A busy week for me and my blog posts have had to take a back seat. Yet again the data this week has been awful. The market feels as if it is in freefall and is looking for a base. At present it is impossible to predict where the current correction will find a floor. In the US the ISM data was poor as expected and the biggest concern has to be the ADP employment numbers which were worse than expectations with a decline in private sector employment of 697,000 last month. This must mean that we are on course for a big decline in the Non Farm Payrolls tomorrow somewhere close to -700,000, but potentially larger.

The house price data in the UK today from the Halifax confirms the ongoing bleak outlook whilst the Bank of England interest rate decision was not unexpected. Monetary policy is now spent and the BofE can now only look to quantitative easing to boost economic activity. They now enter unknown territory and the impact short term and long term of pumping money into the economy is difficult to estimate, but what is clear is they have to do it.

I wonder if the insurers are going to take the place of the banks now that the shorting community have focused their attention in the sector. The results from Aviva today highlight the risks these companies face particularly with their significant corporate bond portfolios where provisioning is likely to grow although the final default bill may well be less than they are providing for. I suspect the sector is in for a tough time over the coming months, but it will be a sector that remains in good enough shape to recover well when times improve, something that cannot be said of the banking sector.

No activity on my CFD portfolio at present with the market more unpredictable than ever it is a lot easier to watch and wait. Tomorrow afternoon could be particularly interesting with the US unemployment data.

Very little to report today so I have reproduced an extract from our Pearson note following their results earlier this week:-

Pearson produced a strong set of full year results this week as anticipated following their Q4 trading update in January. Sales were up 8% at constant exchange rates to £4,811m with pre tax profit at £674m (2007 £549m) and clean eps of 57.7p (consensus earlier in the year was 52p). The total dividend for the year was 33.8p which was a little shy of expectations. However, this was a good result given the harsh economic climate and it reflects the resilient nature of the educational publishing division which represents over 50% of profits. The share price of Pearson has been rewarded for its more defensive characteristics despite the more cyclical nature of some aspects of the company’s business such as the FT and Penguin publishing. In February last year the shares were trading around £6.50 and remain at that level today which is an impressive performance against such a substantial decline in the overall market. The question is whether Pearson’s resilience will remain and if the momentum of the last few years could be about to stall.

Pearson generates around 60% of sales in the US. The strength of the dollar boosted sales by £320m and operating profit by £76m. Acquisitions added £199m to sales and £35m to operating profit. In addition because a lot of their debt is dollar denominated, currency movements added £410m to net debt to bring the total exposure to £1,460m. Net debt/EBITDA remains at a comfortable 1.7X and interest cover stands at 8.7x. Total free cash flow increased by £224m to £631m. All divisions made a better than expected contribution.

In the outlook statement the company re-iterated that trading towards the end of 2008 had become more difficult and they anticipate this to continue throughout 2009. There was mention that cost savings would be found to help mitigate the slowdown and they anticipate that the company will deliver earnings for 2009 at the same or a similar level to 2008 which equates to eps of around 57.7p per share. Given the strength of the 2008 results it is a little disappointing to already be guiding on a similar result for 2009. This does limit any upside in the shares and if anything we feel that the risk is to the downside.

Given the significant contribution that education provides to Pearson’s results we have to examine the downside risk. Given that this is primarily a US based business that is dependent on US State budgets the risks are clear. We know that the Obama fiscal stimulus package has earmarked funds for education, and undoubtedly this will benefit Pearson. However, it must also be borne in mind that with tax receipts in free-fall most State budgets are heading for significant deficits and whilst education remains a priority for them it is hard not to see pressure mounting to cut educational spending. This is a theme that we are going to see in Pearson’s other international markets.

Educational book sales are also likely to suffer as students adopt a policy of buying second hand books rather than new as they struggle to fund themselves through their education given the lack of jobs suitable for students. The FT was reported to have experienced a decline in advertising revenues during the fourth quarter of 2008 and it is difficult not to expect this trend to continue during the first half. Penguin publishing will also not escape the downturn. Recent results from US publishers suggest the market is turning ugly. Revenue at Harper Collins US operation was reported to have declined 25% for the last quarter of 2008 which was primarily due to the weak retail environment. Many US book retailers are having a hard time of it with declining revenue and this will have inevitable implications for Penguin.

It is difficult to be too negative about a company that has clearly bucked the trend over the last year and the share price has been incredibly resilient. We do not expect a sudden catastrophic deterioration in Pearson’s trading, but we do recognise that even the best will struggle to avoid the severity of this downturn. The shares are trading on a forward rating of 11.2x earnings and a prospective dividend yield of 5.2% and we will be looking to incorporate Pearson into our shorting strategy if the shares strengthen from current levels.

A very bad two days for world markets and we are clearly now at a stage where no one knows where the point is at which a degree of stability will return. On a fundamental basis I think we will soon reach at least a short term floor. A great deal depends upon the US market and I have read several reports which are looking for a floor on the S&P500 of around 600 which means possibly another 15% in the US and this could easily drag the FTSE100 closer to the 3,000 level. There are cheap stocks out there which are getting cheaper and at some point we will see a short term bounce which could be quite significant the further we fall. At the moment the fear factor has definitely taken hold and undoubtedly there will be more and more fund redemptions which will result in forced sales and more market weakness. Nevertheless with the FTSE100 seemingly on a path towards the 3,000 level I will not be losing sight of the fact that at some point a recovery will come and in whatever shape or form good quality stocks will benefit.

My CFD portfolio position in Vodafone was stopped out today. I never find it easy to cut a loss especially on a good stock, but with the risks of further downside in the market there may well be an opportunity to buy back in at a lower level. At the moment capital preservation is the name of the game.

A terrible day for world stock markets and the real concern I have is that there is nothing to prevent sentiment and the sell-off deteriorating further. What is needed is some evidence that economic conditions are stabilising and this week is unlikely to provide that. Stop losses in the current market are very important. No activity on my cfd portfolio today and if we see another significant sell-off my Vodafone holding will be at risk of being stopped out. Sometimes when markets are suffering from a very significant correction over a short time frame you have to accept that stop losses will be used. I have listed below our normal Monday briefing.

Another week dominated by huge banking losses and grim economic data. The US S&P 500 hit a twelve year low and the Japanese Nikkei 225 fell back to levels not seen since 1982. The UK FTSE100 remained firmly below the 4000 level. US consumer confidence plunged to an all time low and Bernanke in his speech at the Senate Banking Committee in Washington said that the US economy is in a severe recession contraction and warned that the recession may last into 2010 unless policy makers can stabilise the financial system.

Not a huge amount of economic data In the US last week, but what we did have gave little hope for recovery in the next few months. The level of consumer confidence in February declined to just 25.0 from 37.4 in January. This was a historically low level and suggests that the rate of consumer spending over the coming months will continue to decline as consumers cope with increasing unemployment, destruction of their wealth and a need to increase their savings rate to start rebuilding their own shattered balance sheets. Also in the US last week the Treasury announced details of its ‘stress test’ for banks with more than $100bn in assets. The basic idea is a forward looking assessment of the impact of an ‘adverse’ economic environment. If this shows that a bank would not be able to ‘comfortably absorb losses and continue lending’ then they are given six months to raise additional capital privately or tap into the Treasury ‘Capital Assistance Program’.

Absolutely no sign of housing market stability in the US, with existing home sales down 5.3% month on month in January to an annualised rate of 4.49m which was below consensus expectations of 4.8m units. Interestingly foreclosures accounted for a massive 45% of all activity which demonstrates just how bad the market is. With over 9 months of supply available it is difficult to see the US housing market reaching a bottom for several months yet. New home sales declined by a very significant 10.2% month on month to a record annualised low of just 309,000 units against expectations of 330,000. The inventory of new homes available for sale stands at over 13 months of supply. It looks increasingly like we will have to wait for 2010 before there is any real sign of an upturn in prices.

The weekly initial jobless claims were again higher than expectations and we now look to be on course for a non-farm payroll figure to show in the region of 700,000 more unemployed during February. Durable goods orders for January fell by 5.2%, more than twice as bad as anticipated by the consensus. Finally, in the US we had the revision to fourth quarter GDP which was revised down from -3.8% to -6.4%, quite a significant revision although not totally unexpected given that the consensus expected a decline to around 5.8%. There is no doubt that the US recession is very severe and the question now is how long it will take for conditions to at least stabilise. The first quarter of 2009 is probably going to be close to as bad as the fourth quarter of 2008, but given the severity of the decline we may well be close to the worst stage of this correction.

In Germany a report showed that exports fell by a very significant 7.3% quarter on quarter rate which was clearly a primary reason for the 2.1% decline in 2008 Q4 German GDP. Inventory accumulation helped to mitigate the decline in GDP by 0.5% which as in the US suggests that inventory rundown will be a factor during Q12009 which is likely to contribute to another hefty decline in GDP. Japanese factory output fell a record 10% during January. Trade data for Japan was again awful with exports down 45.7% year on year in January. Breaking the figure down, the decline was widespread with exports to the US down 52.9%, Asia down 46.7% and Europe down 47.4% with the rest of the world declining by 34%.

UK house price data published by the Nationwide last week demonstrated clearly that the recent Halifax data which suggested house prices had started to recover was an anomaly. The seasonally adjusted data from the Nationwide for February showed a 1.8% decline, the sixteenth consecutive monthly drop. According to the Nationwide data, the peak to trough decline in house prices during the early 90s was 20.2%. Since the October 2007 peak, the decline has already been 20.59% according to the Nationwide who actually register the largest peak to trough decline of all the house price data providers. Many analysts suggest that house prices remain on course for a further fall of around 15% to 20% this year and another 5% to 10% decline during 2010.

GDP data for the fourth quarter was unrevised for the UK at -1.5%.

The first week of the month always brings a lot of the major US economic data. Today we kick off with the Institute for Supply Management Manufacturing Index which is expected to continue bouncing along the bottom which consensus expectations of 33.8 for February against the January figure of 35.6. The US manufacturing sector looks set to continue contracting for some time yet and given how depressed this index already is we feel it is unlikely to have a material impact on market sentiment unless it is a big miss. On Wednesday we get the ISM Non Manufacturing data. The January data did show a 3 point improvement to 42.9 and the consensus is expecting a modest decline from this level to 41 for February. Also on Wednesday we get the ADP employment report for the private sector which is always used as a guide for the Non Farm Payrolls due on Friday. The ADP report is likely to show a decline in private sector employment of between 550,000 and 650,000. The Beige book is published on Wednesday and this will undoubtedly show a continuing grim economic picture across the US when each of the Federal Banks reports on current economic conditions in its district. On Thursday in the US we have factory orders for January and the weekly initial jobless claims figure. This leads us into the big number of the week, the Non Farm Payroll data on Friday. The consensus is looking for a decline in employment of 645,000, but looking at the trends in the initial jobless numbers, this figure could easily exceed 700,000 which would almost certainly upset the market during Friday afternoon trading.

The UK and Euro zone data is not that significant this week. We have more inflation data for the Euro zone today whilst in the UK we get consumer credit data and mortgage approvals for January. On Wednesday we have Euro zone retail sales data which is likely to show a decline over January if the consumer confidence data is anything to go by. On Thursday we get the Bank of England interest rate decision and it is widely anticipated that rates will again fall by 50bp leaving us with a base rate of just 0.5%. The ECB also announces its interest rate decision on Thursday and we anticipate a cut of 50bp as well to leave the Euro rate at 1.5%.
This week we will be updating our research note on Pearson and we will be focusing on the Pearson full year results scheduled for today.

A quick trade update. I closed out my Next short on Friday for a nice profit after the heavy fall in the FTSE100 and the shares actually rebounded shortly after closing the position. I may well look to enter another short if the shares do move back up towards the £12 level. The market looks as if it is going to open weaker in the morning.

The words of Obama on his budget proposals appear to have drowned out the very bad durable goods order figure for January which was down by 5.2% more than double consensus expectations. This is the sixth consecutive fall with a previous month decline of 4.6%. Looking at the breakdown of the figure, inventory continues to decline and was run down at double the rate of December which demonstrates the likely impact on Q1 GDP of inventory declines. Excluding the impact of a 35% decline in defence orders, durable goods orders decreased 2.3%. Overall another bad figure and it would be surprising not to see a seventh decline next month.

Sales of new homes have fallen to a record low of just 309,000 on an annualised basis against consensus expectations of 324,000. Also today the weekly initial claims figures jumped to a monthly run rate of 667,000. It looks like we are on course for another huge non farm payroll figure next week of close to 700,000 out of work in one month.

Overall, nothing at present to suggest even a bottoming process is under way.

The market has certainly had a better day for a change driven on by the financials and very strong performances from the insurers with the likes of Legal and General up by 27% on the day. Not the kind of daily share price performance you would think for insurers 12 months ago. It just goes to show that at present the market finds it impossible to value these stocks. A sector only for the brave I think.

I did today take a short position in Next. Despite the better than expected retail sales data of the last month or so I am convinced that consumer spending will remain on a downward spiral. You only have to look at the house price data for today which to me suggests we are on course for another 20% decline in house prices this year. The consumer will respond to this and increased unemployment in only one way and that is reduced expenditure. The retailers have enjoyed a better performance so far this quarter, but I believe it is too soon to expect any kind of sustained recovery.

Little to report today. We had speeches from Obama and Bernanke within the last 24 hours. They were of course positive and this seemed to help the market a little, but it does nothing to change the outlook over the short term. Tomorrow we have the durable goods orders in the US which will shape trading tomorrow afternoon. A decline of around 2.5% during January looks to be on the cards and anything worse will almost inevitably result in a further market decline.

A very difficult market to call at the moment. Last year when the FTSE100 hit around the 3,800 level it bounced back above 4,000. At present it certainly has the feel of a market that is going to reach a new low. The fundamentals are deteriorating with earnings still being cut and dividends either being cut or clearly very at risk over the coming weeks and months. There is just no positive news flow whatsoever and for that reason the market is very susceptible to a move down to perhaps 3,500. A lot depends upon the performance of the US market and again it is very easy to see the S&P 500 below 700 and the Dow below 7000 anytime soon. However, if by some miracle we do get even the smallest piece of good news we could see a sharp albeit brief rally. At present we are focusing on only relatively defensive stocks and I am happy to keep my Unilever which is around 2.5% off the purchase price and the Vodafone which is around 7% off the purchase price. Both are still a fair amount away from my stop-loss targets, but that is not to say that a further significant decline won't bring them closer. The last stop loss we hit was in October last year when we had the major sell-off and at present there is a real risk of this happening again. I am looking at short possibilities which include Pearson although I will be awaiting their results on Monday before taking any action on this. They are on course to deliver a good set of results, but I believe the outlook statement will be very cautious and there may be an opportunity to short the shares. Tesco at the moment appears to be moving closer to being a potential short. More than one broker has started to raise concerns over the forthcoming results in April and an article in the last Sunday Times suggests that their US operation is now struggling. This may well turn the market against Tesco if it proves to be true.

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.