Posts from — August 2008
A quick look at some of the M&A activity (and quasi M&A activity) from Simon Denom of Capital Spreads:
Alliance and Leicester warned investors yesterday that if the bid from Santander was rejected then the bank would be “at risk of external events” eroding value. This is about as clear a warning that a CEO is going to give that there is not much else to play for other than sell out.
On the other side of the spectrum Michael Page CEO Steve Ingham was obviously a bit tongue in cheek when he suggested that Adecco would have to bid 600p to make it attractive for shareholders to sell. “Make it attractive” seems too small a phrase to sum up what investors would think if such a price was even hinted at. The stock was trading at around 260p before the approach was made so the 400p initial price does not seem too out of line. With the stock closing at 330p last night the City obviously does not expect a second suitor to leap out of the woods. The board at MPI might find themselves at odds with their major share holders if too robust a defence drives away the welcome attention.
Freddie Mac and Fannie Mae look to be under severe pressure over in the US and they might well find themselves in a Northern Rock situation. The value of the companies on purely commercial terms is probably close to zero but they trade on a premium due to the Fed’s quasi support. If the company is taken over by the State we can expect some very interesting valuations and some serious financing problems for the other mortgage lenders. In these nervous times it is probably not wise to be dipping too dramatic a toe into the investment pool.
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A new article from Simon Denom of Capital Spreads:
As the FTSE struggles to maintain the rallies of the last week traders try to add in the effects of 4.4% inflation. On the face of it Sterling’s decline and the prospect of high interest rates for longer will drag on returns and clients are settling in with some solid shorts. There is now some in-depth analysis looking for stocks with higher than norm borrowing requirements as the ‘dodgy’ gearing up of balance sheets over the past decade comes back to haunt the markets. Financial engineering looked very good in the era of the ‘death of inflation’ but in the cold dawn of high costs, high wage demands, rising taxation levels and high interest payments there are likely to be some red races from Finance Directors.
The global situation does not exactly look rosy as capital destruction continues in the Far East, the Chinese stock market is now down over 60% and they are still trading on a p/e of over 18 with inflation over 8%. Europe and the UK are on a more normal p/e of around 12 with inflation at 4-5%. The dash for growth in the emerging markets has led to many companies operating on miniscule margins with no room for manoeuvre. A small set back could lead to disaster for a huge block of export driven manufacturers.
In this scenario the recent 500 point rally in the FTSE 100 from Mid July might be seen by many as a god send as shell shocked stocks have made something of a return to respectability but investors should be wary of expecting substantial further gains. The market may move higher but it will probably be a while before we can attempt the levels of May.
The 5500 region reflects the lows of the two previous moves lower in 2008 (January and March) and also the support back in May ’06 and as such will probably take a serious effort to break through. The fact is that the macro economic situation is not moving in the UK’s favour as Government profligacy over the past decade (even on a high tax base) has left Captain Darling sitting around with a dazed expression as Our Gordon’s poisoned legacy is handed over. Everywhere we look we see huge reductions in revenue income. Much as we all hated the banks they paid monumental cheques into the exchequer (not much hope of that this year). In fact, with the UK’s method of payment in arrears the Treasury will probably have to be paying back over the next few quarters. The £6bn Housing Stamp Duty will be lucky to be just half this total and the ever rising level of unemployment means an increase in outflow AND a decrease in income tax revenue. On the plus side there will be a huge increase in Oil tax inflows (remember that
most of the price we all suffer at the pumps is nothing to do with the actual cost of the black stuff) but here-say has it that petrol sales are falling as well.
Much of Europe will be better insulated against these problems and the US, for all of the Sub Prime problems, is actually operating on a low(ish) tax level giving the President a good store of ammunition to kick start growth.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
The above comments do not constitute investment advice Clean Financial accepts no responsibility for any use that may be made of them.
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