Trend change confirmed as markets turn down
22/05/2008
16th May - Bullish trend continues but caution ahead of options expiry It might have seemed that despite the recent volatility the FTSE 100 index has made little progress this week, but the bias has been to the bull side, and again this morning we have good rallies in equities. For a change it is not the miners leading the way but a series of special situations that are worth examining. Former high flyer British Energy is topping the list so far with a 5% rise after it confirmed it had received a range of takeover proposals, including some priced above Thursday's closing share price. It added that the process of working through these offers might last some weeks, and this is good news after previous concerns that hardly any bidders were interested. We feel that existing holders should stay put, but the shares seem unlikely to get above the 790p area where they topped out two weeks ago.
Another big mover was British Airways with a 3% rally after profits rose to £883m in the year to March despite the well aired problems at Heathrow and a massive fuel bill rise. These figures were good, but understandably it is very cautious on the current year, and continues to review costs across its whole network. Technically we have recently see divergence between price and volume, so it is a hard call right now and we would stand aside. A similar rise has been seen at Ladbrokes where profits increased by 13% in the four months to April 30. Most interestingly, gross win increased by 16% and by 34% including the contribution from high rollers, and these latter players chipped in £40m but their activity has recently fallen to low levels. With another cautious statement, and given its exposure to discretionary spending, it looks like further downside ahead here and we remain slightly bearish. 19th May - Footsie slightly ahead on further mining strength Yet another strong start for the miners has pushed the FTSE 100 index up this morning with Kazakhmys, Vedanta and Anglo American leading the pack on another rise in higher metals prices, but as has been the pattern recently another poor housing survey has sent mortgage banks lower with HBOS, Alliance & Leicester and Bradford & Bingley all struggling under selling pressure. Another faller is BAe Systems after chairman Sir Nigel Rudd and CE Mike Turner were detained briefly last week by US officials investigating allegations of corruption by the company, whose shares continue to underperform a rising market.
Elsewhere, it has been fairly steady but a couple of statements this morning are worth looking at. Oil services group John Wood said that trading was ahead of its expectations, with the strongest performance from engineering & production facilities, which has benefited from high demand for its services across all areas. There seems every chance these shares will join others in the sector and move to new highs very soon.
Down in the property sector, Segro has seen little improvement in the commercial property market in recent months. It stated that occupier demand had continued at good levels in all our markets, but continuing weakness in the credit and real estate investment markets maintained downward pressure on UK commercial property values, and we have to remain relatively cautious here, although Segro looks one of the better placed candidates for eventual recovery. 20th May - Sharp fall in London reflects cautious markets and mixed trading figures The recent gentle uptrend on the FTSE 100 index was reversed this morning after world markets fell away overnight and there were some mixed corporate reports from leading blue chips. With the miners running into some profit taking the index stood down 55 points mid-morning. The eagerly awaited statement from Marks & Spencer saw profits back through the £1bn profit barrier, and up 4.3%, in the year to March. Total sales rose by 5.1% at £9,022m with UK up 4.2% and International up 16.8%, but there was a fairly cautious accompanying statement and after an early rise the shares drifted back to stand unchanged, so we would stick with our cautious view on the outlook here.
Imperial Tobacco announced details of its widely leaked rights issue to tidy up debt taken on following its acquisition of Altadis. It is to raise £4.9bn net of expenses through the issue of 338.75m new shares at 1,475p each on the basis of 1 new share for every 2 held, and in the style of recent fundraising the shares were marked down 3.2%. We can see these down further in coming weeks, and it may be that the best of this major defensive stock has been seen for now.
One stock that has had a terrible year is Yell Group, and there was more bad news for shareholders today after it halved its final dividend due to economic pressures which it sees continuing during the current year. Although it posted a 9% increase in EBITDA for the year to end-March, pre-tax profit fell 25% to £310.9m and the outlook remains very poor here. If the market continues to fall away, we could see major downside for these shares.
21st May - Short term bounce but markets now look vulnerable Yesterday we saw the first big fall of note for some time as markets were rattled by the rise in oil prices, increasing inflation concerns and the return of potential funding problems. The FTSE 100 index fell almost 3%, and it now looks like a potential top formation, so traders should be aiming to sell into snapback rallies. That is what we have so far with the miners bouncing after heavy falls yesterday, and another run up in oil stocks as crude closes in on $130 a barrel, but there is an uncertain feel to markets right now. Elsewhere, it was another busy day for reports, with Experian drifting as it matched market forecasts with a 15% rise in full-year operating profit. It did add that organic revenue may be flat to slightly down in Q1 due to a strong comparable period, and overall we see the short term outlook as neutral to bearish here. Wolseley has been very hard hit in the last twelve months and today it said it would take a £50m hit for cost cutting, adding that its markets show little sign of recovery with the UK now following the US and the rest of Europe lower. With a challenging outlook given by management, we see further downside pressure on these shares before conditions improve. 22nd May - Markets see more falls on inflation and economic worries After all the talk in recent weeks that the credit crunch was over, reality has hit and markets are falling worldwide as a combination of factors hits the outlook for equities. With crude oil now above $134, there are significant inflationary pressures in the pipeline and this is pressuring central banks who do not have much room for manoeuvre on interest rate policy. In the UK, this comes against the background of a sharp fall in house prices, and there are signs of another round of funding shortfalls as the banks start to raise cash in the markets. It all adds up to uncertainty and the FTSE 100 index is down 13 points mid-morning, and the only areas of strength are once again the oil stocks and the mining stocks where commodity prices remain buoyant. The main focus on the downside is on results, with LSE falling sharply despite seeing adjusted operating profit rise 56% to £289m on revenue that increased 56% to £546.4m. Traders are understandably concerned about a potential future drop in trading revenues notwithstanding the reasonably confident statement, and we would stay short here. Another faller was Daily Mail & General where its national titles are holding up well but revenues at local media outlets are now coming under pressure. It saw revenue for the half year to March up 5% from a year earlier, with an unchanged operating margin. It added that the economic outlook remained uncertain but its strong cash flow allows continued investment to ensure its businesses achieve their full potential. All a bit vague to us, and again the fact that the shares are hitting new lows suggests more downside to come.
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