The unfolding drama of the announced bank rescue plans in the US combined with Obama's statement about the dire state of the US economy have sent the US market firmly down this afternoon. The announcement of a public-private investment fund to provide financing for investors to buy distressed securities and a Treasury initiative to fund new consumer and business loans could cost up to $1 trillion each. These are big numbers and big plans that will inevitably take time to have any impact and may well end up costing the tax payer a lot of money if not successful. The main fiscal stimulus package that is due to be voted on in the Senate has been receiving much criticism recently. A recent analysis published in the Washington Post suggests that only 10% of the money will get spent in the current fiscal year with very little to provide an immediate stimulus to the economy. A link to the full diagram is here:- http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/01/GR2009020100154.html
Whatever happens any sign of real economic recovery is some way off and we are going to continue to see wild gyrations in markets as sentiment swings from hope to fear and back again.
I have taken advantage of the sell off in the last hour to take a CFD holding in Vodafone. The shares were holding up well during most of the day until the last hour. After the IMS last week I am quite happy to hold the shares and after a large fall today there is a possibility of a swing back tomorrow if Wall Street recovers some of its losses. As always I have set a stop loss and with a safe yield of 6% the shares should hold up reasonably well even if markets do sell off further. As mentioned yesterday I too advantage of the weak market today to close out my Pearson short. I can't help but feel that Pearson is going to come under increasing pressure especially given the rapidly reducing State budgets in the US which is likely to impact on their education spend which Pearson is exposed to and I may well short the shares again.
Tuesday, February 10, 2009
Monday, February 09, 2009
A very quiet today with little going on and a lack of any direction in the market. I am keeping a close eye on my Pearson short which is in profit and is certainly heading in the right direction. If we have a weak day tomorrow there may well be an opportunity to close that position out. I have copied below our usual Monday briefing and will report again tomorrow:-
A Review of Last Week
Last week commenced with the announcement of a slump in US consumption spending which declined by 1% on a month on month basis and was the 6th consecutive monthly decline. US personal income fell 0.2% month on month. With unemployment increasing at break-neck speed as evidenced by the 600,000 drop in the nonfarm payrolls on Friday we can expect an ongoing deterioration in consumption especially as the savings rate increases with households choosing to repair their damaged balance sheet rather than spend.
Both sets of Institute for Supply Management data were published in the US last week. The manufacturing data on Monday indicated a modest improvement from the extreme low of 32.9 to 35.6 in January. The market was relieved to see an improvement although at this level it is still consistent with an extremely weak manufacturing sector that is continuing to decline. The employment element of the index was unchanged which suggests yet more significant job losses to come. The Non Manufacturing equivalent published on Thursday also showed improvement from 40.1 to 42.9 during January. A welcome sign, but again the level remains significantly below 50 suggesting ongoing contraction in activity. As with manufacturing the non manufacturing employment constituent showed no change suggesting that the rate of job loss continues at a significant pace. It does look likely that the nonfarm payrolls for February are likely to show yet another massive decline close to 600,000 given these statistics and the evidence from the weekly initial jobless claims.
On Thursday in the UK we had the headline grabbing news from the Halifax that house prices rose 1.9% in January. This received huge press coverage, but sadly there are several reasons to discount it. Firstly, Halifax is the fourth agency to report monthly house prices, the first 3, Rightmove, Hometrack and Nationwide said house prices fell 1.9%, 1.0% and 1.3% respectively during January. Halifax only records data of transactions made with the Halifax. Last year HBOS restricted lending severely and issued much tighter lending criteria and valuations and as a result its house price series was worse than its peers. Under the new ownership of Lloyds and with pressures to start lending it seems likely that lending criteria and valuation policy is being relaxed a little which could easily result in a perceived bounce. This is definitely not the end of the house price correction and if anything demonstrates that some of these indices, both private and public are open to inaccuracies and inconsistency.
On Thursday we also had the Bank of England MPC meeting with the base rate reduced by 50bps to 1%. Most commentators believe rates are headed for zero, it is just a question now of whether the Bank of England starts to use quantitative easing before reducing rates further. On Friday in the UK the latest figures for Industrial Production and corporate insolvencies painted a very gloomy picture. During the 3 months to the end of December Industrial Production fell by 4.5%, the largest decline since 1974. Manufacturing output declined by 2.2% during December and 5.1% during the quarter. These figures according to the ONS will result in a further downgrade to GDP estimates for the final quarter of 2008 by around 0.1% which will be added to the decline of 1.5% already reported. Clearly the weakness in sterling is having no beneficial impact for the manufacturing sector at present and with no sign of an improvement in conditions there could be worse still to come.
This Week
This Week it is relatively quiet on the economic announcement front. On Tuesday we get the RICS house price survey for the UK which is unlikely to show any improvement in the housing market. Also on Tuesday we get the UK trade balance figures and some January retail sales data. The main event of the week for the UK is the publication of the Bank of England Quarterly Inflation report on Wednesday. This will give some indication of the next action the Bank of England is likely to take in its fight against the recession whether it is quantitative easing or a move to zero interest rates. The headline grabber will be the extent to which they downgrade their 2009 GDP forecast and inflation expectations for the UK with the former almost certainly to be revised downwards to a decline of between 2% and 3% with a figure close to -3% likely. It will be interesting to see if the CPI is expected to move into negative territory before the end of the year. Also on Wednesday we get unemployment numbers for the UK with unemployment now expected to breach the 2m mark. The key US data of the week will be the US retail sales figures due to be published on Thursday with the consensus expecting a decline of 0.8% during January. On the same day in the US we get business inventory data, initial jobless claims and University of Michigan consumer confidence.
On Friday look out for the Euro area quarterly GDP data with expectations of a fourth quarter decline of 1.2%.
In terms of companies reporting this week, we will be focusing on the trading update from Daily Mail and General Trust on Wednesday and the BT Q3 figures on Thursday. If you are a client you can access our most recent research notes via your client login.
A Review of Last Week
Last week commenced with the announcement of a slump in US consumption spending which declined by 1% on a month on month basis and was the 6th consecutive monthly decline. US personal income fell 0.2% month on month. With unemployment increasing at break-neck speed as evidenced by the 600,000 drop in the nonfarm payrolls on Friday we can expect an ongoing deterioration in consumption especially as the savings rate increases with households choosing to repair their damaged balance sheet rather than spend.
Both sets of Institute for Supply Management data were published in the US last week. The manufacturing data on Monday indicated a modest improvement from the extreme low of 32.9 to 35.6 in January. The market was relieved to see an improvement although at this level it is still consistent with an extremely weak manufacturing sector that is continuing to decline. The employment element of the index was unchanged which suggests yet more significant job losses to come. The Non Manufacturing equivalent published on Thursday also showed improvement from 40.1 to 42.9 during January. A welcome sign, but again the level remains significantly below 50 suggesting ongoing contraction in activity. As with manufacturing the non manufacturing employment constituent showed no change suggesting that the rate of job loss continues at a significant pace. It does look likely that the nonfarm payrolls for February are likely to show yet another massive decline close to 600,000 given these statistics and the evidence from the weekly initial jobless claims.
On Thursday in the UK we had the headline grabbing news from the Halifax that house prices rose 1.9% in January. This received huge press coverage, but sadly there are several reasons to discount it. Firstly, Halifax is the fourth agency to report monthly house prices, the first 3, Rightmove, Hometrack and Nationwide said house prices fell 1.9%, 1.0% and 1.3% respectively during January. Halifax only records data of transactions made with the Halifax. Last year HBOS restricted lending severely and issued much tighter lending criteria and valuations and as a result its house price series was worse than its peers. Under the new ownership of Lloyds and with pressures to start lending it seems likely that lending criteria and valuation policy is being relaxed a little which could easily result in a perceived bounce. This is definitely not the end of the house price correction and if anything demonstrates that some of these indices, both private and public are open to inaccuracies and inconsistency.
On Thursday we also had the Bank of England MPC meeting with the base rate reduced by 50bps to 1%. Most commentators believe rates are headed for zero, it is just a question now of whether the Bank of England starts to use quantitative easing before reducing rates further. On Friday in the UK the latest figures for Industrial Production and corporate insolvencies painted a very gloomy picture. During the 3 months to the end of December Industrial Production fell by 4.5%, the largest decline since 1974. Manufacturing output declined by 2.2% during December and 5.1% during the quarter. These figures according to the ONS will result in a further downgrade to GDP estimates for the final quarter of 2008 by around 0.1% which will be added to the decline of 1.5% already reported. Clearly the weakness in sterling is having no beneficial impact for the manufacturing sector at present and with no sign of an improvement in conditions there could be worse still to come.
This Week
This Week it is relatively quiet on the economic announcement front. On Tuesday we get the RICS house price survey for the UK which is unlikely to show any improvement in the housing market. Also on Tuesday we get the UK trade balance figures and some January retail sales data. The main event of the week for the UK is the publication of the Bank of England Quarterly Inflation report on Wednesday. This will give some indication of the next action the Bank of England is likely to take in its fight against the recession whether it is quantitative easing or a move to zero interest rates. The headline grabber will be the extent to which they downgrade their 2009 GDP forecast and inflation expectations for the UK with the former almost certainly to be revised downwards to a decline of between 2% and 3% with a figure close to -3% likely. It will be interesting to see if the CPI is expected to move into negative territory before the end of the year. Also on Wednesday we get unemployment numbers for the UK with unemployment now expected to breach the 2m mark. The key US data of the week will be the US retail sales figures due to be published on Thursday with the consensus expecting a decline of 0.8% during January. On the same day in the US we get business inventory data, initial jobless claims and University of Michigan consumer confidence.
On Friday look out for the Euro area quarterly GDP data with expectations of a fourth quarter decline of 1.2%.
In terms of companies reporting this week, we will be focusing on the trading update from Daily Mail and General Trust on Wednesday and the BT Q3 figures on Thursday. If you are a client you can access our most recent research notes via your client login.
Friday, February 06, 2009
The hope factor has pushed the market on this afternoon despite an appalling set of US jobs data showing just under 600,000 people losing their jobs last month. The hope is based again on the Obama fiscal stimulus package which is struggling to get past the Senate. In the UK the latest figures for Industrial Production and corporate insolvencies paint a very gloomy picture. During the 3 months to the end of December Industrial Production fell by 4.5%, the largest decline since 1974. Manufacturing output declines by 2.2% during December and 5.1% during the quarter. These figures according to the ONS will result in a further downgrade to estimated GDP during the final quarter of 2008 by around 0.1% which will be added to the decline of 1.5% already reported. Clearly the weakness in sterling is having no beneficial impact for the manufacturing sector at present and with no sign of an improvement in conditions there could be worse still to come.Finally on the economic front. insolvency figures published today show the number of personal insolvencies reached 29,444 in the fourth quarter of 2008, an increase of 18.5% on the same period for the previous year. Corporate insolvencies for the same period increased by 51%.
I think there is a good possibility that as the Obama stimulus package winds its way to agreement and implementation we will see the market rally further, but I remain very cautious at this early stage of the year. There is every chance that it will fall way short of what is required and provide only a temporary respite. Added to that as the inventory cycle unwinds in the US I think we are going to see some major swings in US GDP both ways as companies run down stocks over the first half and then start to rebuild inventory during the second half. A lot if unknowns still and with this we are going to see bull phases followed by disappointment and sell-offs. It will make trading harder as the year progresses as there will undoubtedly be false dawns that some investors will chase and push valuations to high and possibly unjustified levels.
Yesterday I bought some BP and sold out this afternoon. It is a stock that I have rarely traded and I am a little wary of the sector given the uncertainty over where the oil price is going. Nevertheless given that other valuations have been chased higher during the last couple of trading days especially in the retail sector, I felt that BP offered a quick trading opportunity. The market sell off yesterday morning took them down to £4.89 and I bought in at £4.9425 and sold out today at £5.085. The dividend yield of 8% is certainly providing support to the shares given the slightly disappointing results earlier in the week, and they seem to be staying around the £5 level at present.
I think there is a good possibility that as the Obama stimulus package winds its way to agreement and implementation we will see the market rally further, but I remain very cautious at this early stage of the year. There is every chance that it will fall way short of what is required and provide only a temporary respite. Added to that as the inventory cycle unwinds in the US I think we are going to see some major swings in US GDP both ways as companies run down stocks over the first half and then start to rebuild inventory during the second half. A lot if unknowns still and with this we are going to see bull phases followed by disappointment and sell-offs. It will make trading harder as the year progresses as there will undoubtedly be false dawns that some investors will chase and push valuations to high and possibly unjustified levels.
Yesterday I bought some BP and sold out this afternoon. It is a stock that I have rarely traded and I am a little wary of the sector given the uncertainty over where the oil price is going. Nevertheless given that other valuations have been chased higher during the last couple of trading days especially in the retail sector, I felt that BP offered a quick trading opportunity. The market sell off yesterday morning took them down to £4.89 and I bought in at £4.9425 and sold out today at £5.085. The dividend yield of 8% is certainly providing support to the shares given the slightly disappointing results earlier in the week, and they seem to be staying around the £5 level at present.
Thursday, February 05, 2009
My fears over Unilever have been borne out today with disappointing Q4 figures. With volume declines only rescued by increased prices and increased costs having eroded margin the outlook for Unilever over the coming 12 months looks to be a difficult one indeed. The shares have fallen by almost £1 this morning. For regular readers you will know that this is a company we have been shorting for some time. I have closed my short positions in the stock and I will wait for the dust to settle before considering any more trading activity in Unilever.
Today we have the MPC meeting result at 12 and it is widely expected that a further 0.5% will be cut from the base rate taking it down to 1% although it is possible that we will only see a 0.25% cut. Most economic commentators believe that rates in the UK are heading for almost zero as we have seen in the US. I have a feeling that with some of the indicators suggesting that the rate of deterioration in economic conditions is at least slowing we may see rates held at 1% after today at least until there is a more clear picture of whether any of the stimulus that has been used so far is having any effect. We may also see quantitative easing being adopted given that any further rate cut to zero is unlikely to have much more impact than a 1% rate.
Today we have the MPC meeting result at 12 and it is widely expected that a further 0.5% will be cut from the base rate taking it down to 1% although it is possible that we will only see a 0.25% cut. Most economic commentators believe that rates in the UK are heading for almost zero as we have seen in the US. I have a feeling that with some of the indicators suggesting that the rate of deterioration in economic conditions is at least slowing we may see rates held at 1% after today at least until there is a more clear picture of whether any of the stimulus that has been used so far is having any effect. We may also see quantitative easing being adopted given that any further rate cut to zero is unlikely to have much more impact than a 1% rate.
Wednesday, February 04, 2009
Two consecutive days of strong gains is a welcome relief although I did get caught out a little this morning when I sold my last Marks and Spencer holding at a nice profit only to see the stock move ahead another 3%. Timing is sometimes incredibly difficult and once you have achieved a price target it is always right to take it.
The Non Manufacturing ISM index in the US today was a little better than expectations, but still shows that the economy is contracting at a fairly sharp rate. The US ADP employment report today showed a decline in private payrolls of 522000 jobs during January which was a little better than expected. The key non farm payrolls on Friday are also forecast to show a decline of around 520,000 according to the consensus. Which ever way you cut it these are big numbers and it is difficult to see the market rallying unless the figure is considerably better.
We have been busy writing a note on the recent Vodafone KPI figures and I have copied a snippet below. I will be looking to trade Vodafone again soon now that we have a clear idea of where revenue and profits are going at least short term.
The share price of Vodafone has traded between £1 and £1.40 for some time now. Concerns over regulatory issues have dogged the stock and with a worldwide recession in full flow the concerns have moved to worries over growth. Vodafone does have a worldwide footprint and with a market leading position in many countries it does look well placed to grow albeit at a slow pace over the coming years. The company issued a third quarter statement of its key performance indicators which in general general show declining organic growth in many of its more mature markets. However currency movements have provided a significant benefit and the company has raised guidance with adjusted operating profit now anticipated to be around £500m higher in the range of £11.5bn to £12bn with revenue now expected to be in the range of £40.6bn to £41.5bn (previously £38.8bn to £39.7bn) and free cash flow is also expected to be £300m higher at between £5.5bn and £6bn. Overall group revenue (excluding fx and merger and acquisitions) for the quarter is up 1.4%(including India) on an organic basis which compares to 2.1% in Q2 and 3.5% in Q1. Taking into account fx and m&a activity group revenue increased by 14.3%. The company has not given any further data on profitability. The key area of growth remains Asia and the middle east where organic revenue growth was 8.4% whilst African and Central Europe delivered revenue growth of 2.3%. The problem area remains Western Europe with revenue down 1.4% and within this the major problem area is again Spain with organic growth of -5.8%. Only Italy managed positive growth at 1.9%, but the rate of decline in the UK improved to -0.7% from -1.7% in Q2. In Germany organic service revenue declined by 1.4% (previously -3.4% Q2 and -3.0% Q1), the rate of decline improved from the previous quarter helped by changes in termination rates, increased message usage and lower rebates to service providers.
Africa/ Central Europe growth was slowed down due to Turkey which is a real problem area with organic service revenue growth down by 14.5% due to the impact of lower termination rates, higher churn and a decline in average revenue per user. They have employed a new CEO for this area and a turnaround is anticipated. Overall growth for this area was 3.5% on an organic basis compared to 6.3% in Q2.
Within Asia Pacific/Middle East revenue growth remained at a healthy rate of 9.2% boosted by a strong contribution from India where revenue growth was at 29.6% on an organic basis. India added 2.1 million customers per month over the period bringing the user base here to 60.9 million.
Data revenue growth over the period remained high at 25.3%. The company stated that it is still on course to achieve cost savings on £1bn by the end of the 2011 financial year with around £500m targeted by the end of FY2010.
Whilst the fx movements have been beneficial it also impacts on the value of foreign denominated debt which increased by £5.7bn from the H1 debt level of £27.8bn. We also need to keep in mind the potential tax liability of £2bn which Vodafone is currently fighting in the Indian courts in relation to its purchase of Essar from Hutchison. The next hearing is due in March.
The uplift to guidance is based on revised fx assumptions of £1:E1.20 (previously £1:E1.26) and £1:$1.72 (previously £1:$1.80). Given that the spot rates are different there is every chance that current guidance will prove to be conservative.
Whilst Vodafone still has growth potential it is clear that it is going to be much harder work going forward especially with the big economic head winds we currently face. Most brokers still have buy recommendations on the stock with price targets tending to range between £1.80 and £2.00. We feel that any upside in Vodafone in the current market is limited to around £1.50 at best whilst the downside is likely to be to around £1.20. The above average forward dividend yield of 6% looks quite safe at present given that free cash flow of around £5.5bn is expected to exceed the annual dividend cost of around £4bn and this should provide some downside protection to the shares. We can only expect modest revenue and profit growth over the coming 12 months and the shares are likely to provide good trading opportunities.
The Non Manufacturing ISM index in the US today was a little better than expectations, but still shows that the economy is contracting at a fairly sharp rate. The US ADP employment report today showed a decline in private payrolls of 522000 jobs during January which was a little better than expected. The key non farm payrolls on Friday are also forecast to show a decline of around 520,000 according to the consensus. Which ever way you cut it these are big numbers and it is difficult to see the market rallying unless the figure is considerably better.
We have been busy writing a note on the recent Vodafone KPI figures and I have copied a snippet below. I will be looking to trade Vodafone again soon now that we have a clear idea of where revenue and profits are going at least short term.
The share price of Vodafone has traded between £1 and £1.40 for some time now. Concerns over regulatory issues have dogged the stock and with a worldwide recession in full flow the concerns have moved to worries over growth. Vodafone does have a worldwide footprint and with a market leading position in many countries it does look well placed to grow albeit at a slow pace over the coming years. The company issued a third quarter statement of its key performance indicators which in general general show declining organic growth in many of its more mature markets. However currency movements have provided a significant benefit and the company has raised guidance with adjusted operating profit now anticipated to be around £500m higher in the range of £11.5bn to £12bn with revenue now expected to be in the range of £40.6bn to £41.5bn (previously £38.8bn to £39.7bn) and free cash flow is also expected to be £300m higher at between £5.5bn and £6bn. Overall group revenue (excluding fx and merger and acquisitions) for the quarter is up 1.4%(including India) on an organic basis which compares to 2.1% in Q2 and 3.5% in Q1. Taking into account fx and m&a activity group revenue increased by 14.3%. The company has not given any further data on profitability. The key area of growth remains Asia and the middle east where organic revenue growth was 8.4% whilst African and Central Europe delivered revenue growth of 2.3%. The problem area remains Western Europe with revenue down 1.4% and within this the major problem area is again Spain with organic growth of -5.8%. Only Italy managed positive growth at 1.9%, but the rate of decline in the UK improved to -0.7% from -1.7% in Q2. In Germany organic service revenue declined by 1.4% (previously -3.4% Q2 and -3.0% Q1), the rate of decline improved from the previous quarter helped by changes in termination rates, increased message usage and lower rebates to service providers.
Africa/ Central Europe growth was slowed down due to Turkey which is a real problem area with organic service revenue growth down by 14.5% due to the impact of lower termination rates, higher churn and a decline in average revenue per user. They have employed a new CEO for this area and a turnaround is anticipated. Overall growth for this area was 3.5% on an organic basis compared to 6.3% in Q2.
Within Asia Pacific/Middle East revenue growth remained at a healthy rate of 9.2% boosted by a strong contribution from India where revenue growth was at 29.6% on an organic basis. India added 2.1 million customers per month over the period bringing the user base here to 60.9 million.
Data revenue growth over the period remained high at 25.3%. The company stated that it is still on course to achieve cost savings on £1bn by the end of the 2011 financial year with around £500m targeted by the end of FY2010.
Whilst the fx movements have been beneficial it also impacts on the value of foreign denominated debt which increased by £5.7bn from the H1 debt level of £27.8bn. We also need to keep in mind the potential tax liability of £2bn which Vodafone is currently fighting in the Indian courts in relation to its purchase of Essar from Hutchison. The next hearing is due in March.
The uplift to guidance is based on revised fx assumptions of £1:E1.20 (previously £1:E1.26) and £1:$1.72 (previously £1:$1.80). Given that the spot rates are different there is every chance that current guidance will prove to be conservative.
Whilst Vodafone still has growth potential it is clear that it is going to be much harder work going forward especially with the big economic head winds we currently face. Most brokers still have buy recommendations on the stock with price targets tending to range between £1.80 and £2.00. We feel that any upside in Vodafone in the current market is limited to around £1.50 at best whilst the downside is likely to be to around £1.20. The above average forward dividend yield of 6% looks quite safe at present given that free cash flow of around £5.5bn is expected to exceed the annual dividend cost of around £4bn and this should provide some downside protection to the shares. We can only expect modest revenue and profit growth over the coming 12 months and the shares are likely to provide good trading opportunities.
Tuesday, February 03, 2009
A quick trading update. Yesterday I closed out my Unilever short at £15.06 at a nice profit having had this position open since mid December. Yesterday I traded WH Smith for the first time having bought them at £3.2375 I sold out this morning at £3.365. This is quite an interesting mid 250 stock and I may well trade it again.
Monday, February 02, 2009
I will comment later on stock trades, and in the meantime this is our normal Monday report.
The economic data last week painted a very grim picture with not even a glimmer of hope that a recovery could start anytime soon. With even the likes of Microsoft now announcing job losses the extent of the recession is undoubtedly severe and has some way to go. The IMF made clear just how dismal the situation is in the UK with a forecast decline of 2.8% in UK GDP during 2009. Alistair Darling’s pre-budget assumptions of a 2009 second half recovery looked optimistic when he stated them in November last year and now look decidedly like wishful thinking.
During the last week US consumer confidence plummeted to new lows and the sorry state of their housing market was reflected in the new home sales which fell to an annual rate of 331,000, a decline of almost 15% and the largest decline for 14 years. With over 12 months of supply available house prices will remain under significant pressure. President Obama’s $820bn fiscal stimulus package passed the first hurdle last week, but we are unconvinced that this will create anything but a small cushion to prevent US GDP falling even more than already expected with a decline of at least 2% in US GDP still looking very likely this year. The first estimate for fourth quarter US GDP was published on Friday which came out a little better than expectations at an annualised rate of -3.8% compared to consensus of -5.5%. Breaking the figure down, inventory accumulation contributed +1.2% to GDP which is the primary reason the figure was better than the consensus, but this will almost inevitably have a negative impact on GDP over the first half of 2009 as companies run down their excess inventory rather than continue to produce. Within the published GDP figures there are also various bits of data which make interesting reading and in particular the information on company expenditure on equipment and software made grim reading. This figure fell by 27.8% over the quarter and demonstrates that it is not just consumer expenditure in the US that has fallen off a cliff. Durable goods orders provided further disappointment with a decline of 2.6% during December compared to expectations of a 2% fall.
In Europe last week we had CPI data which declined from 1.6% to 1.1% which is well below their target of 2%. This certainly leaves room for further cuts in the ECB rate, but for the meeting this week they have already indicated that the rate will remain at 2%. The CPI will undoubtedly continue to fall as the year progresses and further cuts in the ECB rate look very likely.
In the UK data published on Friday showed that the number of mortgage approvals in December rose to 31,000 from the November low of 27,000. Whilst it is encouraging to see this figure pick up, the current level is still extremely low and house prices look set to continue to decline over the coming 12 months.
This week we get the big economic numbers in the US. We kick off today with the ISM Manufacturing Index in the US. The figure for December was 32.4 and with the manufacturing sector in the US in real difficulties the consensus expects a similar figure of 32.6. On Wednesday we get the equivalent figure for the non manufacturing sector. In December this index stood at 40.6 and the consensus for January is for it to slip back to 39.0. On Thursday we get the results of the Bank of England MPC meeting when it is widely expected that the base rate will be reduced by a further 50bps bringing the rate down to 1%. On the same day the ECB also meets but for this meeting they have already made it clear that the rate will be maintained at 2% although the CPI data last week gives them plenty of room to reduce rates further and they seem to be delaying the inevitable. On Thursday in the US we get the weekly initial jobless claims which are expected to show a monthly run rate of around 583,000 putting us on course for a non-farm payroll figure on Friday of close to -600,000. Finally, on Friday we get some industrial and manufacturing production figures for the UK. Given the sharp decline in UK GDP over the fourth quarter we can expect a further deterioration in this data.
This week the company results we will be focusing on will be the Vodafone IMS on Tuesday, the Aviva trading statement on Wednesday and the Unilever Q4 and finals on Thursday. If you are a client you can access our current views on these stocks by logging into our client research centre.
The economic data last week painted a very grim picture with not even a glimmer of hope that a recovery could start anytime soon. With even the likes of Microsoft now announcing job losses the extent of the recession is undoubtedly severe and has some way to go. The IMF made clear just how dismal the situation is in the UK with a forecast decline of 2.8% in UK GDP during 2009. Alistair Darling’s pre-budget assumptions of a 2009 second half recovery looked optimistic when he stated them in November last year and now look decidedly like wishful thinking.
During the last week US consumer confidence plummeted to new lows and the sorry state of their housing market was reflected in the new home sales which fell to an annual rate of 331,000, a decline of almost 15% and the largest decline for 14 years. With over 12 months of supply available house prices will remain under significant pressure. President Obama’s $820bn fiscal stimulus package passed the first hurdle last week, but we are unconvinced that this will create anything but a small cushion to prevent US GDP falling even more than already expected with a decline of at least 2% in US GDP still looking very likely this year. The first estimate for fourth quarter US GDP was published on Friday which came out a little better than expectations at an annualised rate of -3.8% compared to consensus of -5.5%. Breaking the figure down, inventory accumulation contributed +1.2% to GDP which is the primary reason the figure was better than the consensus, but this will almost inevitably have a negative impact on GDP over the first half of 2009 as companies run down their excess inventory rather than continue to produce. Within the published GDP figures there are also various bits of data which make interesting reading and in particular the information on company expenditure on equipment and software made grim reading. This figure fell by 27.8% over the quarter and demonstrates that it is not just consumer expenditure in the US that has fallen off a cliff. Durable goods orders provided further disappointment with a decline of 2.6% during December compared to expectations of a 2% fall.
In Europe last week we had CPI data which declined from 1.6% to 1.1% which is well below their target of 2%. This certainly leaves room for further cuts in the ECB rate, but for the meeting this week they have already indicated that the rate will remain at 2%. The CPI will undoubtedly continue to fall as the year progresses and further cuts in the ECB rate look very likely.
In the UK data published on Friday showed that the number of mortgage approvals in December rose to 31,000 from the November low of 27,000. Whilst it is encouraging to see this figure pick up, the current level is still extremely low and house prices look set to continue to decline over the coming 12 months.
This week we get the big economic numbers in the US. We kick off today with the ISM Manufacturing Index in the US. The figure for December was 32.4 and with the manufacturing sector in the US in real difficulties the consensus expects a similar figure of 32.6. On Wednesday we get the equivalent figure for the non manufacturing sector. In December this index stood at 40.6 and the consensus for January is for it to slip back to 39.0. On Thursday we get the results of the Bank of England MPC meeting when it is widely expected that the base rate will be reduced by a further 50bps bringing the rate down to 1%. On the same day the ECB also meets but for this meeting they have already made it clear that the rate will be maintained at 2% although the CPI data last week gives them plenty of room to reduce rates further and they seem to be delaying the inevitable. On Thursday in the US we get the weekly initial jobless claims which are expected to show a monthly run rate of around 583,000 putting us on course for a non-farm payroll figure on Friday of close to -600,000. Finally, on Friday we get some industrial and manufacturing production figures for the UK. Given the sharp decline in UK GDP over the fourth quarter we can expect a further deterioration in this data.
This week the company results we will be focusing on will be the Vodafone IMS on Tuesday, the Aviva trading statement on Wednesday and the Unilever Q4 and finals on Thursday. If you are a client you can access our current views on these stocks by logging into our client research centre.
Friday, January 30, 2009
The first estimate of Q4 US GDP was better than anticipated at an annualised rate of decline of 3.8%. The figure was better than anticipated due to inventory build up and we can expect this to unwind over the first quarter of 2009 which will inevitably worsen the rate of GDP decline for the start of 2009.
Next week is the big economic numbers week with the manufacturing ISM index in the US on Monday. The figure last time was 32.4 and with the manufacturing sector in real difficulties I would expect to see a similar figure at best and possible worse than last time. On Wednesday we get the equivalent figure for the non manufacturing sector. The figure last time was 40.6 with the consensus expecting around 39 for January. Both sets of ISM data are sitting at historically low levels consistent with a fast rate of contraction in the US economy. On Thursday we get the results of the Bank of England MPC meeting where it is widely expected that another 50bp cut to 1% will be implemented. On the same day the ECB meets, but they have already made it clear that the rate will remain at 2% for the time being. On Thursday we get the last of the initial jobless claims for January in the US and it is already clear that we are heading for a Non Farm Payroll figure of around -600,000 which will be announced on Friday. Also on Friday we get some manufacturing and industrial production data for the UK which will make grim reading.
This has been an uneventful week for trading in my CFD portfolio. I only opened the one position which was a short in Pearson although I did close out a few physical holdings. Today with the market sell off my Unilever short has now moved firmly into profit and with Q4 and full year results to be announced next Thursday I will be keeping a close eye on them as the week progresses. This is a position that I opened before Christmas at £15.52 and it has been as high as £16.80 before moving back. I have a target price of around £15.
Next week I will also be taking a close look at the Vodafone IMS on Tuesday as well as the BP IMS also on Tuesday. I have traded both of these stock during recent months.
Next week is the big economic numbers week with the manufacturing ISM index in the US on Monday. The figure last time was 32.4 and with the manufacturing sector in real difficulties I would expect to see a similar figure at best and possible worse than last time. On Wednesday we get the equivalent figure for the non manufacturing sector. The figure last time was 40.6 with the consensus expecting around 39 for January. Both sets of ISM data are sitting at historically low levels consistent with a fast rate of contraction in the US economy. On Thursday we get the results of the Bank of England MPC meeting where it is widely expected that another 50bp cut to 1% will be implemented. On the same day the ECB meets, but they have already made it clear that the rate will remain at 2% for the time being. On Thursday we get the last of the initial jobless claims for January in the US and it is already clear that we are heading for a Non Farm Payroll figure of around -600,000 which will be announced on Friday. Also on Friday we get some manufacturing and industrial production data for the UK which will make grim reading.
This has been an uneventful week for trading in my CFD portfolio. I only opened the one position which was a short in Pearson although I did close out a few physical holdings. Today with the market sell off my Unilever short has now moved firmly into profit and with Q4 and full year results to be announced next Thursday I will be keeping a close eye on them as the week progresses. This is a position that I opened before Christmas at £15.52 and it has been as high as £16.80 before moving back. I have a target price of around £15.
Next week I will also be taking a close look at the Vodafone IMS on Tuesday as well as the BP IMS also on Tuesday. I have traded both of these stock during recent months.
Thursday, January 29, 2009
Lots of US economic data today, none of which has provided any sign of hope. New home sales fell to an annual pace of just 331,000 way below the consensus estimate of 400,000. The building of new homes in the US is not far off standstill. With so many unsold properties, somewhere around 12 months supply, it is hard to envisage any sign of stability in house prices until 2010 at least. The durable goods orders for December also disappointed on the downside showing a 2.6% decline compared to consensus estimates of a 2% decline. The initial jobless claims figure confirms that we are on course for payrolls to show another 600,000 people out of work in the US during January. The market has sold off today on the back of all of this grim news and with the first stab at Q4 US GDP due to be announced tomorrow I think we can expect further selling pressure if as I expect this figure is worse than expectations. The consensus is for an annualised decline of 5.4% which I think could easily be more like 6%.
Wednesday, January 28, 2009
The Fed rate will remain at close to zero as announced by the Federal Reserve tonight and they have also made it clear they will purchase long term treasuries if necessary to help stimulate lending. There is no news in this and I doubt it will have much if any market impact. In the UK the banking sector and financials have been bouncing as concerns appear to be easing that full nationalisation was on the cards for some of the biggest banks. The catalyst for all of this was the announcement from Barclays on Monday that it did not expect to need to raise more capital. At the moment I find it difficult to believe that this is the end of the story especially given the ongoing deterioration in bad debts. We have a long way to go and I think nearly every analyst is struggling to come up with a confident valuation or forecast for any of the UK banks although Citigroup appears to be the exception having raised Lloyds to a buy today. I still believe it is a sector only for the brave, but if you had bought in late last week and still hold today some serious returns would have been made!
Excitement over the Obama fiscal stimulus package and the prospect of a bad bank to absorb the toxic debt of US banks and financial institutions is driving the market at the moment. I suspect that this will be short lived. I am unconvinced that the fiscal stimulus package will achieve a great deal apart from reducing the amount by which US GDP falls this year and possibly next. The real problem is that tax cuts may not have the desired effect as the US savings rate is going to rise significantly over the coming months as households repair their broken balance sheets. Consequently there will be little impact on economic growth. Government expenditure will have a greater impact but this may well prove to be a short term boost without any lasting impact. Even $800bn is small compared to the destruction in value we have already seen and are going to see over the coming year. Nevertheless it is a step in the right direction and I do hope that it has the desired effect.
I sold out of my Marks and Spencer CFD portfolio holding today for a profit and I have retained my physical holding. There may be a little more to go for if the market maintains its momentum tomorrow. Not unexpectedly Pearson made some progress today and that short is around 2% out of the money at present, but I am happy to hold that at the moment and my other short Unilever seems to be finding it difficult to make headway even in a strong market and I am still hopeful that it will return back into profit soon.
Excitement over the Obama fiscal stimulus package and the prospect of a bad bank to absorb the toxic debt of US banks and financial institutions is driving the market at the moment. I suspect that this will be short lived. I am unconvinced that the fiscal stimulus package will achieve a great deal apart from reducing the amount by which US GDP falls this year and possibly next. The real problem is that tax cuts may not have the desired effect as the US savings rate is going to rise significantly over the coming months as households repair their broken balance sheets. Consequently there will be little impact on economic growth. Government expenditure will have a greater impact but this may well prove to be a short term boost without any lasting impact. Even $800bn is small compared to the destruction in value we have already seen and are going to see over the coming year. Nevertheless it is a step in the right direction and I do hope that it has the desired effect.
I sold out of my Marks and Spencer CFD portfolio holding today for a profit and I have retained my physical holding. There may be a little more to go for if the market maintains its momentum tomorrow. Not unexpectedly Pearson made some progress today and that short is around 2% out of the money at present, but I am happy to hold that at the moment and my other short Unilever seems to be finding it difficult to make headway even in a strong market and I am still hopeful that it will return back into profit soon.
Tuesday, January 27, 2009
A quiet day with little to move world markets. The US consumer confidence data fell to a new low which is unsurprising given the speed at which people are losing their jobs. My new short in Pearson has started to move in the right direction and it may be a little while before I achieve my price target. Everything else is very close to where I bought it and it is a case of waiting for a more volatile day. The durable goods orders in the US on Thursday should provide that and with Q4 US GDP on Friday I am sure we will get some big moves in the market before the week is out.
Monday, January 26, 2009
The existing home sales and leading indicators in the US today were positive rather than negative which provided an immediate boost to the market and helped the UK to rally further. The announcement from Barclays that its financial position is stronger than what most if not all commentators and analysts felt was the case helped the market and the financials in general during morning trading.
Today I used the strength in the market to sell out and take profits in my physical holdings of BP and British Telecom whilst I opened a short position in my CFD portfolio in Pearson. I have nothing against Pearson which does have a quality earnings stream, but valuation does now look full and more importantly a significant proportion of their earnings are derived from the US education market. Given the deteriorating position of US state budgets I believe there is earnings risk. In addition the FT will be struggling to maintain momentum in advertising given the state of financial markets and it is difficult to know how Penguin publishing will perform as the recession gathers momentum. On a positive note their US earnings will benefit from the strong dollar which will help to mitigate the impact of an earnings slowdown.
Today I used the strength in the market to sell out and take profits in my physical holdings of BP and British Telecom whilst I opened a short position in my CFD portfolio in Pearson. I have nothing against Pearson which does have a quality earnings stream, but valuation does now look full and more importantly a significant proportion of their earnings are derived from the US education market. Given the deteriorating position of US state budgets I believe there is earnings risk. In addition the FT will be struggling to maintain momentum in advertising given the state of financial markets and it is difficult to know how Penguin publishing will perform as the recession gathers momentum. On a positive note their US earnings will benefit from the strong dollar which will help to mitigate the impact of an earnings slowdown.
I will comment on the market later on, and for the time being I have placed below our usual notes on the the economic data coming this week.
The week ahead holds a lot of market moving data, but all of it is focused on the US with little in Europe to make any real difference to market sentiment. In addition to which we have the FOMC meeting in the US. With the Federal Reserve rate standing at 0.25% the market focus will be on the statement they issue and any indication of additional quantitative easing such as buying longer dated Treasury securities.
On Monday we get the existing home sales data for the US with the consensus expecting a decline from the November level of 4.49m to 4.4m on an annualised basis. Given the increasing levels of unemployment in the US and the deteriorating credit worthiness of buyers a further decline seems inevitable. With the housing stock standing at close to 12 months of supply the downward pressure on house prices looks set to continue for some time. On Monday we also get the US leading economic indicators which are set to show a further decline month on month. The consensus expectation is for a decline of 0.3%.
On Tuesday we get the US Conference Board consumer confidence data which is expected to decline from the November level of 44.7 to a consensus estimate of 39.1. Given the levels at which unemployment is rising combined with further falls in the equity market it seems likely that another big drop in confidence will be announced.
The FOMC rate decision on Wednesday will leave the rate at 0.25% as there is no where to go, but the accompanying statement will set the tone for market trading.
On Thursday the durable goods order for December are going to be significant. The consensus is expecting a decline of 2.0% for December which would make 5 monthly declines in a row. Given the dire state of the US auto industry at the moment it is difficult to see anything but another decline which could be worse than the consensus figure. On Thursday we also get the initial jobless claims figure for the US with the latest weekly figure expected to show we are headed for a monthly Non Farm Payroll figure of close to 600,000. This is unlikely to shock the market although a further deterioration would be unwelcome news. Finally, on Thursday in the US we get new home sales figures which are expected according to the consensus to decline to 400,000 on an annualised basis. Not a market moving statistic but what is important is stability in the US housing market and without this there is no foundation for recovery. The existing stock of new homes available for sale remains at uncomfortably high levels.
In Germany on Thursday we get unemployment data where the rate is almost certainly going to move higher and for Europe we will have various sentiment indicators published including Business, Industrial, Services and Consumer confidence. We will also see published some data on private sector loans which will inevitably be weak due to much stricter lending criteria and a general unwillingness amongst the financial sector to release cash as they rebuild their battered balance sheets.
Friday brings us to the big market moving data of the week when we get the first stab at Q4 US GDP. Consensus is showing an expected annualised decline rate of 5.4%, but given the sharp contraction in economic activity across all areas during the fourth quarter we would not rule out a bigger figure and this could easily result in a market sell-off. Finally, on Friday we get another confidence indicator with the University of Michigan Consumer sentiment figure.
The week ahead holds a lot of market moving data, but all of it is focused on the US with little in Europe to make any real difference to market sentiment. In addition to which we have the FOMC meeting in the US. With the Federal Reserve rate standing at 0.25% the market focus will be on the statement they issue and any indication of additional quantitative easing such as buying longer dated Treasury securities.
On Monday we get the existing home sales data for the US with the consensus expecting a decline from the November level of 4.49m to 4.4m on an annualised basis. Given the increasing levels of unemployment in the US and the deteriorating credit worthiness of buyers a further decline seems inevitable. With the housing stock standing at close to 12 months of supply the downward pressure on house prices looks set to continue for some time. On Monday we also get the US leading economic indicators which are set to show a further decline month on month. The consensus expectation is for a decline of 0.3%.
On Tuesday we get the US Conference Board consumer confidence data which is expected to decline from the November level of 44.7 to a consensus estimate of 39.1. Given the levels at which unemployment is rising combined with further falls in the equity market it seems likely that another big drop in confidence will be announced.
The FOMC rate decision on Wednesday will leave the rate at 0.25% as there is no where to go, but the accompanying statement will set the tone for market trading.
On Thursday the durable goods order for December are going to be significant. The consensus is expecting a decline of 2.0% for December which would make 5 monthly declines in a row. Given the dire state of the US auto industry at the moment it is difficult to see anything but another decline which could be worse than the consensus figure. On Thursday we also get the initial jobless claims figure for the US with the latest weekly figure expected to show we are headed for a monthly Non Farm Payroll figure of close to 600,000. This is unlikely to shock the market although a further deterioration would be unwelcome news. Finally, on Thursday in the US we get new home sales figures which are expected according to the consensus to decline to 400,000 on an annualised basis. Not a market moving statistic but what is important is stability in the US housing market and without this there is no foundation for recovery. The existing stock of new homes available for sale remains at uncomfortably high levels.
In Germany on Thursday we get unemployment data where the rate is almost certainly going to move higher and for Europe we will have various sentiment indicators published including Business, Industrial, Services and Consumer confidence. We will also see published some data on private sector loans which will inevitably be weak due to much stricter lending criteria and a general unwillingness amongst the financial sector to release cash as they rebuild their battered balance sheets.
Friday brings us to the big market moving data of the week when we get the first stab at Q4 US GDP. Consensus is showing an expected annualised decline rate of 5.4%, but given the sharp contraction in economic activity across all areas during the fourth quarter we would not rule out a bigger figure and this could easily result in a market sell-off. Finally, on Friday we get another confidence indicator with the University of Michigan Consumer sentiment figure.
Friday, January 23, 2009
The UK GDP data today was bad with a fall of 1.5% in Q4 which to me suggests that this year will almost certainly be worse than the anticipated 2 to 2.5% which many economists are forecasting. The ONS retail sales data for December did not look good either. The non seasonally adjusted volume of non food retail sales in December rose 2.4%, but in value terms they fell 3.6% due to heavy discounting and the cut in vat. In food stores, non seasonally adjusted sales value rose by 2.1 per cent but the volume of food sales fell by 2.1 per cent. Food inflation of 4.2% has saved the day for the food retailers, but we expect this benefit will slowly disappear over the coming months providing very difficult conditions for the traditional food retailers whilst the discounters should continue to benefit. The ONS data is notoriously volatile and I would not necessarily place huge emphasis on this data, but it does nevertheless suggest that further downgrades across food and non food stocks are likely over the coming months.
Nothing to report on the trading front today. Next week I will be interested in the WH Smith Christmas trading update. It is a stock that I have been watching for a while and may well start to trade once the update is out of the way on Monday.
Nothing to report on the trading front today. Next week I will be interested in the WH Smith Christmas trading update. It is a stock that I have been watching for a while and may well start to trade once the update is out of the way on Monday.
Thursday, January 22, 2009
The US housing starts were awful falling to a record low in December of 550,000 on an annualised basis. This is the lowest figure since records began in 1959. At this rate housebuilding will soon come to a grinding halt especially given the huge stock of unsold homes. Without a recovery in the housing market is is difficult to see the US consumer starting to spend for a long time to come.
In the market today I was interested in the next profit warning from BT due to a disappointing performance from its Global Services division. This is a result of a review into the operational performance of ongoing contracts which will result in a one off charge of £340m being taken with further charges likely when the Q4 results are announced. . On the plus side the rest of the Group appears to have outperformed relative to expectations with a 5% improvement in EBITDA over the same period last year. The key short term issues for the BT share price aside from the ongoing reorganisation of Global Services are the triennial pension fund review, the results of which will not be known until the final results on the 14th May. Cash flow will be impacted by any additional contributions that the company will have to make as a result of this review and with Global Services also eating into cash it seems almost inevitable that a dividend cut will occur during 2009. We have factored in a worst case scenario of a fall to 8p (currently 15.8p) with consensus sitting around the 10p mark which should be covered by cash flow. The shares today are off by 12% to stand at £1.08 and at this level stand on a worst case forward yield of 7.4% and possibly as much as 9.2%. I believe that at current levels the shares will be underpinned by the prospective yield and the market does appear to be fully discounting a cut. I took the opportunity to buy a small holding this morning at £1.06 and will probably sell out tomorrow if the shares recover any more from the close of £1.118.
I also sold today my holding of Home Retail which I bought after the disappointing trading statement earlier in the month.
I noticed that Unilever sold off today even when the market was up 40 points which suggests the valuation is perceived by the market as looking fairly full which gives me some confidence that they are unlikely to rally much further from current levels.
In the market today I was interested in the next profit warning from BT due to a disappointing performance from its Global Services division. This is a result of a review into the operational performance of ongoing contracts which will result in a one off charge of £340m being taken with further charges likely when the Q4 results are announced. . On the plus side the rest of the Group appears to have outperformed relative to expectations with a 5% improvement in EBITDA over the same period last year. The key short term issues for the BT share price aside from the ongoing reorganisation of Global Services are the triennial pension fund review, the results of which will not be known until the final results on the 14th May. Cash flow will be impacted by any additional contributions that the company will have to make as a result of this review and with Global Services also eating into cash it seems almost inevitable that a dividend cut will occur during 2009. We have factored in a worst case scenario of a fall to 8p (currently 15.8p) with consensus sitting around the 10p mark which should be covered by cash flow. The shares today are off by 12% to stand at £1.08 and at this level stand on a worst case forward yield of 7.4% and possibly as much as 9.2%. I believe that at current levels the shares will be underpinned by the prospective yield and the market does appear to be fully discounting a cut. I took the opportunity to buy a small holding this morning at £1.06 and will probably sell out tomorrow if the shares recover any more from the close of £1.118.
I also sold today my holding of Home Retail which I bought after the disappointing trading statement earlier in the month.
I noticed that Unilever sold off today even when the market was up 40 points which suggests the valuation is perceived by the market as looking fairly full which gives me some confidence that they are unlikely to rally much further from current levels.
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