Our normal Monday review:-

The scale and depth of the worldwide recession was clearly evident last week with the 3.3% quarter on quarter decline in Japanese GDP during the last quarter of 2008 which is an incredible 12.7% decline on an annualised basis. Given that this is the second largest economy in the world it certainly makes the figure even more significant. The decline was primarily due to a collapse in exports against a modest improvement in imports. With the prospect of inventory destocking over the first quarter of 2009, GDP is likely to continue contracting. The Taiwanese economy also published a terrible set of Q42008 GDP data with an 8.4% year on year decline and again a collapse in exports was primarily to blame. To cap it all Russian Industrial production fell 20% year on year in January. In the US the car makers stand on the brink of bankruptcy.

The inflation data for the UK last week did not show as large a decline as many were expecting. The annualised CPI rate for January was 3% which was down 0.1% from the previous month. Expectations were for a decline to around 2.7%. Nevertheless the CPI is still expected to continue its decline and the Bank of England expects it to fall below the 2% target over the coming months and it is expected to remain below this figure for at least 2 years. The RPI figure was down to just 0.1% from a previous figure of 0.9% reflecting the impact of declining house prices and mortgage payments.

We also had the minutes of the latest MPC meeting last week. One member voted for a 1% cut rather than the 0.5%. Overall it seems likely that rates will be reduced by another 50bps at the March meeting. What is also clear is that the utilisation of quantitative easing is imminent and in fact the Governor is expected to write to the Chancellor this week to seek authority to begin the purchase of government and other securities, financed by the creation of central bank money using the asset purchase facility.

The state of the UK’s public finances was published last week and it did not make good reading. The impact of the injections into the banking sector will be felt for many years to come, but we also have to keep one eye on tax receipts which are in sharp decline. January’s public sector net borrowing surplus was £3.3bn some £10bn less than last year. Given that this is an important month for tax receipts the shortfall shows how the coming 12 months is likely to be significantly worse with receipts ranging from corporation tax, income tax and vat likely to be heavily down. The Public Sector Net Borrowing Requirement is expected to be far higher than anything the Chancellor is predicting.

In the US we had the National Association of Home Builders (NAHB) housing market index which rose from the January level of 8 to 9 during February. Hardly a major jump for an index where a level above 50 is considered to be one of optimism about house building conditions and below 50 suggests a deteriorating environment.

The latest FOMC meeting minutes were also published. The interesting aspect were their expectations for US GDP growth which now stand at -0.9% for 2009, +2.9% in 2010 and 4.4% in 2011. This compares to trend growth which according to them is +2.6%. If these figures were realised the outlook for equity markets during the second half would be very positive indeed. We remain sceptical firstly of a relatively modest decline in US GDP this year of -0.9% and a move back to just above trend growth in 2010. A stronger recovery during 2011 does seem more plausible.

US Industrial production declined during January by 1.8% which was worse than consensus estimates. Manufacturing production dropped by 2.5% month on month with the decline exacerbated by a significant decline in auto production. Given the high level of inventory held by the manufacturers the trend is likely to remain in negative territory over the coming month.
There was more grin news for the housing sector with a decline in the housing starts to an annualised figure of just 466,000 units which was well below consensus estimate of 530,000. House builders in the US are not unexpectedly coming to a grinding halt. The surplus of housing stock which stands at over 12 month of supply will leave this figure under considerable pressure for some time to come.

Finally, the manufacturing data we had from the Empire (a record 7 year low) and Philadelphia Fed (18 year low)were considerably worse than expectations showing the dire state of the US manufacturing sector.

Next week in the US we get the Conference Board consumer confidence data on Tuesday which is likely to be languishing at record lows. On Wednesday we get existing home sales data. The data for December actually showed an n improvement of 6.5% which was probably more due to distressed sales rather than any underlying improvement in the market. The consensus is expecting an annualised rate of 4.8m units. The significant data of the week will be durable goods orders for January which are published on Thursday. The consensus expects orders to have declined by 2.5% during January. Given the significant decline in world demand during the fourth quarter it is difficult to see any improvement in conditions during January and there is a good possibility that this figure will be worse than expected. Also on Thursday we get new home sales data which is expected to be little changed from the previous month figure of 330,000 on an annualised basis. On Friday we get the second estimate for fourth quarter US GDP which is expected to be revised down to an annualised rate of decline of around -5.4% compared to the initial estimate of -3.8%. On Friday we get the final February University of Michigan Consumer Sentiment figure which is expected to be around 56, the same level as the previous estimate. Bernanke will be speaking on Tuesday when he gives his semi-annual testimony before the Senate Banking Committee.

Not a great deal of major economic data in the UK this week, on Tuesday there will be the publication of business investment data and also the British Bankers Association mortgage data and the quarterly CBI distributive trades data. Also on Tuesday we get some Euro zone trade data. On Wednesday we get the second estimate for UK fourth quarter GDP. This is expected to be revised down to -1.6% from -1.5% due to the impact of worse than expected Industrial Production data. On Thursday we get some Euro zone consumer confidence data and keep a look out for the Japanese CPI data. The Japanese economic situation is deteriorating at an incredibly fast rate and the CPI is again moving close to negative territory, a rate of 0% is expected for January. On Friday we get the Euro zone CPI data and a decline to an annualised rate of 1.1% from the previous December figure of 1.6% is anticipated.

Last week we updated our research notes on BT and Daily Mail and General Trust. If you are a client you can access these notes via your client login to our research centre.

I have not had opportunity to update the blog over the last two tradings days of last week, but nothing has changed in my CFD portfolio. Friday brought another hefty decline in the UK market and my holdings of Unilever and Vodafone did fall back, but so far are holding up relatively well and I think will respond quickly to any rally. It is difficult at this stage to see the market rebounding much above the 4000 level with so much bad news and absolutely no sign of any improvement in the economic trends. The coming week brings a reasonable amount of market moving economic data and I fear that world markets will again be under pressure. I will provide our usual economic summary tomorrow.

Another bad day for the UK market with sentiment still very negative. The latest housing start data in the US was the worst on record at an annualised rate of only 466,000. With little prospect of a housing market recovery in the US it seems likely that housebuilding in the US will remain at very depressed levels.

I cannot at the moment see any near term catalyst to boost the equity market and whilst some stocks are definitely sitting on attractive valuations investors have little appetite for buying with valuations look set to get even cheaper in the very short term.

I mentioned yesterday that I had bought some Daily Mail and I was able to sell these today after a 4% upward move against the overall trend in the market which was quite pleasing. I have decided to go long of some Unilever today for the first time in many months. The recent results were bad and the outlook this year is a very difficult one for Unilever, but with them now around the £13.70 mark I have decided to take a position. With a safe yield of around 5% I feel that the downside in the shares is reasonably limited over the next couple of months with a good 4-5% upside if the market rallies at all from the current level.

Another big negative day for the FTSE100 and world markets as concerns grow that the worldwide recession is going to take a lot longer to reverse than originally anticipated. The world will need the US to lead any recovery and I think the general consensus is that the Obama fiscal stimulus package isn't enough and doesn't provide sufficient short term relief to prevent a heavy drop in GDP this year and possibly a further decline during 2010. In the UK one member of the MPC was quoted to say that a GDP drop of 4% or more is possible in the UK this year. This certainly looks very possible and would be a very significant event indeed leaving a high level of unemployment and an output gap that will leave inflation at low levels for some time to come. Growth in 2010 is more likely to be very subdued and it looks increasing likely that we will have to look to 2011 for the first year of growth back towards the trend.

I have bought a small CFD position in Daily Mail today. The IMS statement last week was broadly in line with expectations. Visibility remains low in terms of predicting advertising revenues this year and with the business to business division also suffering from the recession this will be a difficult year for Daily Mail. However, it has a strong brand and cash flow looks more than sufficient to cover the 5% yield on the shares. The shares have traded between £2.50 and £2.80 for sometime now and it should provide opportunities for trading over the coming weeks.

The FTSE100 is now close to the 4000 level and the risks of it now falling back below this level have increased significantly. I believe there is a real risk that with earnings continuing to be downgraded and the outlook showing no sign of improvement we may well see a decisive move below 4000 perhaps to a new low.

I have pasted below our usual Monday morning briefing:-

Last Week

Last week in the UK we had trade data and an update from the British Retail Consortium. The trade data showed an improvement in the trade deficit from £8.1bn to £7.4bn in December which was the lowest deficit for one and a half years. Despite the weak pound exports only rose by 0.3% month on month whilst imports fell by 2.5% which is the primary reason for the decline in the deficit. Under more normal circumstances a weak pound would have generated a strong response in export demand and once a worldwide recovery does begin we would expect to see exports to respond.

The January retail sales data provided what we would consider to be something of a blip and the annualised improvement of 1.1% is likely to prove short-lived. It is not impossible that January spending was boosted by an element of deferred expenditure from December as consumers decided to sit tight and await the January sales. The ongoing decline in house prices combined with rising unemployment will continue to impact on consumer spending as households start to allocate a greater percentage of disposable income to savings as they continue to repair their own balance sheets.

On Wednesday we had the Bank of England quarterly inflation report. The main elements were an expectation of a severe recession during most of 2009 followed by a gradual recovery during the last quarter and a return to trend growth during 2010. Interest rates are expected to fall further and the use of quantitative easing now looks to be on the cards with the effectiveness of further interest rate cuts likely to be less as rates head towards zero. Inflation is expected to remain below the target of 2% well into 2011 which suggests low interest rates are here for at least the next two years. A 50bp cut in March looks to be almost a certainty now. We find it hard to believe that a strong recovery back to trend growth will occur during 2010 given that lending will be much reduced for a very long time as the process of deleveraging continues, especially given the withdrawal of a large number of lending institutions from the market.

During the week in the US the main news was the announcement by Treasury Secretary, Tim Geithner, of the new Government plan to assist the banking industry. The plan is focused on four main areas, the creation of a public/private investment fund to purchase toxic assets from banks, further injections of capital into the banks, a further expansion of the TALF (Term Asset Backed Liquidity Facility), and finally, a program to reduce the number of mortgage foreclosures. The costs of all of this are likely to go into the trillion dollar bracket and the fact that the funding of such an exercise remains uncertain and given that the final cost is also open to significant debate left the market feeling very unimpressed. What is clear is that they do not know what scale of rescue package will be sufficient to achieve their objectives. There is also every chance that the scale of the entire rescue program may well be reduced as it moves its way through the various stages of US legislature. You only have to look at the problems the fiscal stimulus package is currently encountering to see why the market remains very sceptical of the effectiveness of any such announcement no matter what the intended scale of intervention is.

This Week

There is not a great deal of major economic data scheduled for the UK this week. Look out for the UK inflation data on Tuesday when the CPI is expected to show a further decline from 3.1% to an annualised rate of around 2.6%. A larger decline is possible although food price inflation does still appear to be holding up. On Wednesday we get the minutes from the Bank of England MPC meeting which will almost certainly show a unanimous decision in favour of the recent 50bp cut. On Thursday we get Public Sector Net Borrowing Data. Finally, on Friday we get more retail sales data for January.

In the US on Tuesday we get the Empire State Manufacturing data for February. This index is a monthly survey of manufacturers in New York State. The index is continuing to bounce along the bottom and is expected to show a further decline to around -24 from the -22.2 reported for January. With falling demand and high inventories, production cuts are likely for some time to come. The FOMC meeting minutes will be published on Tuesday and investor focus will be on discussions that have taken place concerning their intentions to begin the purchase of Treasury securities. On Wednesday we get the housing starts for January. The previous figure for December was 550,000 units on an annualised basis with expectations for January around 530,000. With so much unsold housing stock the house building industry in the US is likely to keep production at historically low levels. On Wednesday we also get Industrial Production figures for January. The decline during December was 2.0%. The consensus expectation for January is for a further decline of 1.5%. With demand at home and abroad continuing to fall we could see a bigger decline than the consensus is expecting. On Thursday we get the results of the Philadelphia Fed survey for February which is expected to show that the manufacturing sector remains in the doldrums. Also on Thursday we get the Producer Price Index figures for the US which will reflect the continuing decline in input costs. Other data due on Thursday are the weekly initial jobless claims which are likely to show a continuing monthly run rate of another 600,000 unemployed. Finally, on Friday we get CPI data for the US which is expected to show a slight rise over the month due to the impact of higher energy prices, but on an annualised rate it will fall and this trend is expected to continue over the coming months as consumer prices remain under pressure. Please note that Monday is a US holiday for President’s Day.

Lloyds Banking Group

Last week the dramatic announcement of a huge HBOS loss demonstrates the potential for further bad debts yet to be announced by the banks. Interestingly enough the press focused on the headline loss, but Lloyds had already flagged a large capital adjustment would be made for HBOS in November and the overall number was around £1.6bn larger than anticipated and not £5bn more which some press headlines were suggesting. Nevertheless, bearing in mind that a lot of the HBOS loss related to corporate loans suggests that with an economy that is continuing to deteriorate we have to expect more of the same. The potential for further Government injections of cash looks to be almost inevitable. We continue to avoid the sector.

Our Research

During the week we have updated our research notes on Aviva and Unilever. This week we will be updating our BT and Daily Mail and General Trust notes. We will also be reviewing the Reed Elsevier results. If you are a client of The CFD Group you can access any of our notes via your client login.

The profit warning from Lloyds this afternoon is a clear sign of the dangers that are continuing to lurk in the banking sector. The pre-tax loss of £8.5bn relating to HBOS is primarily due to £7bn of impairment charges in the corporate division. The use of more conservative provisioning by LLoyds is high-lighted as the reason for this write-down. The amount is around £1.6bn higher than previously announced in November. This certainly has implications for the rest of the sector in how they are valuing their assets and liabilities. I believe that Barclays is a particular risk on this point. Across the board the exposure to potentially harmful write downs remains very signifiant with credit exposures in the trillions and I fear there is a lot more of this to come.

Other news today is a 1.5% drop in EU GDP for the fourth quarter which is hardly surprising given the rapid deterioration in economic conditions and especially in Germany.

Next week we get the UK CPI data on Tuesday and this will undoubtedly show a further month on month decline down to an annual rate of around 2.6%. On Wednesday we get the minutes from the last Bank of England MPC meeting and this will show a unanimous vote in favour of the last 50bp cut with another cut of 50bp now almost a certainty judging from the Quarterly Inflation Report this week. Apart from that we also get some more retail sales data for January next Friday. In the US it is a very quiet week with no major data due for publication.

The US Retail Sales figures today did as per the UK and rose by 1% during January. The market reaction was rather muted and I think there is little trust at the moment in any economic indicator which bucks the downward trend. There is just too much evidence at present to show that the US economy is heading firmly south and any economic recovery when it does come will have to prove itself in some of the data which carries considerably more weight such as the ISM numbers.

The Bank of England quarterly report yesterday made particularly gloomy reading especially given that they usually take a slightly more optimistic stance. There was some optimism in their belief in a relatively strong economic recovery during 2010, but I can't help but feel that by 2010 there will be so much slack in the economy with high unemployment and output significantly below capacity that any recovery when it does come will be very muted. This will almost certainly mean low inflation and low interest rates for some time to come. The MPC also indicated that the effectiveness of interest rates is diminishing and it is now likely to utilise quantitative easing. What should also help is the decline in sterling and the low oil price which will in due course have a favourable impact.

What all this means for the market is hard to say, but I would anticipate a rally around mid year once we have got through two bad sets of quarterly GDP data. Inventory draw down in the US and the UK will have a significantly negative impact on GDP during the first half. For an equity rally to be sustainable we will have to see at least some consistent signs of recovery in the economic data.

Very little to report from today's markets. With little momentum coming from the US we were lucky to end the day in positive territory. Tomorrow should bring a little more excitement in the afternoon with the publication of US retail sales for the last month. I doubt that they will surprise on the upside as the UK figures did earlier in the week. Consensus is expecting a decline of around -0.8% although I would not be surprised to see a figure worse than this. The destruction of household wealth in the US will continue to impact on consumer spending and it may be a while yet before spending starts to pick up again. I believe that in the UK consumer spending will contract considerably over the coming months. The positive January figure may well represent an element of delayed expenditure from Christmas. The ongoing decline in household wealth driven on by a collapsing property market will inevitably result in reduced expenditure particularly given that a greater percentage of disposable income will be saved.

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.

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.

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.

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.

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.

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.

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.