The state of the US housing market seems to be deteriorating once again which can only be bad news for those hoping for a consumer led recovery later this year. The sales of new homes during December fell by 7.6% to an annualised rate of 342000 units against consensus expectations of a gain to 370,000 units.

This evening we get the statement from the latest FOMC meeting and President Obama will be giving his State of the Union address tonight as well.

The market remains in sell off mode and it is difficult to tell where we go from here. One interesting area of strength remains the tobacco stocks, one of our favourite sectors. At one point today the Imperial Tobacco share price overtook BAT and it could well do so again over the coming months given the discount to BATs share price that remains. Both stocks continue to look attractive to us given their ability to grow earnings over the coming two years and of course strong defensive characteristics.

US existing home sales were reported to have decline by a very significant 16.7% during December to an annualised rate of 5.45m (the consensus expected 5.9m), which was the largest monthly drop since 1968. The reason is that the expiry of the tax credit scheduled for the end of November incentivised many purchases especially amongst first time buyers but with the extension of this tax break until April demand has fallen off a cliff during December. The real issue is whether after April the housing market will be able to recover with no incentives available especially with unemployment so high and little sign of any significant rebound in the labour force.


The news this morning that the UK has emerged from recession is somewhat tainted by the fact that Q4 growth was a mere 0.1%. This figure will be subject to revision and could conceivably become negative although more recent data may well mean it is revised upwards a little.

The UK and Europe have again opened down today with the DOW futures pushing markets weaker. The main data for today in the US will be the Conference Board’s Consumer Confidence data for January. The December figure was 52.9 with expectations for January for a slight improvement to 53.5.

We are looking for the market to show some resistance before committing to our next trade. Most chartists seem to be taking a very bearish view given the events of the last few days but we are more inclined to expect some consolidation and range bound trading rather than a move back below 5,000 which some are now suggesting is on the cards.

The last week has provided a reminder that stock markets do not always go up vertically as has been the case for the best part of a year now. The US market suffered its worst 3 day slide for 10 months with comments from Obama on bank lending restrictions providing further uncertainty over what the banking sector will look like in the near future. This has left many analysts scurrying around trying to estimate the potential hit to profitability and valuations for the banking stocks if the plans Mr Obama has come to fruition. In the UK the Conservatives have thrown their weight behind the American plans and clearly this would have some impact on the big players in the UK especially given that the Conservatives continue to look like a government in waiting. What happens next as far as the market is concerned is more difficult to tell. Clearly at this stage of the economic recovery we need the banks to continue lending to fuel growth and any measures that restrict that could damage the chances of a sustainable recovery. With world markets selling off again on Friday and Europe down again this morning this has left the UK market down over 4% in four trading days.


We would expect a degree of normality to return very soon and whilst the concerns over the banks are very real the reality is that these measures are unlikely to derail the eocnomic recovery at this stage. However, financial sector valuations look set to remain under considerable pressure given the uncertainty Obama's comments have raised and the questions that have been left unanswered. This may well mean that the market will be more range bound during the coming weeks and whilst further falls are possible we are unlikley to see a major correction this early in the year. The fear factor is back but the situation is very different to 12 months ago.

The big economic nerws of the week will be the publication of Q4 GDP figures in the US and the UK. The data for the UK is due to be published tomorrow and a negative figure will make big headlines if the UK has remained in recession during the last 3 months of 2009. The consensus does seem to be expecting a negative figure with expectations standing around -0.2%. The equivalent figure for the US is due out on Friday with an annualised rate expected to be a very strong 4.2%. As always there is plenty of room for error in these projections.

Sentiment has taken another hit today with concerns over restrictions on risk taking by US banks. The market is now actually down on the year. I did mention yesterday in my blog that the market needs to adjust to the fact that a lot of the stimulus being used worldwide will have to be withdrawn soon and clearly regulatory changes concerning the financial system are also something that will not be avoided. To what extent restrictions on bank lending will impact on global economic growth are hard to say and this is the reason why the market may well struggle at least in the very short term.

The announcement from Liu Mingkang, chairman of the China Banking Regulatory Commission that Chinese banks were expected to cut lending in 2010 to 7.5 trillion yuan (£675 billion), down from 9.5 trillion yuan last year has spooked the market today. Clearly any curb on bank lending may restrict growth but this is seen as necessary to prevent an asset price bubble in China and is something that remains a risk worldwide. The market reaction today is an indication of what we can expect as the taps are slowly turned off in the major economies and realistically the sooner the market accepts this the easier it will be. Otherwise we do run the risk of a rally to the point at which a major correction will be necessary which will be very damaging.

The strength in the UK CPI today has caught a few people by surprise. The year on year rate rose by a record 1% to 2.9% and whilst a lot of this is undoubtedly due to the 12 month effect of the VAT cut last year, there are further pressures in the system including energy prices with the comparison last December to the fall in the oil price. It is far too early for the MPC to start considering hiking the interest rate but alarm bells in some quarters are probably faintly ringing and the next few months will bring a good deal of uncertainty over the timing of the first interest rate increase. At present given how much output the economy has given up during the recession and the amount of spare capacity it is hard to believe that pricing pressures will increase and if anything the CPI should as forecast drop back below the 2% level as the year progresses.

We have managed to day trade GlaxoSmithkline today. The shares have been hit hard by cancellations for its Pandemic Flu vaccine but the market reaction has been far overdone in our view. Even with a 50% cut in orders the company's earnings wil only suffer a modest downgrade and there was never any belief that this would be a major income earner after next year anyway. This was a case of sentiment rather than fact bringing the shares back into buying territory. They may well weaken again which is something we will be keeping an eye on.

We closed out a long position in British American Tobacco on Friday and once again this looks likely to be a sector that will deliver good returns this year. I don't necessarily want it to go up in a straight line which there is certainly a danger of if you look at how well Imperial Tobacco is performing. In fact this was a good trade to demonstrate how another stock in the sector can drag up others. Before BAT started to rise on Friday, Imperial was already performing well, up 1% with BATS up very modestly, but Imperial went on to make another 1% which ultimately pulled BAT up 1% on the day. Watching the rest of the stocks in the sector of your chosen stock can pay dividends and is a must for short term trading. It can almost act as a barometer for where your stock is about to move.


Today will be quiet with the US closed for Martin Luther King Day. It is a relatively quiet week in the US for economic data. On Wednesday we get Housing Starts data for December which is expected to show a modest improvement on the previous figure of 574,000 annualised. Also on Wednesday the Producer Price Index for December will be published which is expected to be broadly unchanged after the 1.8% hike during November due to energy and food prices. On Thursday the Leading Indicators are due for publication for December and also on the same day the Philadelphia Fed Manufacturing Index is due out for January which according to the consensus is expected to dip slightly from the 20.4 registered during the previous month.

In the UK the CPI data for December due tomorrow is expected to push the year on year rate back above the key 2% level targeted by the Bank of England. However, any such move is expected to be short lived with expectations that the rate will fall back below 2% over the coming months. The minutes from the latest Bank of England MPC meeting are due out on Wednesday together with the unemployment report. On Friday in the UK we get retail sales data for December.

In Europe the main announcement will be the ZEW Economic Sentiment Survey.

For the UK and Europe Q4 GDP is already shaping up to be a disappointment. Comments yesterday from the German statistics office suggested that German GDP during Q4 may have stagnated after two previous quarters of modest growth. The UK is yet to come out f recession and there is now a real possibility that Q4 GDP will again be a negative figure.


In the US yesterday the publication of retail sales for December provided another downbeat picture with a decline of 0.3% during December. Clearly without the consumer buying recovery is going to be muted at best during the latter half of 2010. The first half will be driven by other factors such as inventory replacement and investment but unless the US consumer can take up the running as the year progresses there remains a real risk that the eventual recovery will disappoint. Certainly at present lots of reminders out there as to why we may see some form of correction before the year is out.

To add the doom an interesting article today detailing comments from the World Economic Forum on the potential for a second leg of the financial crisis due to an asset bubble implosion and the possibility of debt default from a major economy. To read more go to this link:- http://www.telegraph.co.uk/finance/financetopics/davos/6990433/Significant-chance-of-second-financial-crisis-warns-World-Economic-Forum.html

The market is continuing to struggle to make much head way at present. The data that is likely to move the market this afternoon will be the University of Michigan Consumer sentiment data for January. The expectation is for a figure of 74.0 from the previous 72.5. Any disappointment is likely to provide an excuse for a sell off.

A disappointing start to the US earnings season yesterday prompted the first real decline of the year in the Dow with Alcoa losing over 10% on lower than expected results. Concerns over a possible government levy on US banks did not help sentiment. Concerns that China may be about to start raising their interest rate were exacerbated by the People’s Bank of China’s decision to raise the proportion of deposits banks must set aside as reserves which may well be a precursor to the first rate hike.


UK Industrial Production reported this morning for November was a little better than expected with a 0.4% jump. Manufacturing output was flat against expectations of a 0.3% improvement. Looking at the constituent figures it was interesting to see that consumer durable and non durable production fell over the month which may well indicate that consumer expenditure is likely to tail off over the coming months. The data does at least suggest that the UK economy is now out of recession although growth for Q4 is likely to be very modest indeed.

In the US today we get the publication of the Beige book which compiles anecdotal accounts of economic activity across the Fed's 12 districts and does provide helpful clues to where economic activity is heading.

After the 3% or so gain in the FTSE100 in the first few trading days of the New Year we would expect to see the market taking a breather and even giving up some of the gains made during 2009 before a base can be found for further gains this year. To us the rally is now looking to start a little tired and we can expect more range bound trading during the first few months of the year.

A lot of comment yesterday about world governments taking advantage of low interest rates to raise money ahead of an expected tightening in rates later this year. This is a theme that is likely to continue although any tightening is likely to be very modest in nature during 2010.


On the economic front, French Industrial production rose by twice the expected amount during November with a 1.1% gain.

The UK RICS house price survey out today suggests that the pace of recovery in the housing market is slowing which is consistent with several forecasters that have suggested house prices will end 2010 down rather than up.

Tesco’s trading statement was a little above expectations and it would seem the food retailers have enjoyed a better than expected Christmas trading period. It is possible they benefitted from a degree of panic buying caused by the cold weather in December but so far the market is giving them the benefit of the doubt and the sector has rallied during the first few trading days of the year. Morrisons are due to report on the 21st January.

The reported decline of 85,000 in the Non Farm Payrolls for December in the US led to some headlines suggesting that the improving employment trend may already have reversed. This was especially so given that the number for November was revised upwards to a positive number of 4000 against the previously reported number of a 11000 decline. It is unlikely that the trend has been broken and there is every reason to expect the number to turn positive once again over the next couple of months. It should be borne in mind that this data can be very volatile as well and is subject to quite big future revisions. The market took the figure in its stride and we are yet to see any data this year that has caused a big upset. However at some point we will reach a point whne positive data is taken negatively as it will raise concerns over both fiscal and monetary tightening. We are some way off from that point but it will undoubtedly happen at some point this year.

A very strange start to the 2010 trading year with the market almost having a holiday feel about it with no volatility and clearly everyone making snowmen instead. Without volatility it becomes incredibly difficult to find high conviction trades unless you believe the market is going to continue this rally. We are sceptical and expect some form of profit taking soon but saying that we could easily see another 1-2% on the FTSE100 before it happens. Either way we need a good down day to start picking trades and unless the Non Farm Payrolls disappoint in a big way this afternoon in the US we are unlikely to get the movement we need until next week. There are times when trading can be very frustrating and this week has been one of them but as always by sitting on the sidelines you are at least not losing money and trades will always come along eventually.

The Sainsbury's Q3 trading statement this morning was a little better than most brokers expectations. Like for Like sales growth of 4.2%(excluding petrol and vat) compared to consensus expectations of around 3.6% and the previous quarterly figure of 5.4%. Estimates for the company will not be changed as a result of the update today. Merril Lynch downgraded Sainsbury earlier in the week to underperform from neutral. We retain our view that the shares will remain range bound for at least the first 6 months of the year unless bid speculation resurfaces and it is a stock we expect to trade over the coming weeks.

The Producer Price Index for Europe published today for November showed that inflationary pressures are starting to edge up a little with a 0.1% increase although on an annualised basis including energy the rate of producer inflation is -4.4%. Given the considerable amount of slack in the Euro Zone economy it is difficult to see inflationary pressures starting to build for some time yet.


Today in the US we get the Non Manufacturing ISM data for December with the consensus looking for an improvement to 50.4 in December from the previous level of 48.7. We also get the ADP private payrolls data in the US for December which will be closely watched for sign of a further improvement in the rate at which jobs are being lost in the US ahead of the Non Farm Payroll data due out on Friday which may well post a positive number. Later today the minutes of the latest FOMC meeting will be published. With economic recovery appearing to be picking up pace the minutes will be scrutinised for further details of a timescale to the winding up of the asset purchase programme which the committee has already stated will be phased out in 2010.

The ISM Manufacturing Index data announced yesterday for the month of December was strong at 55.9 from 53.6 in November. This suggests that growth has been maintained during Q4 and it will be interesting to see what the ISM Non Manufacturing Index for December shows when it is published tomorrow. The figure for November was 48.7 and the consensus is looking for an increase to 50.4. US Construction spending for November declined by a little more than consensus expecations at -0.6%.

Barclays has risen by 6% at the time of writing with rumours of an upgrade to guidance from the company and also a bullish broker note that has been published today.

The market continues to rally with financials generally strong today whilst many consumer stocks are lower. It is difficult to see this rally continuing much further in the short term.