I am starting to feel like a contrarian investor. After a a few pieces of only very modestly positive economic data a raft of big name brokers have come out with relatively strong statements that the market has bottomed and we are now on the path to recovery. It is incredible how quickly sentiment and indeed brokers can turn their views. I for one remain relatively pessimistic about the very short term especially given the speed at which markets have recovered from their recent lows (we are up around 20% across the main indices). What this tells me is that investors have again allowed sentiment and the crowd mentality to plough back into the market in anticipation of what can only be described as the expectation of a strong economic recovery later this year. I for one just do not buy into it. The switch from defensive stocks into cyclicals has almost been as aggressive as during the late 90s when everyone was selling anything that was blue chip and made a profit and had a secure dividend to buy an Internet stock. I think that whilst there is always good reason to pick up some of the cyclicals ahead of recovery which will probably come early next year, albeit a muted one, I think the recent financials and cyclical driven rally is too much too soon. To me it seems inevitable that a pull back will occur, as to when is another matter.
We are again moving into the period of big data with lots on the US agenda next week and if we are going to see a pull-back it will start next week. We have two lots of ISM data for manufacturing (Wednesday) and Non Manufacturing (Friday) plus the ADP employment data on Wednesday and the big Non Farm Payrolls on Friday. I do not believe either of the sets of ISM data will show any meaningful recovery and if you look at the weekly initial jobless claims figures for the US I think we could easily be on course for the biggest monthly job loss yet in this recession with a real possibility of over 700,000 jobs lost.
If you look at the recent data that the market has decided to get excited about, the housing data can be discounted at present because the level of inventory of unsold housing stock is so large at present that there is no way we will see any meaningful recovery in prices or the housing situation for several months at the very least. The improvement in durable goods orders was only after very significant downward revisions to the last two months leaving an even lower base from which at least some form of monthly recovery could be expected. There remains the possibility that the data will continue to show signs of improvement, but at this stage I remain very sceptical and the recent gains are at real risk of being quickly eroded if the data next week continues to paint a very grim picture.
My cfd portfolio still has my short in Pearson and the long position in Vodafone, but today the Unilever has been closed at a very modest loss as I believe there will be an opportunity to trade the stock at lower levels.
This is my last blog post due to a much needed holiday for two weeks and I will return on Thursday 9th April.
Friday, March 27, 2009
Wednesday, March 25, 2009
The market keeps finding more fuel to keep going and this afternoon that was provided by the US durable goods orders which showed an unexpected rise of 3.4% although it was somewhat tempered by the downward revisions for the previous two months with December revised to -4.6% from -1.5% whilst January was revised to -7.3% from -5.2%. One positive month after such significant declines does not make a recovery, but it does provide a glimmer of hope. Home data this week in the US has been reasonable positive, but again I go back to the glut of new and existing homes available and this overhang has to be reduced significantly before we see any meaningful recovery in the US housing market. However, no matter what something positive is good and it will be interesting to see if the market can maintain the momentum. Tomorrow we have the third estimate of US GDP for the fourth quarter which according to the consensus is expected to show a further decline to around -6.6% quarter on quarter from the last estimate of -6.2%. Any improvement on this figure could well be positive for the market given current sentiment.
In my cfd portfolio I still have my short position in Pearson although it is proving stubbornly resilient and may well end up being stopped out. My holdings of Unilever and Vodafone are progressing okay. Following the reassuring trading update on Daily Mail earlier in the week I have added this to my possible trades over the coming weeks.
In my cfd portfolio I still have my short position in Pearson although it is proving stubbornly resilient and may well end up being stopped out. My holdings of Unilever and Vodafone are progressing okay. Following the reassuring trading update on Daily Mail earlier in the week I have added this to my possible trades over the coming weeks.
Tuesday, March 24, 2009
I have been very busy the last few days so I have copied below our comments on the market that were produced today.
The market at the moment is being announcement driven. The news in the US whilst to be welcomed makes no difference to the current economic situation which remains dire and whilst some of the US housing data has shown some sign of better times it makes little difference at present given the levels of unsold housing stock which will prevent any recovery in prices for many months to come. The US market does not look cheap and in fact if earnings forecasts are as optimistic as many believe, including us, the US market is arguably looking expensive. We have seen time and again over the last 18 months how policy announcements have been able to drive the market with no sign of any improvement in the underlying economic situation. The US is now running out of ideas and announcements! If as we expect the economic data reasserts itself over the coming months the market will quickly give up the recent gains. The sectors likely to be hardest hit will be those that have rallied on the back of the recent news, namely the financials. For those of you wishing to adopt high risk/high return strategies this is one sector that again looks likely to provide shorting opportunities.
The market at the moment is being announcement driven. The news in the US whilst to be welcomed makes no difference to the current economic situation which remains dire and whilst some of the US housing data has shown some sign of better times it makes little difference at present given the levels of unsold housing stock which will prevent any recovery in prices for many months to come. The US market does not look cheap and in fact if earnings forecasts are as optimistic as many believe, including us, the US market is arguably looking expensive. We have seen time and again over the last 18 months how policy announcements have been able to drive the market with no sign of any improvement in the underlying economic situation. The US is now running out of ideas and announcements! If as we expect the economic data reasserts itself over the coming months the market will quickly give up the recent gains. The sectors likely to be hardest hit will be those that have rallied on the back of the recent news, namely the financials. For those of you wishing to adopt high risk/high return strategies this is one sector that again looks likely to provide shorting opportunities.
Monday, March 23, 2009
Our usual Monday briefing:-
The major news of last week was the unexpected announcement from the Federal Reserve of its intention to engage in significant quantitative easing in the form of buying back Treasury securities with £300bn earmarked for this exercise. The market took the news well, but realistically what impact this action will have remains an unknown.
The first major data for last week were the Industrial Production figures for the US which showed a decline of 1.4% during February. The figure actually looks worse than it was because around 0.7% of the decline was due to reduced utility output as a result of the unseasonably warm weather. One of the major drags on manufacturing production over the last few months has been declining car manufacturing output, but following the temporary shutdown of many plants over Christmas and the New Year production did start again and this helped to reduce the overall decline. Also in the US, the Empire State manufacturing index fell to a record low of -38.2 in March from -34.7 in the previous month. The new orders index was particularly bad falling to -44.8 from -30.5. At present there is little sign of an improvement in the manufacturing sector.
The National Association of House builders index in the US was unchanged in March at 9 which was in line with the consensus and is substantially below the key level of 50 which indicates improving conditions in the housing sector.
Eurozone inflation data showed an uptick in the CPI by 0.1% to 1.7% year on year during February. The ECB has been very much against a zero interest rate policy based on their assessment of economic conditions and assertion that deflation is not a risk. This figure certainly lends weight to that argument, but with the severe slowdown being felt across the Eurozone, especially in Germany, it is difficult to see inflation doing anything but weakening and a further cut in the Euro rate looks inevitable.
The US Producer Price Index came in with a 0.1% increase which provided some relief that deflationary pressures are primarily confined to food and energy. The slight increase was primarily due to an increase in gasoline prices which offset a fall in food prices. The core figure excluding energy and food rose by 0.2% month on month and was at 4.0% year on year.
The US housing starts provided a surprise last week with a 22% increase from 477,000 in January to 583,000 in February. This could well be a sign that the US housing market is at least stabilising, but with the existing inventory of over 13 months of supply it is difficult to see any improvement in prices coming through for several months to come.
The big news of the week came with the Federal Reserve announcement that they would buy $300bn in long dated Treasury bonds in an aggressive move to cut long term interest rates. This took the market completely by surprise and led to an immediate 50bps fall in 10-year US bond yields. The impact of this and their decision to more than double the exiting asset purchase program will increase the Fed’s balance sheet to something around one third of annual GDP. It is a complete unknown as to whether these measures will work and much depends on whether the banks will use the proceeds from selling their Treasury holdings to lend out more money. The market took the news well and rallied on the back of this especially the financials. Something similar happened in the 90s when the Bank of Japan announced significant quantitative easing measures and after a 20% rally in the Nikkei, a few months later the same index was lower than at the time of the announcement due to ongoing deterioration in the economic situation. It is at present a very difficult market to call and following a strong rally from the lows earlier in the year we do feel that despite this news the recent rally is nothing more than a bear market rally.
The minutes of the recent Bank of England MPC meeting suggest that quantitative easing will now be used as the main stimulus tool now that Bank rates have reached a level at which further cuts are unlikely to have any real impact. With an initial £75bn now earmarked for asset purchases we are again in a position of not knowing what impact this will have and there remains a real issue of whether this action will spur additional bank lending.
The UK unemployment data made for unpleasant reading with unemployment now over the 2m mark and the monthly claimant increase of 138,000 was significant. Many commentators expect unemployment to reach 3m by mid 2010 and possibly earlier.
This week in the US on Monday we get existing home sales data and on Tuesday there will be consumer confidence figures. On Wednesday we get the first of the big numbers of the week with durable goods orders with a decline of 2% expected for February following a 4.5% drop in January. On the same day we get new home sales data which are expected to post a similar figure to the January sales of 309,000 on an annualised basis. On Thursday we have the publication of the third estimate for fourth quarter US GDP. The second estimate resulted in a substantial revision down to -6.2% quarters on quarter and there is the potential for the figure to fall a little more with the third estimate. Also on Thursday we get the usual weekly initial jobless claims figures. Finally, on Friday we have the University of Michigan consumer sentiment index for March.
On Tuesday look out for the UK CPI data. A further decline in the year on year CPI rate is expected with the consensus looking for a decline to 2.6% from the previous monthly figure of 3.0%. The RPI index which includes mortgage rates could well make the headline as the year on year rate is likely to drop into negative territory. On Tuesday we also get PMI data for France, Germany and the Eurozone. On Wednesday we get the UK CBI Distributive Trades survey for March. On Thursday the retail sales data for the UK is expected to show a decline during the month of February of anywhere between -0.1% and -1.0%. The recent interest rate cuts may well have helped retail sales to hold up reasonable well during a very difficult period and this has certainly been reflected in retail sector valuations. We do not expect this trend to continue especially as savings rates increase, and any short term boost from additional spending power that has resulted from low interest rates is likely to be short lived. The February retail sales may well show some initial evidence of this. On Friday we get the final estimate for fourth quarter UK GDP which is widely expected to be unchanged at -1.5% quarter on quarter.
This week we will be reviewing the Daily Mail and General Trust trading statement scheduled for Monday morning and the Next full year results on Thursday.
Please note the next Key Economic Data Briefing will be sent on Monday 13th April.
The major news of last week was the unexpected announcement from the Federal Reserve of its intention to engage in significant quantitative easing in the form of buying back Treasury securities with £300bn earmarked for this exercise. The market took the news well, but realistically what impact this action will have remains an unknown.
The first major data for last week were the Industrial Production figures for the US which showed a decline of 1.4% during February. The figure actually looks worse than it was because around 0.7% of the decline was due to reduced utility output as a result of the unseasonably warm weather. One of the major drags on manufacturing production over the last few months has been declining car manufacturing output, but following the temporary shutdown of many plants over Christmas and the New Year production did start again and this helped to reduce the overall decline. Also in the US, the Empire State manufacturing index fell to a record low of -38.2 in March from -34.7 in the previous month. The new orders index was particularly bad falling to -44.8 from -30.5. At present there is little sign of an improvement in the manufacturing sector.
The National Association of House builders index in the US was unchanged in March at 9 which was in line with the consensus and is substantially below the key level of 50 which indicates improving conditions in the housing sector.
Eurozone inflation data showed an uptick in the CPI by 0.1% to 1.7% year on year during February. The ECB has been very much against a zero interest rate policy based on their assessment of economic conditions and assertion that deflation is not a risk. This figure certainly lends weight to that argument, but with the severe slowdown being felt across the Eurozone, especially in Germany, it is difficult to see inflation doing anything but weakening and a further cut in the Euro rate looks inevitable.
The US Producer Price Index came in with a 0.1% increase which provided some relief that deflationary pressures are primarily confined to food and energy. The slight increase was primarily due to an increase in gasoline prices which offset a fall in food prices. The core figure excluding energy and food rose by 0.2% month on month and was at 4.0% year on year.
The US housing starts provided a surprise last week with a 22% increase from 477,000 in January to 583,000 in February. This could well be a sign that the US housing market is at least stabilising, but with the existing inventory of over 13 months of supply it is difficult to see any improvement in prices coming through for several months to come.
The big news of the week came with the Federal Reserve announcement that they would buy $300bn in long dated Treasury bonds in an aggressive move to cut long term interest rates. This took the market completely by surprise and led to an immediate 50bps fall in 10-year US bond yields. The impact of this and their decision to more than double the exiting asset purchase program will increase the Fed’s balance sheet to something around one third of annual GDP. It is a complete unknown as to whether these measures will work and much depends on whether the banks will use the proceeds from selling their Treasury holdings to lend out more money. The market took the news well and rallied on the back of this especially the financials. Something similar happened in the 90s when the Bank of Japan announced significant quantitative easing measures and after a 20% rally in the Nikkei, a few months later the same index was lower than at the time of the announcement due to ongoing deterioration in the economic situation. It is at present a very difficult market to call and following a strong rally from the lows earlier in the year we do feel that despite this news the recent rally is nothing more than a bear market rally.
The minutes of the recent Bank of England MPC meeting suggest that quantitative easing will now be used as the main stimulus tool now that Bank rates have reached a level at which further cuts are unlikely to have any real impact. With an initial £75bn now earmarked for asset purchases we are again in a position of not knowing what impact this will have and there remains a real issue of whether this action will spur additional bank lending.
The UK unemployment data made for unpleasant reading with unemployment now over the 2m mark and the monthly claimant increase of 138,000 was significant. Many commentators expect unemployment to reach 3m by mid 2010 and possibly earlier.
This week in the US on Monday we get existing home sales data and on Tuesday there will be consumer confidence figures. On Wednesday we get the first of the big numbers of the week with durable goods orders with a decline of 2% expected for February following a 4.5% drop in January. On the same day we get new home sales data which are expected to post a similar figure to the January sales of 309,000 on an annualised basis. On Thursday we have the publication of the third estimate for fourth quarter US GDP. The second estimate resulted in a substantial revision down to -6.2% quarters on quarter and there is the potential for the figure to fall a little more with the third estimate. Also on Thursday we get the usual weekly initial jobless claims figures. Finally, on Friday we have the University of Michigan consumer sentiment index for March.
On Tuesday look out for the UK CPI data. A further decline in the year on year CPI rate is expected with the consensus looking for a decline to 2.6% from the previous monthly figure of 3.0%. The RPI index which includes mortgage rates could well make the headline as the year on year rate is likely to drop into negative territory. On Tuesday we also get PMI data for France, Germany and the Eurozone. On Wednesday we get the UK CBI Distributive Trades survey for March. On Thursday the retail sales data for the UK is expected to show a decline during the month of February of anywhere between -0.1% and -1.0%. The recent interest rate cuts may well have helped retail sales to hold up reasonable well during a very difficult period and this has certainly been reflected in retail sector valuations. We do not expect this trend to continue especially as savings rates increase, and any short term boost from additional spending power that has resulted from low interest rates is likely to be short lived. The February retail sales may well show some initial evidence of this. On Friday we get the final estimate for fourth quarter UK GDP which is widely expected to be unchanged at -1.5% quarter on quarter.
This week we will be reviewing the Daily Mail and General Trust trading statement scheduled for Monday morning and the Next full year results on Thursday.
Please note the next Key Economic Data Briefing will be sent on Monday 13th April.
Friday, March 20, 2009
After a strong rally in world markets it has become increasingly difficult to find good long trades that are not at risk from another major sell-off. I am convinced that we have been experiencing a bear market rally and I believe that there remains a strong likelihood of markets reaching new lows yet. The simple reason is that earnings forecasts are still too optimistic and as this becomes clear markets will look fairly valued at best.
This has not been the best trading period for my cfd portfolio with stops very close on my Pearson short and long Unilever It is never possible to get it right every time and especially at the moment with the market in a very difficult position. Wall Street has sold off this evening and we can expect a weak start on Monday.
This has not been the best trading period for my cfd portfolio with stops very close on my Pearson short and long Unilever It is never possible to get it right every time and especially at the moment with the market in a very difficult position. Wall Street has sold off this evening and we can expect a weak start on Monday.
Wednesday, March 18, 2009
The US housing starts yesterday surprised on the upside which led some to suggest that the bottom of the US housing market is near and the market seemed to respond well to this and the PPI figures. I don't think the housing market is likely to stabilise just yet given the historically high level of inventory which remains at over 13 months of supply. Once this has reduced to around 8 months we may start to see some signs of improvement, but that is some way off yet.
I am being bombarded with questions as to whether this current rally marks the end of the bear phase and whilst it is quite possible that the current rally may well have further to run I fear that this is just a bear market rally and it will correct soon. I think earnings forecasts have further to fall and with dividends being cut or at risk of being cut across many sectors it is difficult to see that we have the foundations for a sustained recovery.
The FOMC announces the results of its two day meeting tonight and the tone of the accompanying statement will be what everyone is looking at. Rates have nowhere to go so any statement as to whether the Fed feels the recession is deepening and what additional measures they intend to take will be very much the focus of investors attention.
I am being bombarded with questions as to whether this current rally marks the end of the bear phase and whilst it is quite possible that the current rally may well have further to run I fear that this is just a bear market rally and it will correct soon. I think earnings forecasts have further to fall and with dividends being cut or at risk of being cut across many sectors it is difficult to see that we have the foundations for a sustained recovery.
The FOMC announces the results of its two day meeting tonight and the tone of the accompanying statement will be what everyone is looking at. Rates have nowhere to go so any statement as to whether the Fed feels the recession is deepening and what additional measures they intend to take will be very much the focus of investors attention.
Tuesday, March 17, 2009
It is difficult to see where the market may be going over the very short term. Sentiment appears to have improved, but the economic situation certain hasn't and whilst it is entirely possible that we could see the momentum of the last few trading sessions maintained I think that the economic data will again get the upperhand and before long we will be heading south. The severity of the slowdown and the fact that there is no evidence yet of even stabilisation in the economic numbers to me will again leave markets under pressure. After the latest correction which took us down from over the 4000 mark of the FTSE100 to around 3,400 we can at least see some possibility of range trading and I think there are quite a few stocks that look good value and are lending themselves to trading again. During the last week we have traded Vodafone twice and may well do so again if they drop below £1.20.
Today in the US we get the housing starts data which will inevitably have dropped again, but I don't see this having a material impact on trading this afternoon. Tomorrow should provide volatility in the US when we get the FOMC statement and I suspect that any news on additional action the Fed is taking along the lines of quantitative easing will be taken positively and with Bernanke taking a more positive stance about the recession ending in 2009, we may again get a bullish statement that will help the market along.
Today in the US we get the housing starts data which will inevitably have dropped again, but I don't see this having a material impact on trading this afternoon. Tomorrow should provide volatility in the US when we get the FOMC statement and I suspect that any news on additional action the Fed is taking along the lines of quantitative easing will be taken positively and with Bernanke taking a more positive stance about the recession ending in 2009, we may again get a bullish statement that will help the market along.
Monday, March 16, 2009
Our usual Monday briefing:-
World equity markets found a better footing last week following the leaked Citigroup memo that the bank has enjoyed a strong January and February. Comments from Ben Bernanke seemed to help as well and sentiment in general seemed to improve as the week wore on. Whether this marks the beginning of a recovery is another matter. The US initial jobless claims seemed to go unnoticed despite the fact that they worse than expectations with initial claims for unemployment benefits up by 9,000 to 654000 for the week ended 7th March. This was against consensus expectations of 644,000. Claims for the previous week were increased by 11,000 to 645,000. With a deteriorating labour market it was hard to view the better than expected US retail sales figures as a sign of stabilisation especially if you consider the substantial deterioration in auto sales. Nevertheless with the economic data remaining at awful levels we have to assume that we are at least in the middle of this recession particularly from a US perspective and we would hope to see signs of stabilisation in the numbers, especially the employment data within the next quarter.
The UK trade figures for January were bad with the trade in goods deficit widening from £7.2bn to £7.7bn in January. Clearly despite the weakness in sterling the worldwide slowdown is more than offsetting any potential benefit to exports that would normally be expected. China suffered a similar fate with exports down 25.7% year on year during February with imports down by 24.1%. The collapse in the latter seems to suggest that there has been no sign of stabilisation in the Chinese economy over the last month.
Overall very little economic data last week which is one of the factors we believe behind the market rally. Looking at this week, today we get the final Eurozone CPI data for February. On Tuesday we have the German ZEW economic sentiment survey which is closely followed and is very likely to show a further deterioration. On Wednesday we get the minutes from the latest Bank of England MPC meeting which is likely will show a 9-0 vote in favour of the latest 50bp cut. What will be of more interest will be their comments on quantitative easing. We also get on Wednesday the headline grabbing unemployment data which is likely to show unemployment has increased to over the 2m mark. On Thursday the February public borrowing data for the UK is published and the CBI Industrial trends survey for March will also be announced. Also on Thursday we get the Eurozone Industrial Production data for January.
In the US on Monday we get the Empire State manufacturing survey for March which is basically a survey of manufacturers in New York State. It is unlikely this index will show any improvement on the Feb figure of -34.7. On Monday we also get Industrial Production figures for February. The previous month on month decline for January was -1.8% with the consensus anticipating a decline of -1.2% in February. Given the disastrous state of the car manufacturing industry the probability of a figure worse than this seems high. A closely followed indicator are the housing starts which are scheduled for Tuesday. The annualised rate dropped to 466,000 in January and this is expected to fall again to 450,000 on an annualised basis in February. In many respects a continual decline in new house builds will help to bring inventory down and this may at least contribute to bringing a recovery in house prices a little closer. At the moment total inventory of unsold new homes stands at over 13 months of supply. On Wednesday look out for the CPI data in the US which is expected to remain at the previous monthly level of +0.3% month on month which will leave the year on year rate at 0%. On Wednesday the FOMC meet and whilst interest rates have nowhere to go now, the focus will be on the accompanying statement and especially additional measures that the Fed is taking now that monetary policy has run out of ammunition. On Thursday we the usual weekly initial jobless claims and also the Philadelphia Fed manufacturing index for March. The previous figure for the latter in February was 41.3 with consensus expecting around 38.0 for March. On Friday with no economic data scheduled the market will be focusing on the next Ben Bernanke speech.
This week we will be focusing on the Prudential full year figures scheduled for Thursday which will have broader implications for the rest of the sector.
World equity markets found a better footing last week following the leaked Citigroup memo that the bank has enjoyed a strong January and February. Comments from Ben Bernanke seemed to help as well and sentiment in general seemed to improve as the week wore on. Whether this marks the beginning of a recovery is another matter. The US initial jobless claims seemed to go unnoticed despite the fact that they worse than expectations with initial claims for unemployment benefits up by 9,000 to 654000 for the week ended 7th March. This was against consensus expectations of 644,000. Claims for the previous week were increased by 11,000 to 645,000. With a deteriorating labour market it was hard to view the better than expected US retail sales figures as a sign of stabilisation especially if you consider the substantial deterioration in auto sales. Nevertheless with the economic data remaining at awful levels we have to assume that we are at least in the middle of this recession particularly from a US perspective and we would hope to see signs of stabilisation in the numbers, especially the employment data within the next quarter.
The UK trade figures for January were bad with the trade in goods deficit widening from £7.2bn to £7.7bn in January. Clearly despite the weakness in sterling the worldwide slowdown is more than offsetting any potential benefit to exports that would normally be expected. China suffered a similar fate with exports down 25.7% year on year during February with imports down by 24.1%. The collapse in the latter seems to suggest that there has been no sign of stabilisation in the Chinese economy over the last month.
Overall very little economic data last week which is one of the factors we believe behind the market rally. Looking at this week, today we get the final Eurozone CPI data for February. On Tuesday we have the German ZEW economic sentiment survey which is closely followed and is very likely to show a further deterioration. On Wednesday we get the minutes from the latest Bank of England MPC meeting which is likely will show a 9-0 vote in favour of the latest 50bp cut. What will be of more interest will be their comments on quantitative easing. We also get on Wednesday the headline grabbing unemployment data which is likely to show unemployment has increased to over the 2m mark. On Thursday the February public borrowing data for the UK is published and the CBI Industrial trends survey for March will also be announced. Also on Thursday we get the Eurozone Industrial Production data for January.
In the US on Monday we get the Empire State manufacturing survey for March which is basically a survey of manufacturers in New York State. It is unlikely this index will show any improvement on the Feb figure of -34.7. On Monday we also get Industrial Production figures for February. The previous month on month decline for January was -1.8% with the consensus anticipating a decline of -1.2% in February. Given the disastrous state of the car manufacturing industry the probability of a figure worse than this seems high. A closely followed indicator are the housing starts which are scheduled for Tuesday. The annualised rate dropped to 466,000 in January and this is expected to fall again to 450,000 on an annualised basis in February. In many respects a continual decline in new house builds will help to bring inventory down and this may at least contribute to bringing a recovery in house prices a little closer. At the moment total inventory of unsold new homes stands at over 13 months of supply. On Wednesday look out for the CPI data in the US which is expected to remain at the previous monthly level of +0.3% month on month which will leave the year on year rate at 0%. On Wednesday the FOMC meet and whilst interest rates have nowhere to go now, the focus will be on the accompanying statement and especially additional measures that the Fed is taking now that monetary policy has run out of ammunition. On Thursday we the usual weekly initial jobless claims and also the Philadelphia Fed manufacturing index for March. The previous figure for the latter in February was 41.3 with consensus expecting around 38.0 for March. On Friday with no economic data scheduled the market will be focusing on the next Ben Bernanke speech.
This week we will be focusing on the Prudential full year figures scheduled for Thursday which will have broader implications for the rest of the sector.
Thursday, March 12, 2009
A busy week for me with little time for the blog. I started the week believing that if we were going to see some form of rally this week had a reasonable chance because of the lack of major economic data. Today's US retail sales were the big number of the week and they were a little ahead of expectations although if you look at the drag caused by Auto sales it is hard to interpret the figure as a sign of recovery. We also had the weekly jobless claims which continue to show a worsening trend. Still the market has focused on the Citigroup memo from yesterday and the lack of any bad news this week to make an attempt at a rally which looks like it will continue into tomorrow. It would be nice if this marks the beginning of a sustainable recovery, but I fear it will not hold and we could see the gains eroded next week. This is a particularly difficult time for trading as a rally could easily last for a little longer and it does make the timing of trades more difficult.
In my cfd porfolio I have the long position of Unilever which is gradually returning to break even and for some short side protection I have the short in Pearson.I am again looking at another long position in Vodafone, but it depends on how the market behaves tomorrow.
In my cfd porfolio I have the long position of Unilever which is gradually returning to break even and for some short side protection I have the short in Pearson.I am again looking at another long position in Vodafone, but it depends on how the market behaves tomorrow.
Tuesday, March 10, 2009
A big rally and a welcome one after so many weeks of relentless declines. The Citigroup CEO made bullish comments about trading during the first two months of the year to give the financials and the market in general the excuse to make the biggest rally this year. Positive comments from Bernanke also helped to fuel the rally today. It is interesting that several money managers have already started calling this the bottom of the market. Today's comments were certainly welcome, but I am not sure that this is the bottom of the market. It may well mean that we will rally further as the market certainly looks oversold on a short term basis. It will be interesting to see if the market maintains the momentum tomorrow.
For my cfd portfolio I managed to make a small profit on a holding of Vodafone which was purchased yesterday and sold this afternoon. I may well buy these back in due course. I also opened a small short in Pearson this afternoon after they moved ahead by 7% on an intra-day basis. I have nothing against Pearson, but the shares look to be up with events at the moment and I think the upside is limited with real downside risks over the coming year. I still have an open long position in Unilever and decided to balance it up with a Pearson short this afternoon.
The big test this week comes with the US retail sales figures on Thursday. I would anticipate this figure to be worse than the consensus of -0.5 month on month and it will be interesting to see how the market reacts.
For my cfd portfolio I managed to make a small profit on a holding of Vodafone which was purchased yesterday and sold this afternoon. I may well buy these back in due course. I also opened a small short in Pearson this afternoon after they moved ahead by 7% on an intra-day basis. I have nothing against Pearson, but the shares look to be up with events at the moment and I think the upside is limited with real downside risks over the coming year. I still have an open long position in Unilever and decided to balance it up with a Pearson short this afternoon.
The big test this week comes with the US retail sales figures on Thursday. I would anticipate this figure to be worse than the consensus of -0.5 month on month and it will be interesting to see how the market reacts.
Monday, March 09, 2009
Our usual Monday briefing:-
The economic data we had last week was unsurprisingly very bad with no sign of any stabilisation in the rate of economic decline especially in the US. Both sets of ISM data, manufacturing and non manufacturing remain well below the crucial 50 level which indicates expansion and looking at the constituents of each index there is little chance that we will see any material improvement for some months to come. The Federal Reserve Beige book presented a grim picture of reduced lending, tight credit and a continuing slow down across all aspects of the economy. The Non Farm Payrolls on Friday were always destined to show a big decline and the only positive was that the number was not larger than consensus expectations with 651,000 jobs lost last month. The previous two months data were revised downward by a further 160,000 jobs. In the UK and Europe the interest rate decisions were as expected with the Bank of England reducing rates by 50bps to 0.5% whilst the ECB also reduced rates by 50bps to 1.5%. Monetary policy in the UK has now run out of fire power and the Bank of England signalled its first foray into Quantitative Easing with a £75bn injection to begin almost immediately. The ECB signalled that rates are close to bottom and it looks as if we can possibly expect one final cut to 1% before other big measures such as Quantitative Easing are adopted.
The coming week brings little in the way of big economic news. In the US look out for the retail sales figure on Thursday. Retail sales bounced in January probably due to an element of deferred expenditure from December and also the impact of heavy discounting. This trend is unlikely to continue and the consensus expectation is for a 0.5% decline during February. In the UK on Tuesday we get the RICS house price survey which will inevitably be weak and on the same day there will be industrial/manufacturing production data. Apart from that there will be German CPI data on Tuesday and French CPI data on Thursday. On Friday look out for the Eurozone retail sales data for January which may also show a very modest improvement at best.
This week we have a trading statement from Home Retail Group (owner of Argos and Homebase) on Thursday. This will have significant implications for a lot of the retail sector given that it will be the first major trading update of any big general retailer since the Christmas trading statements. On Thursday we also have full year figures from William Morrison and Standard Life which we will be taking a close look at.
The life sector was in focus last week following results from Aviva that disappointed the market and resulted in a share price slump across the sector. We have been asked by clients during the week whether this sector will be the next disaster following on from the banks. At the moment it is clear that fear is driving valuations far more than fundamentals, but the fear could turn into reality. The issue is again solvency and the fear at present primarily relates to their substantial corporate bond portfolios that these companies have. Under normal circumstances AAA corporate bonds will result in minimal defaults with historical default figures of around 0.3%. The severe deterioration in economic conditions may well result in a much larger default rate, but it remains an unknown. The Aviva results were not that bad and the stock price decline was more a result of intense shorting pressure than any substantial deterioration in the underlying position of the company. Their decision to maintain the dividend could arguably be read as a sign of strength, but the market took it as a major negative given the implications for their IGD surplus capital position. If equity markets improve and there is some evidence that an economic recovery is coming we may well see Aviva escape the possibility of a dividend cut, but at this stage that looks unlikely. The concerns are real and they may be applied to the rest of the sector. However, at this time we would not write the sector off and in the event that markets do start to recover it will offer the potential for significant recovery. We will be updating our Aviva note this week.
The economic data we had last week was unsurprisingly very bad with no sign of any stabilisation in the rate of economic decline especially in the US. Both sets of ISM data, manufacturing and non manufacturing remain well below the crucial 50 level which indicates expansion and looking at the constituents of each index there is little chance that we will see any material improvement for some months to come. The Federal Reserve Beige book presented a grim picture of reduced lending, tight credit and a continuing slow down across all aspects of the economy. The Non Farm Payrolls on Friday were always destined to show a big decline and the only positive was that the number was not larger than consensus expectations with 651,000 jobs lost last month. The previous two months data were revised downward by a further 160,000 jobs. In the UK and Europe the interest rate decisions were as expected with the Bank of England reducing rates by 50bps to 0.5% whilst the ECB also reduced rates by 50bps to 1.5%. Monetary policy in the UK has now run out of fire power and the Bank of England signalled its first foray into Quantitative Easing with a £75bn injection to begin almost immediately. The ECB signalled that rates are close to bottom and it looks as if we can possibly expect one final cut to 1% before other big measures such as Quantitative Easing are adopted.
The coming week brings little in the way of big economic news. In the US look out for the retail sales figure on Thursday. Retail sales bounced in January probably due to an element of deferred expenditure from December and also the impact of heavy discounting. This trend is unlikely to continue and the consensus expectation is for a 0.5% decline during February. In the UK on Tuesday we get the RICS house price survey which will inevitably be weak and on the same day there will be industrial/manufacturing production data. Apart from that there will be German CPI data on Tuesday and French CPI data on Thursday. On Friday look out for the Eurozone retail sales data for January which may also show a very modest improvement at best.
This week we have a trading statement from Home Retail Group (owner of Argos and Homebase) on Thursday. This will have significant implications for a lot of the retail sector given that it will be the first major trading update of any big general retailer since the Christmas trading statements. On Thursday we also have full year figures from William Morrison and Standard Life which we will be taking a close look at.
The life sector was in focus last week following results from Aviva that disappointed the market and resulted in a share price slump across the sector. We have been asked by clients during the week whether this sector will be the next disaster following on from the banks. At the moment it is clear that fear is driving valuations far more than fundamentals, but the fear could turn into reality. The issue is again solvency and the fear at present primarily relates to their substantial corporate bond portfolios that these companies have. Under normal circumstances AAA corporate bonds will result in minimal defaults with historical default figures of around 0.3%. The severe deterioration in economic conditions may well result in a much larger default rate, but it remains an unknown. The Aviva results were not that bad and the stock price decline was more a result of intense shorting pressure than any substantial deterioration in the underlying position of the company. Their decision to maintain the dividend could arguably be read as a sign of strength, but the market took it as a major negative given the implications for their IGD surplus capital position. If equity markets improve and there is some evidence that an economic recovery is coming we may well see Aviva escape the possibility of a dividend cut, but at this stage that looks unlikely. The concerns are real and they may be applied to the rest of the sector. However, at this time we would not write the sector off and in the event that markets do start to recover it will offer the potential for significant recovery. We will be updating our Aviva note this week.
Friday, March 06, 2009
Any attempt at a rally quickly peters out and I think we are now heading into the capitulation stage when just about everyone apart from the heavy weight shorters start to give up. Valuations do not look bad, but I think it is inevitable that the market is going to weaken further over the coming weeks. The US payroll figures this afternoon provided little in the way of hope and the only glimmer if you can call it that is the number of 651,000 lost jobs during February was broadly in line with expectations. The December and January figures were revised downwards by 160,000 in total and the latest figure is therefore a slight improvement in the trend. Nevertheless it is bad and with all of the data this week showing no sign of even stabilisation I think we have to prepare for yet further market falls. Morgan Stanley have today revised their 12 months FTSE100 target from 4300 to 3500. I remember commenting at the start of the year that every year end FTSE100 broker target would have seen the market gaining on the year. This is starting to look like wishful thinking.
Thursday, March 05, 2009
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.
Wednesday, March 04, 2009
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.
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.
Tuesday, March 03, 2009
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.
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.
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