A good day for our trading and having opened positions in Tesco late yesterday when the shares sold off for no apparent reason they rebounded just as quickly this morning to give us a healthy profit. We also closed out long positions in GlaxoSmithkline which were taken towards the end of last week.

I am growing increasingly nervous of this market and a pull back seems inevitable to me although I suspect it will be the Autumn when things go horribly wrong. There is every chance that in the absence of any horror stories during the summer the market may well rally further, but I feel that eventually the economic data will take hold and a reality check will leave investors running for cover. In the meantime our aim is to focus on some of the more defensive stocks which are happily trading within reasonable ranges and so far it is a strategy that is working well. I think there are interesting short opportunities in some of the more cyclical stocks, but at the moment given how the market seems to be remaining so resilient it will take a brave man to short these and I think we need to see a shift in sentiment before contemplating a change in strategy.

Week Ahead

The market has again made progress over the week and clearly the number of commentators suggesting this is a bear market rally seem to be becoming part of a minority. There is still a strong argument for a bear case judging by the economic data and undoubtedly a lot of the market performance during recent weeks will have come from short covering and is arguably a technical based rally. What there is no dispute over is that the rate of contraction has clearly slowed down, but there is a big difference between a slowdown and a return to sustainable growth. Nevertheless we acknowledge that the current rally could easily roll on for some time yet.

During the last week there was eager anticipation ahead of the publication of the bank stress tests which in the main had already been leaked to the press and the announcement itself had little impact on the market. We has the ISM Non Manufacturing Index for April which was 43.7 compared to expectations of around 42, and we see this index remaining under pressure and certainly standing below the critical level of 50 for several months yet. Other key announcements of the week were the US unemployment figures which were better than expectations with the ADP Private payrolls showing a decline of 491,000 which was lower than consensus expectations of a decline of over 600,000 whilst the all important nonfarm payrolls came in with a decline of 539,000 against initial expectations of a 600,000 fall. Part of the improvement however was down to the one-off impact of the government employing people for the 10 year population census which over the month employed 60,000 people. It is hard to believe that this time last year the unemployment rate in the US was 5% and it now stands at 8.9%. We still appear to be on course for a further decline of over 500,000 in the number employed during the current month.

On Thursday of last week we had the results of the MPC and ECB interest rate meetings. Not unexpectedly the UK interest rate was maintained at 0.5%, and the Bank announced a further tranche of £50bn of quantitative easing bringing the total to £125bn which will be completed over the next 3 months. Given that this week we will see the publication of the quarterly inflation report we have to assume that they have already judged from this that further QE is necessary. Clearly with unemployment likely to continue rising for the rest of the year and with an output gap growing larger it is difficult to see any inflationary pressures near term. The ECB cut their rate by 25bp to 1% which was in line with expectations. There was no guidance on where rates are likely to go from here. Euro zone retails sales data for March was disappointing at -0.6% compared to consensus expectations of a modest 0.1% improvement.

This week is relatively quiet in terms of significant economic data. On Monday Ben Bernanke will be speaking about the stress test results although given the plethora of Fed officials talking last week we do not expect anything new that may move the market. On Monday in the UK we get the RICs house price survey and whilst activity is picking up we still expect the overall balance to show a continuing decline in house prices. On Tuesday in the UK we get the BRC retail sales results for April. Recent data has been a lot better than what most commentators have been expecting, but as the year develops we feel that consumer spending will remain under pressure. Also on Tuesday in the UK we get Industrial and manufacturing production data for March both of which are anticipated to show a month on month decline of 1%. We also get the UK trade balance on the same day. Wednesday brings the first major data of the week in the US with retails sales data for April. The consensus is expecting a modest improvement of +0.1% on the month, but we feel the risks are to the downside and a negative figure is highly probable.
The Bank of England issues its Quarterly Inflation Report on Wednesday. We can assume based on their decision to commit a further £50bn to Quantitative Easing announced last week that inflationary pressures are expected to remain subdued. Given the terrible initial Q1 GDP estimate of -1.9% quarter on quarter it seems likely that the report will contain a further downward revision to their GDP forecast for 2009 and this may well have an impact on the market. On the same day we get UK unemployment data for April and Eurozone Industrial Production data for March. On Thursday the US Producer Price Index data for April will give further insight into whether inflationary pressures are building in the supply chain. Friday is the most significant day with plenty of data to keep the market occupied. We get the first stab at Q1 GDP data for the Eurozone which is expected to show a significant quarter on quarter decline of 2.1%, with data for Germany, France and Italy due on the same day we would expect to see the worst performance from Germany which could show a hefty quarter on quarter decline of over 3%. On Friday in the US we get CPI data for April which the consensus expects to show a 0% reading month on month, but a negative figure is certainly not out of the question, plus on the same day we get Industrial Production for April and the latest University of Michigan Consumer Sentiment index. Also on Friday the latest Empire State manufacturing survey for May will be announced.

This week we will be focusing on the National Grid full year results due on Thursday and we will be updating our note on Unilever.

Sentiment and hope seem to be winning the day at the moment. Today's US unemployment numbers were better than expectations although part of the improvement was due to the Government hiring 60,000 workers for the 10 year population census. Nevertheless the ADP private payrolls also showed an improvement earlier in the week and overall it now seems clear that the economic data has improved although we still have some way to go before sustainable growth returns and unemployment looks set to continue increasing in the US and Europe for the rest of 2009 at least.

The debate as to whether this is a bear market rally is still raging although a lot of the bears seem to be becoming fewer in number and I suspect just when everyone goes quiet and a bull market phase appears to be happening the market will turn and we will have a big setback. You cannot ignore what the market appears to be saying and whilst it does get it wrong often as a trader you still have to ride the wave to keep up. We are doing so albeit in a moderate sense with one eye still on the prospect of this rally turning bad at some point soon. Our positions are very much focused on the companies that are relatively defensive simply because many of them are quite range bound and offer good short term trading opportunities whilst also providing downside protection if the market does turn.

One stock that we have not been trading for a while is Unilever although I must admit to having a position in my physical portfolio which I bought earlier in the year when the shares were out of favour. The results this week were not particularly good, but the relief that they were not as bad as some expected resulted in a strong rally yesterday. Now that sentiment towards the stock has improved I believe the shares will offer good trading opportunities and we will be focusing on Unilever over the coming days once the shares have settled down and we can see where the limits lie before entering into a trade.

An interesting day with the FTSE100 giving up a 120 point plus gain to stand slightly down at the time of writing. I do feel that we are now at a critical point where sentiment could easily turn quite negative and clearly market nerves over the results of the US bank stress tests are keeping traders on edge. After closing out our long positions in Tesco this morning at a nice profit I decided to short Pearson in my cfd portfolio which probably by luck more than judgement I caught at exactly the right level and shorted at £7.385 and closed out after the market fell at £7.19. We are sticking close to the defensive stocks at the moment which goes against the massive shift into cyclicals, but with still little sign of economic growth and a market seemingly fixated with the prospect of a strong recovery later this year the room for disappointment is high. I for one would not want to be buying some of the cyclicals which are now standing at levels that I think are hard to justify.

Week Ahead

Last week started with significant concerns over the possibility of a Swine flu pandemic, a concern that remains although the risks appear to have diminished during recent days. A pandemic even if the disease is mild would still have significant social costs and consequences for world economic growth. However, world stock markets have remained resilient in the face of these concerns and yet more disappointing economic data. It still seems that the market is anticipating a V shaped recovery to start some time during the second half. There is no doubt about the first part of the V, but we are still of the view that the other side will more likely resemble that of a long U shape. There remains real scope for disappointment which is more likely to hit home around September/October time when we believe the data will not be showing anything like the strong improvement that the market still seems to expect.

Last week began with the US Conference Board consumer confidence index which rebounded from 26.9 in March to 39.2 for April. The size of the recovery suggests confidence is improving which is probably due in part to the 20% stock market rally and may well be a precursor to an improvement in economic conditions. However, the index remains at a low level and we would like to see a further improvement next month to have confidence that a trend is being established. The UK CBI Distributive trades survey provided a glimmer of hope for high street spending. The reported sales balance improved to +3 in April from -44, which was partly due to the timing of Easter, but it does nevertheless present the possibility of a pick-up in high street activity. Consumer spending is one area where we remain very cautious given the ongoing level of consumer debt which we anticipate will fall as consumers opt to divert spend to balance sheet repair and increased savings.

We are close to the point at which economists have been expecting inflation in the major economies to turn negative. The latest figures from Germany this week bucked the trend with an increase in the CPI to 0.7% in April from 0.4% in March. The increase was primarily due to the timing of Easter with higher package holiday prices and a recovery in energy prices helping to keep the CPI in positive territory. It still seems likely that the German CPI will at some point fall into negative territory especially given the severity of the recession in Germany with increasing unemployment and a significant amount of spare capacity adding to the deflationary pressures.

The big news of the week was the Q1 US GDP data which was considerably worse than expectations with a 6.1% annualised drop. The reasons for the bigger than expected fall were a decline in government spending and a significant contraction in business inventories. On the positive side, consumption increased by 2.2% driven on by higher tax rebates. The fact that government spending fell should mean that Q2 will be boosted by an increase in government expenditure as the stimulus package starts to work, but a return to growth is still some way off.
The FOMC meeting last week provided few surprises with the key funds rate unchanged at 0% to 0.25% with further quantitative easing due to take place over the coming months.

The UK Nationwide April house price data last week demonstrated that the March rise of 0.9% was an anomaly with a 0.4% decline during April. Economic recovery is unlikely to happen until the housing market stabilises and with mortgage approvals still at very depressed levels, we are still months away from this point and house prices look set to continue falling.

Looking at the week ahead, on Monday we get data for US pending home sales and this may be in focus more than usual given the slight improvement in other housing data more recently. Tuesday brings the Institute For Supply Management Non Manufacturing Index. The consensus is anticipating a modest improvement on the March figure of 40.8 to 42.0 for April. This is unlikely to move the market, but a figure that is within striking distance of the magic 50 level would certainly provide a boost. Several Fed officials are speaking this week and all eyes will be on Ben Bernanke on Tuesday when he testifies before the Joint Economic Committee. The market always seems to warm to any bullish ‘green shoots’ comment made by senior Fed officials. On Wednesday we get Eurozone retail sales data for March which is expected to show a modest month on month improvement of +0.1% according to the consensus. Also on Wednesday the US ADP private sector payroll data is announced which is expected to show a further decline of over 600,000 in the number employed in the private sector during the month of April. On Thursday we get the Bank of England MPC interest rate decision at midday. With interest rates already expected to remain at 0.5% for the rest of the year, focus will again be on the accompanying statement and any further details of their QE policy. The European Central bank will announce their interest rate decision 45 minutes later and the consensus is anticipating a further cut to 1% from 1.25% in the ECB rate. The big data of the week comes on Friday when we get the US Non Farm Payrolls. The monthly increase in unemployment looks set to remain around the 625,000 level for April and the unemployment rate looks set to rise to 9%. These are huge numbers, but the market is now more than used to it and consequently unless there is a significant improvement this number is unlikely to have a major impact on the market. Finally, before the end of the week we will get the results of the US Treasury bank stress tests. There has been press speculation that several banks may need to raise fresh capital and this announcement may well result in some market volatility.

This week we will be updating our research notes on Aviva and Home Retail. We will be focusing on the Q1 Unilever results on Thursday.

Last week was a good one for my cfd portfolio with several day trades in Vodafone when I traded in size for a profit of 1-2p per share which can be quite profitable if your timing is good and a little bit of luck is on your side. I also traded Tesco which is looking quite interesting around current levels. I am not sure how much further the market is going to run, but whilst we have a reasonable amount of stability and a trading range it should provide good opportunities for trading over the coming weeks. I am still not of the view that we are in a bull market phase, but a bear market rally that could easily run for some time yet. With a lack of any significant improvement in the data I believe there is a good possibility that a sell-off will occur when it becomes clear that we are not about to see the start of a v shaped recovery which I think many still consider as the likely outcome before the end of 2009. I suspect the pressure will come in the autumn.

The market rally seems set to continue at least for the time being although it does seem to be more based on technical factors rather than fundamentals. The poor US Q1 GDP data did not upset the applecart and clearly the market is now betting on recovery during the second half and possibly even a strong recovery. I have been very sceptical and remain so in the face of poor economic data. Looking at the most recent data what is clear is that inventory run down during the last quarter and the final quarter of 2008 will provide a boost to economic activity as early as this quarter and the second half as companies increase stock levels. The real threat lies after that because as consumers continue to repair their own finances and pay down debt and increase savings it is difficult to see consumer demand holding up. Consequently I do not see a strong recovery coming and at best a subdued one with sub trend growth. We must not forget that next year will bring fiscal tightening as the government attempts to repair the public finances.

I am watching the retail sector with great interest and it will be interesting to see just how far valuations are going to be pushed. They certainly have momentum and as always with markets I think valuations are about to overshoot. Next is now double the value of its 2008 low and if the shares do continue to rally we will be looking to short. We have already seen disappointment this week with Home Retail's figures and I think as the year wears on valuations are going to start coming under pressure especially if they rally much further from current levels.

Better than expected US consumer confidence data helped the market to pare back some of the swine flu induced losses, but clearly markets remain worried over how events are going to develop over the coming days. If you look back to the SARS outbreak I suspect that ultimately this may prove to be an overreaction especially if the disease does respond to existing drugs which it seems to although even then if it does develop to Pandemic status the disruption to economic output let alone the social costs may still be very high indeed.

I have been watching GlaxoSmithkline start sliding back today having rallied on the Swine flu outbreak and the positive news that its drug Avodart does reduce the risk of prostate cancer. I think Glaxo may well become a good trading stock over the coming months and I will be looking to buy back in if they fall back to around the £10 level. I am still watching Vodafone and did buy another holding today with a view to taking a couple of pence out if we see a bounce back tomorrow.

Monday Briefing

The last week provided a good deal of economic data, and whilst it is clear that the rate of economic decline in the US, UK and Europe is starting to slow, most economic data suggests that an ongoing contraction in economic growth is still occurring. The first stab at Q1 GDP for the UK produced a terrible figure of -1.9% and with the possibility of a further hefty decline in Q2, it is going to be very difficult for any improvement in the second half to make a meaningful difference to the outcome for 2009. In fact several forecasts now suggest that GDP in the UK could decline by over 4% which leaves the Chancellor’s forecasts already looking optimistic. In our view any green shoots of recovery are yet to break the surface.

The IMF stated this week that global losses from the credit crisis could hit $4.1 trillion by the end of 2010 with banks expected to shoulder around 61% of the writedowns with insurers, pension funds and other non banks expected to assume the rest. They downgraded their forecast for the world economy to show a decline in GDP during 2009 of -1.3% (they were forecasting +0.5% in January) whilst their forecasts for the UK have become even more grim with a decline in GDP of -4.1% this year and -0.4% next year.

This week in the UK the RPI fell into negative territory for the first time since 1960 falling to -0.4% for March. The CPI fell to 2.9% from 3.2% driven down by lower food and energy costs, but contrary to many forecasts remains relatively high at this stage in the economic cycle especially if you compare it to the US (-0.4%) and Europe (+0.6%). The CPI is still expected to fall much further as energy prices continue to decline, but the risk of a period of deflation appears to be receding.

In Europe there was some positive news with an improvement in the German ZEW survey which rose to +13.0 in April from -3.5 the previous month. A positive number suggests that investors expect economic conditions to improve over the next six months rather than deteriorate. However, this is not the most reliable indicator and the German economy still looks on course to experience a significant decline in GDP during 2009 that will be considerably worse than the UK.

The Budget in the UK brought home the extent of the disastrous state of the public finances. The level of government borrowing is set to increase substantially according to the Chancellor’s figures and what is of real concern are his optimistic estimates of growth from 2011 onwards. The level of public borrowing and debt is likely to be substantially higher than forecast. This year the PSNB is expected to be £175bn with £173bn earmarked for next year. Both of these figures could easily exceed £200bn in reality. The real issues will undoubtedly be faced by the next Government and the outlook for public spending remains bleak if the ratio of debt to GDP is ever going to return to the original target set by Gordon Brown of 40% with a figure closer to 80% likely by 2013/14.

The CBI Industrial Trends survey this week showed an improvement, but the various constituents remain consistent with declining output in the manufacturing sector.
The week was rounded off with the announcement of a sharp drop in UK GDP during the first quarter of -1.9% against expectations of around -1.5%. With a further decline anticipated during Q2, the UK looks on course for a decline of 4% or more in GDP during 2009. Retail sales data for March was reasonable with a 0.3% increase in volumes.

In the US, existing home sales data published last week suggests that sales have stabilised albeit at relatively low levels and with the inventory of existing stock standing at levels consistent with falling prices it may still be several months before prices start to stabilise and recover. The durable goods orders for March fell less than expected with a 0.8% decline against expectations of a -1.5% fall. However the previous month’s rise of 3.4% was reduced to 2.1% which does demonstrate that this data can be subject to significant revisions.

This week in the US we get Conference Board consumer confidence data on Tuesday which is expected to show a modest improvement, but remain at a very depressed level. The first big data of the week comes on Wednesday with the first estimate of Q1 US GDP data. The consensus estimate is for a decline of -5.0%, but the probability of a worse figure remains significant. Also on Wednesday we get the results of the latest FOMC meeting when focus will again be on the accompanying statement given that interest rates will remain unchanged. On Friday look out for the Institute for Supply Management Manufacturing index which is expected to show a modest improvement to 38.3 from 36.3 in the previous month, but still substantially less than the key level of 50 which is consistent with expansion. In addition, with the announcement by GM last week of significant production cuts there is every chance this index may be back in decline over the coming months. The data for March factory orders due on Friday is expected to show a -0.5% decline.

During the week a lot of economic data will be published for various Euro-Zone countries, and we would high-light the German CPI data on Tuesday and the Euro-zone economic confidence data due on Wednesday. Given the particularly bad state of the German economy their retail sales figures for March due on Thursday will make interesting reading. We also get Euro-Zone CPI data for April and unemployment figures for March on Thursday. On Friday we get Halifax house price data for the UK during April. This index is notoriously volatile and is not the best means of judging house price movements.

This week we will be updating our research note on Tesco.

The much publicised outbreak of Swine flu over the weekend provided a boost to GlaxoSmithkline this morning and I closed my position out at £10.48 providing a good profit. There is no doubt that Glaxo's anti-viral drug, Relenza, could benefit if this does indeed become a pandemic, but I remain cautious given that a Pandemic would have huge implications for world economic recovery and the pharmaceutical sector would not escape. I suspect the outbreak will be contained, but I will be watching developments very carefully and I may well buy back into Glaxo if they move back towards the £10 level.

Existing home sales in the US were lower than expectations and reversed the gain in February. Nevertheless they are showing some signs of stability and whilst it is still months rather than weeks away we do seem to be getting closer to a position from which house prices in the US will start to recover and this will almost certainly be the first stage of any economic recovery.

Today I decided to take advantage of further weakness in the GlaxoSmithkline share price to take a long position. I do not expect it to recover quickly, but I do feel that a gradual recovery will come after the initial disappointment over the Q1 results starts to fade.

I will be keeping a close eye on Vodafone tomorrow which is again within striking range.

Very little to report today.Glaxo produced a slightly disappointing set of results which has resulted in the shares selling off and with the market likely to open weak tomorrow there may well be a trading opportunity.

A good day of trading in my cfd portfolio. I rarely trade a share on the day of a results announcement purely because analysts interpretation can vary significantly and it is very easy to get caught out if one of the big houses makes a strong recommendation after the usual analysts presentation on the day of the announcement. Consequently I tend to sit back and see how trading develops and what views come out. Today with the Tesco results it was a different matter as I follow the company closely and the results were clearly as good if not better than consensus expectations. I was fortunate in that during the first couple of minutes of trading the shares were yet to reflect the results and I dived in with a good long position which very quickly moved into a good profit. I sold the position mid morning and with the big sell-off during the afternoon the shares came back from their highs for the day providing a second trading opportunity and again I took a nice position size and closed out after the shares recovered again during the afternoon. Another stock that has provided lots of good trades during recent weeks is Vodafone and the shares were also hit early this afternoon and I took advantage of this and they recovered later in the day to give me another good profit.

Tomorrow I will be taking a close look at the Glaxo results due at midday.

Last week provided two good trades for me and on Friday I closed out my cfd positions in Vodafone and GlaxoSmithkline at good profits. This week I am again watching both companies although I feel there may be a better chance of trading GlaxoSmithkline given that their results on Wednesday may create some volatility. I will also be looking at the Tesco results tomorrow and I am hopeful that Tesco will start to provide some trading opportunities over the coming weeks. I picked out Reed Elsevier early last week on this blog as a potential trade and very much wish I had taken it as the shares shot up from a low of £4.60 to £5.10 over a couple of trading days after several brokers mentioned that they were looking undervalued.

I have copied below our usual Monday briefing and will post again tomorrow:-

The decline in US retail sales versus expectations of a modest rise during March demonstrated clearly that we are yet to find the firm foundation for economic recovery. The drop was partially due to a decline in the value of gasoline sales. However, sales also fell across all areas of discretionary spending which does suggest that a consumer led recovery is some way off and the consumer is more concerned with paying down debt and increasing savings than spending. US Producer Prices declined by 1.2% during March which was again caused primarily by the decline in gasoline prices, and we may see further deflationary pressures building over the coming months. We also had CPI data in the US last week which slipped into negative territory for the first time since 1955. The annual rate of CPI fell to -0.4% from 0.2% and most of the decline can be accounted for by the decline in energy prices compared to this time last year. With energy prices now appearing to have stabilised the impact in the future will be less and the CPI can be expected to return to positive territory during the coming months. Nevertheless with so much spare capacity in the US economy which will increase as unemployment rises there remains a real risk that deflation could rear its ugly head as we move into 2010. Industrial Production during March fell by 1.5% which was worse than consensus expectations. The manufacturing sector data for New York and Philadelphia both showed an improvement, but both remain at levels consistent with contraction rather than expansion. Business inventories declined 1.3% month on month during February and as production is cut we would anticipate inventories to continue declining which does not bode well for Q2 US GDP let alone the terrible GDP figure we can expect for Q1. Overall there was little to get excited about in terms of economic data from the US last week.

In the UK we did get the BRC retail sales data for the UK which showed a monthly decline for March of -1.2% a trend that is likely to continue given the rate at which unemployment is increasing and with consumers beginning to focus more on saving rather than spending.
This week brings us the UK Budget and what we know for sure is that the Chancellor will have to admit to a serious deterioration in the UK public finances. We will not speculate as to what will be included as this can be rather tedious, but a big revision down in growth estimates for 2009 is a certainty.

Not a huge amount on the agenda this week. On Monday we get Leading Indicator data for the US which is expected to show a modest decline during March. Tuesday brings us the UK CPI data with a slight fall expected in the annual rate from 1.6% to 1.5% whilst the RPI rate will almost certainly take the headline when it moves into negative territory with further downward pressure from lower mortgage rates and house prices. On Wednesday we get the Bank of England meeting minutes from the last meeting which are expected to show a unanimous 9-0 vote in favour of maintaining the base rate at 0.5%. Also on Wednesday we get unemployment data for the UK which is expected to show a further significant deterioration in the claimant count. The UK Budget statement is on Wednesday. On Thursday we get existing home sales data in the US which is expected to have remained around the annualised level of 4.7m units during March. The big data of the week comes with the US durable goods orders which are expected according to the consensus to have declined by 1.8% during March following a 3.5% rebound in February. The improvement during February was partially due to a boost in aircraft equipment orders that is now expected to reverse during March especially given depressed auto demand. On Friday we get the first estimate of Q1 GDP for the UK which is currently expected to show a quarter on quarter decline of around -1.5% which will be very close to the Q4 2008 decline of -1.6%.

A mixed bag of US economic data so far this week.Today the annual rate of CPI inflation dipped into negative territory from +0.2% to -0.4%. This is likely to worsen further due to the decline in energy prices before recovering and it is too early to predict whether damaging deflation is likely to take hold. The decline in industrial production of -1.5% month on month during March was worse than the consensus whilst the improvement in the Empire State manufacturing index provided a surprise move to -14.7 in April from -38.2. The improvement in the new orders aspect of this index certainly provides a glimmer of hope.

Within my cfd portfolio I bought some GlaxoSmithkline yesterday at below £10. The shares have taken a big hit with the move out of defensives into cyclicals and they do find a base around the £10 level.I am looking for a target price of between £10.30 and £10.40.