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Spot Markets Live Transcript: 19/12/2022

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Izabella Kaminska10:59

Hello and welcome to the last SML of the year.

We will be taking a break now until January, when we will be back with renewed vigour and insight.

Today I’m joined by Betaville’s Ben Harrington, as you can see. Hello Ben

Ben Harrington11:00

Morning!

Izabella Kaminska 11:00

 Ben has to go at 11.30 for mysterious reasons (not Christmas shopping) so we will get straight to his markets insights first.

Ben Harrington11:01

Hi Izzy and rabble

Izabella Kaminska11:01

But first, I wanted to thank everyone who managed to make it over to the Drayton Arms last Monday.

Ben Harrington11:01

yes it was good fun

Izabella Kaminska11:01

It was a great showing and I was super impressed by the range and calibre of Blind Spot/ Altif readers. You are an excellent bunch! Thanks again.

Ben Harrington11:01

Yeah there were some serious players there!

Izabella Kaminska11:02

Highlights definitely included a heated exchange between David and Dario about UAP 🙂

Or so I hear.

Ben Harrington11:03

Liked that Polish place

some decent grub

never had Polish food before

Izabella Kaminska11:03

Ah, Ben is referring to the little christmas lunch we had at Ognisko on Exhibition Road earlier that day.

Ben Harrington11:03

Apparently there is another good Polish restaurant round the corner

?

called Daquise

Izabella Kaminska11:03

yes of course

Ben Harrington11:03

any good?

Izabella Kaminska11:04

Daquise is the other informal spot i always take my contacts to.

Ben Harrington11:04

oooh

Anyway that’s enough food talk

I got slip off in 20 mins

Izabella Kaminska11:04

Both Ognisko and Daquise go way back to the days of the old Polish emigree community living it large in London, and even Christine Keeler used to meet her spy friends at Daquise. And actually Daquise is where my dad had his first UK job.

But yes let’s crack on

The big chill is finally over in the UK. And European markets are up. Even if most of the UK is still on strike.

In terms of the FTSE, Fresnillo, BP and Shell lead this morning with NEXT, LSE and AutoTrader losing.

Ben Harrington11:05

All the major action over the weekend was happening in the US – when I say action I mean deal stories not football – the British Sunday papers were focussing on other things …

Izabella Kaminska11:05

On the FTSE 250, the leaders are FirstGroup, Sirius and Tui with Genus the top loser.

Ben Harrington11:06

Soooo, you had US defence contractor L3 Harris announce the takeover of Aerojet Rocketdyne, independent rocket and missile maker for $4.7 billion or $58 a share in cash.

that was late yesterday

Izabella Kaminska11:06

Aerojet Rocketdyne sounds like a name from Terminator 2

Ben Harrington11:07

Well it is a missile and rocket maker

The takeover of Aerojet was actually first flagged by little old Betaville back in late 2020

just before Lockheed Martin made its move.

Izabella Kaminska11:07

Wasn’t there a big PE deal this weekend too?

Ben Harrington11:08

Yeah also in the US.

Advent International – the company that recently took private Cobham and Ultra Electronics – announced the purchase of space and satellite company Maxar Technologies for $53 a share in cash – a 129pc premium.

Izabella Kaminska11:08

@bruce no idea but the idea of a Claude Shannon multibagger intrigues me.

Ben Harrington11:08

Yes you read that correctly – a 129pc premium

not often you see PE houses pay such large premiums

Izabella Kaminska11:09

That rather puts paid to the theory that private equity are out of the dealmaking market because of the rising cost of capital no?

Or is it different if it’s defence

because it’s all WW3?

Ben Harrington11:10

Maybe but Maxar is a satellite company

and then a little PE deal was announced in the UK last week

that wasn’t related to defence in any way

Izabella Kaminska11:10

Which one was that?

Ben Harrington11:11

It was a business you probably have never heard off called K3 Capital

Izabella Kaminska11:11

Yeah, I have never heard of that!

What does it do?

Ben Harrington11:11

Ironically it advises on … mergers and acquisitions.

Its independent board agreed to a 350p a share offer from Sun Capital

Izabella Kaminska11:12

Ben Harrington11:13

It’s now trading at a discount to the offer price .. .as you can see

not sure why …

the premium was a bit miserly – 16.7pc

Izabella Kaminska11:14

That’s a bit odd because previously a lot of these offers were trading at the offer price or above it no?

Ben Harrington11:14

Yes … the whole thing is a bit odd. I broke the originally rumour in an UNCOOKED alert a couple of weeks ago. At the time there was talk of a 390p share offer. Was that from somebody else?

Dunno…

Otherwise there isn’t much RARE around these days but still a few UNCOOKED bid rumours.

Izabella Kaminska11:15
Quick reminder about Ben’s definitions:

UNCOOKED: Market gossip as Betaville receives it. This scuttlebutt has just come in and hasn’t been checked with all of Betaville‘s well-informed RARE sources let alone formal journalistic channels (public relations executives, bankers etc). The rumour might be total codswallop, rubbish or nonsense – but then again there may be something in it, so it’s worth airing on Betaville.

RARE: Market gossip that has been tested with some of Betaville‘s USUALLY WELL-INFORMED sources. In fact, Betaville might have spent several days or weeks working on this story. However, the rumour hasn’t been tested through formal journalistic channels (public relations executives, bankers etc). The scuttlebutt might be complete rubbish – but then again there may be something in it, so it’s worth airing on Betaville.

Well done is obviously from your top sources meanwhile.

What’s the latest uncooked rumour?

Ben Harrington11:17

Volution, the FTSE 250 company that makes ventilation systems like Vent-Axia, is the most talked about one at the moment.

Been a bid rumour around for about a week so. People following the situation say it is being “looked” at but nobody quite nows who is doing the “looking”.

Izabella Kaminska11:19

anything going on in Europe?

Ben Harrington11:19

Europe has been even quieter than the UK over the last few months but …

(for deals, I mean)

There is some fresh talk around Ageas.

Izabella Kaminska11:20

What is Ageas?

Ben Harrington11:20

it’s a Belgian insurance company

Izabella Kaminska11:21

Ah, old Fortis right?

I remember

Ben Harrington11:21

Earlier this year there was gossip circulating European markets that BNP Paribas was looking at a major purchase with some suggesting Ageas is the target. This rumour has come back. Now people following the situation suggest the company has appointed NM Rothshchild as a “defence advisor”.

So watch that space

Izabella Kaminska11:22

Are there going to be any more deals in the US?

Ben Harrington11:23

Well, there is takeover talk around Atlantica Sustainable Infrastructure, a renewable energy company.

And …

Minerals Technologies and Innospec

have been linked with Elementis

the UK-listed specialist chemicals company

Izabella Kaminska11:24

@bruce – that’s a good little deep dive on K3 Capital. Thanks for the link

Why have minerals Tech been linked with Elementis?

Ben Harrington11:26

Well there has been talk that Elementis recently held some sort of board meeting post the sale of its Chromium business

I will leave readers to read between the lines here …

Izabella Kaminska11:27

is that everything?

Ben Harrington11:27

pretty much but been told to keep an eye on Premier Minerals African … don’t think this is an M&A story but supposed to be some kind of update around the corner about the Lithium miner .. stock is currently up about 10pc this morning …

11:29To be clear all of the above is UNCOOKED!

Izabella Kaminska11:29

yeah, important reminder. Ok well that was a good overview, thank you Ben.

Ben Harrington11:30

Right gonna have to go to catch my train

See you all in 2023 I hope for some more market scuttlebutt.

Izabella Kaminska11:30

Happy Christmas and New year… but rabble stick with me as I’ve got more to cover.

I thought we could start by looking at auto loans

Auto Trader still at the bottom of the FTSE this morning.

It’s been a tough time of late for second hand car dealers, as the record premiums of 2021 have quickly turned into discounts. Cazoo’s share price has plummeted 45 per cent in the past five days alone.

Cazoo definitely seems exposed. It was valued at £6.5bn as not long ago as August 2021, when it launched on NYSE.

It’s now valued at just over £79m

11:37The Cazoo model always mystified me, as it’s basically a traditional dealer model – but as with everything in recent years, just adding any tech component angle got you crazy valuations.

Things are supposedly stabilising but it’s hard to see how this business can have long-term legs.

Car financing underpins this market. The days when second-hand cars were all sold for cash are long gone. With higher interest rates this market is going to be severely tested, because auto loan affordability is going to be strained.

Even Musk is hinting of armageddon in the market. As he replied to his bestie Cathie Wood:

Clearly it’s not just UK/Europe. The following Twitter thread by CarDealshipGuy is worth a read.

He’s predicting a mass wave of car repossessions in 2023. I’m not so sure whether the EV preference thing is real either.

Full disclosure: My brother is in the second-hand EV car trade and my understanding is that things are very tough right now. They have had to reduce their stock.

“Demand has fizzled and supply of ex lease cars is through the roof”, says close related contact.

(Of course if anyone is interested in a second hand EV, do let me know ?. My little brother is too proud to do any formal advertising with his big sister but he could do with the flow.)

Should we talk about Elon now or leave it until the end?

I just noticed some interesting flashes

Izabella Kaminska
Headline RedBox Fixed Income
10:01
BANK OF ENGLAND: PUBLISHES CONSULTATION PAPER ON BANKS BONUS CAP
Headline RedBox Fixed Income
10:02
BANK OF ENGLAND: PROPOSES TO REMOVE THE CURRENT LIMITS ON THE RATIO BETWEEN FIXED AND VARIABLE COMPONENTS OF TOTAL REMUNERATION
Headline RedBox Fixed Income
10:04
BANK OF ENGLAND: PROPOSES TO STRENGTHEN THE EFFECTIVENESS OF THE REMUNERATION REGIME BY INCREASING THE PROPORTION OF COMPENSATION SUBJECT TO INCENTIVE SETTING TOOLS
Izabella Kaminska11:44

This is no doubt indirectly part of Rishi’s big City comeback plan.

Jeremy Hunt is also hoping to turn the UK into Silicon Valley.

The Evening Standard has more:

City bankers may soon be able to receive unlimited bonuses after the Bank of England today announced plans for a consultation on scrapping the so-called ‘bonus cap’.

The decision to scrap the cap, which sets limits on the ration between fixed and variable pay in financial services, was among the few policy moves that survived Kwasi Kwarteng’s disastrous ‘mini-Budget’ after much of it was axed by his replacement, Jeremy Hunt.

Under the current rules, which were introduced under EU legislation in 2016, city bankers may not receive a bonus greater than their salary, or not more than double their salary subject to shareholder approval.

In a statement, the Bank of England said: “The proposals to remove the current limits on the ratio between fixed and variable components of total remuneration aim to strengthen the effectiveness of the remuneration regime by increasing the proportion of compensation at risk that can be subject to the incentive setting tools within the remuneration framework – including deferral, payments in instruments, and risk adjustment.”

11:46Personally, I find this quite mystifying. Where’s the outrage? The whole system threw a wobbler about £2bn worth of tax cuts that would have gone to the UK’s most leveraged and most exposed middle classes, but nobody bats an eyelid about this?

That’s not to say I’m against this being scrapped. The cap was having distorting effects on salaries, leading to arguably even worse outcomes.

A generation of lying-flat bankers, taking no risk for their massively over-inflated salaries.

But the point was to address the disproportional risk and return. In the old uncapped model, bankers had an incentive to take outsized risk which they benefited from when things went right, but which the taxpayer had to cover if it went wrong. Removing the caps brings this imbalance back into the system.

The only alternative I can think of is removing banks’ limited liability. But that would be an even bigger headache for the system. If traders were personally liable for their losses, no-one would ever want to be a trader.


 

Two other stories that are worth quickly flagging before we finish off with Elon.

Energy remains the story in Europe. And given the stress it’s no surprise all oil major activity is under close scrutiny.

On that note, there was an interesting story last week pertaining to Spanish investigators raiding the offices of Reposl, Cepsa and BP in a probe about petrol market manipulation.

@peter – i think the two markets are different. But in the UK it’s not all PCP.

11:54Also, Bloomberg had a good read on the overall costs of sanctions.

They note the cost so far equates to almost $1 trillion, but also that the energy crisis is only getting started.

Even with more facilities to import liquefied natural gas coming online, the market is expected to remain tight until 2026, when additional production capacity from the US to Qatar becomes available. That means no respite from high prices.

Relatedly, I spoke with Nouriel Roubini a couple of weeks ago, and he was very critical about the price cap measures that European policymakers were taking.

He said they were needlessly populist, and actually you need prices to go as high as possible to encourage substitution.

And in case you missed it, Christine Lagarde had some choice words about the TTF market at last week’s press conference.

(Though she originally called it the TFF market)

She was responding to this question:

You stated in a recent opinion that a gas price regulation could put at risk financial stability and be counterproductive. Could you explain why this mechanism would increase margin calls and volatility, because this is not necessarily logical? If the proposed mechanism is not efficient, what will be your solution for an energy price cap?

Her answer:

Suffice to say that one of the considerations in the legal opinion that was issued has to do with the fact that there is a clear risk of pushing out of the derivative and clearing system, which functions as it does. The TTF [Title Transfer Facility] has its own method of operations, but at least there is a degree of information that is available and that can be used. The risk is, in our view, based on the financial stability perspective that we take, that there could be transactions that would move out to much darker corners with a lot less information available that would then certainly cause some financial instability.

Separately from that, we have also opined on the fact that the ECB can be consulted, but is not a member of the operation, and cannot have an active role in that process, because it is part of the ECB to be an independent institution, and not participate in such a mechanism, which leads me to tell you that I don’t have the solution, because it’s not for us to find the solution.

12:00This is actually encouraging I would say. The idea that price caps could be enforced without any externalities was always nuts.

The realisation that “darker corners with a lot less information available” will always plague these sorts of solutions is I think a good step forward. Shame the ECB is powerless to expand on that.

Anyway, we are at the hour, and we didn’t even mention Elon (thank god). But I guess we have to acknowledge it.

For those not in the know, ELon has done a poll asking people to vote on whether he should remain in charge of Twitter. He says he will abide by it. Lots of people are speculating that he already has a successor mapped out so it’s all bluster.

Tesla shares are up on the news.

The poll comes in response to what many people feel is highly hypocritical action from “free speech defender” Elon, with the banning of key journalist accounts for doxxing behaviour and/or for sharing details of his live coordinates.

He has also sneakily added rules about not being able to link to rival sites like Mastadon and Truth social into the Terms of Service.

Though, he claims there’s a difference between occasional Tweeting and strategic redirection offsite. “You have to pay for advertising”.

He’s also hinted that Twitter is on a fast track to bankruptcy unless it restructures itself quickly.

And, yes, he was tweeting live from the world cup finale on Sunday, where he was pictured standing next to Jared Kushner.

Which means, naturally, there are all sorts of conspiracy theories doing the rounds based on that. Like, will Kushner be made the new Twitter CEO? Could you imagine?!

My own take on it all is that I side with Bari Weiss’ view.

I think absolutely everyone is being an utter hypocrite, from the mainstream media to Elon. And it would be nice if we had some proportional coverage that focuses on the actually sordid revelations in the Twitter Files that are far from nothing burgers.

But for more on that check out my delayed Blind Spot Wrap which I will publish shortly (delayed due to me being ill over the weekend).

On that note, I think we will call it a day. Unless there is some massively market moving stuff going on between now and January (in which case I will send a note by email and alert via Discord) we will be taking a break until January 9 (because January 2 is a holiday).

Merry Christmas everyone! And thank you for joining.

And thank you too for all your support too. Let’s hope we can make SML a more regular phenomenon as of next year.

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