested in buying both the retail and wholesale businesses had taken place on Friday.

These included those interested in buying the stores as a going concern, he said.

Talks will continue on Monday, added the spokesperson.

The Observer said Deloitte had been "inundated" with proposals for various parts of the business. Around ten of these are considered to be serious or significant buyers.

The well known high street chain, which sells everything from sweets and childrens clothes to DVDs and stationery, put its retail and distribution businesses into administration on Wednesday.

(Reporting by Rosalba O'Brien; Editing by Richard Hubbard)


BHP head to focus on downturn after Rio failure (Reuters)

Sunday, November 30th, 2008 | Finance News

LONDON (Reuters) –
BHP Billiton (BLT.L) Chief Executive Marius Kloppers will likely use the same pragmatic resolve to grapple with a collapse in metals markets that he did in ditching a mega takeover of mining rival Rio Tinto (RIO.L).

The 46-year-old South African fought hard during a year-long battle to swallow Rio, but ultimately his bid was undone by the world's worst financial crisis since the 1930s Great Depression.

Melbourne-based Kloppers' name was thrust into the media spotlight when he took the helm of BHP Billiton just over a year ago, and weeks later launched the audacious tilt at Rio.

Yet, for such a high-profile person, surprisingly little is written about Kloppers himself, his motivators or his personality.

Publicly, he is the highly-educated and determined businessman with superb organizational skills and a clear vision of what he wants to achieve.

Kloppers also served two years in the South African army, has a taste for Bob Dylan songs, is a vegetarian, and is well-liked by his staff.

He is notorious for abhorring desk clutter, although a company spokeswoman denies claims that pictures of sweethearts and families are forbidden in the workplace.

Now, in the wake of the Rio deal, analysts and investors have widely supported his decision as the right one considering the turmoil on financial markets and Chairman Don Argus has said Kloppers had the full support of the board.

"While this is a big climb-down for BHPB and Marius Kloppers, conditions have indeed changed significantly and we believe this decision shows the triumph of pragmatism over ego and that BHPB is indeed focused on shareholder value," said analyst Kieran Daly at Investec Securities in South Africa.

Some analysts, however, said the deal's collapse put a dent in the reputation of BHP under Kloppers, who has been regarded as a clever strategic thinker since he joined Billiton in 1993.

"We feel neither company has come out smelling roses ... BHPB under new CEO Marius Kloppers I think has misjudged the ferocity of the anti-trust process. I am not sure either side is sufficiently damaged for heads to roll," said analyst Michael Rawlinson at Liberum Capital in London.

Kloppers, a married father of three, launched the plucky Rio move in November 2007 after only six weeks on the job as chief executive. BHP (BHP.AX) was already the largest diversified mining group, with more than 100 operations spanning the globe in 25 countries, but Kloppers was convinced a marriage with Rio (RIO.AX) would reap big synergy dividends.

It would have been one of the world's biggest mergers.


The former management consultant with a Phd in materials science had assembled extensive research, including scenarios showing the deal would work even in a downturn.

Kloppers told London's Observer newspaper in August he had taken 100 people off their normal jobs to work exclusively on the deal. "This deal is the one with by far the biggest potential. Everything else would be an order of magnitude lower on my radar screen. I would feel a little sheepish if it didn't work out," he said.

At its peak the massive all-share deal was worth $193 billion as a commodities boom sent the share prices of both companies soaring, but it had plummeted in value to about $66 billion when Kloppers called it off on Tuesday.

"Marius moves at a fast clip, which can be challenging at times for others in the organization trying to keep pace," a South African mining analyst who watched him climb BHP's ladder said earlier this year.

"But his organizational skills are superb and he knows what he wants out of people," said the analyst, speaking on condition of anonymity as his firm does not permit him to talk to media.

Kloppers, now that the Rio deal is dead, will be able to devote full attention to the implications of the unexpectedly steep plunge in mining markets.

One of the key architects in 2001 of the merger of BHP and Billiton that created the world's No. 1 mining group, he has not given up seeking further mergers for the group.

"There will be no doubt some players in this industry will not come out unscathed (from the global economic turbulence) and we will have to continue to look at those opportunities," Kloppers told a conference call after cancelling the Rio deal.

(Additional reporting by James Regan in Sydney)

(Reporting by Eric Onstad; Editing by Andrew Macdonald)