Tuesday 11 November 2008

Markets continue their yo-yo performance with traders reversing (and more) the 150 point gains of early yesterday by the close.

This morning we are looking at an opening level of around 4320, off 85 points. The trigger for this has, to some extent, been outside influences from the US and the Far East with both the Dow and the Nikkei failing to hold on to gains in late trade last night and early action this morning. But it must be said that announced results this morning will not exactly help as Vodafone miss targets and Taylor Wimpey indicate that orders are 40pc off last year (we were already entering ‘le crunch’ by then).

Sitting on a debt burden of £1.9 bln (the numbers just trip off the tongue now), with a capitalisation of just £170m and presumably making a loss on every unit sale, is not exactly a situation that would fill many with confidence. The only thing holding the company up appears to be the fact that the banks do not want to ‘call in’ the loans as this would just add another huge slug to its bad debt books. A bit tongue in cheek I know, but shareholders should beware of a late liquidation when the economy begins to turn and the banks start to feel they can make more of a return with the assets than with the loan.

It is not just the fact that Vodafone has missed targets that will be worrying investors in a host of related (and unrelated) stock; it is also the downbeat assessment from the board. Sales targets for the next six months have been cut yet again and the company is looking for cost savings. Mind you, I do love accounting policy in the UK. Vodafone’s 1H ‘Net’ is 2.14Bln, Operating Profit is 5.77Bln, Pre-Tax is 3.31Bln and EBITDA is 7.24Bln. So which is the ‘real’ number? The dark arts seem to be weaving quite a web. On the other hand, investors in Vodafone, in particular, will be pleased that income remains solid in a challenging market and there was no skeleton in the cupboard to scare us off. The call is for the shares to come in a few pence up at around 111p (no mean feat in a generally weak opening environment)

Trading in virtually every instrument is getting very jumpy again as ‘bottom pickers’ fight it out with ‘trend continuation’ merchants. We are seeing increased willingness from punters to come in on the buy side for oil, sterling and equities as the sense that just possibly we are near to a low percolates through confidence levels. The problem is that this is what always happens in extended bear market conditions, where hope for the future coupled with fear of ‘missing out’ on any long term rally tempts investors in to what turns out to be just a bear market bounce. The trick, of course, is to spot which is which.

In all honesty there are precious few reasons to indicate that the bottom has been reached. The corporate news is getting steadily worse and in some sectors is actually accelerating to the downside. Virtually every developed and emerging nation on earth is still in the process of trying to stimulate growth and, whilst we all hope that this has the desired effect, sentiment has yet to give that ‘final’ signal where the majority fear that the entire project will fail. Nearly all bear markets have this ‘moment’ where the worst seems to be about to happen and then ‘doesn’t’.

Sterling seems to be forming a short term ‘flag’ formation, with the price range contracting to a point. Resistance to the upside is at around 1.5770 and support is between 1.5525 and 1.5540. With the price currently at 1.5633-1.5636 we are neatly in the middle, so traders should be aware of the opportunities and perils of either one or the other being breached.

Oil has also given up the rally of Monday morning and we a perilously close to a new closing low for the December contract. At 57.14-57.19 in the Brent contract we are under the previous end of day settlement at 57.42, but still well above intraday lows of $56.16. There seems to be a surplus of the black stuff around at the moment and, for all of OPEC’s calls for production cuts, precious little evidence that ‘high words’ will translate into dirty action. Most of the nation states outside of the Middle East (and many of those within it) desperately need the revenue flows to balance public sector books. Action from local administrators (Venezuela and Russia for example) in the recent past has meant that there is almost no outside financial help to be had when times get tough. If dealers drive oil even lower and it remains there then the consequences could be quite severe. Economists make much of the fact that the emerging markets will take up any slack in Western demand, but with fuel efficiencies getting ever greater, the increased demand from economic growth must be considerable just to keep up with reducing requirements.

On the equity front, Lloyds is slipping again as the prospect of picking up HBOS either ‘on the cheap’ or as a ‘disastrously risky acquisition’ sways back to the second of these two prognoses. In reality, boards would not normally take quite such a cavalier attitude to their own businesses’ long term outlook, but these are not normal times. Mandelson has indicated that Lloyds will only get its Treasury money if it agrees to the tie in, which effectively means that the Government is playing Russian roulette with Lloyds’ shareholders money. If the gamble pays off, we will end up with a company that is so locally dominant that it will probably be forced to split up again in 4 or 5 years time!